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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. 33-75758
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
(Exact name of Registrant as specified in its charter)
Texas 75-2533518
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
Suite 210, LB 59,
8080 North Central Expressway,
Dallas, Texas 75206
(Address of principle
executive offices) (Zip Code)
Registrant's telephone number, including area code (214)891-8294
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months ( or for such shouter
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 statement to this Form 10-K. (X)
As of December 31, 1997 there were 4,342,942 shares of Registrant's
stock outstanding. The aggregate market value of the stock held by non-
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affiliates, based on the average bid and ask prices of such stock as of
December 31, 1997 was $41, 590,262. 209,748 shares of stock held by
affiliates were valued at $2,110,589.
Documents Incorporated by Reference: Certain portions of the
Registrant's Definitive Proxy Statement (the "Proxy Statement") for its
Annual Meeting of Limited Partners to be held on May 29, 1998 pursuant to
Regulation 14A are incorporated by reference in Items 10 through 13 of
Part III of this Annual Report on Form 10-K.
Part I
Item 1. Business.
GENERAL DEVELOPMENT OF BUSINESS
Renaissance Capital Growth & Income Fund III, Inc. (sometimes
referred to as the "Fund" or the "Registrant") is a Texas corporation
formed January 20, 1994 that has elected to operate as a Business
Development Company (sometimes referred to herein as a "Business
Development Company" or a "BDC") under the Investment Company Act of 1940,
as amended (the "1940 Act"). Through December 31, 1997, the Fund has
raised $41,489,500 through capital contributions and the public sale of
its common stock, par value $1.00 per share.
The investment objective of the Fund is to provide its shareholders
with current income and long-term capital appreciation by investing
primarily in private placement securities of small and medium size public
companies("Portfolio Companies").
Renaissance Capital Group, Inc. ("Renaissance Group" or the
"Investment Adviser"), a Texas corporation, serves as the investment
adviser to the Fund. In this capacity, Renaissance Group is primarily
responsible for the selection, evaluation, structure, and administration
of the Fund's investment portfolio. Renaissance Group is a registered
investment adviser under the 1940 Act and the Texas Securities Act.
However, its activities are subject to the supervision of the Board of
Directors of the Fund ("Board of Directors") who provide guidance with
respect to the operations of the Fund.
Generally, investments are, and will continue to be, in companies
that have their common stock registered for public trading under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
companies that, in the opinion of the Investment Adviser, have the ability
to effect a public offering within three to five years. The Fund
generally invests in preferred stock or debentures of a Portfolio Company,
which securities are convertible into or exchangeable for common stock of
the Portfolio Company. While such common stock of the Portfolio Company
may be publicly traded, the common stock acquired by the Fund is generally
unregistered. Therefore, such securities are restricted from distribution
or sale to the public except in compliance with certain holding periods
and exemptions under the Securities Act of 1933, as amended ( the
"Securities Act"), or after registration pursuant to the Securities Act.
At December 31, 1997 the Fund had made fourteen (14) portfolio
investments aggregating $33,148,232, of which twelve (12) are still active
as of December 31, 1997. The Fund is seeking additional investment
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opportunities.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Fund has no concentrated industry segments. The Fund does not
contemplate specializing in any particular industry but instead
anticipates diversifying its investments to a variety of industries.
NARRATIVE DESCRIPTION OF THE BUSINESS
The Fund, as a Business Development Company, is engaged primarily in
investments in convertible securities of small and medium sized public
companies.
Under the provisions of the 1940 Act, a Business Development Company
must invest at least 70% of its funds in "eligible portfolio investments,"
such being generally defined as direct placements to eligible companies
and temporary investments in "cash items" pending other investments.
However, under and pursuant to the provisions of the 1940 Act, a Business
Development Company may invest up to 30% of its funds in "Other
Investments" that is, investments that do not qualify as "eligible
portfolio investments," such exception allowing up to the specified
maximum amount, for example, open market purchases or participation in
public offerings.
Pending investment in convertible securities of eligible Portfolio
Companies or other investments as provided under the 1940 Act, the
Registrant's funds are invested in "Short-term Investments" consisting
primarily of U.S. Government and agency debt.
At December 31, 1997, the Fund's investment assets were classified by
amount as follows:
<TABLE>
Classification Cost Percentage
Of Investments (at cost)
<S> <C> <C>
Eligible Portfolio
Companies $18,939,221 78%
Other Portfolio
Companies $5,211,444 22%
</TABLE>
INVESTMENT OBJECTIVES
The investment objective of the Fund is to provide its shareholders
with both current income and long-term capital appreciation.
The Fund seeks to provide current cash returns to shareholders
through a quarterly dividend of current investment interest income while
providing opportunities for capital gains appreciation through the
appreciation in the value of the Fund's convertible securities.
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The Fund anticipates paying a quarterly dividend to the shareholders,
to be made within 120 days of the end of each quarter. Dividends will be
made in such amounts as shall be determined by the Board of Directors and
shall generally reflect the earnings from the prior quarter of the Fund.
Optionally, in addition to the quarterly dividends, the Fund may make
distributions of realized gains or of securities that have appreciated in
value.
GENERAL INVESTMENT POLICIES
The Fund invests in Emerging Growth Company ("Emerging Growth
Company") securities that are generally not available to the public and
which typically require substantial financial commitment. An Emerging
Growth Company is generally considered to have the following attributes:
(1) either a publicly held company with a relatively small market
capitalization or a privately held company; (2) an established operating
history but of a limited period so as to not have fully developed its
market potential for the product of services offered; and (3) generally
have a new product or service that provides an opportunity for exceptional
growth. However, because the extent and nature of the market for such
product or services is not fully known, there is uncertainty as to the
rate and extent of growth and also uncertainty as to the capital and human
resources required to achieve the goals sought.
With respect to investments in Emerging Growth Companies, the Fund
emphasizes investing in convertible preferred stock or convertible
debentures of publicly held companies that the Fund anticipates will be
converted into common stock and registered for public sale within three to
five years after the private placement. In addition, the Fund anticipates
participating in bridge financings in the form of loans which are
convertible into common stock of the issuer or issued together with equity
participation, or both, for companies which the Fund anticipates will
complete a stock offering or other financing within one to two years from
the date of the investment. The Fund will make bridge loans, either
secured or unsecured, intended to carry the borrower to a private
placement, an initial public offering or a merger and acquisition
transaction.
The Fund has no fixed policy concerning the types of businesses or
industry groups in which it may invest or as to the amount of funds that
it will invest in any one issuer. However, the Fund currently intends to
limit its investment in securities of any single Portfolio Company to
approximately 10% (8% to 12%) of its net assets at the time of the
investment.
The Fund's nominees to the boards of directors of Portfolio Companies
will generally be selected from among the officers of Renaissance Group.
When, in the discretion of Renaissance Group, a suitable nominee is not
available from among its officers, Renaissance Group will select, as
alternate nominees, outside consultants who 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,
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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 ("BDC")
A BDC:
(1) is a closed-end management company making 70% of its investments only
in certain companies (identified as "Eligible Portfolio Companies"), and
in "cash items" pending other investment. Under the regulations
established by the Securities and Exchange Commission (the "SEC") under
the 1940 Act only certain companies may qualify as "Eligible Portfolio
Companies." These qualifications are:
(A) it must be organized under the laws of a state or states,
(B) it may not be an investment company (except for a wholly owned Small
Business Investment Company), and
(C) it must generally fall into one of three following categories:
(1) Companies that do not have a class of securities registered on a
national securities exchange or are listed of the Federal Reserve OTC
margin list,
(2) companies that are actively controlled by the BDC either alone or as
part of a group (for this purpose, control is presumed to exist if the BDC
or group in which the BDC is a member owns 25% or more of the voting
securities), or
(3) it meets such other criteria as established by the SEC.
(2) must be prepared to provide "Significant Managerial Assistance" to
such Portfolio Companies. Significant Managerial Assistance means, as to
the Fund:
(A) any arrangement whereby the Fund, through its officers, employees, or
the officers or employees of the Investment Adviser, seeks to provide
significant guidance concerning management, operations, objectives or
policies of the Portfolio Company, or
(B) the exercise of a controlling influence over the Portfolio Company.
Therefore, the Investment Adviser believes that "Eligible Portfolio
Companies" are, generally, those companies that, while being publicly
held, may not have or do not have a broad based market for their
securities, or the securities that they wish to offer are restricted from
public trading until registered.
Further, the regulations generally provide that the securities must
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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 is not the general policy of the Fund to acquire a controlling
position in its Portfolio Companies. The Fund only provides managerial
assistance, and seeks to limit its "control" position by requiring only
that a designee of the Fund be elected to the board of directors of the
Portfolio Company, or be selected an advisory director. While these are
the Fund's general policies, the application of these policies, of
necessity, vary with each investment situation.
1940 ACT REQUIREMENTS
The BDC election exempts the Fund from some provisions of the 1940
Act. However, except for those specific provisions, the Fund will
continue to be subject to all provisions of the 1940 Act not exempted,
including the following:
(1) restrictions on the Fund from changing the nature of business so as to
cease to be, or to withdraw its election as, a BDC without the majority
vote of the shares outstanding;
(2) restrictions against certain transactions between the Fund and
affiliated persons;
(3) restrictions on issuance of senior securities, such not being
prohibited by the 1940 Act but being restricted as a percentage of
capital;
(4) compliance with accounting rules and conditions as established by the
SEC, including annual audits by independent accountants;
(5) compliance with fiduciary obligations imposed under the 1940 Act; and
(6) requirement that the shareholders ratify the selection of the Fund's
independent public accountants and the approval of the investment advisory
agreement or similar contracts and amendments thereto.
On September 19, 1996, the Fund and the Investment Advisor filed
their Application for an order pursuant to Sections 6(c) and 57(i) of the
Investment Company Act of 1940 and Rule 17d-1 thereunder authorizing
certain joint transactions otherwise prohibited by Section 57(a)(4) of the
Act requesting an order from the SEC permitting the Fund to co-invest with
companies that are affiliated with the Investment Advisor, including
Renaissance US Growth & Income Trust PLC ("RUSGIT") as "Advisor
Affiliate". The order was granted on December 30, 1996.
In order for the Fund and the Investment Advisor to make co-
investments with the same entity, the following conditions apply:
(a) the Investment Advisor will determine if the investment is eligible
for investment by the Fund;
(b) the Investment Advisor will determine an appropriate amount that the
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Fund should invest;
(c) the Investment Advisor will distribute written information, including
the amount of the proposed investment, concerning all co-investment
opportunities to the Fund's Independent Directors. The Fund will co-
invest only if a required majority of the Fund's Independent Directors
conclude, prior to the acquisition of the investment, that the investment
should be made;
(d) the Fund will not make an investment if any Advisor Affiliate, the
Investment Advisor, or a person controlling, controlled by, or under
common control with the Advisor is an existing investor in such issuer;
(e) the terms, conditions, price, class of securities, settlement date,
and registration rights shall be the same for the Fund and the Advisor
Affiliate;
(f) the Fund's Independent Directors will review quarterly all information
concerning co-investment opportunities during the preceding quarter to
determine whether the conditions set forth in the application were
complied with;
(g) the Fund will maintain the records required by section 57(f)(3) of the
Act as if each of the investments permitted under these conditions were
approved by the Fund's Independent Directors under section 57(f) of the
Act; and
(h) no Independent Director of the Fund will be a director or general
partner of any Advisor Affiliate with the Fund co-investors.
