As filed with the Securities and Exchange Commission on October 30, 2003
Securities Act Registration No. 333-______
Investment Company Registration No. 811-08376
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No. ____
and/or
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] Amendment No. ____
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Exact name of Registrant as Specified in Charter
c/o RENN Capital Group, Inc.
8080 N. Central Expressway, Suite 210/LB 59
Dallas, Texas 75206
Address of Principal Executive Offices
(Number, Street, City, State, Zip Code)
(214) 891-8294
Registrant's Telephone Number, including Area Code
Russell Cleveland
President and CEO
RENN Capital Group, Inc.
8080 N. Central Expressway, Suite 210/LB 59
Dallas, Texas 75206
Copy to:
Norman R. Miller, Esq.
Kirkpatrick & Lockhart LLP
2828 North Harwood Street, Suite 1800
Dallas, Texas 75201-6966
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of the registration
statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box: [X]
It is proposed that this filing will become effective (check appropriate box)
[X] when declared effective pursuant to section 8(c)
If appropriate, check the following box:
[ ] this [post-effective] amendment designates a new effective date for a
previously filed [post-effective amendment] [registration statement].
[ ] This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, and the Securities
Act registration statement number is of the earlier effective
registration statement for the same offering is ___-_______.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
--------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER SHARE PRICE FEE(1)
--------------------------------------------------------------------------------
Common Stock,
$1.00 par value 1,450,572 $11.63 $16,870,152 $1,364.80
--------------------------------------------------------------------------------
(1) Estimated for purposes of calculating the registration fee pursuant to Rule
457(c) under the Securities Act of 1933, as amended (the "1933 Act"), based
on the average of the high and low price per share of Common Stock on
September 30, 2003 as reported on the Nasdaq National Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE 1933
ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
FORM N-2
CROSS REFERENCE SHEET
PARTS A AND B OF PROSPECTUS
ITEM CAPTION LOCATION IN PROSPECTUS
---- ------- ----------------------
Item 1. Outside Front Cover Front Cover Page
Item 2. Inside Front and Outside Back Cover Front Cover Page; Outside
Page Back Cover Page
Item 3. Fee Table and Synopsis Summary; Fee Table and
Example
Item 4. Financial Highlights Selected Financial Data
Item 5. Plan of Distribution Not Applicable
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds;
Investment Objectives
Item 8. General Description of the Registrant Cover Page; Summary; Risk
Factors; The Fund;
Investment Objectives
Item 9. Management Management
Item 10. Capital Stock, Long-Term Debt, and Dividends and Dividend
Other Securities Reinvestment Plan; The
Offering; Description of
Common Stock
Item 11. Defaults and Arrears on Senior Not Applicable
Securities
Item 12. Legal Proceedings The Fund - Legal
Proceedings
Item 13. Table of Contents of the Statement of Not Applicable
Additional Information
Item 14. Cover Page Front Cover Page
Item 15. Table of Contents Back Cover Page
ITEM CAPTION LOCATION IN PROSPECTUS
---- ------- ----------------------
Item 16. General Information and History The Fund
Item 17. Investment Objective and Policies Investment Objectives
Item 18. Management Management
Item 19. Control Persons and Principal Holders Principal Shareholders
of Securities
Item 20. Investment Advisory and Other Services Information About the
Fund's Officers and the
Investment Adviser
Item 21. Brokerage Allocation and Other Practices Investment Objectives
Item 22. Tax Status Federal Income Tax
Considerations
Item 23. Financial Statements Financial Statements
[LOGO]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale for these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to notification under the securities laws of any such state.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 30, 2003
1,450,572 SHARES OF COMMON STOCK
Issuable upon the Exercise of Transferable Rights to Subscribe for such Shares
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Renaissance Capital Growth & Income Fund III, Inc. (the "Fund") is issuing
to its shareholders of record ("Record Date Shareholders") as of the close of
business on ___________, 2003 (the "Record Date") transferable rights (the
"Rights") entitling you to subscribe for an aggregate of 1,450,572 shares of
common stock, $1.00 par value ("Common Stock"), of the Fund (such shares,
together with all outstanding shares of the Fund's Common Stock, "Shares"). You
will receive one Right for each three Shares you hold on the Record Date. The
number of Rights issued to you will be rounded up to the nearest number of
Rights. The Rights entitle you to subscribe for Shares at the rate of one Share
for every one Right held (the "Primary Subscription"). The Rights further
entitle you to subscribe, subject to certain limitations and subject to
allotment, for any Shares not acquired by other holders in the Primary
Subscription (the "Over-Subscription Privilege"). The offering (the "Offering")
will expire at 5:00 p.m., Eastern time, on ______________, 2003 (the "Expiration
Date"), unless extended by the Fund. The Rights are transferable and will be
listed for trading on the Nasdaq National Market under the symbol "RENNR." The
Shares trade on the Nasdaq National Market under the symbol "RENN."
Affiliates of Russell Cleveland, President and CEO of the Fund, which own
5.8% of Common Stock, intend to subscribe for at least 84,066 shares of Common
Stock upon full exercise of their Rights and may participate in the
Over-Subscription Privilege.
The subscription price for each Share to be issued pursuant to the Offering
will be 95% of the volume-weighted average of the last reported bid price per
Share on the Nasdaq National Market on the Expiration Date and the four
preceding business days (the "Subscription Price"). You will not know the actual
Subscription Price at the time of exercise. You therefore will be required
initially to pay for the Shares at the estimated Subscription Price of $______
per Share, based on the volume-weighted average of the last reported bid price
per share on the Nasdaq National Market on the commencement date of the Offering
and each of the four preceding business days ("Estimated Subscription Price").
Once you subscribe for Shares and your payment is received, you will not be able
to change your decision.
Shareholders who do not exercise their Rights should expect that they will,
at the completion of the Offering, own a smaller proportional interest in the
Fund than they would if they exercised. In addition, because the Subscription
- 1 -
Price per Share will be less than the net asset value per share on the Pricing
Date, you will experience an immediate dilution, which could be significant, of
the aggregate net asset value of your shares. This dilution will
disproportionately affect you if you do not exercise your Rights in full. The
Fund cannot state precisely the extent of this dilution at this time because the
Fund does not know what the net asset value per share will be when the Offering
expires, what the Subscription Price will be or what proportion of the Rights
will be exercised. See "Risk Factors - Dilution," page 18.
The net asset value per share at the close of business on September 30,
1998, September 30, 2002 and September 30, 2003 were $9.02, $9.67 and $14.76,
respectively, and the last reported bid price per share on the Nasdaq National
Market on ___________, 2003 was $____.
Pursuant to its annual distribution policy, the Fund currently pays to its
shareholders a minimum annual distribution of $0.40, payable quarterly. The Fund
has paid a total of $7.96 per share in cash to its shareholders since inception
in 1995 through September 30, 2003.
The Fund is a non-diversified, closed-end fund that has elected to be
treated as a business development company under the Investment Company Act of
1940 (the "1940 Act"). The investment objective of the Fund is to provide
shareholders with current income and long-term capital appreciation by investing
primarily in privately-placed convertible or equity securities of emerging
growth public companies. The Fund's mailing address is 8080 N. Central
Expressway, Suite 210-LB 59, Dallas, Texas 75206, its telephone number is (214)
891-8294.
FOR A DISCUSSION OF CERTAIN RISK FACTORS AND SPECIAL CONSIDERATIONS WITH RESPECT
TO OWNING SHARES, SEE "RISK FACTORS" ON PAGE 17 AND "THE FUND" ON PAGE 33 OF
THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Per Share Total(4)
--------- --------
Estimated Subscription Price(1) $________ $________
Sales Load None None
Estimated Proceeds to Fund(2)(3) $________ $________
-------------------
(1) The Estimated Subscription Price is computed as 95% of the volume-weighted
average of the last reported bid price of the Fund's Common Stock on the Nasdaq
National Market on __________, 2003 and each of the four preceding business
days.
(2) Before deduction of Offering costs incurred related to this Offering,
payable by the Fund, estimated at $_____.
- 2 -
(3) Funds received prior to the final due date of the Offering will be
deposited into a segregated interest-bearing account (which interest will be
paid to the Fund) pending proration and distribution of Shares. Interest on
subscription monies will be paid to the Fund regardless of whether shares are
issued by the Fund.
(4) Assumes all Rights are exercised at the Estimated Subscription Price.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus and to retain it for future reference.
ALL QUESTIONS AND INQUIRIES RELATING TO THE OFFERING SHOULD BE DIRECTED TO THE
INFORMATION AGENT, THE ALTMAN GROUP, TOLL FREE AT TELEPHONE NUMBER (800)
467-0740 OR EMAIL ADDRESS WANTLER@ALTMANGROUP.COM. THE MAILING ADDRESS OF THE
ALTMAN GROUP IS 1275 VALLEY BROOK AVENUE, LYNDHURST, NEW JERSEY 07071.
----------------------
The date of this Prospectus is ________________, 2003
- 3 -
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE OFFERING FULLY, YOU
SHOULD READ THE ENTIRE DOCUMENT CAREFULLY, INCLUDING THE RISK FACTORS.
PURPOSE OF THE OFFERING
The Board of Directors of the Fund has determined that it is in the best
interests of the Fund and its shareholders to increase the number of outstanding
Shares of the Fund and to increase the assets of the Fund available for
investment. The primary reasons are as follows:
o raising more cash will better position the Fund to take advantage of
investment opportunities that may arise in the future, while retaining
investments believed to be attractive in the Fund's portfolio.
o a larger number of outstanding Shares and a larger shareholder base
could increase the level of market interest in the Fund and the
liquidity of the Shares.
o increasing the Fund's total assets would reduce expenses per share due
to the spreading of fixed expenses over a larger asset base and may
lower the Fund's expenses as a proportion of net assets.
The Board considered the effect that the issuance of the Shares would have
on the net asset value of the Fund and also considered the dilutive effect on
current shareholders, particularly those who determine not to exercise their
Rights to purchase additional Shares. The Board considered that
non-participating shareholders would have the opportunity to sell their Rights
for cash and would derive a benefit if the Fund invests additional amounts that
earn a return that exceeds the dilution, thus mitigating the dilutive effect of
the Rights Offering on those shareholders.
The Board believes that the Offering would permit the Fund to accomplish
these objectives, while allowing shareholders an opportunity to purchase
additional Shares at a price below market value without paying a brokerage
commission.
IMPORTANT TERMS OF THE OFFERING
Maximum Number of Shares to be Issued 1,450,572
Number of Rights Issued 1,450,572
Number of Rights Issued Per Existing Shares 1 Right for each 3 shares
held
Subscription Ratio 1 Right to buy 1 Share
Estimated Subscription Price $__________
Shares Outstanding at September 30, 2003 4,351,718
- 4 -
KEY ELEMENTS OF THE OFFERING
o ONE-FOR-THREE OFFERING
The Offering will give shareholders of record the "right" to purchase
one new Share of the Fund for every one right held. For example, if you own
300 shares on the announced record date, you will receive 100 Rights
entitling you to purchase 100 new Shares of the Fund. Shareholders will be
able to exercise all or some of their Rights. The number of Rights issued
to a Record Date Shareholder will be rounded up to the nearest number of
Rights. However, Record Date Shareholders who do not exercise all of their
Rights will not be able to participate in the Over-Subscription Privilege.
See "Over-Subscription Privilege" below.
o TRANSFERABLE RIGHTS
The Rights issued in the Offering will be transferable, will be traded
on the Nasdaq National Market and will afford non-subscribing shareholders
the option of selling their Rights on the Nasdaq National Market or through
the subscription agent, The Colbent Corporation (the "Subscription Agent").
Selling the Rights allows a non-exercising shareholder (i.e., a shareholder
who does not wish to purchase additional shares in the Offering) the
ability to offset some of the dilution which would otherwise occur. In
contrast, in a non-transferable rights offering (i.e., an offering where
the rights cannot be traded), non-exercising shareholders would experience
full dilution.
There can be no assurance that a liquid trading market will develop
for the Rights or that the price at which such Rights trade will
approximate the amount of dilution otherwise realized by a non-exercising
shareholder. The period during which Rights will trade will be limited and,
upon the Expiration Date, the Rights will cease to trade and will have no
residual value.
o SUBSCRIPTION PRICE
Under the Offering, new Shares will be sold at a price equal to 95% of
the volume-weighted average of the last reported bid price per Share on the
Nasdaq National Market on the Expiration Date and the four preceding
business days. Management believes that this pricing formula (versus a
higher or lower percentage discount or a pre-determined fixed price) will
provide an incentive to shareholders (as well as others who might trade in
the transferable Rights) to participate in the Offering.
o OVER-SUBSCRIPTION PRIVILEGE
If all of the Rights initially issued are not exercised by Record Date
Shareholders, any unsubscribed shares will be offered to other Record Date
Shareholders who have fully exercised the Rights initially issued to them
and who wish to acquire additional shares. If shares are insufficient to
honor all over-subscriptions, the available shares will be allocated
pro-rata among those who over-subscribe based on the number of Rights
originally issued to them.
- 5 -
HOW TO EXERCISE RIGHTS
o If your existing Shares are held in a brokerage account or by a custodian
bank or trust company, contact your broker or financial adviser for
additional instructions on how to participate in the Offering.
o If your existing Shares are held by you of record, complete, sign and date
the enclosed Subscription Certificate.
o Make your check or money order payable to "Renaissance Capital Growth &
Income Fund III, Inc." in the amount of $___________ for each Share you
wish to buy including any Shares you wish to buy pursuant to the
Over-Subscription Privilege. This payment may be more or less than the
actual Subscription Price. Additional payment may be required when the
actual Subscription Price is determined.
o You should mail the subscription certificate and your payment in the
enclosed envelope to the Subscription Agent in a manner that will ensure
receipt prior to 5:00 p.m., Eastern time, on _________, 2003, unless
extended. Its mailing address is 161 Bay State Drive, Braintree, MA 02184.
Once you subscribe for Shares and your payment is received, you will not be
able to change your decision.
Rights holders will have no right to rescind a purchase after the
Subscription Agent has received the Subscription Certificate or Notice of
Guaranteed Delivery. See "The Offering."
The Subscription Agent will deposit all checks received by it prior to the
final due date into a segregated interest-bearing account pending distribution
of the shares from the Offering. All interest will accrue to the benefit of the
Fund, and investors will not earn interest on payments submitted.
IMPORTANT DATES TO REMEMBER
Record Date ____________, 2003
Final Date for Sales of Rights ____________, 2003
Expiration Date (Payment for Shares and Notices of ____________, 2003
Guaranteed Delivery Due) (unless extended)
Due Date for Delivery by Brokerage Firms or Custodian ____________, 2003
Banks of Payment and Subscription Certificates to (unless extended)
Subscription Agent pursuant to Notice of Guaranteed
Delivery
Mailing of Shares and Confirmations of Purchases of Not later than
Shares ______, 2003
(unless extended)
- 6 -
ADDITIONAL TERMS OF THE OFFERING
The Rights entitle you to subscribe for Shares at the rate of one Share for
every one Right held by you. You will receive one Right for each three Shares
you hold on the Record Date. These Rights are transferable. The holders of the
Rights may exercise them at any time from the date of this Prospectus until 5:00
p.m., Eastern time, on _____________, 2003, unless extended.
In addition, if a Record Date Shareholder subscribes for the maximum number
of Shares to which it is entitled, such holder may also subscribe for Shares
that were not otherwise subscribed for by other shareholders. Shares acquired
pursuant to the Over-Subscription Privilege are subject to allotment, which is
more fully discussed below under "The Offering - Over-Subscription Privilege" on
page 23. The Fund will not offer or sell in connection with the Offering any
Shares that are not subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege.
No fractional Rights will be issued.
The Subscription Price per Share will be 95% of the volume-weighted average
of the last reported bid price per Share on the Nasdaq National Market on the
Expiration Date and each of the four preceding business days.
The Rights are transferable and will be listed for trading on the Nasdaq
National Market under the symbol "RENNR." There is no assurance that a market
for the Rights will develop.
Before exercising your Rights pursuant to the Offering, you should consider
the factors described in this Prospectus, including without limitation, the
factors described under "The Fund," "Investment Objectives and Policies" and
"Risk Factors." These factors include the effects of the Offering, the
limitations on the ability of the Fund to pay dividends, and the fact that
Shares sometimes trade above or below their net asset value. In addition, the
Offering involves the risk of an immediate dilution of the aggregate net asset
value of your Shares, if you do not fully exercise your Rights.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE METHOD OF SUBSCRIBING
FOR SHARES OR FOR ADDITIONAL COPIES OF THIS PROSPECTUS OR SUBSCRIPTION
CERTIFICATES OR NOTICES OF GUARANTEED DELIVERY MAY BE DIRECTED TO THE
INFORMATION AGENT, THE ALTMAN GROUP, TOLL FREE AT TELEPHONE NUMBER (800)
467-0740 OR EMAIL ADDRESS WANTLER@ALTMANGROUP.COM. THE MAILING ADDRESS OF THE
ALTMAN GROUP IS 1275 VALLEY BROOK AVENUE, LYNDHURST, NEW JERSEY 07071.
SHAREHOLDERS MAY ALSO CONTACT THEIR BROKERS OR NOMINEES FOR INFORMATION WITH
RESPECT TO THE OFFERING.
THE FUND
The Fund is a non-diversified, closed-end fund that has elected to be
treated as a business development company under the 1940 Act. The investment
objective of the Fund is to provide shareholders with current income and
long-term capital appreciation by investing primarily in convertible and equity
securities of emerging growth public companies.
- 7 -
Pursuant to its annual distribution policy, the Fund currently pays to its
shareholders a minimum annual distribution of $0.40, payable quarterly. The Fund
has paid a total of $7.96 per share in cash to its shareholders since inception
in 1995 through September 30, 2003.
As discussed more fully herein, investment in the Fund involves a number of
significant and substantial risks, including:
o risks associated with the Fund's investments in securities of emerging
growth companies
o the fluctuation of the Fund's net asset value in connection with
changes in the value of its portfolio securities
o risks associated with the Fund's investments in certain restricted and
illiquid securities
No assurance can be given that the Fund will achieve its investment
objectives.
In addition, the Rights Offering involves the risk of an immediate dilution
of the aggregate net asset value of your Shares if you do not fully exercise
your Rights.
THE ADVISER
RENN Capital Group, Inc., a Texas corporation ("RENN Group"), with its
executive offices at 8080 N. Central Expressway, Suite 210-LB 59, Dallas, Texas
75206, is the investment adviser to the Fund and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"), and subject to its reporting and other requirements. RENN Group is also
the investment manager of Renaissance US Growth and Investment Trust PLC
("RUSGIT") and the investment adviser to BFSUS Special Opportunities Trust PLC
("BFSUS"), investment trusts listed on the London Stock Exchange with similar
investment objectives as the Fund. RUSGIT and BFSUS are referred to as the
"Advisor Affiliated Funds."
RENN Group is primarily responsible for the selection, evaluation,
structure, valuation and administration of the Fund's investment portfolios.
Pursuant to its Investment Advisory Agreement with the Fund, RENN Group is
entitled to receive an annual management fee of 1.75% of the Fund's net assets,
payable quarterly. In addition, RENN Group is entitled to receive an incentive
fee payable quarterly that is equal to 20% of the Fund's realized capital gains
in excess of realized capital losses after allowance for any unrealized capital
losses in excess of unrealized capital gains on the portfolio investments of the
Fund.