On October 30, 1996, the Advisor Affiliate made an investment of
$1,200,000 in Topro, Inc. Prior to this investment by the Advisor
Affiliate, in February of 1996, the Fund made an original investment of
$2,500,000. This investment was made prior to the entry of an order. At
the time the original investment was made, an additional loan from the
Advisor Affiliate was not contemplated. Therefore, the investment of the
Advisor Affiliate did not fall within the prohibited transactions and an
order of exemption was not necessary.
After the order was granted by the SEC, the Advisor Affiliate and the
Fund made a co-investment into Integrated Security Systems, Inc. of
$2,500,000 each on December 31, 1996.
The Fund anticipates making additional investments with the Advisor
Affiliate in the future.
INVESTMENT ADVISERS ACT OF 1940 ("ADVISERS ACT") AND INVESTMENT ADVISER'S
AGREEMENT
Renaissance Group is the investment adviser to the Fund pursuant to
the Investment Advisory Agreement dated and approved by the Board of
Directors on February 15, 1994 ( the "Investment Advisory Agreement") and
is registered as an investment adviser under the Advisers Act and is
subject to the reporting and other requirements thereof. The Advisers Act
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also provides restrictions on the activities of registered advisers to
protect its clients from manipulative or deceptive practices, while the
Advisers Act generally restricts performance compensation of up to 20% on
realized capital gains computed net of all realized capital losses and
unrealized capital depreciation.
The Investment Advisory Agreement provides that Renaissance Group is
entitled to receive an annual management fee of 1.75% of the Fund's
assets. The agreement also has language that is inconsistent with the
description of the management fee in the Fund's prospectus. The
Investment Advisory Agreement language provides that to the extent any
portion of the annual management fee is based on an increase in Net Asset
Value attributable to non-realized appreciation of securities, such
portion of the fee shall be deferred and not earned or payable until such
time as appreciation or any portion thereof is in fact realized and such
deferred fees shall be earned and paid in proportion to the gains in fact
realized. This inconsistency has caused Renaissance Group to compute the
management fee incorrectly, resulting in a net overpayment to Renaissance
Group of $187,988 through December 31, 1997. This will be refunded to the
Fund by offsetting the net overpayment against payables due by the Fund to
Renaissance Group until the net overpayment is completely satisfied. The
Board of Directors has voted to strike the inconsistent language contained
in the Investment Advisory Agreement, subject to the ratification of the
holders of a majority of the Fund's outstanding shares at the Annual
Meeting to be held as specifically set forth in the Proxy Statement.
In addition to the annual management fee of 1.75% of the Fund's
assets, Renaissance Group is entitled to receive an incentive fee (the
"Incentive Fee") in an amount equal to 20% of the Fund's realized capital
gains computed net of all realized capital losses and unrealized
depreciation.
Investment advisory agreements are further subject to the 1940 Act,
which requires that the agreement, in addition to having to be initially
ratified by a majority of the outstanding shares, shall precisely describe
all compensation to be paid; shall be approved annually by a majority vote
of the Board of Directors; may be terminated without penalty on not more
than 60 days notice by a vote of a majority of the outstanding shares; and
shall terminate automatically in the event of assignment. The Board of
Directors has determined that the Investment Advisory Agreement shall
constitute the Fund's advisory agreements and at all times be construed so
as to comply with the Advisers Act and the 1940 Act.
FUND PORTFOLIO INVESTMENTS
As of December 31, 1997 the Fund has twelve (12) active investments
in Portfolio Companies, nine (9) of which meet the criteria of investments
in Eligible Portfolio Companies:
Bentley Pharmacerticals, Inc. (BNT)
On February 20, 1996, the Fund purchased 800 Units of Bentley
Pharmaceuticals, Inc. ("Bentley"), each unit consisting of a one thousand
dollar ($1,000) principal amount 12% Convertible Senior Subordinated
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Debenture due February, 2006; and 1,000 Class A Redeemable Warrants, each
to purchase one share of common stock and one Class B Redeemable Warrant.
The Partnership paid $1,000 per unit for a total investment of $800,000 of
which $55,200 was allocable to the Warrants and $744,800 to the 12%
Convertible Subordinated Debentures.
The Debentures, which are unsecured, are convertible prior to
maturity beginning on the first year anniversary of the date of issuance
(the "Anniversary Date"), into shares of Common Stock of Bentley
Pharmaceuticals, Inc. at a conversion price per share which is the lesser
of $2.50 or 80% of the average closing price of the Common Stock on the
American Stock Exchange for the 20 consecutive trading days immediately
preceding the Anniversary Date. Interest is payable quarterly.
Each Class A Redeemable Warrant entitles the holder, for a period of
three years, to purchase one share of Common Stock and one Class B
Redeemable Warrant at a price of $3.00 per share. On 30 days prior
written notice, Bentley may redeem all of the Warrants for $0.05 per
warrant if the per share closing price for the underlying common stock on
the American Stock Exchange for each of the 20 consecutive trading days
immediately preceding the record date for redemption equals or exceeds
150% of the then exercise price.
On May 28, 1996, the Company announced it would permit public trading
of its debentures and warrants separately. The Fund elected to separate
its units detaching the $800,000 Debenture with a cost allocation of $931
per
$1,000 Debenture, and the 800,000 Class A Redeemable Warrants with a cost
allocation of $69 per 1,000 warrants.
On September 20, 1996, the Fund sold 400,000 of the Class A
Redeemable Warrants at a price of $1.125 per warrant with aggregate
proceeds of $426,000 and capital gains of $398,400. In October 1996, the
Fund sold an aggregate of 7,000 Warrants for $8,806, allowing the Fund to
realize a gain of $8,323. On January 27, 1997, the Fund sold its
remaining 393,000 Warrants for $447,022, representing approximately
$419,905 in capital gains. From September 20, 1996 to January 27, 1997,
the Fund sold 800,000 of the Class A Redeemable Warrants for $882,208 in
proceeds, representing an approximate gain of $826,628.
The Fund still has its Convertible Debenture, the value of which is
$744,800 on a cost basis.
In the fourth quarter of 1997, the Company announced that it was
awarded a judgment of $7.68 million relating to a claim of fraud the
Company had filed against Medstar Inc., Maximed, Inc. and Robert S. Cohen.
The Company plans to pursue the judgment, but is unsure what portion will
ultimately prove collectible.
Contour Medical, Inc. (CTMI)
Contour Medical, Inc. ("Contour") is a distributor of medical
supplies and prepackaged kits for medical uses as well as a manufacturer
of foam and vinyl based products for medical applications. It is majority
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owned by Retirement Care Associates, an Atlanta-based operator of
retirement care centers and nursing homes.
On July 12, 1996, the Fund invested $2,500,000 in a 9% Convertible
Debenture of Contour. The Debenture had mandatory monthly principal
installments beginning July 1, 1999, which would have amortized
approximately one-half of the principal prior to maturity on July 1, 2003.
The Debentures were callable at 120% of par, once specific earnings per
share and bid price test of the underlying common stock were met.
At the option of the Fund, in multiples of $100,000, the Debentures
were convertible into Common Stock of Contour at $5.00 per share. The
conversion price was subject to certain anti-dilution provisions and a
one-time adjustment in 1997. The adjustment was predicated on earnings
and the bid price of the Company's stock. The Fund had the right to
demand stock registration and certain piggyback stock registration rights.
Cost of two demand registrations were at the Company's expense if
commenced subsequent to July 12, 1998.
In addition to the Fund's investment on July 12, 1996, Renaissance US
Growth & Income Trust PLC ("RUSGIT'), a public limited company registered
in England and Wales, made an identical investment of $2,500,000 in
Contour Medical, Inc. The investment by RUSGIT was made on a pari-passu
basis with the Fund.
On February 18, 1997, Sun Healthcare Group, Inc. ("Sun"), an
Albuquerque, New Mexico based operator of nursing homes, announced it
would acquire all of the outstanding publicly held shares of the Company
as part of its acquisition of the Company's majority owner, Retirement
Care Associates. The announced purchase price of the Company's shares was
$8.50 per share,
payable in cash or in Sun common stock, at the option of Sun. On December
31, 1997, the Fund sold its Convertible Debenture to Sun for $4,200,000 or
$8.40 a share on a fully converted basis, representing a gain of
$1,700,000. The Fund has liquidated its position in this investment as of
December 31, 1997.
The RUSGIT debenture was also sold to Sun on December 31, 1997, under
the same terms and conditions as the sale of the Fund's debenture.
Dwyer Group, Inc. (DWYR)
Dwyer Group, Inc. ("Dwyer") is a holding company for service-based
businesses providing specialty services internally through franchising.
On June 2, 1995, the Fund purchased in the open market 4,000 shares
of Dwyer's common stock at a cost of $12,320. On June 9, 1995, the Fund
and the Company entered into a Stock Purchase Agreement in which the Fund
agreed to purchase from the Company 70,000 shares of common stock at $3.50
per share for a total aggregate consideration of $245,000. Also on June
9, 1995, the Fund entered into a Stock Purchase Agreement with the Estate
of Donald J. Dwyer, Deceased, pursuant to which the Fund agreed to
purchase from the Estate 300,000 shares of common stock at $3.00 per share
for a total consideration of $900,000. The stock purchased pursuant to
the Stock Purchase Agreements is covered by a Demand Registration Rights
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Agreement.
Including its first acquisition of 4,000 shares of common stock in
June 1995, the Fund purchased 334,000 shares of Dwyer's common stock for
an aggregate purchase price of $921,502 through May 1996.
During the quarter ended September 30, 1997, the Fund sold 25,000
shares of common stock for approximately $45,000 and recorded a realized
loss of $42,616. The shares were sold to reduce the Fund's holdings below
10% of the total common shares outstanding.
The Partnership does not have a Director Designee on the Board of
Directors of Dwyer Group, Inc.
Fortune Natural Resources Corporation (FPX)
On November 7, 1997, the Fund invested $350,000 in a 12% Convertible
Debenture of Fortune Natural Resources Corporation ("FNRC"). The
Debenture matures on December 31, 2007 and bears annual interest at the
rate of 12%, payable quarterly, commencing January 1, 1998. The interest
is computed on the basis of a 360-day year and will be subordinated to any
senior debt of the Company, which, as of September 30, 1997, was
$1,893,000 in the aggregate. The Debenture is convertible into the
Company's common stock at $3.00 per share, subject to certain anti-
dilution provisions. The Fund also has limited rights to demand a
registration of its common stock and certain piggyback stock registration
rights.
The Company is an independent public oil and gas company whose
primary focus is exploration and development of domestic onshore and
offshore oil and gas properties located primarily in Louisiana and Texas.
In addition to the Fund's investment on November 7, 1997, RUSGIT made
an identical investment of $350,000 in FNRC. The investment by RUSGIT was
made
on a pari-passu basis with the Fund.
Integrated Security Systems, Inc. (IZZI)
On December 31, 1996, the Fund invested $2,300,000 in a 9%
Convertible Debenture of Integrated Security Systems, Inc. ("IZZI"). The
Company is a holding company which designs, develops, manufactures, sells
and services commercial security and traffic control devices. In
addition, it sells fully integrated turnkey security systems that control
and monitor access to governmental, commercial and industrial sites.
The Debenture has a mandatory monthly principal installment beginning
December 1, 1999, which will amortize approximately one-half of the
principal prior to maturity on December 1, 2003. The Debentures are
callable at 120% of par, once specific earnings per share and bid price
tests of the underlying common stock are met.
At the option of the Fund and in multiples of $10,000, the Debentures
are convertible into common stock of IZZI at $1.05 per share. The
conversion price is subject to certain anti-dilution provisions and is
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subject to a one-time adjustment in 1998 based on IZZI's performance for
1997. The adjustment is predicated on earnings and the bid price of the
Company's stock. The Fund has the right to demand stock registration and
certain piggyback stock registration rights. Costs of two demand
registrations are at the Company's expense if commenced subsequent to July
12, 1998. The Fund also has warrants to purchase 12,500 shares of IZZI
stock, which warrants have a cost basis of $3,750.
Effective October 31, 1997, the Fund entered into an Intercreditor
Agreement with the Company, its subsidiaries, and an outside lender,
pursuant to which the Fund has agreed to subordinate its first priority
security interest in the assets of Tri-Coastal Systems, Inc., one of the
Company's wholly owned subsidiaries. In exchange for the Funds's
agreement to execute the Intercreditor Agreement, the Company agreed to
increase the interest payable in the Fund's Convertible Debentures by 300
basis points for so long as the Intercreditor Agreement is in effect.
In addition to the Fund's investment on December 31, 1996, RUSGIT
made an identical investment of $2,300,000 in IZZI. The investment by
RUSGIT was made on a pari-passu basis with the Fund.
The Fund has a right to designate a nominee to the Board of Directors
of the Company, which designee may serve as a Director or Advisory
Director at his or her election.
Interscience Computer Corporation. (INTR)
On September 22, 1994, the Fund purchased 36,000 shares of
Interscience Computer Corporation's ("Interscience") Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") with a stated
value of $100 per share for a total purchase price of $3,600,000.
Interscience provides third party maintenance to large data centers and
high-speed production printers. Interscience's field engineers provide
top quality on-site care, operational advice and prompt delivery of parts.
Interscience also develops and markets consumable products used in various
printing processes. Interscience experiences a high rate of recurring
revenue because of their long-term service contracts.
The holders of Series A Preferred Stock are entitled to receive, if
declared by the Board of Directors of Interscience, out of funds legally
available therefor, cumulative dividends at the annual rate of 7.5% of the
stated value of the Series A Preferred Stock. In addition, Interscience
pays the Fund a 1.5% management fee per year.
The holders of Series A Preferred Stock are entitled to vote upon all
matters presented to the Stockholders, together with the holders of common
stock as one class except (i) as otherwise required by law and (ii) with
respect to the election of directors to the Interscience Board of
Directors. Each share of Series A Preferred Stock entitles the holder
thereof to that number of votes equal to the number of shares of common
stock into which one share of Series A Preferred Stock would have been
convertible, if such conversion had taken place on the record date set for
determining stockholders entitled to vote at a meeting of the date of the
consent of stockholders if action is being taken by written consent. At
any meeting of the shareholders of Interscience at which directors are
<PAGE>
<PAGE 13>
elected to Interscience's board of directors, the holders of shares of
Series A Preferred Stock shall have the right, voting separately as a
class, to elect one director to the board of directors. To date, the
Investment Adviser has not exercised this right and has attended board
meetings only as an advisory director. In addition, if Interscience
defaults under the purchase agreement with the Fund, the Fund has the
right to elect a majority to the board of directors of Interscience.
Each share of Series A Preferred Stock is convertible into a number
of shares of Common Stock determined by dividing (i) $100 by (ii) the
conversion price in effect on the Conversion Date. The conversion price
at which shares of common stock shall initially be issuable upon
conversion of the shares of Series A Preferred Stock shall be $6.00
(initially, 600,000 shares of common stock for $3,600,000). The
conversion price shall be subject to further adjustment including anti-
dilution provisions.
Shares of the Series A Preferred Stock may be redeemed, in whole or
in part, at any time at the option of Interscience (subject, however, to
the Fund's right to convert), for cash at $120 per share beginning
September 23, 1994 plus, in each case, all unpaid dividends thereon,
including accrued dividends, whether or not declared, to the redemption
date. However, Interscience may not redeem the Series A Preferred unless
all of the following are satisfied: (1) Interscience's Common Stock has
had a trading price of not less than 300% of the conversion price; (2)
Interscience shall have earned at least $1.20 per share in the aggregate
for the last four consecutive fiscal quarters preceding the date of
notice, and (3) the shares to be issued on conversion shall have been
registered or shall be exempted from registration and such shares shall be
freely tradeable when issued.
If any of the Series A Preferred Stock remains outstanding on or
after September 23, 2000 then at any time thereafter during the period
that any shares of the Series A Preferred Stock remain outstanding, the
remaining holders of the Series A Preferred Stock shall have the right to
elect the smallest number of directors constituting a majority of the
authorized number of directors of Interscience, and the holders of the
Common Stock shall have the right to elect the remaining directors.
On April 4, 1996, the Fund purchased 4,000 shares of Interscience
Series B Cumulative Convertible Preferred Stock ("Series B Preferred"),
stated value $100 per share, for $400,000. The holders of the Series B
Preferred are
entitled to receive dividends at an annual rate of 7.5%, the dividends to
be cumulative. The Series B Preferred stock bears voting privileges
similar to these of the Series A Preferred stock discussed above. The
Series B Preferred Stock is convertible into common stock at an initial
price of $5.00 per share. The conversion price is subject to anti-
dilution provisions. The Series B Preferred Stock also carries the
failure to convert or redeem provisions if outstanding after September 23,
2000 as the Series A Preferred Stock.
On March 6, 1997, the Company filed a Voluntary Petition for
Reorganization under Chapter 11 of the Bankruptcy Code. A plan of
<PAGE>
<PAGE 14>
reorganization has been filed, and the Company plans to emerge from
bankruptcy in the first quarter of 1998. The Fund's ownership in the
Company has increased from 19% to 38%, making the Fund the Company's
largest shareholder.
Robert Pearson, Vice President of Corporate Finance for Renaissance
Group is a member of the Company's Board of Directors as the Fund's
Director Designee.
Intile Designs, Inc. (IDES)
On February 27, 1997, the Fund purchased 10 units of Intile Designs,
Inc. ("Intile") securities through a private placement at a cost of
$50,000 per unit. Each unit consists of 150,000 shares of the Intile's
common stock. The private placement provided that Intile would seek
approval of a 1 for 3 reverse split of its common stock and enter into a
letter of intent to sell securities in a secondary public offering in
which Intile would be obligated to register the units of common stock.
The reverse split has occurred, but the secondary offering has not.
Because the units were not registered as of June 30, 1997, however,
holders of the majority of the units have the right, on one occasion only,
through two years after the private placement closing date, to demand the
company register the shares. In addition, the holders still have
piggyback registration rights with respect to the shares.
Intile is a direct distributor and importer of ceramic tile, marble,
and related home design products.
In the quarter ended September 30, 1997, a dispute involving the
taxable value of inventory led to new management and the implementation of
a reorganization plan.
In addition to the Fund's investment, on February 27, 1997 RUSGIT
made an identical investment of $500,000 in Intile. The investment by
RUSGIT was made on a pari-passu basis with the Fund.
JAKKS Pacific, Inc. (JAKK)
On December 31, 1996, the Fund invested $3,000,000 in a 9%
Convertible Debenture of JAKKS Pacific, Inc. ("Jakks"). The Debenture has
mandatory monthly principal installments beginning December 31, 1999,
which will amortize approximately one-half of the principal prior to
maturity on December 31, 2003. The Fund has the option to redeem the
stock in the event of the death or disability of the Company's CEO, Mr.
Jack Friedman. The Loan Agreement requires key employee insurance on Mr.
Friedman's life to meet this requirement.
At the option of the Fund and in multiples of $10,000, the Debentures
are convertible into common stock of JAKKS at an initial price of $8.50
per share. The conversion price is subject to certain anti-dilution
provisions. The Fund has the right to demand stock registration and
certain piggyback stock registration rights. Costs of two demand
registrations are at the Company's expense if commenced subsequent to
December 31, 1998.
<PAGE>
<PAGE 15>
The Company is engaged in the development, marketing and distribution
of toys and electronic products for children.
On May 1, 1997, the Company completed a secondary offering and sold
600,000 shares of common stock at a price of $5.75 per share. Pursuant to
the anti-dilution provisions contained in the Fund's convertible
debenture, the Fund's conversion price was adjusted from $8.50 to $5.75
per share, giving the Fund the right to 521,739 shares of the Company's
common stock on a fully converted basis.
In October 1997, the company announced that it had completed is
acquisition of the Child Guidance and REMCO Steel toy lines.
In addition to the Fund's investment on December 31, 1996, RUSGIT
made an identical investment of $3,000,000 in JAKKS Pacific, Inc. The
investment by RUSGIT was made on a pari-passu basis with the Fund.
LifeQuest Medical, Inc. (LQMD)
On December 19, 1997, the Fund invested $1,500,000 in a 9%
Convertible Debenture of LifeQuest Medical, Inc. ("LifeQuest"). In
addition, the Fund purchased 125,000 shares of the Company's common stock
for $500,000, or $4.00 per share. The Debenture has mandatory monthly
principal installments beginning December 19, 2000 and continuing on the
first day of each successive month thereafter prior to maturity on
December 19, 2004.
At the option of the Fund and in multiples of $100,000, the
Debentures are convertible into common stock of the Company at a price of
$4.00 per share. If any additional common stock is issued by the Company
for consideration of less than $4.00 per share, then in each such case the
initial conversion price of the Fund's Debenture shall be reduced to a new
conversion price in an amount equal to the price per share for the
additional common stock being issued.