FEE TABLE AND EXAMPLE
The following Fee Table and Example are intended to assist investors in
understanding the costs and expenses that an investor in the Fund bears directly
or indirectly.
- 8 -
FEE TABLE
--------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of the Subscription Price per Share) None
--------------------------------------------------------------------------------
ANNUAL EXPENSES (AS A PERCENTAGE OF THE FUND'S NET ASSETS)(1)
Management Fee(2) 1.75%
--------------------------------------------------------------------------------
Interest Expense 0.11%
--------------------------------------------------------------------------------
Other Expenses(3) 1.17%
--------------------------------------------------------------------------------
Total Annual Expenses 3.03%
--------------------------------------------------------------------------------
----------------------------
(1) Amounts are based on estimated amounts for the Fund's current fiscal year
after giving effect to anticipated net proceeds of the Offering, assuming that
all of the Rights are exercised.
(2) Paid quarterly at the rate of 0.4375%. In addition to its management fees,
RENN Group is entitled to receive an incentive fee payable quarterly that is
equal to 20% of the Fund's realized capital gains in excess of realized capital
losses after allowance for any unrealized capital losses in excess of unrealized
capital gains on the portfolio investments of the Fund.
(3) The expenses of the Dividend Reinvestment Plan are included in stock record
expenses, a component of "Other Expenses."
EXAMPLE
-------
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses
on a $1,000 investment, assuming a 5%
annual return throughout the periods $32 $97 $165 $345
The purpose of the foregoing table and example is to assist Rights holders
in understanding the various costs and expenses that an investor in the Fund
bears, directly or indirectly. It should be noted that if any portion of the
assumed return on investment includes net realized gain, an incentive fee of 20%
of such realized gain may be incurred and would further increase expenses
reflected in the table above. See footnote (2) above. The example set forth
above assumes reinvestment of all dividends and other distributions at net asset
value and an annual expense ratio of 3.03%. The Fee Table above and the
assumption in the Example of a 5% annual return are required by Securities and
Exchange Commission (the "Commission") regulations applicable to all management
investment companies. The Example and Fee Table should not be considered as a
representation of past or future expenses or annual rates of return, which may
be more or less than those assumed for purposes of the Example and Fee Table. In
addition, while the Example assumes reinvestment of all dividends and other
distributions at net asset value, participants in the Fund's Dividend
Reinvestment Plan may receive Shares purchased or issued at a price or value
different from net asset value.
SELECTED FINANCIAL DATA
The following selected financial data for the period from January 1, 1998
through December 31, 2002 is derived from the Fund's audited financial
statements. The selected data presented for the six months ended June 30, 2002
- 9 -
and 2003 are derived from unaudited financial statements of the Fund which, in
the opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of the Company as of and for these periods.
Results of operations for the six months ended June 30, 2003 are not necessarily
indicative of the results of operations that may be achieved for the full fiscal
year. The Data should be read in conjunction with the Fund's financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OPERATING PERFORMANCE
---------------------
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
Gross income $2,491,568 $(3,195,048) $(3,051,938) $2,676,702 $9,750,577 $12,768,575 $5,956,344
(loss),
including
realized gain
(loss)
Net unrealized 8,500,437 2,805,510 (8,205,633) 9,365,167 (1,507,015) 4,465,591 (1,222,151)
appreciation
(depreciation)
on investments
Net income 10,096,729 (1,324,151) (12,773,524) 9,546,715 5,032,203 13,535,928 2,794,004
(loss)
Net income 2.32 (0.30) (2.93) 2.19 1.18 3.27 0.66
(loss) per share
Total assets 85,343,440 69,870,643 50,495,721 77,016,668 64,077,600 46,725,122 42,322,725
Net assets 50,485,451 53,213,357 41,259,066 54,537,508 47,346,067 45,934,306 41,475,701
Net assets per 11.60 12.20 9.48 12.50 10.86 11.09 10.01
share
- 10 -
SELECTED PER SHARE DATA
-----------------------
JUNE 30, DECEMBER 31,
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
Investment Income 0.35 0.05 0.09 0.14 0.40 0.42 0.67
Operating (0.20) (0.20) (0.33) (0.54) (0.75) (0.89) (0.46)
Expenses
Interest Expense (0.01) (0.01) (0.01) (0.03) (0.00) (0.00) (0.00)
Net Investment 0.14 (0.16) (0.26) (0.43) (0.36) (0.48) 0.21
Income (Loss)
Tax return of (1) 0.00 (0.10) (0.00) (0.03) (0.08) (0.30)
capital
Distributions (1) 0.00 (0.00) (0.54) (1.47) (2.11) (0.68)
from net capital
gains
Net realized 0.23 (0.79) (0.79) 0.47 1.89 2.67 0.74
gain (loss) on
investments
Net increase 1.95 0.64 (1.89) 2.14 (0.35) 1.08 (0.29)
(decrease) in
unrealized
appreciation of
investments
Increase 2.12 (0.30) (3.05) 1.64 (0.32) 1.08 (0.32)
(decrease) in
net asset value
Capital stock 0.00 0.00 (0.01) 0.00 0.09 0.00 0.08
transactions
Net Asset Value 9.48 12.50 12.50 10.86 11.09 10.01 10.25
Beginning of year
Net Asset Value 11.60 12.20 9.48 12.50 10.86 11.09 10.01
End of year
----------------------------
(1) The nature of the dividends cannot be determined until year-end. As of June 30, 2003, $0.20 had
been paid.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The purpose of the Fund is to provide capital to emerging growth public
companies whose ability to service the securities is sufficient to provide
income to the Fund and whose growth potential is sufficient to provide
opportunity for long-term capital appreciation.
SOURCES OF OPERATING INCOME
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 generates income through capital gains. Further, the Fund in some cases
receives due diligence, commitment, and closing fees, as well as other similar
- 11 -
types of revenue. Director's compensation received by RENN Group (or its
personnel) for services to a portfolio company is paid to the account of the
Fund.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended June 30, 2003, net assets increased 38.36% from
$36,487,668 at March 31, 2003, to $50,485,451, or $11.60 per share, at June 30,
2003. This increase is primarily attributable to an increase in the net
unrealized appreciation of investments from $479,705 at March 31, 2003, to
$15,041,337 at June 30, 2003.
At the end of the second quarter of 2003, the Fund had net cash and cash
equivalents of $681,236 versus net cash and cash equivalents of $1,181,514 at
March 31, 2003, primarily due to an increase in the Fund's margin balance.
Receivables, including interest, dividends, and brokerage, increased from
$418,407 at March 31 to $604,436 at June 30, 2003, due primarily to a
combination of dividends accrued on Integrated Security Systems Series F and G
Preferred Stock, interest and dividends that were accrued on the restructuring
of eOriginal, and the brokerage receivable. Prepaid expenses decreased from
$21,575 at March 31 to $2,877 at June 30, 2003, primarily due to quarterly
charges against prepaid insurance amounts.
Accounts payable increased slightly from $20,932 at March 31, to $21,632 at
June 30, 2003. Accounts payable to affiliate decreased 7.37% from 372,169 at
March 31, to $344,753 at June 30, 2003, reflecting an increase in management fee
due to higher portfolio values in the second quarter offset by a decrease in
incentive fees due to lower realized gains during the second quarter.
The majority of the Fund's investments in portfolio companies are
individually negotiated, unregistered for public trading, and subject to legal
and contractual investment restrictions. Accordingly, the portfolio investments
are generally considered non-liquid. This lack of liquidity primarily affects
the ability to make new investments and distributions to shareholders.
From time to time, funds are deposited in margin accounts and invested in
government securities. Government securities used as cash equivalents typically
consist of U. S. Treasury securities or other U. S. Government and Agency
obligations having slightly higher yields and maturity dates of three months or
less. These investments qualify for investment as permitted in Section 55(a)(1)
through (5) of the 1940 Act.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002. For the six months ended June 30,
2003, the Fund experienced net investment income in the amount of $614,993,
compared to a net investment loss in the amount of ($705,270) for the same
six-month period in 2002. Interest income increased from $185,104 for the six
months ended June 30, 2002, to $347,486 for the same period of 2003, an increase
of 86.72%. Dividend income for the six-month period ended June 30, 2003, was
$1,161,230 versus $43,238 for the same period in 2002.
General and administrative expenses decreased from $246,609 in the six
months ended June 30, 2002, to $193,180 for the same period in 2003. Legal and
professional expenses also decreased from $165,289 in 2002 to $80,514 for the
six months ended June 30, 2003. Management fees decreased from $478,313 for the
- 12 -
six months ended June 30, 2002, to $386,878 for the same period in 2003; whereas
incentive fees increased from zero in 2002 to $196,260 for the six months ended
June 30, 2003.
Net income for the first six months of 2003 was $10,096,729, compared to a
net loss in the amount of ($1,324,151) for the same period of 2002. In addition
to the increases in income and decreases in expenses discussed previously, this
increase was driven by an increase in net unrealized appreciation on investments
from $2,805,510 in 2002 to $8,500,437 in 2003. In addition, in the first six
months of 2003, the Fund realized net gains on investments in the amount of
$981,299, compared to a net realized loss on investments of ($3,424,391) in the
same period of 2002.
2002 COMPARED TO 2001. During the year ended December 31, 2002, the Fund
made additional portfolio investments aggregating $6,851,707 compared to
$3,509,674 in 2001. The Fund realized proceeds from the sale of investments in
the amount of $4,911,282 compared to $10,364,052 in 2001. The Fund's realized
net loss of ($12,773,524) is due to a combination of a net investment loss of
($1,138,298), net unrealized depreciation on investments of ($8,205,633), and
net realized loss on investments of ($3,429,593).
Interest income decreased 34.14% for the year in comparison to 2001
primarily due to the conversion of debt positions into equity. In addition,
reserves were taken on interest accruals for some of the Fund's investments.
Dividend income decreased 63.86% from $195,453 in 2001 to $70,640 in 2002 due
primarily to smaller custodial cash balances earning dividends and decreased
dividends declared and paid by portfolio investments. Commitment and other fee
income increased from $3,100 in 2001 to $28,442 in 2002 primarily as a result of
increased loan closing fees.
General and administrative expenses, including interest expense and legal
fees, but excluding incentive and management fees, decreased 1.17% from $662,872
in 2001 to $655,119. No incentive fee was incurred in 2002 compared to an
incentive fee expense of $919,429 in 2001 because there were no net realized
capital gains achieved on investments during 2002. Management fees decreased
from $912,544 in 2001 to $860,834 in 2002, a decrease of 5.67% due to lower
portfolio values during 2002. Net investment loss decreased 39.24% to
($1,138,298) in 2002 down from ($1,873,288) in 2001 due primarily to the absence
of an incentive fee in 2002, combined with the decrease in interest expense,
legal fees, and management fees, partially offset by the increase in general and
administrative expenses.
Net income decreased from $9,546,715 in 2001 to a net loss of ($12,773,524)
in 2002. In 2001, the Fund had realized gains of $2,054,836 compared to a net
realized loss on investments of ($3,429,593) in 2002. Likewise, the Fund
experienced net unrealized appreciation on investments in 2001 of $9,365,167
compared to the 2002 net unrealized depreciation on investments in the amount of
($8,205,633).
2001 COMPARED TO 2000. During the year ended December 31, 2001, the Fund
realized proceeds from the sale of investments $10,364,052 compared to
$10,366,539 in 2000. The Fund expended $3,509,674 in 2001 for the purchase of
investments compared to purchases of $7,838,711 in 2000. The Fund's net income
of $9,546,715 for 2001 is due primarily to a net unrealized appreciation on
investments of $9,365,167 and a net realized gain on investments of $2,054,836.
- 13 -
Interest income decreased 71.19% for the year in comparison to 2000
primarily because many of the Fund's debt positions were converted to equity
positions. Dividend income in 2001 increased 70.77% from $114,455 in 2000 to
$195,453 in 2001 due primarily to the previously described conversion from debt
to equity positions and a change in the custodial arrangements whereby
short-term treasury funds now earn a dividend rather than interest. Commitment
and other fee income decreased from $112,375 in 2000 to $3,100 in 2001 due to
fewer investments being originated together with a reduction in outside
directors fees and advisory fees as a result of the Fund's officers holding
fewer outside board positions.
General and administrative expenses decreased 2.65% from $422,554 in 2000
to $411,348 in 2001. Incentive fees decreased 42.93% from $1,611,135 in 2000 to
$919,429 in 2001 due to lower net realized gains achieved on investments
throughout 2001. Management fees decreased 13.62% to $912,544 due to a lower net
asset value throughout the year. Net investment loss for 2001 increased to
($1,873,288) in 2001, compared to ($1,516,461) for 2000, an increase of 23.53%,
due primarily to lower interest income as a result of converting debt positions
to equity, offset somewhat by reduced expense levels.
Net income for 2001 was $9,546,715, an increase of 89.71% over $5,032,203
in 2000. In 2000, realized gains were $8,055,679 in comparison to realized gains
for 2001 of $2,054,836. Realized gains decreased in 2001 from 2000 due to higher
levels of realized losses taken on portfolio investments. In addition, the
Fund's net unrealized appreciation on investments in 2001 was $9,365,167 in
comparison to a net unrealized depreciation on investments for 2000 of
($1,507,015) due to higher market values for Fund holdings.
MARKET RISK
The Fund is subject to financial market risks, including changes in market
interest rates as well as changes in marketable equity security prices. The Fund
does not use derivative financial instruments to mitigate any of these risks.
The return on the Fund's investments is generally not affected by foreign
currency fluctuations.
A majority of the Fund's net assets consists of common stocks and warrants
and options to purchase common stock in publicly traded companies. These
investments are directly exposed to equity price risk, in that a percentage
change in these equity prices would result in a similar percentage change in the
fair value of these securities.
A lesser percentage of the Fund's net assets consists of fixed rate
convertible debentures and other debt instruments as well as convertible
preferred securities. Since these instruments are generally priced at a fixed
rate, changes in market interest rates do not directly impact interest income,
although changes in interest rates could impact the Fund's yield on future
investments in debt instruments. In addition, changes in market interest rates
are not typically a significant factor in the Fund's determination of fair value
of its debt instruments, as it is generally assumed they will be held to
maturity, and their fair values are determined on the basis of the terms of the
particular instrument and the financial condition of the issuer.
- 14 -
A small percentage of the Fund's net assets consists of equity investments
in private companies. The Fund would anticipate no impact on these investment
from modest changes in public market equity prices. However, should significant
changes in market prices occur, there could be a longer-term effect on
valuations of private companies which could affect the carrying value and the
amount and timing of proceeds realized on these investments.
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Shares have traded at various times at either a premium or
a discount in relation to net asset value. It is not possible to predict whether
the Shares offered hereby will trade at, above or below net asset value. Shares
of closed-end investment companies frequently trade at a discount from net asset
value. As of September 30, 2003, the Fund's Shares traded at a 22.49% discount
from their net asset value. The Fund's net asset value is determined by the
Board of Directors at the end of each calendar quarter.
Shares of the Fund's Common Stock are traded on the Nasdaq National Market
under the symbol "RENN" and reported on Bloomberg. The following table sets
forth, for the periods indicated, high and low bid prices as quoted on Nasdaq,
the net asset value per share at the end of each quarter and the premium
(discount) to net asset value at the end of each quarter. The Nasdaq bid
quotations represent prices between dealers, do not include retail markups,
markdowns or commissions, and may not represent actual transactions. See
"Valuation of Investments" below.
NET ASSET VALUE BID PRICE PREMIUM
--------------- -----------------
PER SHARE AT END (DISCOUNT) TO
---------------- -------------
YEAR AND QUARTER BID PRICE OF NET ASSET VALUE
---------------- --------- -- ---------------
HIGH LOW QUARTER HIGH LOW
---- --- ------- ---- ---
2000
----
First Quarter $15.38 $8.75 $18.76 -18.02% -53.36%
Second Quarter $14.56 $12.50 $12.64 15.19% -1.11%
Third Quarter $13.75 $11.25 $13.48 2.00% -16.54%
Fourth Quarter $13.50 $8.38 $10.85 24.42% -22.76%
2001
----
First Quarter $11.00 $8.81 $10.95 0.46% -19.54%
Second Quarter $11.00 $8.75 $12.30 -10.57% -28.86%
Third Quarter $11.00 $9.85 $11.66 -5.66% -15.52%
Fourth Quarter $11.45 $10.03 $12.54 -8.69% -20.02%
2002
----
First Quarter $10.93 $10.25 $12.76 -14.34% -19.67%
Second Quarter $11.95 $9.96 $12.20 -2.05% -18.36%
Third Quarter $10.00 $8.94 $9.67 3.41% -7.55%
Fourth Quarter $8.59 $6.75 $9.48 -9.39% -28.80%
2003
----
First Quarter $8.36 $6.75 $8.38 -0.24% -19.45%
Second Quarter $9.35 $6.80 $11.60 -19.40% -41.38%
Third Quarter $12.02 $9.15 $14.76 -18.56% -38.01%
- 15 -
The net asset value per share at September 30, 1998, September 30, 2002 and
September 30, 2003 were $9.02, $9.67 and $14.76, respectively, and the last
reported bid price per share on the Nasdaq National Market on _________, 2003
was $_____.
As of September 30, 2003, there were approximately 863 record holders of
Common Stock.
DIVIDENDS AND DIVIDEND REINVESTMENT PLAN
DIVIDENDS
The Fund seeks to provide returns to shareholders through cash dividends of
net investment income and through distributions of realized gains. On November
5, 2002, the Fund announced a minimum annual distribution policy of $0.40 per
share, with an initial quarterly cash distribution of $0.10 per share that was
paid December 12, 2002. The intent of the Policy is for the Fund to make
distributions of $0.10 per share in each of the first three quarters of the year
with a final distribution in the fourth quarter equal to $0.10 per share or a
greater amount sufficient to satisfy the distribution requirements of the
Internal Revenue Code. The Policy is subject to quarterly review and approval by
the Fund's Board of Directors. According to the Policy, the distributions could
be paid from interest or dividend income, capital gains, or a return of capital
in the event there is insufficient income or capital gains to satisfy the
Policy.
The Fund has paid a total of $7.96 per share to its shareholders since
inception, including $1.54 in capital gains distributions and investment income
in 2000, $0.54 in capital gains distributions in 2001, $.10 per share in
December 2002 classified as a tax return of capital, and distributions of $0.10
per share in each of February, May and August 2003. Pursuant to its annual
distribution policy, the Fund currently pays to its shareholders a minimum
annual distribution of $0.40, payable quarterly.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the
"Reinvestment Plan") any shareholders whose shares are registered in their own
names will be deemed to have elected to have all dividends and distributions
automatically reinvested in Fund shares pursuant to the Reinvestment Plan unless
and except for each such shareholder who individually elects to receive such on
a current basis in lieu of reinvestment. In the case of shareholders such as
banks, brokers or nominees that hold shares for others who are beneficial owners
("Nominee Shareholders"), the plan agent, American Stock Transfer & Trust Co.
(the "Plan Agent") will administer the Reinvestment Plan on the basis of the
number of shares certified by such Nominee Shareholders as registered for
shareholders that have not elected to receive dividends and distributions in
cash.
Investors that own shares registered in the name of a Nominee Shareholder
should consult with such nominee as to participation or withdrawal from such
plan.
When the Fund declares a dividend or distribution payable in cash, the
non-participants will receive cash, and the Participants will receive Common
Stock to be issued by the Fund or purchased in the open market. If the market
value per share on the valuation date equals or exceeds the net asset value per
share on that date, or if such open market purchases cause the price to increase
- 16 -
to the net asset value, the Fund will issue new Shares at the net asset value.
If the net asset value exceeds the market price, the Fund will, as agent for the
participants, buy Fund shares in the open market or in private transactions as
soon as practicable after such date. If before the Fund has completed the
purchases the market price exceeds the net asset value, the Fund may suspend
purchasing in the market and the Fund will issue new Shares at net asset value
to fulfill the purchase requirements.
Participants also have the option, commencing on January 1 of each year, of
making additional annual cash payments to the Reinvestment Plan in any amount of
$1,000 or more up to $10,000. Larger amounts may be accepted with the prior
approval of the Fund. The Fund will use all funds received from participants to
purchase Fund shares to be issued by the Fund or purchased in the open market on
or about February 28. Any voluntary funds must be received no later than 10 days
prior to such date and any prior deposit may be withdrawn if written request for
withdrawal is received by the Fund no later than 10 days prior to such date.
The Plan Agent will maintain all shareholder accounts in the Reinvestment
Plan and furnish written confirmation of all transactions in an account. Shares
in the Reinvestment Plan will be held in the name of the participant and each
shareholder's proxy will include any Reinvestment Plan holdings.
There is no charge to the participants for reinvesting dividends and
distributions or for voluntary cash payments. There are no brokerage charges
with respect to shares issued directly by the Fund for participants in the
Reinvestment Plan. However, each participant pays a pro rata share of brokerage
charges for shares purchased in the market.
The Fund reserves the right to terminate the Reinvestment Plan. Further,
the Reinvestment Plan may be amended by the Fund upon 30 days notice to
participants. A participant may withdraw from the Reinvestment Plan upon written
request to the Plan Agent, in which event, no further Fund share purchases will
be made for such withdrawing participant and all shares and funds held for such
participant will be forwarded to the participant or to their order upon their
request. All communications regarding the Reinvestment Plan should be directed
to the Plan Agent.
RISK FACTORS
AN INVESTMENT IN THE FUND IS SUBJECT TO A NUMBER OF RISKS AND SPECIAL
CONSIDERATIONS, INCLUDING THE FOLLOWING:
HIGHER RISK INVESTMENTS
The Fund is designed for long-term investors. Investors should not rely on
the Fund for their short-term financial needs. The value of the higher risk
securities in which the Fund invests will be affected by:
o general economic conditions
o the securities market
o the market for public offerings
- 17 -
o specific industry conditions
o the management of the individual issuer
Additionally, the Fund may not achieve its investment objectives.
DILUTION
You may experience an immediate dilution of the aggregate net asset value
of your Shares if you do not fully exercise your Rights pursuant to the
Offering. This is because the Subscription Price per Share will likely be less
than the Fund's net asset value per Share on the Expiration Date, and the number
of Shares outstanding after the Offering is likely to increase in a greater
percentage than the increase in the size of the Fund's assets. In addition, if
you do not fully exercise your Rights you should expect that you will, at the
completion of the Offering, own a smaller proportional interest in the Fund than
would otherwise be the case. Although it is not possible to state precisely the
amount of any such decrease in net asset value, because it is not known at this
time what the net asset value per share will be at the Expiration Date or what
proportion of the Shares will be subscribed, such dilution could be significant.
For example, assuming that all Rights are exercised at the Estimated
Subscription Price of $_______, expenses associated with the Offering were
$________, and the Fund's net asset value otherwise remained constant, the
Fund's net asset value per Share on such date would be reduced by approximately
$_______ per Share (or ___%). Your ability to transfer your Rights allows you to
receive cash for such Rights should you choose not to exercise them. However, it
is not certain that a market for the Rights will develop, and no assurance can
be given as to the value, if any, that such Rights will have.
INVESTMENTS IN EMERGING GROWTH COMPANIES
As a business development company, the Fund invests a large portion of its
assets in restricted securities issued by emerging growth public companies, some
of which have operated at losses or have experienced substantial fluctuations in
operating results. Typically, such companies depend for their success on the
management talents and efforts of one person or a small group of persons, so
that the death, disability or resignation of such person or persons could have a
materially adverse impact on them. Moreover, smaller companies frequently have
narrower product lines and smaller market shares than larger companies and,
therefore, may be more vulnerable to competitors' actions and market conditions,
as well as general economic downturns. Such companies may face intense
competition, including competition from companies with greater financial
resources, more extensive research and development, manufacturing, marketing and
service capabilities, and a larger number of qualified managerial and technical
personnel. Because these companies will generally have highly leveraged capital
structures, reduced cash flow resulting from an adverse business development,
shift in customer preferences, or an economic downturn or the inability to
complete a public offering or other financing may adversely affect the return
on, or the recovery of, the Fund's investment in them. Investment in such
companies therefore involves a high degree of business and financial risk, which
can result in substantial losses and, accordingly, should be considered highly
speculative. No assurance can be given that some of the Fund's investments will
not result in substantial or complete losses.
- 18 -
LONG-TERM CHARACTER OF PORTFOLIO INVESTMENTS
It is expected that investments made in accordance with the Fund's
investment objective will usually yield a current return from the time they are
made but will generally produce a profit, if any, from an accompanying equity
feature only after three to five years. There can be no assurance that either a
current return or capital gains will actually be achieved.
RESTRICTED SECURITIES AND ILLIQUIDITY
Many of the investments of the Fund consist of securities acquired directly
from the issuers in private transactions. They are usually subject to
restrictions on resale without registration under the Securities Act, which
would involve delay and expense, and there is no established trading market for
such securities.
The common stock underlying these securities is generally unregistered and
thinly-to-moderately traded. From time to time the Fund may seek to register and
sell unregistered securities or, pursuant to Rule 144 of the 1933 Act, may seek
to sell unregistered securities, if certain holding periods, volume
requirements, and other conditions of the Act are met. The limitations on the
sale of securities under Rule 144 could prevent or delay any sale of the Fund's
securities or reduce the amount of proceeds that might otherwise be realized by
the Fund. Restricted securities generally sell at a price lower than similar
securities that are not subject to restrictions on sale.
MARKET PRICE DISPARITIES
Shares of closed-end management investment companies frequently trade at a
discount from net asset value but, there are examples of companies, including
the Fund, which have traded at a premium to net asset value from time to time.
At September 30, 2003, the Fund's shares traded at a 22.49% discount to their
net asset value. This characteristic of shares of closed-end investment
companies is separate and distinct from the risk that a fund's net asset value
per share will decline. It is not possible to predict whether the Shares offered
hereby will trade at, above or below net asset value.
COMPETITION
The Fund has significant competition for investment in emerging growth
companies from private equity funds, institutional investors and private
investors. Many of these sources for growth capital have substantially greater
financial resources than the resources of the Fund. As a result, the Fund may,
from time to time, be precluded from making otherwise attractive investments on
terms considered by the Investment Adviser to be prudent in light of the risks.
The Fund competes 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.
- 19 -
MANAGEMENT FEE
Since RENN Group's management fee is based on a percentage of the Fund's
net assets, increasing the Fund's net assets through the Offering will increase
the dollar amount of the management fees paid to RENN Group.
POSSIBLE NEED FOR FOLLOW-ON INVESTMENTS IN PORTFOLIO COMPANIES
Following its initial investment, the Fund may make additional debt and
equity investments in portfolio companies ("Follow-On Investments") in order to
increase its investment in a successful portfolio company, to exercise
securities that were acquired in the original financing, to preserve the Fund's
proportionate ownership when a subsequent financing is planned or to protect the
Fund's initial investment when such portfolio company's performance does not
meet expectations. The failure or inability to make such Follow-On Investments
may, in certain circumstances, jeopardize the continued viability of a portfolio
company and the Fund's initial investment in that company.
DEPENDENCE ON SECURITIES MARKET
The investment strategy of the Fund is based in large part upon the
securities markets in general and the market for public offerings in particular.
Changes in the securities markets and general economic conditions, including
economic downturns, fluctuations in interest rates, the availability of credit,
inflation and other factors, may affect the value of investments of the Fund.
There can be no assurance that the securities markets will, at any point in
time, be receptive to initial public offerings, particularly those of emerging
growth companies. Any adverse change in the market for public offerings could
have a material adverse effect on the Fund and could impact the Fund's ability
to realize its investment objectives.
LACK OF DIVERSIFICATION
The Fund is classified as a "non-diversified" investment company under the
Act, which means the Fund is not limited by the Act in the proportion of its
assets that may be invested in the securities of a single issuer. However, the
Fund has in the past conducted and intends to continue to conduct its operations
so as to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended (the "Code"), which will relieve the
Fund of any liability for federal income tax to the extent its earnings are
distributed to stockholders. See "Federal Income Tax Considerations." To so
qualify, among other requirements, the Fund will limit its investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund's total assets will be invested in the securities of a
single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer. The Fund's
investments in cash, cash equivalents, and U.S. Government Securities are not
subject to these limitations. To the extent the Fund takes large positions in
the securities of a small number of issuers, the Fund's net asset value and the
market price of its Shares may fluctuate as a result of changes in the financial
condition or in the market's assessment of such issuers to a greater extent than
that of a diversified investment company.
- 20 -
Although the Fund has elected Subchapter M status under the Code and is
therefore required to meet certain diversification requirements thereunder, the
Fund operates as a non-diversified, closed-end fund that has elected to be
treated as a business development company under the 1940 Act, and, therefore,
the Fund's investments may not be substantially diversified. In any event, the
Fund will not be able to achieve the same level of diversification as much
larger entities engaged in similar activities.
NUMBER OF INVESTMENTS; INDUSTRY CONCENTRATION
The Fund is limited in the amount of its assets it may invest in any one
portfolio company. Generally, the Fund does not invest more than 15% of the
value of its assets in a single portfolio company. However, market value
appreciation and follow-on investments may result in greater than 15% of the
Fund's assets being invested in a single portfolio company. While these
restrictions limit the exposure of the capital of the Fund in any single
investment, the Fund's capital is invested in a limited number of portfolio
companies and financial difficulty on the part of any single portfolio company
would expose it to a greater risk of loss than would be the case if it were a
"diversified" company holding numerous investments. At September 30, 2003, the
Fund had investments in 27 portfolio companies, of which three exceed 10% of the
value of its net assets.
The Fund spreads its investments among several industries. Although
Management does not invest more than 25% of the Fund's assets in portfolio
companies in a particular industry or to otherwise concentrate in any one or a
few industries, if the most attractive investments available to Management and
the Fund are concentrated in a small number of industries, the Fund's portfolio
may become concentrated in those industries. In such event, the Fund would be
exposed to the risk of adverse developments in or affecting any single industry
to a greater extent than if its investments were dispersed over a greater
variety of industries.
LOSS OF PASS-THROUGH TAX TREATMENT
The Fund may cease to qualify for pass-through tax treatment if it is
unable to comply with the diversification requirements contained in Subchapter M
of the Code. The Company may also cease to qualify as a regulated investment
company and therefore to qualify for pass-through treatment, or be subject to a
4% nondeductible excise tax, if it fails to make certain distributions. Failure
to qualify as a RIC would subject the Fund to federal income tax as if the Fund
were an ordinary corporation, which could result in a substantial reduction in
both the Fund's net assets and the amount of income available for distributions
to shareholders.
CHANGES IN INTEREST RATES
In addition, the net asset value of the Fund will change with changes in
the value of its portfolio securities. When interest rates decline, the value of
the Fund's portfolio can be expected to rise. Conversely, when interest rates
rise, the value of a fixed-income portfolio can be expected to decline.
- 21 -
THE OFFERING
PURPOSE OF THE OFFERING
The Board of Directors of the Fund has determined that it is in the best
interests of the Fund and its shareholders to increase the number of outstanding
Shares and to increase the assets of the Fund available for investment by making
the Offering. In reaching its decision, the Board noted that more investment
opportunities for the Fund may exist in the future. The Board concluded that an
increase in the assets of the Fund would permit the Fund to take advantage of
these additional investment opportunities, consistent with the Fund's investment
objectives, while retaining investments believed to be attractive in the Fund's
portfolio. The Board believes that the Offering would permit the Fund to
accomplish these objectives, while allowing existing shareholders an opportunity
to purchase additional Shares at a price below market value without paying a
brokerage commission. The Board also believes that a larger number of
outstanding Shares and a larger number of shareholders could increase the level
of market interest in the Fund and the liquidity of Shares.
This additional capital will increase the Fund's equity base and allow the
Fund to take advantage of new investment opportunities. Because the Fund, as a
regulated investment company, must distribute essentially all of its income to
its shareholders each year to avoid unfavorable federal income tax consequences,
the Fund cannot increase its equity base by retaining net income.
The Board considered that the Offering would have a dilutive effect on
nonparticipating shareholders and on shareholders who do not fully participate
in the Offering. The Board also considered the effect that the issuance of the
Shares would have on the net asset value of the Fund. Nonetheless, the Board
believes that the dilutive effect will be mitigated because the Rights are
transferable, which will afford shareholders who do not exercise all of their
Rights the potential of receiving a cash payment upon sale of such Rights.
Additionally, nonparticipating shareholders would derive a benefit from the
Offering if it enables the Fund to invest additional amounts that earn a return
that exceeds the dilution. Additionally, the Board concluded that increasing the
Fund's total assets would reduce expenses per share due to the spreading of
fixed expenses over a larger asset base.
The Fund's directors have voted unanimously to authorize the Offering. One
of the Fund's directors who voted to authorize the Offering is affiliated with
the Adviser and, therefore, could benefit indirectly from the Offering. The
other four directors are not "interested persons" of the Fund within the meaning
of the 1940 Act.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of Shares and on
terms which may or may not be similar to this Offering. Any such future rights
offering will be made in accordance with the 1940 Act.
TERMS OF THE OFFERING
The Fund is issuing Rights to its Record Date Shareholders entitling the
holders thereof to subscribe for an aggregate of 1,450,572 Shares. Record Date
Shareholders, where the context requires, shall include beneficial owners whose
- 22 -
Shares are held of record by Cede & Co. ("Cede"), nominee for The Depository
Trust Company ("DTC"), or by any other depository or nominee. In the case of
Shares held of record by Cede or any other depository or nominee, beneficial
owners for whom Cede or any other depository or nominee is the holder of record
will be deemed to be the holders of the Rights that are issued to Cede or such
other depository or nominee on their behalf. Each Record Date Shareholder will
receive one Right for each three Shares beneficially owned on the Record Date,
and the Rights entitle Record Date Shareholders and holders of Rights acquired
during the period from the commencement date of the Offering to the Expiration
Date (the "Subscription Period") to acquire one Share for each Right held. No
fractional Shares will be issued. In addition, the Rights entitle each holder
thereof to subscribe, pursuant to the Over-Subscription Privilege, for any
Shares not acquired by exercise of Rights in the Primary Subscription. Rights
holders will have no right to rescind a purchase after the Subscription Agent
has received the Subscription Certificate or Notice of Guaranteed Delivery. All
Rights may be exercised until the Expiration Date. (Record Date Shareholders and
Rights Holders purchasing Shares are hereinafter referred to as "Exercising
Rights Holders.") No fractional Rights will be issued.
Shares not subscribed for in the Primary Subscription will be offered, by
means of the Over-Subscription Privilege, to those Record Date Shareholders and
Rights Holders who have exercised all Rights held by them and who wish to
acquire more than the number of Shares they are entitled to purchase pursuant to
the exercise of their Rights. Shares acquired pursuant to the Over-Subscription
Privilege are subject to allotment, as more fully discussed below under
"Over-Subscription Privilege." For purposes of determining the maximum number of
Shares a shareholder may acquire pursuant to the Offering, beneficial owners of
Shares whose Shares are held of record by Cede, as nominee for DTC, or by any
other depository or nominee will be deemed to be the holders of the Rights that
are issued to Cede or such other depository or nominee on their behalf.
There is no minimum number of Rights which must be exercised in order for
the Offering to close.
The number of Rights issued to a shareholder on the Record Date will be
rounded up to the nearest number of Rights. In the case of shares of common
stock held of record by a Nominee (e.g., Cede as nominee for DTC, or any other
depository or nominee), the number of Rights issued to the Nominee will be
adjusted to permit rounding up (to the nearest number of Rights) of the Rights
to be received by beneficial owners for whom the Nominee is the holder of record
only if the Nominee provides to the Fund on or before the close of business on
_____________, 2003 a written representation of the number of Rights required
for such rounding.
Affiliates of Russell Cleveland, President and CEO of the Fund, which own
5.8% of Common Stock, intend to subscribe for at least 84,066 shares of Common
Stock upon full exercise of their Rights and may participate in the
Over-Subscription Privilege.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for in the Primary Subscription (the "Excess Shares")
will be offered, by means of the Over-Subscription Privilege, to those Record
Date Shareholders exercising Rights who have exercised all exercisable Rights
- 23 -
held by them and who wish to acquire more than the number of Shares for which
the Rights held by them are exercisable. Exercising Rights Holders should
indicate on the Subscription Certificate, which they submit with respect to the
exercise of the Rights held by them, how many Excess Shares they are willing to
acquire pursuant to the Over-Subscription Privilege. If sufficient Excess Shares
remain, all over-subscription requests by Exercising Rights Holders will be
honored in full. If requests for Shares pursuant to the Over-Subscription
Privilege exceed the Excess Shares available, the available Excess Shares will
be allocated pro rata among Exercising Rights Holders who oversubscribe based on
the number of Rights held by such Exercising Rights Holders.
THE FUND WILL NOT OFFER OR SELL IN CONNECTION WITH THE OFFERING ANY SHARES THAT
ARE NOT SUBSCRIBED FOR PURSUANT TO THE PRIMARY SUBSCRIPTION OR THE
OVER-SUBSCRIPTION PRIVILEGE.
SUBSCRIPTION PRICE
The Subscription Price for each Share to be issued pursuant to the Offering
will be 95% of the volume-weighted average of the last reported bid price per
Share on the Nasdaq National Market on the Expiration Date and the four
preceding business days.
Exercising Rights Holders will not know the actual Subscription Price at
the time of exercise and will be required initially to pay for the Shares at the
Estimated Subscription Price of $______ per Share based on the last reported bid
price of the Fund's Common Stock on __________________. The actual Subscription
Price may be more than the Estimated Subscription Price.
The net asset value per share at September 30, 1998, September 30, 2002 and
September 30, 2003 were $9.02, $9.67 and $14.76, respectively, and the last
reported bid price of a share on the Nasdaq National Market on ____________,
2003 was $______.
EXPIRATION OF THE OFFERING
The Offering and the Rights will expire on the Expiration Date, unless
extended by the Fund. The Fund may make one or more extensions of the Offering,
as discussed below. Any extension of the Offering will be followed as promptly
as practicable by announcement thereof. Such announcement will be issued no
later than 9:00 a.m., Eastern time, on the next business day following the
previously scheduled Expiration Date. Without limiting the manner in which the
Fund may choose to make such announcement, the Fund will not, unless otherwise
required by law, have any obligation to publish, advertise or otherwise
communicate any such announcement other than by making a release to the Dow
Jones News Service or such other means of announcement as the Fund deems
appropriate.
SUBSCRIPTION AGENT
The Subscription Agent will receive for its administrative, processing,
invoicing and other services as Subscription Agent fees and expenses estimated
to be approximately $10,000. Questions regarding the Subscription Forms should
be directed to the Information Agent at 800-467-0740, (toll free); shareholders
may also consult their brokers or nominees. Completed Subscription Forms must be
sent, together with proper payment of the Estimated Subscription Price for all
Shares subscribed for in the Primary Subscription and the Over-Subscription
- 24 -
Privilege, to the Subscription Agent by one of the methods described below.