In addition to the above anti-dilution clause, the conversion price
is also subject to a one-time adjustment in the event that the Company's
stock price remains below the Debenture conversion price and the Company's
financial results for the fiscal year ended December 31, 1998 meet a
certain threshold. Specifically, if the Company reports pre-tax income of
$4,400,000 excluding extraordinary gains for the December 31, 1998 fiscal
year, and the volume-weighted average closing bid price of the common
stock (as determined by Bloomberg Financial Services for the 21
consecutive trading days following the Company's public press release of
its December 31, 1998 fiscal year end financial results) is a price less
than the existing conversion price, the conversion price for the Fund's
Debentures will be reduced accordingly. Additionally, the Fund has the
right to demand stock registration and certain piggyback stock
registration rights for both the Debenture and the common stock, which is
currently unregistered. The two demand registrations available for the
Fund can only be executed once per year, but must be made within 18 months
following the closing date of the initial investment.
The Company and its four subsidiaries, LifeQuest Endoscopic
Technologies, Inc., KleinMedical, Inc., Val-U-Med Inc., and ValQuest
<PAGE>
<PAGE 16>
Medical, Inc., are engaged in the development, manufacture and
distribution of instruments, equipment and surgical supplies used in
minimally invasive surgery.
In addition to the Fund's investments on December 19, 1997, RUSGIT
made an identical investment by purchasing a $1,500,000 9% Convertible
Debenture, together with 125,000 shares of LifeQuest common stock for
$500,000. The investments by RUSGIT were made on a pari-passu basis with
the Fund.
Packaging Research Corporation
On December 14, 1995, the Fund invested $3,200,000 in a 9%
convertible Debenture issued by Packaging Research Corporation ("PRC") of
Englewood, Colorado and its subsidiary, Mama Rizzo's, Inc. ("MRI"). PRC
manufactured food processing equipment and through its subsidiary, MRI,
manufactured and distributed premium pasta sauces.
The debentures were callable at 120% of par after January 1, 1996,
once specific earnings per share and bid price tests were met. The
debentures provided for mandatory principal installments beginning January
1, 1999, which installments would have amortized approximately one-half of
the principal prior to maturity on January 1, 2003.
At the option of the Fund, the $3,200,000 Convertible Debenture was
convertible into common stock of PRC at $1.50 per share. This conversion
price was subject to a one time adjustment at January 1, 1997, if the
average closing bid price of the common stock for the 20 consecutive
trading days prior to January 1, 1997, was less than $1.50 per share. If
an adjustment was triggered, the conversion price would have been reduced
to eighty percent (80%) of the average closing bid price of the Company's
common stock for the 20 consecutive trading days prior to January 1, 1997.
The Fund had the right to demand stock registration and certain piggyback
stock registration rights and at least two registrations at the Company's
expense.
On August 23, 1996, MRI filed a voluntary petition seeking relief
under Chapter 11 of the Bankruptcy Code. Subsequent to that filing, the
Fund advanced $93,900, with court approval, in order to facilitate the
orderly completion of inventory and to pay administrative costs. MRI sold
its equipment and inventories as well as all intangibles. A sale of the
remaining office equipment is currently being planned.
On March 4, 1997, PRC filed to reorganize under Chapter 11.
Thereafter the Company filed a motion to sell substantially all of its
operating assets. By March 31, 1997, the Fund had recovered $155,080 from
the sale of certain MRI assets, and by May 2, 1997 the Fund had recovered
$500,000 from the sale of the Company's assets. The Fund anticipates
recovering an additional $150,000 to $160,000 from the last payment on
MRI, which has been collected, but is currently held by the Bankruptcy
Trustee pending distribution. In the third quarter ended September 30,
1997, the Fund recorded a realized loss on the investment of $2,438,421
and removed the investment from the books.
<PAGE>
<PAGE 17>
Play by Play Toys & Novelties, Inc. (PBYP)
Effective July 3, 1997, the Fund invested $2,500,000 in an 8%
Convertible Debenture of Play by Play Toys & Novelties, Inc. ("Play by
Play"). The Debenture matures in seven years, is convertible into shares
of common stock of the Company at $17.00 per share, and has mandatory
monthly principal installments beginning June 30, 2000. The Debentures
are callable by the Company at 101% of par, so long as the closing bid
price for the common stock averages at least $25.50 per share for the
twenty consecutive trading days prior to the call, the Company has filed a
registration statement covering the shares of common stock issuable upon
conversion of the Debenture, and the Company achieves certain benchmarks
with respect to trading volume and price to earnings ratios.
Subsequent to the Fund's closing of its investment in Play by Play,
Play by Play completed a secondary public offering for $16.00 per share.
According to the anti-dilution provisions of the Fund's Debenture, the
Fund's conversion price was reduced to $16.00 per share, giving the Fund,
on a fully converted basis, the right to 156,250 shares of the Company's
common stock.
The company designs, develops, markets and distributes stuffed toys
and sculpted toy pillows based upon licenses for children's entertainment
characters and corporate trademarks. The toys are sold into the indoor
and outdoor amusement and entertainment market. The company has also
entered the retail market with a line of interactive and talking toys.
In addition to the Fund's investment on July 3, 1997, RUSGIT made an
identical investment of $2,500,000 in Play by Play. The investment by
RUSGIT was made on a pari-passu basis with the Fund.
Poore Brothers, Inc.
On May 31, 1995, the Fund advanced Poore Brothers, Inc. ("Poore
Brothers") $2,100,000 under terms of a 9% Convertible Debenture. Poore
Brothers manufactures and distributes a line of potato chips and popcorn
in the Phoenix, Arizona and Nashville, Tennessee areas and distributes its
own branded products and other products in the Phoenix and Houston areas.
The Debenture is secured by a lien on the Company's intangible assets and
trademarks; however, the Company's other assets are pledged to senior
secured lenders. The total amount of borrowings issued under the loan
agreement is $2,700,000 with First Interstate Equity Corporation advancing
$600,000.
The Debenture is convertible into common stock of the Company at a
ratio equal to 1,926,606 shares of common stock of the Company for
$2,100,000 (initially $1.09 per share); provided, however, that the
conversion price shall be subject to adjustment at times and in accordance
with the anti-dilution provisions of the debenture. The debenture, at the
option of the Company may be redeemed in whole, but not in part, at 120%
of par, provided the following has occurred: (i) the Company has completed
an initial public offering of its securities; (ii) the closing bid price
for the company's common stock averages at least $4.00 for a period of 30
consecutive trading days and the stock is listed on NASDAQ, AMEX or NYSE;
(iii) the $4.00 call price is supported by a minimum of $0.20 annual
earnings per share fully diluted for the immediately preceding fiscal
<PAGE>
<PAGE 18>
year; and (iv) the shares of common stock underlying the debenture are
fully registered. Interest is payable monthly commencing July 1, 1995.
Monthly principal payments are scheduled to begin July 1, 1998, which
installments will amortize approximately one-half of the principal prior
to maturity on July 1, 2002.
The Fund has the right to demand stock registration and certain piggy
back stock registration rights, and at least two registrations will be at
the Company's expense. The Fund has the right to designate a nominee to
the Board of Directors of the Company, which designee may serve as a
Director or Advisory Director at his or her election.
On December 11, 1996, the Fund converted $311,429 of its debentures
into 285,715 shares of the Company's common stock which were sold on that
date as part of the Company's initial public offering. The Fund received
$900,002 for the stock resulting in a gain of $588,573.
Poore Brothers underwent restructuring in 1997. On January 27, 1997,
the company announced the appointment of Eric J. Kufel as President and
Chief Executive Officer ("CEO"). On June 4, 1997, Poore Brothers of Texas
Inc., a wholly owned subsidiary of Poore Brothers, sold its Houston, Texas
distribution business in which the buyer was sold certain assets including
inventory, vehicles, and capital equipment, was granted a license to be
the Company's exclusive distributor in the Houston, Texas market, and
agreed not to distribute any other brand of kettle chip. In September
1997, the Company consolidated all of its manufacturing operations into a
new 60,000 square foot Goodyear, Arizona facility. As part of the
consolidation, the Company closed its La Vergne, Tennessee facility on
September 30, 1997 resulting in the termination of thirty employees.
Poore Brothers incurred a one-time charge of approximately $470,000 in
connection with the closure of this facility.
Robert Pearson, Vice President of Corporate Finance for Renaissance
Group is a member of the Company's Board of Directors as the Fund's
Director Designee.
TAVA Technologies, Inc. (formerly Topro, Inc.)(TAVA)
TAVA Technologies Inc. ("TAVA"), formerly Topro, Inc., provides
control system integration products and services. It also is a
distributor and manufacturer's representative of component devises used in
control applications. The Company changed its name from Topro, Inc. to
TAVA in February 1998.
On February 21, 1996, the Fund invested $1,500,000 in a 9%
Convertible Debenture of TAVA ("Debenture No. 1"). Debenture No. 1 had
mandatory monthly principal installments beginning March 1, 1999, which
would have amortized approximately one-half of the principal prior to
maturity on March 1, 2003. Debenture No. 1 is also callable at 120% of
par, once specific earnings per share and bid price tests of the
underlying common stock were met.
The Fund received warrants to purchase 225,000 shares of TAVA's stock
on February 21, 1996. These warrants are exercisable at a price of $2.00
per share and expire on March 31, 1999.
<PAGE>
<PAGE 19>
On March 5, 1996, the Fund invested in a second TAVA Debenture in the
amount of $1,000,000 ("Debenture No.2"). Debenture No. 2 contains
substantially the same covenants and terms as Debenture No. 1.
The Fund received warrants to purchase 150,000 shares of TAVA's
common stock on March 5, 1996. These Warrants are exercisable at a price
of $2.00 per share and will expire on March 31, 1999.
On June 17, 1996, the Fund invested in a third TAVA Debenture in the
amount of $1,000,000 ("Debenture No.3") Debenture No.3 contains
substantially the same covenants and terms as Debentures No. 1 and No.2,
except Debenture No.3 has an initial conversion price being set at $2.25
per share and matures June 1, 2003. The initial conversion price of
Debenture No. 3 was reduced to $1.50 by subsequent agreement.
In addition to the Fund's investments in Debenture Nos. 1,2 and 3
discussed above, RUSGIT made an identical investment of $1,200,000 in
Convertible Debentures of TAVA on October 30, 1996. The investment by
RUSGIT was under the same terms and conditions as the Fund's investment
with the exception of timing. The conversion rate of the RUSGIT
investment is at $1.50 per share.
During the quarter ended September 30, 1997, the Fund converted all
of its Debenture No. 1 and $499,500 of its Debenture No. 2 into 1,333,000
shares of common stock. The Fund sold these shares during the quarter for
$7,265,421, recording a realized gain of $5,265,921.
On July 29, 1997, the Fund exercised two warrants to buy 375,000
shares of the common stock of the Company for $2.00 per share. Upon
exercising the warrants, the Fund sold all 375,000 shares of common stock
resulting in proceeds to the Fund of $1,827,052, representing a realized
capital gain of $1,077,052.
In addition to the Fund's conversion of a portion of its Convertible
Debentures, RUSGIT converted a portion of its Debentures into common stock
of the Company pursuant to the terms of the RUSGIT Debenture, and the
stock was thereafter sold. The RUSGIT conversion and sale of stock was
made on a pari-passu basis with the Fund's conversion and sale of stock.