Alternatively, Notices of Guaranteed Delivery may be sent by brokerage firms and
custodian banks and trust companies exercising Rights on behalf of Exercising
Rights Holders whose Shares are held by such institutions by facsimile to
781-380-3388 to be received by the Subscription Agent prior to 5:00 p.m.,
Eastern time, on the Expiration Date. Facsimiles should be confirmed by
telephone at 781-843-1833, extension 200. The Fund will accept only properly
completed and executed Subscription Certificates actually received at any of the
addresses listed below, prior to 5:00 p.m., Eastern time, on the Expiration Date
or by the close of business on the third business day after the Expiration Date
following timely receipt of a Notice of Guaranteed Delivery.
(1) BY FIRST CLASS MAIL:
Renaissance Capital Growth & Income Fund III, Inc.
c/o Colbent Corporation
P.O. Box 859208
Braintree MA 02185-9208
(2) BY OVERNIGHT COURIER:
Renaissance Capital Growth & Income Fund III, Inc.
c/o Colbent Corporation
161 Bay State Drive
Braintree MA 02184
(3) BY HAND:
Securities Transfer and Reporting Services, Inc.
c/o Colbent Corporation
100 Williams Street Galleria
New York, New York 10038
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL
NOT CONSTITUTE VALID DELIVERY.
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Shareholders," will be mailed promptly following the Record
Date to Record Date Shareholders or, if a shareholder's Shares are held by Cede
or any other depository or nominee on their behalf, to Cede or such depository
or nominee. Rights may be exercised by completing and signing the Subscription
Certificate that accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment in full for the
Shares to be purchased at the Estimated Subscription Price by the Expiration
Date. Rights may also be exercised by contacting your broker, bank or trust
company which can arrange, on your behalf, to guarantee delivery of payment and
delivery of a properly completed and executed Subscription Certificate pursuant
to a Notice of Guaranteed Delivery by the close of business on the third
business day after the Expiration Date. A fee may be charged by the broker, bank
or trust company for this service. Completed Subscription Certificates must be
received by the Subscription Agent prior to 5:00 p.m., Eastern time, on the
Expiration Date at one of the addresses set forth above (unless the guaranteed
delivery procedures are complied with as described below under "Payment for
- 25 -
Shares"). Exercising Rights Holders will have no right to rescind their
subscriptions after receipt of their payment for Shares by the Subscription
Agent.
SHAREHOLDERS WHO ARE RECORD OWNERS
Shareholders who are record owners can choose between two options to
exercise their Rights as described below under "Payment for Shares." If time is
of the essence, option (2) under "Payment for Shares" below will permit delivery
of the Subscription Certificate and payment after the Expiration Date, provided
that a Notice of Guaranteed Delivery from a financial institution meeting
certain requirements has been received by the Subscription Agent prior to 5:00
p.m., Eastern time, on the Expiration Date, as described below.
SHAREHOLDERS WHOSE SHARES ARE HELD BY A NOMINEE
Shareholders whose Shares are held by a nominee, such as a bank, broker or
trustee, must contact that nominee to exercise their Rights. In such case, the
nominee will complete the Subscription Certificate on behalf of the shareholder
and arrange for proper payment by one of the methods described below under
"Payment for Shares."
NOMINEES
Nominees who hold Shares for the account of others should notify the
beneficial owners of such Shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the nominee should complete the
Subscription Certificate and submit it to the Subscription Agent with the proper
payment as described below under "Payment for Shares."
PAYMENT FOR SHARES
Shareholders who wish to acquire Shares pursuant to the Offering may choose
between the following methods of payment:
1. An Exercising Rights Holder may send the Subscription Certificate
together with payment (based on Estimated Subscription Price) for the
Shares subscribed for in the Primary Subscription and any additional
Shares subscribed for pursuant to the Over-Subscription Privilege to
the Subscription Agent. A subscription will be accepted when payment,
together with a properly completed and executed Subscription
Certificate, is received by the Subscription Agent's office at one of
the addresses set forth above no later than 5:00 p.m., Eastern time,
on the Expiration Date. The Subscription Agent will deposit all checks
and money orders received by it for the purchase of Shares into a
segregated interest-bearing account (the interest from which will
accrue to the benefit of the Fund) pending proration and distribution
of Shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS
BY MONEY ORDER OR CHECK DRAWN ON A BANK OR BRANCH LOCATED IN THE
UNITED STATES, MUST BE PAYABLE TO RENAISSANCE CAPITAL GROWTH & INCOME
FUND III, INC. AND MUST ACCOMPANY A PROPERLY COMPLETED AND EXECUTED
SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE
ACCEPTED. EXERCISE BY THIS METHOD IS SUBJECT TO ACTUAL COLLECTION OF
- 26 -
CHECKS BY 5:00 P.M., EASTERN TIME, ON THE EXPIRATION DATE. BECAUSE
UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR, SHAREHOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT,
BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
2. Alternatively, an Exercising Rights Holder may acquire Shares, and a
subscription will be accepted by the Subscription Agent if, prior to
5:00 p.m., Eastern time, on the Expiration Date, the Subscription
Agent has received a Notice of Guaranteed Delivery by facsimile
(telecopy) or otherwise FROM A FINANCIAL INSTITUTION THAT IS A MEMBER
OF THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM, THE STOCK
EXCHANGE MEDALLION PROGRAM OR THE NEW YORK STOCK EXCHANGE MEDALLION
SIGNATURE PROGRAM guaranteeing delivery of (i) payment of the
Estimated Subscription Price for the Shares subscribed for in the
Primary Subscription and any additional Shares subscribed for pursuant
to the Over-Subscription Privilege, (ii) payment in full of any
additional amount required to be paid if the actual Subscription Price
is in excess of the Estimated Subscription Price, and (iii) a properly
completed and executed Subscription Certificate. The Subscription
Agent will not honor a Notice of Guaranteed Delivery unless a properly
completed and executed Subscription Certificate and full payment for
the Shares based on the Estimated Subscription Price is received by
the Subscription Agent by the close of business on the third business
day after the Expiration Date.
On a date within eight business days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising Rights
Holder (or, if Shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee) a confirmation showing (i) the number
of Shares purchased pursuant to the Primary Subscription, (ii) the number of
Shares, if any, acquired pursuant to the Over-Subscription Privilege, (iii) any
excess to be refunded by the Fund to such Exercising Rights Holder as a result
of payment for Shares pursuant to the Over-Subscription Privilege which the
Exercising Rights Holder is not acquiring, and (iv) any additional amount
payable by such Exercising Rights Holder to the Fund or any excess to be
refunded by the Fund to such Exercising Rights Holder, in each case, based on
the actual Subscription Price as determined on the Expiration Date. Any
additional payment required from Exercising Rights Holders must be received by
the Subscription Agent within seven business days after the Confirmation Date.
Any excess payment to be refunded by the Fund to an Exercising Rights Holder
will be mailed by the Subscription Agent as promptly as practicable. All
payments by an Exercising Rights Holder must be in U.S. dollars by money order
or check drawn on a bank or branch located in the United States and payable to
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A
HOLDER OF RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION
OR OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY AMOUNTS DUE BY THE
TENTH BUSINESS DAY AFTER THE CONFIRMATION DATE, THE SUBSCRIPTION AGENT RESERVES
- 27 -
THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING ACTIONS: (i) FIND OTHER EXERCISING
RIGHTS HOLDERS TO PURCHASE SUCH SUBSCRIBED AND UNPAID SHARES; (ii) APPLY ANY
PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE GREATEST WHOLE NUMBER
OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON EXERCISE OF THE PRIMARY
SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE; AND/OR (iii) EXERCISE ANY AND
ALL OTHER RIGHTS OR REMEDIES TO WHICH IT MAY BE ENTITLED INCLUDING, WITHOUT
LIMITATION, THE RIGHT TO SET OFF AGAINST PAYMENTS ACTUALLY RECEIVED BY IT WITH
RESPECT TO SUCH SUBSCRIBED SHARES.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00
P.M., EASTERN TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS
MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Subscription
Agent determines in its sole discretion.
The Subscription Agent will not be under any duty to give notification of
any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION
AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS
PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights will be
listed for trading on the Nasdaq National Market under the symbol "RENNR." The
Fund will use its best efforts to ensure that an adequate trading market for the
Rights will exist, although no assurance can be given that a market for the
Rights will develop. It is anticipated that the Rights will trade on the Nasdaq
National Market on a when-issued basis commencing on or about ________, ____
until approximately _______, ____ and on a regular way basis thereafter until
- 28 -
and including _________, ____, the last business day prior to the Expiration
Date.
SALES THROUGH SUBSCRIPTION AGENT
Record Date Shareholders who do not wish to exercise any or all of their
Rights may instruct the Subscription Agent to sell any unexercised Rights.
Subscription Certificates representing the Rights to be sold must be received by
the Subscription Agent on or before ___________, 2003 (or if the Offering is
extended, by two business days prior to the Expiration Date). Upon the timely
receipt by the Subscription Agent of appropriate instructions to sell Rights,
the Subscription Agent will use its best efforts to complete the sale and will
remit the proceeds of sale, net of commissions, to the selling Record Date
Shareholder. Any commissions on sales of Rights will be paid by the selling
Record Date Shareholder. If the Rights can be sold, sales of such Rights will be
deemed to have been effected at the volume-weighted average price received by
the Subscription Agent on the day such Rights are sold. The Subscription Agent
will also attempt to sell all Rights which remain unclaimed as a result of
Subscription Certificates being returned by the postal authorities to the
Subscription Agent as undeliverable as of the fourth business day prior to the
Expiration Date. Such sales will be made, net of commissions, on behalf of the
nonclaiming Record Date Shareholders. The Subscription Agent will hold the
proceeds from those sales for the benefit of such nonclaiming Record Date
Shareholders, until such proceeds are either claimed or escheated. There can be
no assurance that the Subscription Agent will be able to complete the sale of
any such Rights, and neither the Fund nor the Subscription Agent has guaranteed
any minimum sales price for the Rights.
OTHER TRANSFERS
The Rights will be evidenced by a Subscription Certificate and may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register such portion of
the Rights evidenced thereby in the name of the transferee and to issue a new
Subscription Certificate to the transferee evidencing such transferred Rights.
In such event, a new Subscription Certificate evidencing the balance of the
Rights, if any, will be issued to the holder thereof or, if the holder thereof
so instructs, to an additional transferee. The signature on the Subscription
Certificate must correspond with the name as written upon the face of the
Subscription Certificate in every particular, without alteration or enlargement,
or any change whatsoever. A signature guarantee must be provided by an eligible
financial institution as defined in Rule 17Ad-15 of the Securities Exchange Act
of 1934, as amended (the "1934 Act"), subject to the standards and procedures
adopted by the Fund.
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five business days for (i) the transfer
instructions to be received and processed by the Subscription Agent; (ii) a new
Subscription Certificate to be issued and transmitted to the transferee or
transferees with respect to transferred Rights, and to the transferor with
respect to retained Rights, if any; and (iii) the Rights evidenced by such new
Subscription Certificate to be exercised or sold by the recipients thereof.
Neither the Fund nor the Subscription Agent shall have any liability to a
- 29 -
transferee or transferor of Rights if Subscription Certificates are not received
in time for exercise or sale prior to the Expiration Date.
Except for the fees charged by the Subscription Agent (which will be paid
by the Fund), all commissions, fees and other expenses (including brokerage
commissions and transfer taxes) incurred or charged in connection with the
purchase, sale or exercise of Rights will be for the account of the transferor
of the Rights, and none of such commissions, fees or expenses will be paid by
the Fund or the Subscription Agent.
The Fund anticipates that the Rights will be eligible for transfer or
exercise through the DTC PSOP function and that the exercise of the Primary
Subscription and the Over-Subscription Privilege may be effected through the
same facility (Rights exercised through DTC are referred to as "DTC Exercised
Rights"). Holders of DTC Exercised Rights may exercise the Over-Subscription
Privilege in respect of such DTC Exercised Rights by delivering their
instructions to the Subscription Agent via the PSOP function, at or prior to
5:00 p.m., Eastern time, on the Expiration Date, with payment of the Estimated
Subscription Price for the number of Shares for which the Over-Subscription
Privilege is to be exercised.
DELIVERY OF SHARE CERTIFICATES
Except as described herein, certificates representing Shares acquired in
the Primary Subscription and representing Shares acquired pursuant to the
Over-Subscription Privilege will be mailed promptly after the Expiration Date
once full payment for such Shares has been received and cleared. Participants in
the Fund's Dividend Reinvestment Plan (the "Plan") will have any Shares acquired
in the Primary Subscription and pursuant to the Over-Subscription Privilege
credited to their shareholder dividend reinvestment accounts in the Plan.
Participants in the Plan wishing to exercise Rights for the Shares held in their
accounts in the Plan must exercise such Rights in accordance with the procedures
set forth above. Shareholders whose Shares are held of record by Cede or by any
other depository or nominee on their behalf or their broker-dealer's behalf will
have any Shares acquired in the Primary Subscription credited to the account of
Cede or such other depository or nominee. Shares acquired pursuant to the
Over-Subscription Privilege will be certificated and certificates representing
such Shares will be sent directly to Cede or such other depository or nominee.
Stock certificates will not be issued for Shares credited to the Plan accounts.
FOREIGN SHAREHOLDERS
SUBSCRIPTION CERTIFICATES WILL NOT BE MAILED TO RECORD DATE SHAREHOLDERS
WHOSE RECORD ADDRESSES ARE OUTSIDE THE UNITED STATES (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Shareholders"). Each
Foreign Record Date Shareholder will be sent written notice of the Offering,
provided that such provision of notice is consistent with the laws of the
jurisdiction to which such notice is to be sent. The Rights to which such
Subscription Certificates relate will be held by the Subscription Agent for such
Foreign Record Date Shareholders' accounts until instructions are received to
exercise or sell the Rights. If no instructions have been received by 5:00 p.m.,
Eastern time, on _________, 2003, which is three business days prior to the
Expiration Date, the Rights of those Foreign Record Date Shareholders will be
transferred by the Subscription Agent, who will either purchase the Rights or
- 30 -
use its best efforts to sell the Rights. The net proceeds, if any, from the sale
of those Rights by the Subscription Agent will be remitted to Foreign Record
Date Shareholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFERING
The U.S. federal income tax consequences to holders of Shares with respect
to the Offering will be as follows:
o The distribution of Rights to Record Date Shareholders will not result
in taxable income to them, nor will they realize taxable income as a
result of the exercise of the Rights. No loss will be realized if
Rights expire without being exercised.
o The basis of a Right to a Record Date Shareholder who exercises or
sells the Right is expected to be zero, since the Right's fair market
value on the distribution date is expected to be less than 15% of the
fair market value on that date of the Shares with regard to which it
is issued (unless the holder elects with respect to all Rights
received, by filing a statement with his or her timely filed federal
income tax return for the year in which the Rights are received, to
allocate the basis of the Share between the Right and the Share based
on their respective fair market values on that date). The basis of a
Right to a Record Date Shareholder who allows the Right to expire will
be zero, and the basis to anyone who purchases a Right in the market
will be its purchase price.
o An Exercising Rights Holder's basis for determining gain or loss on
the sale of a Share acquired on the exercise of Rights will be equal
to the sum of the Record Date Shareholder's basis in the Rights, if
any, plus the Subscription Price per Share. An Exercising Rights
Holder's gain or loss recognized on the sale or exchange of such a
Share will be capital gain or loss if the Share was then held as a
capital asset and will be long-term capital gain or loss if the Share
was held for more than one year.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
reportable payments paid on an account if its holder provides the Fund with
either an incorrect taxpayer identification number or no number at all or fails
to certify that he or she is not subject to such withholding.
The foregoing is only a general summary of the material U.S. federal income
tax consequences of the Offering under the Code, and Treasury regulations
presently in effect that are generally applicable to (1) Record Date
Shareholders that are "United States persons" within the meaning of the Code and
(2) any other Record Date Shareholder that would be subject to U.S. federal
income tax on the sale or exchange of the Shares acquired on exercise of the
Rights, and does not cover foreign, state or local taxes. The Code and those
regulations are subject to change by legislative or administrative action, which
may be retroactive. Record Date Shareholders and Exercising Rights Holders
should consult their tax advisers regarding specific questions as to federal,
state, local or foreign taxes. See "Federal Income Tax Considerations."
- 31 -
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the Commission's registration form, undertaken
to suspend the Offering until it amends this Prospectus if, subsequent to the
effective date of this Registration Statement, the Fund's net asset value
declines more than 10% from its net asset value as of that date. In such event,
the Expiration Date would be extended, and the Fund would notify Exercising
Rights Holders of any such decline and thereby permit them to cancel their
exercise of Rights.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are on tax-deferral arrangements, such as plans qualified
under Code section 401(a) (including corporate savings plans, 401(k) plans, and
Keogh plans of self-employed individuals), individual retirement accounts under
Code section 408(a) ("IRAs"), Roth IRAs under Code section 408A, and custodial
accounts under Code section 403(b) (collectively, "Retirement Plans"), should be
aware that additional contributions of cash to a Retirement Plan (other than
permitted rollover contributions or trustee-to-trustee transfers from another
Retirement Plan) in order to exercise Rights, when taken together with
contributions previously made, may result in, among other things, excise taxes
for excess or nondeductible contributions or the Retirement Plan's loss of its
tax-favored status. Furthermore, the sale or transfer of Rights may be treated
as a distribution or result in other adverse tax consequences. In the case of
Retirement Plans qualified under Code section 401(a) and certain other
Retirement Plans, additional cash contributions could cause the maximum
contribution limitations of Code section 415 or other qualification rules to be
violated.
Retirement Plans and other tax-exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Code section 511. If any portion of an IRA or a
Roth IRA is used as security for a loan, the portion so used is also treated as
distributed to the IRA or Roth IRA owner, which may result in current income
taxation and penalty taxes.
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
contains fiduciary responsibility requirements, and ERISA and the Code contain
prohibited transaction rules that may apply to the exercise of Rights by
Retirement Plans. Retirement Plans that are not subject to ERISA (such as
governmental plans) may be subject to state law restrictions that could affect
the decision to exercise or transfer Rights. Due to the complexity of these
rules and the penalties for noncompliance, shareholders that are on Retirement
Plans should consult with their counsel and other advisers regarding the
consequences of their exercise of Rights under ERISA, the Code, and, where
applicable, state law.
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the Estimated Subscription
Price of $____ per Share, the net proceeds of the Offering are estimated to be
$_______ after payment of the estimated Offering expenses. These expenses will
be borne by the Fund and will reduce the net asset value of the Fund's shares.
The Fund anticipates that proceeds of the Offering will be used, in accordance
with the Fund's investment objective, to make new investments primarily in
- 32 -
emerging growth public companies. The Fund anticipates that substantially all of
the proceeds of the Offering will be invested within two years. The Fund intends
that, pending investment, the proceeds of the Offering will be invested in cash
and cash equivalents.
THE FUND
GENERAL
Renaissance Capital Growth & Income Fund III, Inc., is a non-diversified,
closed-end fund that has elected to be treated as a Business Development Company
under the Investment Company Act of 1940, as amended. The Fund, a Texas
corporation, was organized in 1994 and commenced operations in 1995.
The investment objective of the Fund is to provide its shareholders with
current income and long-term capital appreciation by investing primarily in
privately-placed convertible and equity securities of emerging growth public
companies.
The Fund seeks to provide returns to shareholders through cash dividends of
net investment income and through distributions of realized gains or of
securities that have appreciated in value. Pursuant to its annual distribution
policy, the Fund currently pays to its shareholders a minimum annual
distribution of $0.40, payable quarterly. The Fund has paid a total of $7.96 per
share in cash to its shareholders since inception in 1995 through September 30,
2003.
RENN Group serves as the investment adviser to the Fund. In this capacity,
RENN Group is primarily responsible for the selection, evaluation, structure,
valuation, and administration of the Fund's investment portfolio. RENN Group is
a registered investment adviser under the 1940 Act.
Generally, investments are and will continue to be in companies that have
their common stock registered for public trading under the 1934 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 privately placed preferred stock or debentures of a portfolio company, which
securities typically 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 often unregistered.
Therefore, such securities are restricted from distribution or sale to the
public except in compliance with certain holding periods and exemptions under
the 1933 Act, or after registration pursuant to the Securities Act. The Fund
also purchases shares of small and micro cap issuers in the secondary markets.
These shares are freely tradable and have no restrictions on resale.
From inception through December 31, 2002, the Fund had made investments in
forty-six (46) different portfolio companies having an aggregate cost of
$69,445,007. The Fund had active investments in 27 portfolio companies at
September 30, 2003. The Fund does not focus on particular industry segments.
Instead, the Fund makes investment decisions using a bottoms-up analysis of the
potential portfolio company, with no predetermined industry bias.
Under the provisions of the 1940 Act, a Business Development Company is
required to invest 70% or more of its funds in "eligible portfolio investments,"
defined generally as direct placements to "eligible portfolio companies" and
- 33 -
temporary investments in "cash items" pending other investments. 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," or "non-eligible
investments," that is, investments that do not qualify as "eligible portfolio
investments." In the event the Fund has less than 70% of its assets in "eligible
portfolio investments," then it will be prohibited from making non-eligible
investments until such time as the percentage of eligible investments again
exceeds the 70% threshold.
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 cash or
U.S. Government and agency obligations.
At June 30, 2003, the Fund's investment assets were classified by amount as
follows:
PERCENTAGE
CLASSIFICATION VALUE OF ASSETS
Eligible Portfolio Investments $72,630,907 85.10%
(including cash and cash
equivalents)
Other Portfolio Investments $12,712,533 14.90%
----------- -------
$85,343,440 100.00%
=========== =======
REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940
The 1940 Act was enacted to regulate investment companies. In 1980, the
1940 Act was amended by the adoption of the Small Business Investment Incentive
Act. The purpose of the amendment was to remove regulatory burdens on
professionally managed investment companies engaged in providing capital to
smaller companies. The Small Business Investment Incentive Act established a new
type of investment company specifically identified as a Business Development
Company as a way to encourage financial institutions and other major investors
to provide a new source of capital for small developing businesses.
BUSINESS DEVELOPMENT COMPANY
A Business Development Company ("BDC") is a closed-end management company
that generally makes 70% or more of its investments in "eligible portfolio
companies" and "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." To be
an "eligible portfolio company," the Company must satisfy the following:
o it must be organized under the laws of, and has its principal place of
business in, any state or states;
o is neither an investment company as defined in Section 3 (other than a
small business investment company which is licensed by the Small
Business Administration to operate under the Small Business Investment
Act of 1958 and which is a wholly-owned subsidiary of the business
- 34 -
development company) nor a company which would be an investment
company except for the exclusion from the definition of investment
company in Section 3(c); and
o satisfies one of the following:
a. it does not have any class of securities with respect to which a
member of a national securities exchange, broker, or dealer may
extend or maintain credit to or for a customer pursuant to rules
or regulations adopted by the Board of Governors of the Federal
Reserve System under Section 7 of the Securities Exchange Act of
1934;
b. it is controlled by a business development company, either alone
or as part of a group acting together, and such business
development company in fact exercises a controlling influence
over the management or policies of such eligible portfolio
company and, as a result of such control, has an affiliated
person who is a director of such eligible portfolio company;
c. it has total assets of not more than $4,000,000, and capital and
surplus (shareholders' equity less retained earnings) of not less
than $2,000,000, except that the Commission may adjust such
amounts by rule, regulation, or order to reflect changes in one
or more generally accepted indices or other indicators for small
businesses; or
d. it meets such other criteria as the Commission may, by rule,
establish as consistent with the public interest, the protection
of investors, and the purposes fairly intended by the policy and
provisions of this title.
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, 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 in certain circumstances seeks to limit its "control" position
by contracting for the right to have 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:
o 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;
- 35 -
o restrictions against certain transactions between the Fund and
affiliated persons;
o restrictions on issuance of senior securities, such not being
prohibited by the 1940 Act but being restricted as a percentage of
capital;
o compliance with accounting rules and conditions as established by the
SEC, including annual audits by independent accountants;
o compliance with fiduciary obligations imposed under the 1940 Act; and
o 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.
INVESTMENT ADVISERS ACT OF 1940 AND THE INVESTMENT ADVISORY AGREEMENT
RENN Group is the investment adviser to the Fund pursuant to the Investment
Advisory Agreement, as amended (the "Investment Advisory Agreement"). RENN Group
is registered as an investment adviser under the Advisers Act and is subject to
the reporting and other requirements thereof. The Advisers Act also provides
restrictions on the activities of registered advisers to protect its clients
from manipulative or deceptive practices and restricts performance compensation.
The Investment Advisory Agreement provides that RENN Group is entitled to
receive a management fee equal to a quarterly rate of 0.4375% (1.75% annually)
of the Fund's Net Assets, as determined at the end of such quarter with each
such payment to be due as of the last day of the calendar quarter. In addition
to the quarterly management fee of 0.4375% of the Fund's net assets, RENN Group
is entitled to receive an incentive fee (the "incentive fee") in an amount equal
to 20% of the Fund's realized capital gains in excess of realized capital losses
of the Fund after allowance for any unrealized capital losses in excess of
unrealized capital gains on the portfolio investments of the Fund. The incentive
fee is calculated, accrued, and paid on a quarterly basis.
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
agreement and at all times be construed so as to comply with the Advisers Act
and the 1940 Act.
OTHER INVESTMENT FUNDS
RENN Group currently serves as the Investment Manager to RUSGIT. RUSGIT is
a public limited company registered in the United Kingdom and listed on the
London Stock Exchange, which invests in privately placed convertible securities
issued by companies similar to the investments of the Fund. RUSGIT will be
eligible to invest pari-passu with the Fund on all relevant terms, except that
- 36 -
amounts may differ. In 1996, RUSGIT raised net capital of approximately
$30,789,000.
RENN Group also serves as the Investment Adviser to BFSUS and is
specifically responsible for managing the Growth Portfolio for BFSUS ("BFS
Growth"). BFSUS is a public limited company registered in the United Kingdom and
listed on the London Stock Exchange. BFS Growth invests in publicly traded
equities, fixed-income and convertible securities of publicly traded issuers,
and also invests in privately placed convertible instruments issued by companies
similar to the investments of the Fund. For privately placed investments, BFS
Growth will be eligible to invest on a pari-passu basis with the Fund as to all
relevant terms of the investment, except that amounts invested may differ. In
2001, BFSUS raised net investment capital of approximately $140,711,000, of
which $83,555,000 was allocated to BFS Growth.
In addition, RENN Group may, from time to time, provide investment advisory
services, management consulting services and investment banking services to
other clients. The determination regarding the existence of conflict of interest
between these affiliated investment funds and the Registrant, and the resolution
of any such conflict, vests in the discretion of the Board of Directors, subject
to the requirements and resolution of the 1940 Act.
CO-INVESTMENTS WITH ADVISOR AFFILIATED FUNDS
In accordance with the conditions of an exemptive order of the Commission
permitting co-investments (the "Co-investment Order"), many of the Fund's
acquisitions and dispositions of investments are made in participation with its
Advisor Affiliated Funds.
The Co-investment Order provides that the Adviser will review investment
opportunities on behalf of the Fund, including investments being considered on
behalf of its Advisor Affiliated Funds. If the Adviser determines that any such
investment, other than marketable securities, is an eligible co-investment
opportunity, the Fund must be offered the opportunity to invest in such
investment in an amount recommended by the Adviser. Securities purchased by the
Fund in a co-investment transaction with Advisor Affiliated Funds will consist
of the same class of securities and will have the same rights, price, terms and
conditions. Any such co-investment transaction must be approved by the Fund's
Board of Directors, including a majority of its independent directors. The Fund
will not make any direct investment in the securities of any issuers in which
the Advisor Affiliated Funds, but not the Fund, has previously made a private
placement, except for follow-on investments which meet the same requirements. To
the extent that the amount of a follow-on investment opportunity is not based on
the amount of the Fund's and the Advisor Affiliated Funds' initial investments,
the relative amount of investment by the Advisor Affiliated Funds and the Fund
will be based on the ratio of the Fund's remaining funds available for
investment to the aggregate of the Fund's and the Advisor Affiliated Funds'
remaining funds available for investment. The Co-investment Order also provides
that the Fund will have the opportunity to dispose of any securities in which
the Fund and the Advisor Affiliated Funds have invested at the same price, terms
and conditions. The Fund will participate in any such disposition to the extent
that a majority of its independent directors believe it is in its best interest.
The Fund will bear no more than its own transaction costs.
- 37 -
LEGAL PROCEEDINGS
There are no legal proceedings currently pending against the Fund.
PERSONNEL
The Fund has no direct employees, but instead has contracted RENN Group
pursuant to the Investment Advisory Agreement to provide all management and
operating activities. RENN Group currently has eight employees who are engaged
in performing the duties and functions required by the Fund. At the present
time, a substantial portion of RENN 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.
PROPERTIES
The Fund's business activities are conducted from the offices of RENN
Group, which offices are currently leased until July 31, 2005, 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 RENN Group at its expense pursuant to the Investment Advisory
Agreement.
INVESTMENT OBJECTIVES
GENERAL
The Fund has elected the special income tax treatment available to a
regulated investment company ("RIC") under Subchapter M of the Code 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 shareholders. If a RIC meets certain
diversification and distribution requirements under the Code, it qualifies for
pass-through tax treatment. The Fund would be unable to qualify for pass-through
tax treatment if it were unable to comply with these requirements. Failure to
qualify as a RIC would subject the Fund to federal income tax as if the Fund
were an ordinary corporation, which could result in a substantial reduction in
both the Fund's net assets and the amount of income available for distributions
to shareholders.
GENERAL INVESTMENT POLICIES
The Fund invests primarily in emerging growth public companies 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 products or services offered; and (3) a provider of a
new or unique product or service that allows the company an opportunity for
exceptional growth. Emerging growth companies typically require non-conventional
sources of financing because the extent and nature of the market for their
products or services is not fully known. Consequently, 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.
- 38 -
With respect to investments in emerging growth companies, the Fund
emphasizes investing in convertible debentures or convertible preferred stock 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 will invest in privately placed common
stock of publicly traded issuers which are initially restricted from trading. To
a lesser extent, the Fund may participate in bridge financings in the form of
loans or other preferred securities 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 or more years from the date of the investment. The Fund may also make
bridge loans, either secured or unsecured, intended to carry the borrower to a
private placement or an initial public offering, or to a merger, acquisition, or
other strategic transaction.
Generally, investments in portfolio companies will have an initial fixed
term of 5 to 7 years, with no amortization of the principal amount for 2 to 3
years. 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.
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 will generally attempt to limit its
investment in securities of any single portfolio company to approximately 15% of
its net assets at the time of the investment. At December 31, 2002, none of the
Fund's portfolio companies represented 15% or more of net assets.
In the event the Fund elects to participate as a member of the portfolio
company's Board of Directors, either through advisory or full membership, the
Fund's nominee to the board will generally be selected from among the officers
of RENN Group. When, at the discretion of RENN Group, a suitable nominee is not
available from among its officers, RENN Group will select, as alternate
nominees, outside consultants who have prior experience as an independent
outside director of a public company. Presently, officers of the Fund serve as
directors of 9 portfolio companies. The Fund makes available significant
managerial assistance to its portfolio companies through participation in
discussions with management and review of various management reports.
Although the Fund has no intent to change its current investment
objectives, they may be changed without a vote of the holders of a majority of
the Fund's Common Stock.
FUND PORTFOLIO INVESTMENTS
At June 30, 2003, the Fund had active investments in the following
portfolio companies:
ACTIVE LINK COMMUNICATIONS, INC. (OTC:ACVE)
1840 Centre Point Drive, Naperville, IL 60563
Active Link Communications, Inc., through its Mobility Concepts, Inc.,
subsidiary, is a provider of wireless networking and mobile computing solutions
for the mobile workforce.
- 39 -
At June 30, 2003, the Fund owned a 12% convertible bridge loan in the
outstanding principal amount of $19,023 and two 8% convertible notes in the
aggregate principal amount of $375,000. The Company was in default on principal
and interest payments due to the Fund. As a result, the Fund has placed a
reserve equal to 100% of the par value of the principal amounts of all positions
held by the Fund in the Company.
AIRNET SYSTEMS, INC. (NYSE:ANS)
3939 International Gateway, Columbus, OH 43219
AirNet Systems Inc., operates AirNet Express, an integrated national air
transportation network that provides expedited air transportation and passenger
charter services to banks, medical customers, the U.S. government, and other
time-critical small package shippers in more than 100 cities nationwide. The
AirNet airline has more than 120 aircraft, including 36 Lear jets, located
strategically throughout the United States. AirNet Express flies over half a
million miles per week. AirNet's fleet departs most cities several hours after
other major package delivery companies.
At June 30, 2003, the Fund owned 50,000 shares of ANS remaining having a
basis of $212,500, or $4.25 per share.
BENTLEY PHARMACEUTICALS, INC. (AMEX:BNT)
2 Holland Way, Exeter, NH 03833
Bentley Pharmaceuticals, Inc., is an international pharmaceutical company
focused on improving drugs through new drug delivery technologies and
commercializing such drugs in the U.S. and other major markets. Bentley also
manufactures and markets pharmaceutical products in Spain for the treatment of
cardiovascular, gastrointestinal, neurological, infectious and other diseases.
At June 30, 2003, the Fund owned 472,979 shares of Bentley common stock
with a basis of $616,582 or $1.30 per share.
BUSINESS PROCESS OUTSOURCING (PRIVATE)
11150 Santa Monica Boulevard, Suite 350, Los Angeles, CA 90025
Business Process Outsourcing is a privately held business process
outsourcing firm that specializes in finance and accounting services, other
administrative functions, and high volume transaction processing services. The
Company's services are designed to empower clients with a competitive advantage
by enabling them to focus on their core activities.
At June 30, 2003, the Fund owned a $100,000 12% promissory note with a cost
basis of $98,000 and a one-year warrant to purchase 4,587 shares.
CAMINOSOFT CORPORATION (OTC:CMSF)
600 North Hampshire Road, Suite 105, West Lake Village, CA 91361
CaminoSoft Corporation creates intelligent data storage and management
infrastructures by facilitating data storage, retrieval, protection, and
performance measurement and management.
- 40 -
At June 30, 2003, the Fund owned 2,458,333 shares of the Company's common
stock having a cost basis of $4,875,000, warrants to purchase 500,000 shares of
the Company's common stock at $1.00 per share on or before August 31, 2003, and
options to purchase 53,300 shares of the Company's common stock.
CANTERBURY CONSULTING GROUP (NASDAQ:CITID)
352 Stokes Road, Suite 200, Medford, NJ 08055-2374
Canterbury provides broad-based information technology and management
consulting services and training to both commercial and government clients. The
Company's focus is to become an integral part of its clients' management and
technical infrastructure, designing and applying the best products and services
to help them achieve a competitive advantage.
At June 30, 2003, the Fund owned 18,521 shares of common stock with a cost
basis of $125,415.
CAPITAL SENIOR LIVING CORPORATION (NYSE:CSU)
14160 Dallas Parkway, Suite 300, Dallas, TX 75254
Capital Senior Living Corporation develops and operates senior living
communities in the United States. The Company provides services such as
independent living, assisted living, skilled nursing, and home care services to
the elderly at its communities.
At June 30, 2003, the Fund owned 57,100 shares of the Company's common
stock having a basis of $146,335, or $2.56 per share.
CAREERENGINE NETWORK, INC. (AMEX:CNE)
200 West 57th Street, Suite 507, New York, NY 10019
CareerEngine Network, Inc., owns a network of category-specific career
search destinations. Its Career Solutions division is an applications service
provider that builds and maintains custom career portals for online and offline
industries and their related web sites.
At June 30, 2003, the Fund owned a $250,000 12% convertible debenture of
the Company due May 2007, convertible into 125,000 shares of the Company's
common stock, warrants to purchase 62,500 shares of the Company's common stock
at an exercise price of $4.00 per share, and warrants to purchase 62,500 shares
of the company's common stock at an exercise price of $6.00 per share.
DAVE & Busters, Inc. (NYSE:DAB)
2481 Manana Drive, Dallas, TX 75220
Dave & Busters, Inc., owns and operates concept restaurants through 30 US
locations. The Company also has international license agreements for the Pacific
Rim, Canada, the Middle East, Mexico, and South Korea.
At June 30, 2003, the Fund owned 100,000 shares of the Company's common
stock having a cost basis of $653,259.
- 41 -
DEXTERITY SURGICAL, INC. (OTC:DEXT)
12961 Park Central, Suite 1300, San Antonio, TX 78216
Dexterity Surgical, Inc., is engaged in the development, manufacture, and
distribution of instruments, equipment and surgical supplies used in minimally
invasive surgery.
At June 30, 2003, the Fund owned $1,316,282 of the Company's 9% Convertible
Debentures, 500 shares of Series A Preferred Stock, 500 shares of Series B
Preferred Stock and 260,000 shares of Common Stock.
DWYER GROUP, INC. (NASDAQ:DWYR)
1010 North University Parks Drive, Waco, TX 76707
The Dwyer Group, Inc., currently supports over 800 franchises in the United
States and Canada and approximately 200 franchises in twenty-four other
countries. The franchises deliver repair, installation and maintenance services
to both residential and commercial consumers under the concepts Mr. Rooter(R),
Rainbow International(R), Glass Doctor(R), Mr. Electric(R), Mr. Appliance(R),
and Aire Serv(R).
At June 30, 2003, the Fund owned 575,000 shares of the Company's common
stock having a cost basis of $1,627,740.
EDT LEARNING, INC. (AMEX:EDT)
2999 North 44th Street, Suite 650, Phoenix, AZ 85018
EDT Learning, Inc., is a leading provider of custom, comprehensive
e-Learning business solutions for corporate clients seeking to train
non-technical users.
At June 30, 2003, the Fund owned a total of 48,266 shares of common stock
having a basis of $27,033. In addition, the Fund owned a $500,000 12%
Convertible Subordinated Note and three-year warrants to purchase 500,000 shares
of the Company's common stock at an exercise price of $3.00.
eORIGINAL, INC. (PRIVATE)
351 West Camden Street, Suite 800, Baltimore, MD 21201
eOriginal, Inc. has a patented process for creating, executing, storing and
retrieving legal documents in a completely electronic format.