Effective October 23, 1997, the Company issued to the Fund warrants
to purchase 25,000 shares of TAVA's common stock at an exercise price of
$2.00 per share. The warrants were issued in consideration for the Fund's
agreement to waive certain financial ratio requirements contained in the
loan agreement between the Fund and the Company.
Robert Pearson, Vice President of Corporate Finance for Renaissance
Group is a member of the Company's Board of Directors as the Fund's
Director Designee.
Voice It Worldwide, Inc. (MEMO)
Voice It Worldwide, Inc. ("VIWI") designs, develops and markets the
"Voice It" personal note recorder which allows the user to verbalize
<PAGE>
<PAGE 20>
reminders and short messages without paper or pencil. The products
utilize computer chips and are the size of credit cards one-quarter inch
thick.
On October 27, 1995, the Fund advanced VIWI $2,450,000 under terms of
an 8% Convertible Debenture due November 1, 2002. Interest is payable
monthly beginning December 1, 1995. The Debentures provide for mandatory
principal installments beginning November 1, 1998, which installments will
amortize approximately one-half of the principal prior to maturity on
November 1, 2002.
The Debenture is convertible into common stock of the Company
initially at $2.625 per share, provided that the conversion price shall be
subject to a one-time adjustment at the time of filing its 1996 Form 10KSB
and additional adjustments at times and in accordance with the anti-
dilution provisions of the debenture. The Fund has the right to demand
stock registration and certain piggyback stock registration rights, and at
least two registrations will be at the Company's expense. The Fund has
the right to designate a nominee to the Board of Directors of the Company,
which designee may serve as a director or Advisory Director at his or her
election.
In addition to the Debentures, the Fund, on October 27, 1995,
purchased for $50,000 warrants to purchase 915,000 shares of common stock
from Voice It Worldwide, Inc. at a purchase price of $2.75 per share. The
warrants are exercisable on the date of purchase and are void after
October 27, 1998. The warrants are subject to anti-dilution provisions.
If after October 27, 1996, the closing bid price of the Company's common
stock averages greater than $6.00 per share for twenty consecutive trading
days prior to notice to call, the warrants may be redeemed for $45,750.
Effective December 31, 1996, the conversion rate on the Debentures was
reset from $2.625 per share to $0.95 per share and the warrant exercise
price was reset at $1.25 per share.
In accordance with an agreement dated November 26, 1997, the Fund
agreed to exercise its warrants to purchase 940,000 shares of the
Company's Common Stock. In exchange for the Fund's agreement to exercise,
the strike price was reduced from $1.25 per share to $1.06 per share, the
Fund received 500,000 additional warrants exercisable at $1.60 per share,
and the Company agreed to sell $500,000 of the Company's common stock
prior to the Fund's exercise.
Valuation of Investments
The Prospectus and original offering documents specify that the
securities held by the Fund are to be valued as follows:
On a quarterly basis, Renaissance Group prepares a valuation of the
assets of the Fund including Temporary Investments, Eligible Portfolio
Investments, and Other Portfolio Investments, subject to the approval of
the Board of Directors. Valuations of portfolio securities are done in
accordance with generally accepted accounting principles and the financial
reporting policies of the SEC. The applicable methods prescribed by such
principles are described below.
Generally, pursuant to the procedures established by the Investment
<PAGE>
<PAGE 21>
Adviser, the fair value of each investment is initially based primarily
upon its original cost to the Fund. Costs are the primary factor used to
determine fair value until significant developments affecting the
Portfolio Company (such as results of operations or changes in general
market conditions) provide a basis for use in the fair value
determination. Portfolio investment for which market quotations are
readily available and which are freely transferable are valued as follows:
(i) securities traded on a securities exchange or the NASDAQ are valued at
the closing price on, or the last trading day prior to, the date of
valuation and (ii) securities traded in the over-the-counter market are
valued at the average of the closing bid and ask price for the last
trading day on, or prior to, the date of valuation. Securities for which
market quotations are readily available but are restricted from free
trading in the public securities markets (such
as Rule 144 stock) are valued by discounting the closing price or the
closing bid and ask prices, as the case may be, for the last trading day
on, or prior to, the date of valuation to reflect the liquidity caused by
such restriction, but taking into consideration the existence, or lack
thereof, of any contractual right to have the securities registered and
freed from such trading restrictions. The fair value of investments for
which no market exists are determined on the basis of appraisal procedures
established in good faith by the Investment Adviser. Fair value
determinations are based upon such factors as the Portfolio Company's
earnings and net worth, market prices for similar securities of comparable
companies and an assessment of the Portfolio Company's future financial
prospectus. In the case of unsuccessful operations, the appraisal may be
based upon liquidation value. Appraisal valuations are necessarily
subjective.
Competition for Investments
The Fund has significant competition for investment proposals.
Competitive sources for growth capital for the industry include insurance
companies, banks, equipment leasing firms, investment bankers and private
investors. Many of these sources have substantially greater financial
resources than is contemplated will be available to the Fund. Therefore,
the Fund will have to compete for investment opportunities based on its
ability to respond to the needs of the prospective company and its
willingness to provide management assistance. In some instances, the
Fund's requirements as to provision of management assistance will cause it
to be non-competitive.
Personnel
The Fund has no direct employees, but instead has contracted
Renaissance Group pursuant to the Investment Advisory Agreement to provide
all management and operating activities. Renaissance Group currently has
twelve employees who are engaged in performing the duties and functions
required by the Fund. At the present time, a substantial portion of
Renaissance Group's staff time is devoted to activities of the Fund.
However, because of the diversity of skills required, the Fund cannot
afford to employ all these persons solely for its own needs, and
therefore, these employees are not engaged solely in activities of the
Fund.
<PAGE>
<PAGE 22>
The Investment Advisor currently serves as General Partner and
manager to Renaissance Capital Partners, Ltd. ("Renaissance I") and
Renaissance Capital Partners II, Ltd. ("Renaissance II") as well as the
Investment Advisor to RUSGIT. Renaissance I and Renaissance II are BDC's
with investment objectives similar to those of the Registrant.
Renaissance I and Renaissance II are not actively seeking additional
investments. RUSGIT is a public limited company registered in England and
Wales, listed on the London Stock Exchange, which invests in privately
placed convertible debentures issued by companies similar to the
investments of the Fund. RUSGIT will invest primarily pari-passu with the
Fund. In 1996, RUSGIT raised net investment capital of approximately
$30,789,000. As of December 31, 1997, RUSGIT had made a total of eight
(8) investments having an aggregate cost value of $14,353,750. Seven (7)
of the investments were active at December 31, 1997. In addition,
Renaissance Group may, from time to time, provide investment advisory
services, management consulting services and investment banking services
to other clients.
No accurate data or estimate is available as to the percentage of
time, individually or as a group, that will be devoted to the affairs of
the Fund. Initially, and while the Fund's assets are in the process of
being invested, a majority of the staff time of Renaissance Group is
employed in functions and activities of the Fund. Thereafter, the
officers and employees have and will devote such time as is required, in
their sole discretion, for the conduct of business, including the
provision of management services to Portfolio Companies.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
The Fund does not contemplate making a substantial portion of its
investments in foreign operations.
Item 2. Properties
The Fund's business activities are conducted from the offices of
Renaissance Group, which offices are currently leased until July 31, 1999
in a multi-story general office building in Dallas, Texas. The use of
such office facilities, including office furniture, phone services,
computer equipment, and files are provided by Renaissance Group at its
expense pursuant to the Investment Advisory Agreement.
Item 3. Legal Proceedings
There are no legal proceedings currently pending with regard to the
Fund.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1997.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
<PAGE>
<PAGE 23>
TRADING
As of December 31,1995 there was no trading in the shares of the Fund
and no established market exists for those shares. On April 30, 1996, the
Fund's common stock began trading on the NASDAQ National Market under the
trading symbol RENN.
The following table sets forth, for the periods indicated, certain
high and low prices for the Common Stock as quoted on the NASDAQ National
Market.
<TABLE>
High Low
<S> <C> <C>
Year ended December 31, 1996
Second quarter (beginning April
26, 1996) $9.88 $7.25
Third quarter $9.38 $7.75
Fourth quarter $9.38 $6.88
<S> <C> <C>
year ended December 31, 1997
First quarter $9.41 $7.25
Second quarter $8.75 $6.75
Third quarter $9.13 $6.63
Fourth quarter $10.00 $8.88
</TABLE>
NUMBER OF HOLDERS
As of December 31, 1997, there were approximately four beneficial
holders of common stock.
DIVIDEND POLICY
The investment objective of the Fund is current income and long term
capital appreciation. The Fund has elected to be treated as a regulated
investment company" under Subchapter M of the Internal Revenue Code and
will, on a quarterly basis, distribute substantially all current income in
the form of a dividend. Since the Fund was in an offering phase for all
of 1994, no dividends were paid; however, shareholders received a dividend
on April 30, 1995, representing their pro rata portion of income earned by
the Fund in 1994. Thereafter, the Fund has paid out dividends on a
quarterly basis.
Item 6. Selected Financial Data.
The following selected financial data for the period from January 20,
1994 (inception) through December 31, 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.
<TABLE>
1997 1996 1995 1994
<S> <C> <C> <C> <C>
Gross Income,
(including
<PAGE>
<PAGE 24>
realized gain) $8,512,374 $3,843,726 $3,070,938 $573,868
Net Unrealized
Appreciation
(Depreciation)
on Investments (4,832,658) 7,779,315 698,270 0
Net Income 1,146,733 10,060,620 2,503,034 206,970
Net Income per shar 0.26 2.32 0.59 0.08
Total Assets 48,356,570 50,688,180 41,995,915 39,476,579
Net Assets 44,497,360 49,130,320 40,500,172 39,182,585
Net Assets Per Share 10.25 11.32 9.54 9.42
</TABLE>
Item 7. Management's discussion and Analysis of Financial Condition and
Results of Operations
General
The purpose of the Fund is to provide growth capital to small and
medium size public companies whose ability to service the securities is
sufficient to provide a quarterly return to the shareholders and whose
growth potentials are sufficient to provide opportunity for above average
capital appreciation.
Sources of Operating Income
Generally, the major source of operating income for the Fund is
investment income, either in the form of interest on debentures, dividends
on stock, or interest on securities held pending investment in Portfolio
Companies. However, the Fund also anticipates generating income through
capital gains. The Fund will generally structure investments to obtain a
current return that is competitive with other long term finance sources
available to potential Portfolio Companies. Further, the Fund may in some
cases receive placement fees, draw-down fees and similar types of income.
It might also receive management fee income.