In the first quarter of 2003, eOriginal, Inc., completed a tax-free
reorganization (the "reorganization") in which all the assets of eOriginal,
Inc., were transferred to eOriginal Holdings, Inc. (the "Company"). As a result
of the reorganization, the Fund exchanged all of its positions in eOriginal,
Inc., for the following securities of the Company: 10,680 of Series A
Convertible Preferred stock; 25,646 of Series B Convertible Preferred Stock;
28,929 shares of Series C Convertible Preferred Stock; 2,302 warrants to
purchase shares of common stock of the Company. Each series of Preferred of the
Company is convertible one for one into common stock of eOriginal Holdings, and
the warrants have an exercise price of $0.01 per share. As a result of the
- 42 -
reorganization, the Fund's cost basis of its entire investment in the Company
was increased from $5,139,877 to $6,012,435, due to the capitalization of
accrued interest and dividends.
FLAMEL TECHNOLOGIES, S.A. (Nasdaq:FLML)
33 Avenue du Docteur Georges, Venissieux, France
Flamel Technologies, S.A., is a biopharmaceutical company principally
engaged in the development of two unique polymer-based delivery technologies for
medical applications. Flamel's Medusa(R) technology is designed to deliver
therapeutic proteins. Micropump(R) is a controlled release and taste-masking
technology for the oral administration of small molecule drugs.
At June 30, 2003, the Fund owned 100,000 shares of FLML common stock having
a basis of $832,267, or $8.32 per share.
FORTUNE NATURAL RESOURCES CORPORATION (OTC:FPXA)
515 West Greens Road, Suite 720, Houston, TX 77067
Fortune Natural Resources Corporation is an independent public oil and gas
company whose primary focus is exploration and development of domestic oil and
gas properties located primarily in onshore and offshore areas of Louisiana and
Texas.
At June 30, 2003, the Fund owned 1,262,394 shares of the Company's common
stock, and warrants to purchase 36,000 shares of the Company's common stock at
$0.25 on or before May 19, 2005.
GASCO ENERGY, INC. (OTC:GASE)
14 Iverness Drive East, Suite H-236, Englewood, CO 80112
Gasco Energy, Inc., is an oil and gas company whose focus is exploration
and development of domestic natural gas properties located primarily in the
rocky Mountain regions of Colorado and Wyoming.
At June 30, 2003, the Fund owned a total of 170,000 common shares having a
basis of $99,704.59, or $0.58 per share purchased in the open market and 250,000
shares at $1.00 per share that were purchased in a private placement.
I-FLOW CORPORATION (NASDAQ:IFLO)
20202 Windrow Drive, Lake Forest, CA 92630
I-Flow Corporation designs, develops, and markets technically advanced drug
delivery systems that provide life enhancing, cost-effective solutions for pain
management and infusion therapy. The Company's products are used primarily in
the home, hospital, and physician office.
At June 30, 2003, the Fund owned 100,000 shares of common stock with a cost
basis of $254,038.
- 43 -
INET TECHNOLOGIES (NASDAQ:INTI)
1500 North Greenville Avenue, Richardson, TX 75081
Inet Technologies is a global provider of communications software solutions
that enable carriers to more effectively design, deploy, diagnose, monitor, and
manage communications networks that carry signaling information used to control
and deliver communications sessions and services. the solutions also address
certain fundamental business needs of communications carriers, such as improved
billing, targeted sales and marketing, fraud prevention, and enhanced routing.
At June 30, 2003, the Fund owned 96,600 shares of the Company's common
stock having a basis of $530,338.
INTEGRATED SECURITY SYSTEMS, INC. (OTC:IZZI)
8200 Springwood Drive, Suite 230, Irving, TX 75063
Integrated Security Systems, Inc., is a holding company which designs,
develops, manufactures, sells and services commercial security and traffic
control devices. In addition, the Company sells fully integrated turnkey
security systems that control and monitor access to governmental, commercial and
industrial sites.
At June 30, 2003, the Fund owned the following: $525,000 in 8%
non-convertible promissory notes; 7,500 shares of Series D preferred stock, with
a cost basis of $150,000, convertible into 187,500 shares of the Company's
common stock at a rate of $0.80 per share; 21,720 shares of Series F preferred
stock, with a cost basis of $542,989, convertible into 2,714,945 shares of the
Company's common stock at a rate of $0.20 per share; 146,678 shares of Series G
preferred stock, with a cost basis of $3,666,951, convertible into 18,334,755
shares of the Company's common stock at a rate of $0.20 per share; 393,259
shares of the Company's common stock having a cost basis of $215,899 or $0.55
per share; 208,004 shares of the Company's common stock having a cost basis of
$49,173 or $0.24 per share; warrants to purchase 364,299 shares of the Company's
common stock at $0.549 per share on or before March 8, 2004; warrants to
purchase 312,500 shares of the Company's common stock at $0.80 per share on or
before October 2, 2003; warrants to purchase 125,000 shares of the Company's
common stock at $1.00 per share on or before October 11, 2004; warrants to
purchase 2,625,000 shares of the Company's common stock at $0.20 per share with
term dates ranging from September 2006 to June 2008; and options to purchase
41,034 shares of the Company's common stock having strike prices ranging between
$0.21 and $0.49 per share and term dates ranging from May 2006 to August 2007.
INTERPOOL, INC. (NYSE:IPX)
211 College Road, East, Princeton, NJ 08540
Interpool, Inc., is one of the world's leading suppliers of equipment and
services to the transportation industry. It is the largest lessor of intermodal
container chassis and a world-leading lessor of cargo containers used in
international trade. Interpool operates from more than 240 locations throughout
the world.
- 44 -
At June 30, 2003, the Fund owned $375,000 9.25% convertible redeemable,
subordinated debentures. The Debentures are convertible at $25 per share and
mature December 27, 2022.
JAKKS PACIFIC, INC. (NASDAQ:JAKK)
22619 Pacific Coast Highway, Suite 250, Malibu, CA 90265
JAKKS Pacific, Inc., is a multi-brand toy company that designs, develops,
produces and markets toys and related products under various brand names in
multiple product categories.
At June 30, 2003, the Fund owned 49,847 shares of JAKK common stock having
a basis of $297,421, or a cost basis of $5.97 per share.
LASERSCOPE (NASDAQ:LSCP)
3070 Orchard Drive, San Jose, CA 95134
Laserscope designs, manufactures, sells, and services on a worldwide basis
an advanced line of medical laser systems and related energy delivery devices
for the office, outpatient surgical center, and hospital markets.
At June 30, 2003, the Fund owned $1,300,000 in 8% Convertible Debentures of
the Company having a conversion rate of $1.25 per share and options to purchase
30,000 common shares at $4.19, and 160,000 common shares, with a cost basis of
$200,000 or $1.25 per share.
MEDICAL ACTION INDUSTRIES, INC. (NASDAQ:MDCI)
800 Prime Place, Hauppauge, NY 11788
Medical Action Industries, Inc., develops, manufactures, markets and
distributes a variety of disposable surgical related products.
At June 30, 2003, the Fund owned a total of 25,000 shares of MDCI common
stock having a basis of $292,329, or $11.69 per share.
POORE BROTHERS, INC. (NASDAQ:SNAK)
3500 South La Cometa Drive, Goodyear, AZ 85338
With facilities in Indiana and Arizona, Poore Brothers, Inc., is a marketer
and manufacturer of "Intensely Different"(TM)salted snack foods under a variety
of owned or licensed brands, including T.G.I. Friday's(TM), Poore Brothers(R),
Bob's Texas Style(R), Boulder Potato Company(TM), and Tato Skins(R).
At June 30, 2003, the Fund owned 2,016,357 shares of the Company's common
stock having a cost of $2,078,170 and three tranches of options to purchase a
total of 18,650 shares, having exercise prices ranging from $1.31 per share to
$1.50 per share.
PRECIS, INC. (NASDAQ:PCIS)
2040 North Highway 360, Grand Prairie, TX 75050
Precis, Inc., is a national membership marketing company that provides
membership programs to a variety of industries including: healthcare, retail,
banking, consumer finance and member based associations. Its leading program,
- 45 -
Care Entree, is marketed as a membership based healthcare savings program
designed to significantly reduce out-of-pocket medical expenses at affordable
rates to the consumer while helping the medical community receive accelerated
payment for their services.
At June 30, 2003, the Fund owned a total of 200,700 shares of the Company's
common stock having a basis of $1,372,416 or $6.84 per share.
SIMTEK CORPORATION (OTC:SRAM)
4250 Buckingham Drive, Suite 100, Colorado Springs, CO 80907
Simtek Corporation is a fabless semiconductor company, supplying innovative
products to a worldwide marketplace. The Company has design and manufacturing
expertise in a variety of technologies, including high performance non-volatile
memory, application specific integrated circuits, and data communications.
At June 30, 2003, the Fund owned a $1,000,000 7.5% Convertible Debenture,
convertible into the Company's common stock at a rate of $0.312 per share,
1,000,000 shares of the Company's common stock having a basis of $195,000 or
$0.195 per share and options for 15,000 shares of the Company's common stock.
STONEPATH GROUP, INC. (AMEX:STG)
1600 Market Street, Philadelphia, PA 19103
Stonepath Group, Inc., is a non-asset based provider of third-party
logistics services, offering a full range of time-definite transportation and
distribution solutions. The Company manages and arranges the domestic movement
of raw materials, supplies, components and finished goods, and also provides a
broad range of value-added supply chain management services.
At June 30, 2003, the Fund owned 200,000 shares of the Company's common
stock with a cost basis of $1.35 per share.
THERMOVIEW INDUSTRIES, INC. (AMEX:THV)
5611 Fern Valley Road, Louisville, KY 40228
ThermoView Industries, Inc., is a national company that designs,
manufactures, markets, and installs high-quality replacement windows and doors
as part of a full-service array of home improvements for residential homeowners.
At June 30, 2003, the Fund owned 134,951 shares of ThermoView common stock
having a cost of $497,832.
US HOME SYSTEMS (NASDAQ:USHS)
750 State Highway 121 Bypass, Suite 170, Lewisville, TX 75067
US Home Systems is engaged in the manufacture, design, sale, and
installation of quality specialty home improvement products with specific
emphasis on kitchen and bath improvements, and also provides consumer financing
services to the home improvement and remodeling industry. The Company's home
- 46 -
improvement product lines include replacement kitchen cabinetry, kitchen cabinet
refacing and counter top products utilized in kitchen remodeling, bathroom
refacing and related products utilized in bathroom remodeling, and replacement
windows. The Company provides through its wholly owned subsidiary, First
Consumer Credit, Inc., consumer financing to the home improvement and remodeling
industry.
At June 30, 2003, the Fund owned 110,000 shares of the Company's common
stock having a basis of $535,587 or $4.87 per share.
VALUATION OF INVESTMENTS
On a quarterly basis, RENN Group prepares a valuation of the assets of the
Fund subject to the approval of the Board of Directors. The valuation principles
are described below.
Generally, the guiding principle for valuation is application of objective
standards. The objective standards for determining market prices and applying
valuation methodologies govern in all situations except where a debt issuer is
in default.
Generally, the fair value of debt securities and preferred securities
convertible into common stock is the sum of (a) the value of such securities
without regard to the conversion feature, and (b) the value, if any, of the
conversion feature. The fair value of debt securities without regard to
conversion features is determined on the basis of the terms of the debt
security, and the financial condition of the issuer. The fair value of preferred
securities without regard to conversion features is determined on the basis of
the terms of the preferred security, and its liquidation and redemption rights
and absent special circumstances will typically be equal to the lower of cost or
120% of the value of the underlying common stock. The fair value of the
conversion features of a security, if any, are based on fair values as of the
relevant date less an allowance, as appropriate, for costs of registration, if
any, and selling expenses.
Portfolio investments 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 or in the over-the-counter market 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 that do not have a
closing price on, or the last trading day prior to, the date of valuation are
valued at the volume-weighted 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 value 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.
Because there is no independent and objective pricing authority (i.e. a
public market) for investments in privately held entities, the latest sale of
equity securities governs the value of the enterprise. This valuation method
causes the Fund's initial investment in the private entity to be valued at cost.
Thereafter, new issuances of equity or equity-linked securities by a portfolio
company will be used to determine enterprise value as they will provide the most
objective and independent basis for determining the worth of the issuer.
- 47 -
Where a portfolio company is in default on a debt instrument held by the
Fund, and no market exists for that instrument, the fair value for the
investment is determined on the basis of appraisal procedures established in
good faith by the Investment Adviser. This type of fair value determination is
based upon numerous factors such as the portfolio company's earnings and net
worth, market prices for comparative investments (similar securities in the
market place), the terms of the Fund's investment, and a detailed assessment of
the portfolio company's future financial prospects. In the event of unsuccessful
operations by a portfolio company, the appraisal may be based upon an estimated
net realizable value when that investment is liquidated.
MANAGEMENT
BOARD OF DIRECTORS
The management of the Fund, including general supervision of the duties
performed by the Adviser, is the responsibility of the Board of Directors.
Pursuant to the Fund's Articles of Incorporation and Bylaws, the Board of
Directors consists of five directors and is divided into three classes. Each
class serves for a three-year term.
- 48 -
INFORMATION CONCERNING DIRECTORS
NUMBER OF
PORTFOLIOS
DIRECTOR'S PRINCIPAL IN FUND
POSITION(S) TERM OF OCCUPATION(S) COMPLEX OTHER
HELD OFFICE AND DURING OVERSEEN DIRECTORSHIPS
NAME, ADDRESS* WITH FUND LENGTH OF PAST 5 BY HELD BY
AND AGE TIME SERVED YEARS DIRECTOR DIRECTOR
----------------------------------------------------------------------------------------------------------
Peter Collins Director Class One Consultant 1 None
Age 57 Director
since 1994.
Term expires
2004.
Edward O. Boshell, Jr. Director Class Two Retired 1 None
Age 67 Director Chairman of the
since 1998. Board and CEO
Term expires of Columbia
2005. General and private
investor
Charles C. Pierce, Jr. Director Class Two Retired 1 None
Age 68 Director Vice-Chairman
since 2002. of RBC Dain
Term expires Rauscher and
2005. private investor
Russell Cleveland President, Class Three President and 3 RUSGIT, BFS US,
Age 64 Chief Director CEO of the Fund Tutogen Medical,
Executive since 1994. and RENN Group Inc., Cover-All
Officer, Term expires Technologies,
and 2006. Inc., Integrated
Director Security
Systems, Inc.,
and Digital
Recorders, Inc.
Ernest C. Hill Director Class Three Consultant 1 None
Age 63 Director
since 1994.
Term expires
2006.
------------------------
*The address of all such persons is c/o RENN Capital Group, Inc., 8080 North Central Expressway, Suite 210,
LB-59, Dallas, Texas 75206.
- 49 -
AGGREGATE DOLLAR RANGE*
DOLLAR RANGE* OF EQUITY SECURITIES IN
NAME OF OF EQUITY SECURITIES ALL FUNDS IN
DIRECTOR IN THE FUND RENAISSANCE FUND COMPLEX
-------- -------------------- ------------------------
Edward O. Boshell, Jr. over $100,000 over $100,000
Charles C. Pierce, Jr. $10,001 to $50,000 $10,001 to $50,000
Ernest C. Hill $0 $0
Peter Collins $10,001 to $50,000 $10,001 to $50,000
Russell Cleveland over $100,000 over $100,000
------------------------
*As of September 30, 2003
COMMITTEES AND MEETINGS
The Board of Directors held eighteen (18) meetings or executed consent
actions in lieu of meetings during 2002, and each director attended or executed
at least seventy-five per cent (75%) of these meetings and consent actions. The
Audit Committee consists of Ernest C. Hill, Peter Collins, Charles C. Pierce,
Jr., and Edward O. Boshell, Jr., and held three (3) meetings in 2002.
DIRECTOR COMPENSATION
Directors who are not employees of either the Fund or RENN Group receive a
monthly fee of $1,500, plus $750 and out-of-pocket expenses for each meeting
attended. The Fund does not pay any fees to, or reimburse expenses of, its
directors who are considered "interested persons" of the Fund. The aggregate
compensation for the period from January 1 to December 31, 2002, that the Fund
paid each director, and the aggregate compensation paid to each director for the
most recently completed fiscal year by other funds to which RENN Group provided
investment advisory services (collectively, the "Renaissance Fund Complex") is
set forth below:
- 50 -
PENSION OR
RETIREMENT ESTIMATED TOTAL 2002
AGGREGATE BENEFITS ANNUAL COMPENSATION
2002 ACCRUED AS BENEFITS FROM FUND AND
COMPENSATION PART OF FUND UPON RENAISSANCE
NAME OF DIRECTOR FROM FUND EXPENSES RETIREMENT FUND COMPLEX
---------------- ------------ ------------ ---------- -------------
Russell Cleveland(1) $0 $0 $0 $ 8,993
Peter Collins $21,000 $0 $0 $21,000
Ernest C. Hill $21,000 $0 $0 $21,000
Edward O. Boshell, Jr. $21,000 $0 $0 $21,000
Charles C. Pierce, Jr. $17,250 $0 $0 $17,250
------------------------
(1) Mr. Cleveland is President and CEO of RENN Group. See "Information about the Fund's
Officers and the Investment Adviser - RENN Group."
EXECUTIVE COMPENSATION AND OPTIONS
Officers of the Fund receive no compensation from the Fund. The Fund has
never issued options or warrants to officers or directors of the Fund.
AUDITOR
The Audit Committee has selected Ernst & Young LLP ("EY"), 2121 San Jacinto
Street, Suite 1500, Dallas, Texas 75201, to audit the Fund for the fiscal year
ending December 31, 2003. EY has performed audit services for the Fund since
1999. A representative of EY is expected to attend the Annual Meeting. The EY
representative will respond to appropriate questions from the shareholders and
will be given the opportunity to make a statement, should the representative
desire to do so. The aggregate fees billed by EY for audit services for the
audit of the Fund's financial statements included in the Fund's Form 10-K and
the review of the Fund's financial statements included in the Fund's Forms 10-Q
for 2002 and 2001 were $86,206 and $58,000, respectively.
INFORMATION ABOUT THE FUND'S OFFICERS
AND THE INVESTMENT ADVISER
OFFICERS
Set forth below is certain information regarding the officers of RENN
Group, the Fund's investment adviser:
RUSSELL CLEVELAND, age 64, is the President, CEO, sole Director, and the
majority shareholder of RENN Group. He is also President, CEO, and a Class Three
director of the Fund. He is a Chartered Financial Analyst with more than 35
years experience as a specialist in investments for smaller capitalization
companies. A graduate of the Wharton School of Business, Mr. Cleveland has
served as President of the Dallas Association of Investment Analysts. Mr.
Cleveland serves on the Boards of Directors of Renaissance US Growth Investment
- 51 -
Trust PLC, BFS US Special Opportunities Trust PLC, Integrated Security Systems,
Inc., Tutogen Medical, Inc., Digital Recorders, Inc., and Cover-All
Technologies, Inc. He has served as an officer and director of the Fund since
1994.
BARBE BUTSCHEK, age 49, has been associated with RENN Group and its
predecessor companies since 1977, and is a shareholder of RENN Group. As Senior
Vice-President and Secretary/Treasurer of RENN Group, she has been responsible
for office management, accounting management, and records management of several
investment funds. Ms. Butschek has served as Secretary and Treasurer of the Fund
since 1994.
ROBERT C. PEARSON, age 68, joined RENN Group in April 1997 and is Senior
Vice-President - Investments. He is also Vice-President of the Fund. Mr. Pearson
brings more than thirty years of experience to RENN Group's corporate finance
function. From May 1994 to May 1997, Mr. Pearson was an independent financial
management consultant. From May 1990 to May 1994, he served as Chief Financial
Officer and Executive Vice-President of Thomas Group, Inc., a management
consulting firm, where he was instrumental in moving a small privately held
company from a start-up to a public company with more than $40 million in
revenues. Prior to 1990, Mr. Pearson was responsible for all administrative
activities for the Superconducting Super Collider Laboratory. In addition, from
1960 to 1985, Mr. Pearson served in a variety of positions at Texas Instruments
in financial planning and analysis, holding such positions as Vice-President -
Controller and Vice-President - Finance. Mr. Pearson holds a BS in Business from
the University of Maryland and was a W.A. Paton Scholar with an MBA from the
University of Michigan. He is a director of eOriginal, Inc., Poore Brothers,
Inc., CaminoSoft Corp., Laserscope, Simtek Corporation, and Advanced Power
Technologies, Inc.
JOHN A. SCHMIT, age 36, joined RENN Group in 1997, and is Vice-President -
Investments. He is also Vice-President of the Fund. Mr. Schmit is responsible
for portfolio analysis and monitoring. From September 1992 to September 1994, he
practiced law with the law firm of Gibson, Ochsner & Adkins, Amarillo, Texas. He
holds a BBA in Finance from Texas Christian University, a JD from the University
of Oklahoma College of Law and an LLM in International and Comparative Law from
The Georgetown University Law Center. He is a director of Gasco Energy, Inc. and
Obsidian Enterprises, Inc.
RENN GROUP. RENN Group provides investment advisory services to the Fund
pursuant to the Investment Advisory Agreement. The Agreement is subject to
annual review and approval by the Fund's Board of Directors. RENN Group is also
the Investment Manager of BFS US and RUSGIT, closed-end investment trusts listed
on the London Stock Exchange. RENN Group is a registered investment adviser
under the 1940 Act, and is subject to the reporting and other requirements of
the 1940 Act. RENN Group and its officers and employees devote such time to the
Fund's business as is necessary for the conduct of its operations. Pursuant to
the Agreement, RENN Group is entitled to receive a management fee equal to a
quarterly rate of 0.4375% (1.75% annually) of the Fund's net assets, as
determined at the end of such quarter with each such payment to be due on the
last day of the calendar quarter. Since RENN Group's management fee is based on
a percentage of the Fund's net assets, increasing the Fund's net assets through
the Offering will increase the dollar amount of the management fees paid to RENN
Group. In addition to the quarterly fee of 0.4375% of the Fund's net assets,
RENN Group is entitled to receive an incentive fee in an amount equal to 20% of
the Fund's realized capital gains in excess of realized capital losses of the
Fund after allowance for any unrealized capital losses in excess of unrealized
- 52 -
capital gains on the portfolio investments of the Fund. The incentive fee is
calculated, accrued, and paid on a quarterly basis. In 2002, the Fund paid RENN
Group $860,834 as its management fee and $0 as its incentive fee. For the nine
months ended September 30, 2003, the Fund paid RENN Group $_______ as its
management fee and $__________ as its incentive fee. The Fund also received
director's fees from portfolio companies with respect to Mr. Cleveland's and Mr.
Pearson's services as a director. Neither RENN Group nor its affiliates are
prohibited from engaging in activities outside the Fund's business. Officers and
employees of RENN Group are compensated solely by RENN Group. Russell Cleveland
and Barbe Butschek own 80% and 20%, respectively, of the Common Stock of RENN
Group. The sole director of RENN Group is Russell Cleveland.
CODE OF ETHICS
The Fund and RENN Group have adopted a Code of Ethics pursuant to Rule
17j-1 under the 1940 Act that permits investment personnel to invest in
securities, including securities that may be purchased or held by the Fund, for
their own accounts. The Code of Ethics is on public file with, and is available
from, the Securities and Exchange Commission's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the Commission at (202)-942-8090, and this Code of ethics
is available on the EDGAR database as an exhibit to the Fund's Form 10-Q for the
quarter ended June 30, 2002, which is found on the Commission internet site at
http://www.sec.gov. A copy of this Code of Ethics may be obtained, after paying
a duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Fund with
respect to beneficial ownership of the Fund's Common Stock as of September 30,
2003 (i) for all persons who are beneficial owners of 5% or more of the
outstanding shares of the Fund's Common Stock (ii) each director of the Fund,
and (iii) all officers and directors of the Fund as a group:
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT
NAME OF BENEFICIAL OWNER DIRECTLY OR INDIRECTLY OF CLASS
------------------------ ---------------------- --------
Edward O. Boshell, Jr., Director 29,282(1) 0.67%
Ernest C. Hill, Director 0 0.00%
Peter Collins, Director 1,900 0.04%
Charles C. Pierce, Jr., Director 1,978 0.05%
Russell Cleveland, President, Chief 252,199(3) 5.8%
Executive Officer, and Director (2)
All directors and officers of the 307,185 7.06%
Fund as a group (8 persons)
- 53 -
------------------------
(1) Shares owned indirectly through Columbia General Investments, L.P.
(2) "Interested person," as defined by the 1940 Act.
(3) Includes 22,063 shares owned by the Cleveland Family Limited Partnership
and 230,136 shares owned by Renaissance Investment Limited Partnership.
FEDERAL INCOME TAX CONSIDERATIONS
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFERING
The U.S. federal income tax consequences to holders of Common Stock with
respect to the Offering will generally be as follows:
o The distribution of Rights to Record Date Shareholders will not result
in taxable income to such holders nor will such holders realize
taxable income as a result of the exercise of the Rights.
o The basis of a Right will be (a) to a holder of Common Stock to whom
it is issued and who exercises or sells the Right is expected to be
zero, since the fair market value of the Right immediately after
issuance is expected to be less than 15% of the fair market value of
the Common Stock with regard to which it is issued (unless the holder
elects, by filing a statement with his timely filed income tax return
for the year in which the Rights are received, to allocate the basis
of the Common Stock between the Right and the Common Stock based on
their respective fair market values immediately after the Right is
issued); (b) to a holder of Common Stock to whom it is issued and who
allows the Right to expire, zero; and (c) to anyone who purchases a
Right in the market, the purchase price for a Right.
o The holding period of a Right received by a Record Date Shareholder
includes the holding period of the Common Stock with regard to which
the Right is issued.
o Any gain or loss on the sale of a Right will be treated as a capital
gain or loss if the Right is a capital asset in the hands of the
seller. Such a capital gain or loss will be long-term or short-term,
depending on whether the Right has been held for more than one year,
after giving effect to the rule set forth in paragraph 3 above. A
Right issued with regard to Common Stock will be a capital asset in
the hands of the person to whom it is issued if the Common Stock was a
capital asset in the hands of that person. If a Right is allowed to
expire, there will be no loss realized unless the Right had been
acquired by purchase, in which case there will be a loss equal to the
basis in the Right.
o If the Right is exercised by the Record Date Shareholder, the basis of
the Common Stock received will include the basis, if any, allocated to
the Right and the amount paid upon exercise of the Right.
- 54 -
o If the Right is exercised, the holding period of the Common Stock
acquired begins on the date the Right is exercised.
The foregoing is only a summary of applicable federal income tax laws and
does not include any state or local tax consequences of the Offering. Holders of
Rights should consult their own tax advisors concerning the tax consequences of
the Offering.
TAXATION OF THE FUND
The Fund has elected to be, and qualifies for treatment as, a RIC under
Subchapter M of the Code. To qualify, the Fund must, among other things, (a)
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options or futures contracts) derived from its business of
investing in securities or those currencies ("Income Requirement"); and (b)
diversify its holdings so that, at the end of each quarter of its taxable year,
(i) at least 50% of the value of its total assets is represented by cash, U.S.
Government securities, securities of other RICs and other securities, with such
other securities limited for purposes of this calculation, in respect of any one
issuer, to an amount that does not exceed 5% of the value of its assets and that
does not represent more than 10% of the issuer's outstanding voting securities
and (ii) not more than 25% of the value of its total assets is invested in the
securities (other than U.S. Government securities or the securities of other
RICs) of any one issuer, or two or more issuers which the Fund controls and
which are determined to be engaged in the same or similar trades or businesses
or related trades or businesses.
For each taxable year that the Fund qualifies as a RIC, it is not subject
to federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, net short-term capital gain and
net realized gains from certain foreign currency transactions) and net capital
gain (the excess of net long-term capital gain over net short-term capital loss)
that it distributes to its shareholders, if it distributes at least 90% of its
investment company taxable income for that year ("Distribution Requirement").
The Fund intends to satisfy the Distribution Requirement each taxable year.
The Fund has historically distributed all of investment company taxable
income and realized net capital gain annually. However, the Fund will be subject
under current tax rates to a federal income tax at a maximum effective rate of
35% on any undistributed investment company taxable income and net capital gain.
In addition, if the Board of Directors determines for any taxable year to retain
all or a portion of the Fund's net capital gain (as opposed to its investment
company taxable income), that decision will not affect the Fund's ability to
qualify as a RIC but (as already noted) will subject the Fund under current tax
rates to a maximum effective tax rate of 35% of the amount retained. In that
event, the Fund expects to designate the retained amount as undistributed net
capital gains in a notice to its shareholders, who (i) will be required to
include in their gross income their proportionate share of such undistributed
net capital gain ("grossed-up" to include their share of the tax paid by the
Fund with respect to such undistributed net capital gain) as long-term capital
gains and (ii) will be entitled to a credit or refund, as the case may be, for
their proportionate share of the tax so paid by the Fund. For federal income tax
purposes, the adjusted tax basis of Shares owned by a Fund shareholder will be
increased by an amount equal to the difference between the amount of
undistributed net capital gains (including his proportionate share of the tax
- 55 -
paid by the Fund on such undistributed net capital gains) included in the
shareholder's gross income and his proportionate share of the tax paid by the
Fund on such undistributed net capital gains that is deemed to have been paid by
him.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax
payable by the Fund. To avoid such excise tax, the Fund must distribute, or be
deemed to have distributed, during each calendar year an amount equal to the sum
of (i) at least 98% of its ordinary income for the calendar year, (ii) at least
98% of its capital gain net income (i.e., capital gains in excess of capital
losses, adjusted for certain ordinary losses) for the twelve-month period ending
on October 31 of the calendar year (unless the Fund elects to apply its taxable
year in lieu of the one-year period ending on October 31 provided that such
taxable year ends with the month of November or December) and (iii) all ordinary
income and capital gain net income for the preceding calendar year that was not
distributed during such preceding year. For this purpose, any ordinary income or
gain retained by the Fund that is subject to corporate tax will be considered to
have been distributed by year-end. The Fund intends to make sufficient
distributions in accordance with the calendar year distribution requirements to
avoid application of the excise tax. In addition, for this and certain other
purposes, a distribution will be treated as paid by the Fund and received by the
shareholders on December 31 of a calendar year if it is declared by the Fund in
that month of that year, payable to shareholders of record on a date in that
month and paid by the Fund at any time through the end of the following January.
Any such distribution thus will be taxable to shareholders in the year the
distribution is declared, rather than the year in which the distribution is
received.
TAXATION OF SHAREHOLDERS
OVERVIEW: Distributions paid to shareholders by the Fund from its ordinary
income or from an excess of net short-term capital gains over net long-term
capital losses ("Regular Dividends") will be taxable to shareholders as ordinary
income to the extent of the Fund's earnings and profits. Distributions made to
shareholders from an excess of net long-term capital gains over net short-term
capital losses ("Capital Gains Dividends"), including undistributed net capital
gain credited to a shareholder's account as described above, will be taxable to
shareholders as long-term capital gain, regardless of the length of time a
shareholder has held his Shares. Distributions in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a shareholder's Shares
and, after such adjusted tax basis is reduced to zero, will constitute either
short-term or long-term capital gains (depending on a shareholder's holding
period for his Shares), assuming the Shares are held as capital assets.
Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA"),
special rules apply to Regular Dividends paid to individual shareholders. Such
Regular Dividends, with respect to taxable years beginning on or after January
1, 2003 and ending on or before December 31, 2008, may be subject to tax at the
rates generally applicable to long-term capital gains for individuals (which
under the JGTRRA have been reduced to a maximum rate of 15% with respect
long-term capital gains recognized in taxable years ending on or after May 6,
2003 and before taxable years beginning after December 31, 2008), provided that
the individual shareholder meets certain holding period requirements. The
maximum long-term capital gains rate of 15% will generally apply to such portion
of the Regular Dividends paid by the Fund to an individual shareholder in a
- 56 -
particular taxable year that is attributable to "qualified dividends" received
by the Fund in that taxable year. For this purpose, "qualified dividends" means
dividends received by the Fund from domestic corporations and qualifying foreign
corporations, provided that the Fund satisfies certain holding period
requirements in respect of the stock of such corporations. Generally, "qualified
dividends" do not include dividends from a "real estate investment trust" (i.e.,
a "REIT"). In addition, in the case of securities lending transactions, payments
in lieu of dividends will not constitute "qualifying dividends."
Corporate shareholders which are otherwise eligible to claim the dividends
received deduction under section 243 of the Code can deduct 70% of such portion
of a dividend as is received with respect to their Shares as represent their
proportionate share of the eligible dividend income distributed by the Fund.
Capital gains dividends do not qualify for the dividends received deduction
under section 243 of the Code.
Generally, not later than 60 days after the close of its taxable year, the
Fund will provide shareholders with written notice designating the amount of any
Regular Dividends, Capital Gains Dividends and other distributions.
DIVIDEND REINVESTMENT PLAN: A participant in the Dividend Reinvestment Plan
who receives a distribution that is reinvested in Shares is treated as having
received a taxable distribution and has a basis for those Shares equal to their
fair market value on the distribution date. Shareholders will be notified
annually as to the federal income tax status of distributions to them. Investors
should be careful to consider the tax implications of buying Shares just prior
to a distribution. The price of Shares purchased at that time may reflect the
amount of the forthcoming distribution. Those purchasing just prior to the
Record Date for a distribution will receive the distribution, which nevertheless
will be taxable to them.
SALE OF SHARES: On a sale of Shares, a shareholder will realize taxable
gain or loss depending upon the amount realized on the sale and the
shareholder's basis for the Shares. That gain or loss will be treated as capital
gain or loss if the shareholder held the Shares as capital assets and will be
long-term capital gain or loss if the Shares were held for more than one year.
Any such loss will be disallowed to the extent the Shares that were disposed of
are replaced (such as pursuant to the Dividend Reinvestment Plan) within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition. In such a case, the basis of the acquired Shares will be adjusted
to reflect the disallowed loss. Any loss realized by a shareholder on the sale
of Shares held for six months or less will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received by the shareholder on those Shares or any undistributed capital gains.
PARTIAL EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSINESS STOCK (PORTFOLIO
COMPANIES)
Section 1202 of the Code provides for a partial exclusion of long-term
capital gains received by the Fund's shareholders (other than a C corporation)
on the sale by the Fund of certain "qualified small business stock" if certain
conditions are met, provided that:
o All eligibility requirements for "qualified small-business stock" are
met;
o The stock was held by the Fund for more than five years;
- 57 -
o The shareholder held its interest in the Fund on the date the Fund
acquired the stock and at all times after and before the disposition
of the stock; and
o A shareholder's gain received from the Fund did not exceed his or its
interest in the Fund at the time the Fund acquired the stock.
Shareholders will be notified of any distributions made from long-term
capital gains of the Fund which potentially qualify for the partial exclusion.
BACKUP WITHHOLDING
The Fund is required to withhold federal income tax at the rate of 31% on
all dividends, capital gain distributions and repurchase proceeds payable to any
individuals and certain other noncorporate shareholders who fail to provide the
Fund with certain information, including their correct taxpayer identification
number, or who otherwise (with respect to dividends and capital gain
distributions) are subject to backup withholding under section 3406 of the Code.
Any amount withheld under the backup withholding provisions may be credited
against a shareholder's U.S. federal income tax liability.
FOREIGN WITHHOLDING TAXES IMPOSED ON THE FUND
Income received by the Fund from sources within foreign countries, and
gains realized on foreign securities, may be subject to withholding and other
taxes imposed by such countries, which would reduce the Fund's yield and/or
total return. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes, and many foreign countries do not impose
taxes on capital gains from investments by foreign investors. It is impossible
to determine the rate of foreign tax in advance, because the amount of the
Fund's assets to be invested in various countries is not known. If more than 50%
of the value of the Fund's assets at the close of its taxable year does not
consist of stock or securities in foreign corporations, the Fund would not be
entitled to elect to "pass through" to its shareholders the amount of foreign
taxes it paid, so that such shareholders may claim a credit for such foreign
taxes against their U.S. federal income tax liability, subject to applicable
limitations.
FOREIGN SHAREHOLDERS OF THE FUND
Regular Dividends distributed by the Fund to non-U.S. shareholders (which
generally would include non-resident alien individuals, foreign trusts and
estates, foreign corporations, and foreign partnerships, in each case as defined
in section 7701 of the Code) will be subject to U.S. withholding taxes imposed
at a flat rate of 30%, unless either (i) such non-U.S. shareholder is entitled
to an exemption from, or reduced rate of, withholding under an applicable income
tax treaty, or (ii) such Regular Dividends constitute income "effectively
connected" with the conduct of a trade or business within the United States (or,
if required under an applicable income tax treaty, are attributable to the
conduct of a trade or business carried on within the United States through a
"permanent establishment") in respect of which the non-U.S. shareholder will be
subject to U.S. federal income taxes on its net income at applicable graduated
rates. In order to claim an exemption from, or reduced rate of, withholding
under an applicable income tax treaty with respect to Regular Dividends not
subject to U.S. income tax on a net income basis, a non-U.S. shareholder will be
required to furnish generally a U.S. Internal Revenue Service ("IRS") Form W-8
- 58 -
BEN, and such other information and documentation as is required under the
instructions to the Form W-8 BEN and applicable regulations prescribed by the
IRS, at the times and in the manner set forth therein. In the case of Regular
Dividends that are "effectively connected" with conduct of a trade or business
within the U.S. (or, if required under an applicable income tax treaty, are
attributable to a trade or business carried on within the U.S. through a
"permanent establishment"), a non-U.S. shareholder in order to demonstrate its
exemption from withholding taxes will be required to provide an IRS Form W-8
ECI, and such other information and documentation as is required under the
instructions to the Form W-8 ECI and applicable regulations prescribed by the
IRS, at the times and in the manner set forth therein. In addition, by providing
an applicable Form W-8, a non-U.S. shareholder identifies himself as being a
foreign rather than a U.S. person and, therefore, exempt from backup withholding
discussed above.
Non-U.S. shareholders will not be subject either to U.S. federal income
taxes or withholding taxes in respect of Capital Gains Dividends, or gains on
the sale or exchange of their Shares, unless either (i) such gain is
"effectively connected" with the conduct of a U.S. trade or business, or (ii) in
the case of an individual, such non-U.S. shareholder is present in the U.S. for
183 days or more during the taxable year.
OTHER TAX CONSIDERATIONS
The foregoing is only a summary of some of the important federal tax
considerations affecting the Fund and its shareholders. Distributions may also
be subject to state, local and foreign taxes, depending on each shareholder's
particular situation. Prospective shareholders thus are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.