Generally, management fees received by Renaissance Group (or its
personnel) for services to a Portfolio Company will be paid to the account
of the Fund. The exception to this rule would apply to payments to
Renaissance Group or affiliate or designee thereof for unusual services
performed for the Portfolio Company, which are unrelated to and not
required by the Portfolio Investment in such Portfolio Company and that
are beyond the fund's contemplated management assistance to Portfolio
companies (i.e., beyond providing for director designees and limited
consultation services in connection therewith). These payments would be
made to Renaissance Group or such other person only with the approval of
the Board of Directors based, in part, on the determination that payments
for such services are no greater than fees for comparable services charged
by unaffiliated third parties, and subject to limitations and requirements
imposed by the 1940 Act.
While it will be the general principle that Renaissance Group and its
officers and directors occupy a fiduciary relationship to the Fund and
shall not receive outside compensation or advantage in conflict with that
relationship, neither Renaissance Group nor its officers and directors are
prohibited from receiving other income from non-conflicting sources.
Other Investment Funds
Renaissance Group has formed other investment funds to make
<PAGE>
<PAGE 25>
investments in similar Portfolio Companies and may, in the future, form
additional similar investment funds. Specifically, Renaissance Group
formed Renaissance I and raised net capital contributions of $12,886,000
in a private placement offering for the purpose of making primarily
convertible debentures investments in small and medium size public
companies. Renaissance I is currently fully invested. Renaissance Group
also formed Renaissance II and raised net capital contributions of
approximately $42,874,000 in a public offering for the purpose of making
primarily convertible debenture investments in small and medium size
public companies. Renaissance II is currently fully invested.
In the Spring of 1996, Renaissance Group formed RUSGIT, which invests
in privately placed convertible debentures issued by companies similar to
the investments of the Fund. RUSGIT will invest primarily pari-passu with
the Fund. In 1996, RUSGIT raised investment capital of approximately
$30,789,000, and as of December 31, 1997, had made eight (8) total
investments having an aggregate cost value of $14,353,750. Seven (7) of
the investments were active at December 31, 1997.
The determination regarding the existence of conflict of interest
between these affiliated investment funds and the Registrant, and the
resolution of any such conflict, vests in the discretion of the Board of
Directors, subject to the requirements and resolution of the 1940 Act.
Regular Quarterly Dividends
It is intended that cash dividends from operations be made to all
shareholders each quarter to provide a cash return and also to enable the
Fund to maintain its registered investment company status. Generally,
this dividend is made from profits and investment income from the previous
quarter. However, in the event that net profits are not adequate from
time to time, the dividends may be made from capital, so long as capital
is sufficient to assure repayment of all obligations of the Fund and such
capital distributions are permitted by applicable corporate law and the
1940 Act.
Quarterly dividends may be increased or decreased from time to time
to reflect increases or decreases in current rates of investment income.
The Fund's intention is to provide each shareholder a current return
compatible with the then present economic condition of the Fund.
The accounting records are maintained on a calendar quarter basis
with the fiscal year ending on December 31. Accordingly, quarterly
distributions will be made to shareholders of record as of the end of each
quarter and mailed to each shareholders address of record within 120 days
of the end of the quarter.
Optional Distributions of Capital Gains
In addition to the regular quarterly dividends, it is intended that
on an annual basis the Fund shall dividend out net realized capital gains.
Further, when deemed appropriate by the Board of Directors and subject to
registration requirements, the Fund may make in-kind distribution of
securities of Portfolio Companies. However, the timing and payment of
distributions, including in-kind distributions, is at the discretion of
the Board of Directors. In 1997, the Fund distributed $1.10 per share in
<PAGE>
<PAGE 26>
capital gains to the Shareholders.
Pursuant to its Investment Advisory Agreement, Renaissance Group
shall be paid annually and at the final dissolution or liquidation of the
Fund, a management incentive fee of 20% of the realized capital gains net
of realized and unrealized losses. Notwithstanding the foregoing, no
payment of the management incentive fee shall be made which is not
permitted by the Securities Act or other applicable law.
The performance distributions cannot be adjusted without the consent
of all of the shareholders, except if required by order of a regulatory
agency.
Liquidity and Capital Resources
Through 1994, the Fund raised gross initial capital of approximately
$41,489,500 in the offering and after administrative and offering
expenses, broker's commissions and management fees had a net available
capital for investments of approximately $38,975,000.
During 1995, the Fund invested in four additional Portfolio Companies
in an amount aggregating $9,348,546 after doing intensive due diligence on
a total of fifteen potential companies. Dividends paid to investors in
1995 amounted to $798,050. Net income in 1995 from operating activities
and interest income on funds invested in U.S. government and agency
obligations pending investment in portfolio companies, net of operating
expenses and management fees, amounted to $2,503,034. Cash used by
operating activities
in 1995 amounted to $1,234,699.
The Fund's other potential sources of available capital include gains
from capital transactions and additional investments made pursuant to the
Fund's Dividend Reinvestment Plan. In 1995, the Fund received reinvested
dividends in the amount of $424,717 and additional funds from investments
as provided for in the Fund Guidelines of $808,257. No capital gains were
realized by the Fund during 1995 and no capital gain dividend payments
were made.
During the year ended December 31, 1996, the Fund invested
$13,099,536 in six new portfolio investments and in follow-on investments.
Dividends paid to investors in 1996 amounted to $2,406,381 including 1995
accrued dividends paid in 1996 and shares purchased for reinvestment
amounted to $100,217. Net income from operating activities and interest
income on funds invested in U.S. government and agency obligations,
pending investment in portfolio companies, net of operating expenses and
management fees amounted to $10,060,620. The net cash provided by
operating activities was $4,498,954. The Fund also received $1,334,808
upon the sale of portfolio investments and $100,217 was received from
additional investments in the Fund's stock while dividend reinvestments
were $685,416.
During the year ended December 31, 1997, the fund invested $7,100,150
in four new portfolio investments and in follow-on investments. Dividends
paid to investors in 1997 amounted to $4,430,279 including 1996 accrued
dividends paid in 1997. Net income from operating activities and interest
<PAGE>
<PAGE 27>
income on funds invested in U.S. government and agency obligations,
pending investment in portfolio companies, net of operating expenses and
management fees amounted to $1,146,733. The net cash provided by
operating activities was $1,220,582. The Fund also received $10,401,150
upon the sale of portfolio investments and dividend reinvestments were
$39,849.
Generally, investments in Portfolio Companies will have an initial
fixed term of seven years, with payments of interest or dividends for that
period. Further, investments in Portfolio Companies will be individually
negotiated, non-registered for public trading, and will be subject to
legal and contractual investment restrictions. Accordingly, the Portfolio
Investment will generally be considered non-liquid.
Another possible source of available capital is debt; however, the
Fund does not presently intend to make leveraged investments. Therefore,
a lack of liquidity will generally only affect the ability to make new
investments and make distributions to shareholders.
RESULTS OF OPERATIONS
1997 Compared to 1996
During the year ended December 31, 1997, the Fund made additional
portfolio investments aggregating $7,100,150 compared to $13,009,536 in
1996. As a result of these investments and earnings held for future
investments, the Fund's 1997 total income was $3,679,716 consisting of the
following components: (i) interest income of $2,423,380; (ii) dividend
income of $68; (iii) fee income of $107,085; (iv) realized gains on
investments of $5,981,841; and (v) unrealized depreciation on investments
of $4,832,658.
The aggregate 1997 income of $3,679,716 was less than the aggregate
1996 income of $11,623,041 primarily as a result of the realized gains of
$5,981,841 and an increase in unrealized depreciation of $4,832,658 in
1997 as compared to an unrealized appreciation in 1996 of $7,779,315. The
Funds operating expenses incurred in 1997 were $2,532,983 as compared to
$1,562,421 in 1996. During 1997, an incentive fee of $1,196,366 was paid
to the Investment Advisor representing 20% of the Funds realized capital
gains, net of any realized capital losses and unrealized depreciation,
compared to $199,059 paid in 1996. In addition, the management fees
increased $37,565 in 1997.
As a result, the Funds net income decreased to $1,146,733 in 1997 as
compared to $10,060,620 in 1996.
1996 Compared to 1995
During 1996, the Fund made additional portfolio investments
aggregating $13,099,536 compared to $9,348,546 in 1995. As a result of
these investments and earnings held for future investments, the Fund's
1996 total income was $11,623,041, consisting of the following components;
(i) interest income of $2,182,594; (ii) dividend income of $306,190; (iii)
fee income of $359,323; (iv) realized gains on investments of $995,296;
and (v) unrealized appreciation on investments of $7,779,315.
<PAGE>
<PAGE 28>
The aggregate 1996 income of $11,623,041 exceeded the aggregate 1995
income of $3,769,208 primarily as a result of the realized gains of
$995,296 and an increase in unrealized appreciation to $7,779,315 in 1996
as compared to $698,270 in 1995. The Fund's operating expenses incurred
in 1996 were $1,562,421 as compared to $1,266,174 in 1995. During 1996,
an incentive fee of $199,039 was paid to the Investment Advisor
representing 20% of the Fund's realized capital gains, net of any realized
capital losses. In addition, the management fees increased $69,798 in
1996.
As a result, the Fund's net income increased to $10,060,620 in 1996
as compared to $2,503,034 in 1995.
Item 8. Financial Statements and Supplementary Data.
For the Index to Financial Statements, see "Index to Financial
Statements" on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of Registrant.
Information required by this item is incorporated by reference from
the Proxy Statement pursuant to Regulation 14A of the General Rules and
Regulations under the Exchange Act.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference from
the Proxy Statement pursuant to Regulation 14A of the General Rules and
Regulations under the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item is incorporated by reference from
the Proxy Statement pursuant to Regulation 14A of the General Rules and
Regulations under the Exchange Act.
Item 13. Certain Relationships and Related Transactions.
Information required by this item is incorporated by reference from
the Proxy Statement pursuant to Regulation 14A of the General Rules and
Regulations under the Exchange Act.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8 K.
DOCUMENTS FILED AS PART OF THIS FORM 10K
<PAGE>
<PAGE 29>
Financial Statements: The financial statements filed as part of this
report are listed in "Index to Financial Statements" on page F-1 hereof.
Financial Schedules
There are no schedules presented since none are applicable.
REPORTS ON FORM 8K
The Fund did not file a report on Form 8 K during the fourth quarter
of 1997.
EXHIBITS
3.1 Renaissance Capital Growth & Income Fund Amended Articles of
Incorporation and By-laws (1)
10.1 Investment Advisory Agreement as of February 15, 1994 (1)
10.2 Dividend Reinvestment Plan (1)
(1) Incorporated by reference from Form N-2 as filed with the
Securities and Exchange Commission on February 25, 1994 (Registration No.
33-75758).
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, there unto duly authorized.
Date: March 31, 1998
Renaissance Capital Growth & Income Fund III, Inc.
(Registrant)
By: \s\
Russell Cleveland,
President and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Fund in the capacities and on the date indicated Signatures.
Signature Capacity in Which Signed Date
\s\
Russell Cleveland Chairman, President and director March 31, 1998
\s\ Senior Vice President, Secretary March 31, 1998
Barbe Butschek and Treasurer and Chief Financial
Officer
<PAGE>
<PAGE 30>
\s\
Ernest C. Hill Director March 31, 1998
\s\
Thomas W. Pauken Director March 31, 1998
\s\
Peter Collins Director March 31, 1998
<PAGE>
<PAGE 31>
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Statements of Financial Condition F-3
December 31, 1997 and 1996
Statements of Investments- F-4 through F-7
December 31, 1997 and 1996
Statements of Operations- F-8
Years ended December 31, 1997, 1996, 1995
Statements of Changes in Net Assets F-9
Years ended December 31, 1997, 1996, 1995
Statements of Cash Flows- F-10
Years ended December 31, 1997, 1996, 1995
Notes to Financial Statements F-12 through F-14
<PAGE>
<PAGE 32>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Financial Statements
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
<PAGE F2>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Renaissance Capital Growth & Income Fund III, Inc.:
We have audited the accompanying statements of financial condition of
Renaissance Capital Growth & Income Fund III, Inc., including the
statements of investments, as of December 31, 1997 and 1996, and the
related statements of operations, changes in net assets, and cash flows
for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification and confirmation of
investments owned as of December 31, 1997 and 1996, by examination of
securities held in safekeeping for the Company and correspondence with the
custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Renaissance Capital
Growth & Income Fund III, Inc. as of December 31, 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 GROWTH & INCOME FUND III, INC.
Statements of Financial Condition
December 31, 1997 and 1996
Assets 1997 1996
<S> <C> <C>
Cash and Cash equivalents $15,972,424 $15,841,272
Investments at fair value, cost of
24,150,665 and $25,708,570 in 1997
and 1996, respectively (note 4) 27,795,592 34,186,155
Receivable from sale of
investment (note 5) 4,200,000 -
Accounts receivable - 169,486
Interest receivable 141,279 158,029
Organization costs, net of accumulated
amortization 208,529 333,238
Other assets 38,746 -
Total assets $48,356,570 $50,688,180
Liabilities and Net Assets
Liabilities:
Accounts payable $ 31,198 36,077
Accounts payable -affiliate (note 3) 1,440,889 523,923
Dividends payable 2,387,123 997,860
3,859,210 1,557,860
Net assets (note 6):
Common stock, $1 par value; authorized
20,000,000 shares;4,342,942 and
4,339,422 shares issued and
outstanding in 1997 and 1996,
respectively (note 3) 4,342,942 4,339,422
Additional paid-in capital 36,258,896 36,222,567
Undistributed net investment income 3,895,522 8,568,331
Net assets, equivalent to $10.25
and $11.32 per share on the shares
outstanding in 1997 and 1996
respectively 44,497,360 49,130,320
Commitments and contingencies
(notes 3 and 4)
$48,356,570 $50,688,180
</TABLE>
<PAGE>
<PAGE F4>
<TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statement 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 Promissory Note
Valued at fair value as determined by
the Investment Advisor (note 4):
Voice it Worldwide, Inc. -
Convertible debenture 8.0% 11/01/02 $2,450,000 3,031,875
Poore Brothers, Inc.-
Convertible debenture 9.0 07/01/02 1,788,571 1,788,571
Topro, Inc. -
Convertible debenture 9.0 varies 1,500,500 6,437,145
JAKKS Pacific Inc. -
Convertible debenture 9.0 12/31/03 3,000,000 3,873,478
Integrated Securities Systems (1)
Convertible debenture 9.0 12/01/03 2,300,000 2,575,178
Fortune Natural Resources Corp.
Convertible promissory note 12.0 12/31/07 350,000 350,000
LifeQuest Medical, Inc.-
Convertible debenture 9.0 12/19/04 1,500,000 1,500,000
12,889,071 19,556,247
Other Portfolio Investments-
Convertible Debenture
Valued at fair value as determined by
the Investment Advisor (note 4):
Bentley Pharmaceuticals, Inc.-
Convertible debenture 12.0 02/13/06 744,800 1,080,000
Play by Play Toys and
Novelties,Inc.
Convertible debenture 8.0 06/30/04 2,500,000 2,621,289
3,244,800 3,701,289
<FN>
<F1>
1 - Interest payments under the terms of the convertible debenture are
<PAGE>
<PAGE F5>
delinquent as of December 31, 1997. (Continued)
</FN>
</TABLE>
<PAGE>
<PAGE F6>
<TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments, Continued
1997
Fair
Shares Cost value
<S> <C> <C> <C>
Eligible Portfolio Investments -
Common Stock, Preferred Stock and Warrants
Valued at fair value as determined by
the Investment Advisor (note 4):
Interscience Computer Corporation (2):
Series A, cumulative convertible
redeemable preferred stock 36,000 $3,600,000 1,400,000
Series B, cumulative convertible
preferred stock 4,000 400,000 -
Topro, Inc. - warrants to purchase
25,000shares of Topro, Inc.
common stock 25,000 - 123,750
Voice It Worldwide, Inc. -
warrants to purchase 500,000
shares of Voice It Worldwide,
Inc. common stock 500,000 - -
Voice It Worldwide, Inc. -
common stock 940,000 1,046,400 1,105,088
Integrated Security Systems -
warrants to purchase 12,500
shares of Integrated Security
Systems common stock 12,500 3,750 3,750
Intile Designs, Inc. -
common stock 500,000 500,000 185,000
LifeQuest Medical,Inc.-
common stock 125,000 500,000 412,657
6,050,150 3,230,245
Other Portfolio Investments -
Common Stock and Warrants
Dwyer Group, Inc. - common stock 675,000 1,966,644 1,307,811
4,150,665 $27,795,592
<FN>
<F1>
2 - Dividend payments under the terms of the preferred stock are delinquent
as of December 31, 1997.
</FN>
</TABLE>
<PAGE>
<PAGE F7>
<TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statement 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
by the Investment Advisor (note 4):
Voice It Worldwide, Inc. -
Convertible debenture 8.0% 11/1/02 $2,450,000 2,828,750
Packaging Research Corporation (1):
Convertible debenture 9.0 1/1/03 3,200,00 800,000
Note receivable 15.0 2/28/97 93,900 -
Poore Brothers, Inc. -
Convertible debenture 9.0 7/1/02 1,788,571 5,926,945
Contour Medical, Inc. -
Convertible debenture 9.0 7/1/03 2,500,000 2,500,000
Topro, Inc.-
Convertible debentures 9.0 varies 3,500,000 5,707,500
JAKKS Pacific, Inc. -
Convertible debenture 9.0 12/31/03 3,000,000 3,000,000
Integrated Securities Systems -
Convertible debenture 9.0 12/31/03 2,300,000 7,414,047
18,832,471 28,177,242
Other Portfolio Investments -
Convertible Debenture
Valued at fair value as determined by
the Investment Advisor (note 4):
Bentley Pharmaceuticals, Inc.
Convertible debenture 12.0 2/13/06 744,800 1,040.000
<FN>
<F1>
1- interest payments under the terms of the convertible debenture or note
receivable are delinquent as of December 31, 1996.
</FN>
</TABLE>
<PAGE>
<PAGE F8>
<TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments, Continued
1996
Fair
Shares Cost value
<S> <C> <C> <C>
Eligible Portfolio Investments -
Common Stock, Preferred stock
and Warrants
Valued at fair value as determined
by the Investment Advisor (note 4):
Interscience Computer Corporation:
Series A, cumulative convertible
redeemable preferred stock 36,000 $3,600,000 2,600,000
Series B, cumulative convertible
preferred stock 4,000 400,000 400,000
Topro, Inc.- warrants to purchase
375,000 shares of Topro, Inc.
common stock 375,0000 - 220,313
Voice It Worldwide, Inc. - warrants
to purchase 25,000 shares of
Voice It Worldwide, Inc. common
stock 25,000 - -
Voice It Worldwide, Inc. - warrant
to purchase 915,000 shares of
Voice It Worldwide, Inc. common
stock 1 50,000 50,000
4,050,000 3,270,313
Other Portfolio Investments -
Common Stock and Warrants
Dwyer Group, Inc. - common stock 700,000 2,054,182 1,305,600
Bentley Pharmaceuticals, Inc. -
warrants to purchase 393,000
Bentley Pharmaceuticals, Inc.
common stock 393,000 27,117 393,000
2,081,299 1,698,600
$25,708,570 34,186,155
<FN>
<F1>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE F9>
<TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
Income:
Interest $2,423,380 2,182,917 2,587,738
Dividend Income 68 306,190 256,521
Commitment and other fees 107,085 359,323 226,679
2,530,533 2,848,430 3,070,938
Operating Expenses (note 3):
General and administrative 519,873 584,183 556,793
Incentive fee 1,196,366 199,059 -
Management fees 816,744 779,179 709,381
2,532,983 1,562,421 1,266,174
Operating income (loss) (2,450) 1,286,009 1,804,764
Investment income:
Net unrealized appreciation
on investments (4,832,658) 7,779,315 698,270
Net unrealized gain on
Investments 5,981,841 995,296 -
Investment income 1,149,183 8,774,611 698,270
Net income $1,146,733 10,060,620 2,503,034
Net income per share
(note 1(d)) $ .26 2.32 .59
<FN>
<FN1>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE F10>
<TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Changes in Net Assets
Years ended December 31, 1997, 1996 and 1995
<S> <C>
Net assets, December 31, 1994 $39,182,525
Net income 2,503,034
Dividends (1,986,186)
Proceeds from issuance of 40,141 shares (note 6) 376,082
Reinvested dividends to purchase 45,592 shares (note 6) 424,717
Net assets, December 31, 1995 40,500,172
Net income 10,060,620
Dividends (2,216,105)
Proceeds from issuance of 10,617 shares (note 6) 100,217
Reinvested dividends to purchase 74, 175 shares (note 6) 685,416
Net assets, December 31, 1996 49,130,320
Net income 1,146,733
Dividends (5,819,542)
Reinvested dividends to purchase 3,520 shares (note 6) 39,849
Net assets, December 31, 1997 $ 44,497,360
<FN>
<FN1>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE F11>
<TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
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 income $1,146,733 10,060,620 2,503,034
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Net unrealized (appreciation)
on investments depreciation
on investments 4,832,658 (7,779,315) (698,270)
Net realized gain on investments (5,981,841) (995,296) -
Discount accretion on
short-term investments - - (107,973)
Amortization of organization
costs 124,709 124,708 124,709
Increase (decrease) in
receivable from sale of
investment - 2,500,000 (2,500,000)
(Increase) decrease in accounts
receivable 169,486 (50,483) (25,396)
(Increase) decrease in
interest receivable 16,750 386,327 (544,356)
Increase (decrease) in accounts
payable (4,879) 36,077 -
Increase in accounts payable-
affiliate 916,966 216,316 13,553
Net cash provided by (used
in) operating activities 1,220,582 4,498,954 (1,234,699)
Cash flows from investing activities:
Purchase of investments (7,100,150) (13,099,536) (9,348,546)
Proceeds from sale of
investments 10,401,150 1,334,808 -
Decrease in short term
investments (net) - 21,348,889 460,823
Net cash provided by (used in)
investing activities 3,301,000 9,584,161 (8,887,723)
Cash flows from financing
activities:
Net proceeds from issuance of
shares - 100,217 808,257
Reinvested dividends to
purchase shares 39,849 685,416 424,717
Cash dividends (4,430,279) (2,406,381) (798,050)
Net cash (used in) provided by
financing activities (4,390,430) (1,620,748) 434,924
Net increase (decrease) in cash and
cash equivalents 131,152 12,462,367 (9,687,498)
<PAGE>
<PAGE F12>
Cash and cash equivalents at
beginning of the year 15,841,272 3,378,905 13,066,403
Cash and cash equivalents
at end of the year $15,972,424 15,841,272 3,378,905
<FN>
<F1>
Noncash investing and financing activities:
<F2>
The fourth quarter dividends of $2,387,123, $997,860 and $1,188,136 were
accrued as of December 31, 1997, 1996 and 1995, respectively.
<F3>
During 1997, the Fund recorded a receivable from the sale of an investment
amounting to $4,200,000.
<F4>
During 1997, the Fund recorded a receivable from the liquidation of an
investment. At December 31, 1997, the receivable amounted to $38,746 and
is included in other assets in the accompanying statement of financial
condition.
<F5>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE F13>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(1) Organization and Business Purpose
Renaissance Capital Growth & Income Fund III, Inc. (the Fund), a
Texas corporation, was formed on January 20, 1994. The Fund offered to
sell shares in the Fund until closing of the offering on December 31,
1994. The Prospectus of the Fund required minimum aggregate capital
contributions by shareholders of not less than $2,500,000 and allowed for
maximum capital contributions of $50,000,000. The Fund seeks to achieve
current income and capital appreciation potential by investing primarily
in unregistered equity investments and convertible issues of small and
medium size companies which are in need of capital and which Renaissance
Capital Group, Inc. (Investment Advisor) believes offer the opportunity
for growth. The Fund has elected to be treated as a business development
company under the Investment Company Act of 1940, as amended (1940 Act).
(2) Summary of Significant Accounting Policies
(a) Valuation of Investments
Portfolio investments are stated at quoted market or fair
value as determined by the Investment Advisor (note 4). The securities
held by the Fund are primarily unregistered and their value does not
necessarily represent the amounts that may be realized from their
immediate sale or disposition.
(b) Statements of Cash Flows
The Fund considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
(c) Federal Income Taxes
The Fund has elected the special income tax treatment
available to "regulated investment companies" under Subchapter M of the
Internal Revenue Code (IRC) in order to be relieved of federal income tax
on that part of its net investment income and realized capital gains that
it pays out to its shareholders. The Fund's policy is to comply with the
requirements of the IRC that are applicable to regulated investment
companies. Such requirements include, but are not limited to certain
qualifying income tests, asset diversification tests and distribution of
substantially all of the Fund's investment companies. Such requirements
include, but are not limited to certain qualifying income tests, asset
diversification tests and distribution of substantially all of the Fund's
investment company taxable income to its shareholders. It is the intent
of management to distribute all of its investment company taxable income
and long term capital gains within the defined period under the IRC to
qualify as a regulated investment company. Therefore, no federal income
tax provision is included in the accompanying financial statements.
(d) Net income per share
<PAGE>
<PAGE F14>
Net income per share is based on the weighted average of
shares outstanding during 1997, 1996 and 1995 of 4,342,062, 4,332,390 and
4,217,428, respectively.
(e) Management Estimates
Management of the Fund has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
settlements in conformity with generally accepted accounting principles.
Actual results could differ from these estimates.
(f) Organization Costs
Costs of organizing the Fund were capitalized and are being
amortized on a straight-line basis over five years beginning with the
commencement of the Fund's activities.
(3) Management and Organization Fees
Pursuant to the Prospectus, an initial share purchase of $100,000
was made by the Investment Advisor. Upon admission of additional
shareholders at the closing of the offering described in Note 1, the
Investment Advisor had the right to withdraw from the Fund and was
entitled to receive a return of initial capital of $100,000 without
interest. The right by the Investment Advisor to withdraw from the Fund
was not elected and the initial capital contribution was retained by the
Fund, therefore, increasing the shares issued by 10,000 in 1996.
The Investment Advisor for the Fund is registered as an
investment adviser under the Investment Advisers Act of 1940. Pursuant to
an Investment Advisory Agreement, the Investment Advisor performs certain
services, including certain management, investment advisory and
administrative services necessary for the operation of the Fund. In
addition, under this agreement the Investment Advisor is reimbursed by the
Fund for certain administrative expenses. A summary of fees and
reimbursements paid by the Fund under the Investment Advisory Agreement,
the Prospectus and the original offering document are as follows:
The Investment Advisor receives a fee equal to .4375% (1.75%
annually) of the Net Assets each quarter. The Fund incurred $816,744,
$779,179 and $709,381 for 1997, 1996 and 1995, respectively, for such
operational management fees. Amounts payable for such fees at December
31, 1997 and 1996 were $221,781 and $523,923, respectively.
The Investment Advisor was reimbursed by the Fund for
administrative expenses paid by the Investment Advisor on behalf of the
Fund. Such reimbursements were $220,077, $219,758 and $295,641, for 1997,
1996 and 1995, respectively, and are included in general and
administrative expenses in the accompanying statements of operations.
The Investment Advisor is to receive an incentive fee in an
amount equal to 20% of any of the Fund's realized capital gains computed
net of all realized capital losses and unrealized depreciation. The Fund
incurred $1,196,366 and $199,059 during the years ended 1997 and 1996,
respectively, for such incentive fee. No incentive fee was incurred for
1995.
<PAGE>
<PAGE F15>
(4) Investments
The Fund invests primarily in convertible securities and equity
investments of companies that qualify for investment as permitted in
Section 55(a)(1) through (5). Under the provisions of the 1940 Act at
least 70% of the Fund's assets, as defined under the 1940 Act, must be
invested in Eligible Portfolio Companies. These investments are carried
in the statements of financial condition as of December 31, 1997 and 1996,
at fair value, as determined in good faith by the Investment Advisor. The
investments held by the Fund are generally convertible after five years
into the common stock of the issuer at a set conversion price. The common
stock acquired upon exercise of the conversion feature is generally
unregistered and is thinly to moderately traded, but is not otherwise
restricted. The Fund may register and sell such securities at any time
with the Fund paying the costs of registration. Dividends or interest on
the convertible securities is generally payable monthly. The investments
often have call options, usually commencing three years subsequent to
issuance, at prices specified in the investment agreements.
The Prospectus and the original offering document specify that investments
held by the Fund shall be valued as follows:
Generally, pursuant to procedures established but the Investment
Advisor, the fair value of each investment will be initially based upon
its original cost to the Fund. Costs will be the primary factor used to
determine fair value until significant developments affecting the investee
company (such as results of operations or changes in general market
conditions) provide a basis for use in an appraisal valuation.
Portfolio investments for which market quotations are readily
available and which are freely transferable will be valued as follows: (i)
securities traded on a securities exchange or the NASDAQ will be valued at
the closing price on, or the last trading day prior to, the date of
valuation and (ii) securities traded in the over-the-counter market will
be valued at the average of the closing bid and asked prices for the last
trading day on, or prior to, the date of valuation.
Securities for which market quotations are readily available but
are restricted from free trading in the public securities markets (such as
Rule 144 stock) will be valued by discounting the closing price or the
closing bid and asked prices, as the case may be, for the last trading day
on, or prior to , the date of valuation to reflect the illiquidity caused
by such restrictions, but taking into consideration the existence, or lack
thereof, of any contractual right to have the securities registered and
freed from such trading restrictions.
For this purpose, an investment that is convertible into a
security for which market quotations are readily available or otherwise
contains the right to acquire such a security will be deemed to be an
investment for which market quotations are readily available.
The fair value of investments for which no market exists will be
determined on the basis of appraisal procedures established in good faith
by the Investment Advisor. Appraisal valuations will be based upon such
factors as the company's earnings and net worth, the market prices for
similar securities of comparable companies and an assessment of the
<PAGE>
<PAGE F16>
company's future financial prospectus. In the case of unsuccessful
operations, the appraisal may be based upon liquidation value. Appraisal
valuations are necessarily subjective.
The financial statements include investments valued at $27,795,592
(57% of total assets) and $34,186,155 (67% of total assets) as of December
31, 1997 and 1996, respectively, whose values has been estimated by the
Investment Advisor in the absence of a readily ascertainable market
values. Because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used
had a ready market for the investments existed, and the differences could
be material.
As of December 31, 1997 and 1996, the net unrealized appreciation
associated with investments held by the Fund was $3,644,927 and
$8,477,585, respectively.
(5) Receivable from Sale of Investment
During 1997, the Fund sold an investment in a portfolio company for
$4,200,000. The proceeds from this sale were received in 1998.
(6) Purchase of Additional Shares
In accordance with Fund guidelines, certain shareholders reinvested their
dividends in the Fund, purchasing 3,520, 74,175 and 45,592 Fund shares
issued directly by the Fund in 1997, 1996 and 1995, respectively.
During 1996 and 1995, in accordance with Fund guidelines, additional
contributions were received from certain shareholders which were used to
purchase 10,617 and 40,141 additional Fund shares, respectively, issued
directly by the Fund. As summarized in note 3, the Investment Advisor
exercised its right to convert its initial share purchase to 10,000 shares
in 1996. No additional contributions were received in 1997.
<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> 24,150,665
<INVESTMENTS-AT-VALUE> 27,795,592
<RECEIVABLES> 4,380,025
<ASSETS-OTHER> 208,529
<OTHER-ITEMS-ASSETS> 15,972,424
<TOTAL-ASSETS> 48,356,570
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,859,210
<TOTAL-LIABILITIES> 3,859,210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 40,601,838
<SHARES-COMMON-STOCK> 4,342,942
<SHARES-COMMON-PRIOR> 4,339,422
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 250,595
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,644,927
<NET-ASSETS> 44,497,360
<DIVIDEND-INCOME> 68
<INTEREST-INCOME> 2,423,380
<OTHER-INCOME> 107,085
<EXPENSES-NET> 2,532,983
<NET-INVESTMENT-INCOME> (2,450)
<REALIZED-GAINS-CURRENT> 5,981,841
<APPREC-INCREASE-CURRENT> (4,832,658)
<NET-CHANGE-FROM-OPS> 1,146,733
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 5,819,542
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,520
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 108,742
<NET-CHANGE-IN-ASSETS> (2,331,610)
<ACCUMULATED-NII-PRIOR> 90,746
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 816,744
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,532,983
<AVERAGE-NET-ASSETS> 46,813,840
<PER-SHARE-NAV-BEGIN> 11.32
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0.26
<PER-SHARE-DIVIDEND> 0.81
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.25
<EXPENSE-RATIO> .05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