DESCRIPTION OF COMMON STOCK
GENERAL
--------------------------------------------------------------------------------
(1) (2) (3) (4)
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT HELD BY AMOUNT OUTSTANDING
REGISTRANT OR FOR ITS EXCLUSIVE OF AMOUNT
ACCOUNT SHOWN UNDER(3)
Common Stock,
$1.00 par 4,351,718 as of
Value 20,000,000 -0- September 30, 2003
--------------------------------------------------------------------------------
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted for action by the shareholders. There is no provision for
cumulative voting rights with respect to the election of directors. Accordingly,
the holders of more than 50% of the shares of Common Stock can, if they choose
to do so, elect all of the directors. In such event, the holders of the
remaining shares will not be able to elect any directors. The holders of shares
of Common Stock are entitled to receive dividends, when, as and if declared by
the Board of Directors, out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Fund, the holders of Common Stock
are entitled to share ratably in all assets remaining available for distribution
- 59 -
to them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby, when issued against the consideration set forth
in this Prospectus, will be, fully-paid and non-assessable.
ANTI-TAKEOVER PROVISIONS OF THE BYLAWS
The Fund's Bylaws contain certain provisions (commonly referred to as
"anti-takeover" provisions) which may have the effect of limiting the ability of
other entities or persons to acquire control of the Fund, to cause it to engage
in certain transactions or to modify its structure.
The Board of Directors is classified into three classes, each with a term
of three years with only one class of directors standing for election in any one
year. Consequently, changing a majority of the directors would require up to a
two-year period. Having a classified Board of Directors, which may be regarded
as an "anti-takeover" provision, may make it more difficult for shareholders to
change the majority of directors and thus have the effect of maintaining the
continuity of management. Further, directors may be removed from office only for
cause by vote of at least 66 2/3% of the shares of capital stock entitled to
vote on the matter. The Bylaws provide that an affirmative vote of at least 66
2/3% of the Directors or of the shares of capital stock entitled to vote on the
matter is required to amend the Bylaws to change any of the foregoing
provisions.
The percentage votes required under these provisions which are greater than
the minimum requirements under Texas law or the 1940 Act will make more
difficult a change in the Fund's business or management and may have the effect
of depriving shareholders of an opportunity to sell shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or other acquisition.
ANNUAL MEETINGS
The Fund holds annual meetings of shareholders for the election of
directors and other matters.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND REGISTRAR
The Fund's investment securities and cash are held by The Frost National
Bank, 8201 Preston Road, Dallas, Texas 75225, as custodian.
American Stock Transfer & Trust Co. serves as the Plan Agent, the dividend
disbursing agent of the Fund and the transfer agent and registrar for the Rights
and the Shares.
EXPERTS
The financial statements of the Fund at December 31, 2002 and 2001, and for
each of the three years in the period ended December 31, 2002, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
- 60 -
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Rights and the Shares has been passed on for the Fund
by Kirkpatrick & Lockhart LLP, 2828 North Harwood Street, Suite 1800, Dallas,
Texas 75201-6966.
REPORTS TO SHAREHOLDERS
The Fund sends audited annual reports to its shareholders, including a list
of its portfolio investments.
FURTHER INFORMATION
The Fund has filed with the Commission, Washington, D.C., 20549, a
Registration Statement under the Securities Act with respect to the Shares
offered hereby. Further information concerning these securities and the Fund may
be found in the Registration Statement, of which this Prospectus constitutes a
part, on file with the Commission. The Registration Statement may be inspected
without charge at the Commission's office in Washington, D.C., and copies of all
or any part thereof may be obtained from such office after payment of the fees
prescribed by the Commission.
The Fund is subject to the informational requirements of the 1934 Act and
the 1940 Act and, in accordance therewith, files reports and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and the Commission's regional offices, including offices at Seven World Trade
Center, New York, New York 10048. Information on the Commission's public
reference facilities may be obtained by calling 1-800-SEC-0330. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a Web site (http://www.sec.gov) that contains material
incorporated by reference into this Prospectus, and reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, reports, proxy and information
statements and other information concerning the Fund can be inspected at the
offices of the Nasdaq National Market, Investor Relations, 4 Times Square, New
York, NY 10036.
- 61 -
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Statements of Assets and Liabilities -
December 31, 2002 and 2001 and June 30, 2003 (unaudited) F-3
Statements of Investments -
December 31, 2002 and 2001 and June 30, 2003 (unaudited) F-4
Statements of Operations -
Years ended December 31, 2002, 2001 and 2000 and six months ended
June 30, 2003 (unaudited) F-20
Statements of Changes in Net Assets -
Years ended December 31, 2002, 2001 and 2000 and six months ended
June 30, 2003 (unaudited) F-23
Statements of Cash Flows -
Years ended December 31, 2002, 2001 and 2000 and six months ended
June 30, 2003 (unaudited) F-24
Notes to Financial Statements F-26
F-1
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Renaissance Capital Growth & Income Fund III, Inc.
We have audited the accompanying statements of assets and liabilities of
Renaissance Capital Growth & Income Fund III, Inc., including the schedules of
investments, as of December 31, 2002 and 2001, and the related statements of
operations, changes in net assets, and cash flows for the years ended December
31, 2002, 2001, and 2000. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 confirmation of securities owned as of December 31, 2002, by
correspondence with the custodian and broker. 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, 2002 and 2001, and the results of its
operations, changes in its net assets, and its cash flows for the years ended
December 31, 2002, 2001, and 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
February 25, 2003
F-2
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------------------
JUNE 30,2003 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 2002 2001
--------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $35,172,840 $10,968,001 $27,125,926
Investments at fair value, cost of
$34,521,950, $32,918,344 and $35,015,807
in 2003, 2002 and 2001, respectively
(note 5) 49,563,287 39,459,243 49,762,340
Accounts receivable-brokerage 110,381
Interest receivable, net of reserves 494,055 28,409 114,539
Prepaid expenses 2,877 40,068 13,863
-------------------------------------------- ----------- ----------- -----------
85,343,440 $50,495,721 $77,016,668
-------------------------------------------- ----------- ----------- -----------
Liabilities and Net Assets
Liabilities:
Due to broker (note 3) 34,491,604 9,001,163 22,197,146
Accounts payable 21,632 12,106 13,472
Accounts payable - affiliate (note 4) 344,753 223,386 268,542
-------------------------------------------- ----------- ----------- -----------
34,857,989 9,236,655 22,479,160
-------------------------------------------- ----------- ----------- -----------
Net assets:
Common stock, $1 par value; authorized
20,000,000 shares; 4,561,618 issued;
4,351,718 shares outstanding 6/30/03 &
12/31/02, 4,361,618 shares outstanding
12/31/01 4,561,618 4,561,618 4,561,618
Additional paid-in-capital 35,642,954 35,642,954 37,125,714
Treasury stock at cost, 209,900 shares at
6/30/03 & 12/31/02, 200,000 shares at
December 31, 2001 (1,734,966) (1,734,966) (1,665,220)
Distributable earnings (3,025,492) (3,751,440) (231,137)
Net unrealized appreciation of investments 15,041,337 6,540,900 14,746,533
-------------------------------------------- ----------- ----------- -----------
Net assets, equivalent to $11.60, $9.48 and
$12.50 per share on the shares outstanding
in 2003, 2002 and 2001, respectively 50,485,451 41,259,066 54,537,508
--------------------------------------------------------------------------------------------
$85,343,440 $50,495,721 $77,016,668
--------------------------------------------------------------------------------------------
See accompanying notes to financial statements
F-3
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
June 30, 2003
(Unaudited)
2003
----------------------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory Notes
Active Link Communications, Inc. -
Convertible bridge note (2) 12.00 09/30/03 $ 19,023 $ 0 0.00
Convertible note (2) 8.00 09/30/03 125,000 0 0.00
Convertible note (2) 8.00 09/30/03 250,000 0 0.00
Business Process Outsourcing -
Convertible debenture(1)(3) 12.00 08/31/03 98,000 100,000 0.20
Dexterity Surgical, Inc. -
Convertible debenture(2) 9.00 12/19/04 1,316,282 1,066,282 2.11
EDT Learning Inc. -
Convertible redeemable note(2) 12.00 03/29/12 500,000 500,000 0.99
Integrated Security Systems, Inc. -
Promissory notes (4) 8.00 09/05/03 525,000 525,000 1.04
Laserscope -
Convertible debenture(2) 8.00 02/11/07 1,300,000 8,226,504 16.29
Simtek Corporation -
Debt(2) 7.50 06/28/09 1,000,000 1,094,872 2.17
---------- ----------- -----
$5,133,305 $11,512,658 22.80
F-4
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
June 30, 2003
(Unaudited)
2003
----------------------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory Notes
CareerEngine Network, Inc. -
Convertible debenture(2) 12.00 03/31/10 $ 250,000 $ 250,000 0.50
Interpool, Inc. -
Convertible debenture(2) 9.25 12/27/22 375,000 375,000 0.74
---------- ----------- -----
$ 625,000 $ 625,000 1.24
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities - securities that are not fully registered and freely tradable.
(3) Securities in a privately owned company.
(4) Securities that have no provision allowing conversion into a security for which there is a
public market.
(5) Included Miscellaneous Securities, securities of privately owned companies, securities with no
conversion feature, and securities for which there is no market.
F-5
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
June 30, 2003
(Unaudited)
2003
-------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Bentley Pharmaceuticals, Inc. -
Common stock 400,000 $ 500,000 $5,207,400 10.31
CaminoSoft Corp. -
Common stock 1,750,000 4,000,000 727,650 1.44
Common stock(2) 708,333 875,000 229,650 0.45
Dexterity Surgical, Inc. -
Preferred stock - A(2) 500 500,000 0 0.00
Preferred stock - B(2) 500 500,000 0 0.00
Common stock(2) 260,000 635,000 0 0.00
eOriginal, Inc. -
Series A, preferred stock(1) 10,680 4,692,207 770,383 1.53
Series B, preferred stock(1) 25,646 620,329 1,849,928 3.66
Series C, preferred stock(1) 28,929 699,734 2,086,741 4.13
Fortune Natural Resources Corp. -
Common stock 1,262,394 500,500 324,940 0.64
Gasco Energy, Inc. -
Common stock 250,000 250,000 217,800 0.43
F-6
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
June 30, 2003
(Unaudited)
2003
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Integrated Security Systems, Inc. -
Common stock 393,259 $ 215,899 $ 54,506 0.11
Common stock - PIK(2) 208,004 49,173 0 0.00
Series D, preferred stock(2) 187,500 150,000 31,500 0.06
Series F, preferred stock(2) 2,714,945 542,989 456,111 0.90
Series G, preferred stock(2) 18,334,755 3,666,951 3,080,239 6.10
JAKKS Pacific, Inc. -
Common stock 49,847 297,421 655,841 1.30
Laserscope -
Common stock(2) 160,000 200,000 1,265,616 2.51
Poore Brothers, Inc. -
Common stock(2) 2,016,357 2,078,170 7,645,225 15.14
Simtek Corp. -
Common stock(2) 1,000,000 195,000 376,200 0.75
ThermoView Industries, Inc. -
Common stock 134,951 497,832 85,505 0.17
Miscellaneous Securities 2,165 272,861 0.54
----------- ----------- -----
$21,668,370 $25,338,096 50.19
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities - securities that are not fully registered and freely
tradable.
(3) Securities in a privately owned company.
(4) Securities that have no provision allowing conversion into a security for which
there is a public market.
(5) Included Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
F-7
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
June 30, 2003
(Unaudited)
2003
--------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
AirNet Systems, Inc. -
Common stock 50,000 $ 212,500 $ 200,475 0.40
Bentley Pharmaceuticals, Inc. -
Common stock 72,979 116,582 950,077 1.88
Canterbury Consulting Group, Inc. -
Common stock 18,521 125,415 14,302 0.03
Capital Senior Living Corp. -
Common stock 57,100 146,335 176,935 0.35
Dave & Busters, Inc. -
Common stock 100,000 653,259 1,079,100 2.14
Dwyer Group, Inc. -
Common stock 575,000 1,627,470 3,751,358 7.43
EDT Learning, Inc. -
Common stock 48,266 27,033 17,202 0.03
Flamel Technologies, SA -
Common stock 100,000 832,267 1,331,550 2.64
Gasco Energy, Inc. -
Common stock 170,000 99,705 148,104 0.29
I-Flow Corporation -
Common stock 100,000 254,038 735,570 1.46
F-8
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
June 30, 2003
(Unaudited)
2003
--------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Inet Technologies, Inc. -
Common stock 96,600 $ 530,338 $ 951,558 1.88
Medical Action Industries, Inc. -
Common stock 25,000 292,329 404,168 0.80
Precis, Inc. -
Common stock 200,700 1,372,416 913,988 1.81
Stonepath Group, Inc. -
Common stock(2) 200,000 270,000 461,360 0.91
US Home Systems, Inc. -
Common stock 110,000 535,587 951,786 1.89
Miscellaneous Securities 0 0 0.00
----------- ----------- -----
$ 7,095,275 $12,087,533 23.94
----------- ----------- -----
$34,521,950 $49,563,287 98.17
=========== =========== =====
Allocation of Investments -
Restricted Shares, Unrestricted
Shares, and Other Securities
Restricted Securities(2) $15,260,088 $25,476,833 50.46
Unrestricted Securities 12,624,427 18,481,540 36.61
Other Securities(5) 6,637,435 5,604,914 11.10
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities - securities that are not fully registered and freely
tradable.
(3) Securities in a privately owned company.
(4) Securities that have no provision allowing conversion into a security for which
there is a public market.
(5) Included Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
F-9
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 2002 and 2001
2002
---------------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory Notes
Active Link Communications, Inc. -
Convertible bridge note(2) 12.00 09/30/03 $ 41,480 $ 41,789 0.10
Convertible note(2) 8.00 09/30/03 125,000 126,000 0.31
Convertible note(2) 8.00 09/30/03 250,000 252,000 0.61
Business Process Outsourcing -
Convertible debenture(1)(3) 12.00 08/31/03 98,000 100,000 0.24
Dexterity Surgical, Inc. -
Convertible debenture(2) 9.00 12/19/04 1,316,282 1,066,282 2.58
EDT Learning Inc. -
Convertible redeemable note(2) 12.00 03/29/12 500,000 500,000 1.21
eOriginal, Inc. -
Promissory note(3) 12.00 12/31/02 1,139,683 1,139,683 2.76
Integrated Security Systems, Inc. -
Promissory notes(4) 8.00 09/05/03 325,000 325,000 0.79
Laserscope -
Convertible debenture(2) 8.00 02/11/07 1,500,000 5,026,000 12.18
Simtek Corporation -
Debt(2) 7.50 06/28/09 1,000,000 1,000,000 2.42
---------- ---------- -----
$6,295,445 $9,576,754 23.20
F-10
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2002
---------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory Notes
CareerEngine Network, Inc. -
Convertible debenture(2) 12.00 03/31/10 $250,000 $250,000 0.61
Interpool, Inc. -
Convertible debenture(2) 9.25 12/27/22 375,000 375,000 0.91
-------- -------- ----
$625,000 $625,000 1.52
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities - securities that are not fully registered and freely
tradable.
(3) Securities in a privately owned company.
(4) Securities that have no provision allowing conversion into a security for
which there is a public market.
(5) Included Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
F-11
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2002
--------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Bentley Pharmaceuticals, Inc. -
Common stock 400,000 $ 500,000 $3,187,800 7.73
CaminoSoft Corp. -
Common stock 1,750,000 4,000,000 1,559,250 3.78
Common stock(2) 708,333 875,000 549,250 1.33
Dexterity Surgical, Inc. -
Preferred stock - A(2) 500 500,000 0 0.00
Preferred stock - B(2) 500 500,000 0 0.00
Common stock(2) 260,000 635,000 0 0.00
eOriginal, Inc. -
Series A, preferred stock(1) 6,000 1,500,000 794,000 1.92
Series B-1, preferred stock(1) 1,785 392,700 1,426,215 3.46
Series B-3, preferred stock(1) 447 107,280 357,153 0.87
Series C-1, preferred stock(1) 2,353 2,000,050 2,000,050 4.85
Fortune Natural Resources Corp. -
Common stock 1,262,394 500,500 81,235 0.20
Gasco Energy, Inc. -
Common stock 250,000 250,000 112,150 0.27
F-12
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2002
------------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Integrated Security Systems, Inc. -
Common stock 393,259 $ 215,899 $ 93,438 0.23
Common stock - PIK(2) 104,787 28,319 23,640 0.06
Series D, preferred stock(2) 187,500 150,000 54,000 0.13
Series F, preferred stock(2) 2,714,945 542,989 612,492 1.48
Series G, preferred stock(2) 18,334,755 3,666,951 4,086,321 9.90
JAKKS Pacific, Inc. -
Common stock 59,847 357,088 798,078 1.93
Poore Brothers, Inc. -
Common stock(2) 2,016,357 2,078,170 4,669,485 11.32
Simtek Corp. -
Common stock(2) 1,000,000 195,000 150,400 0.36
ThermoView Industries, Inc. -
Common stock 134,951 497,832 120,241 0.29
Miscellaneous Securities 2,165 462,349 1.12
----------- ----------- -----
$19,494,943 $21,137,547 51.23
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities - securities that are not fully registered and freely
tradable.
(3) Securities in a privately owned company.
(4) Securities that have no provision allowing conversion into a security for which
there is a public market.
(5) Included Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no market.
F-13
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2002
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
AirNet Systems, Inc. -
Common stock 75,000 $ 318,750 $ 296,860 0.72
Bentley Pharmaceuticals, Inc. -
Common stock 259,979 535,168 2,071,902 5.02
Canterbury Consulting Group, Inc. -
Common stock 200,000 193,473 51,480 0.12
Capital Senior Living Corp. -
Common stock 44,500 110,975 112,340 0.27
Creative Host Services, Inc. -
Common stock 4,830 7,921 9,085 0.02
Daisytek International, Inc. -
Common stock 49,600 507,639 389,395 0.94
Dave & Busters, Inc. -
Common stock 100,000 653,259 856,350 2.08
Dwyer Group, Inc. -
Common stock 675,000 1,966,631 2,559,397 6.20
EDT Learning, Inc. -
Common stock 48,266 27,033 14,335 0.03
I-Flow Corporation -
Common stock 100,000 254,038 154,440 0.37
F-14
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2002
------------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Inet Technologies, Inc. -
Common stock 75,000 $ 367,434 $ 452,925 1.10
Precis, Inc. -
Common stock 100,700 1,025,047 550,305 1.33
US Home Systems, Inc. -
Common stock 110,000 535,587 601,128 1.46
Miscellaneous Securities 0 0 0.00
----------- ----------- -----
$ 6,502,956 $ 8,119,942 19.68
----------- ----------- -----
$32,918,344 $39,459,243 95.8
=========== =========== ====
Allocation of Investments -
Restricted Shares, Unrestricted
Shares, and Other Securities
Restricted Securities(2) $15,097,941 $19,191,669 46.52
Unrestricted Securities 12,255,525 13,663,124 33.12
Other Securities(5) 5,564,878 6,604,450 16.01
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities - securities that are not fully registered and freely
tradable.
(3) Securities in a privately owned company.
(4) Securities that have no provision allowing conversion into a security for which
there is a public market.
(5) Included Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no market.
F-15
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 2002 and 2001
2001
---------------------------------------------------------------
Interest Fair % of Net
Rate Due Date Cost Value Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory Notes
Active Link Communications, Inc. -
Convertible bridge note (2) 12.00 05/02 $ 116,667 $ 150,792 0.28
Convertible note(2) 8.00 09/30/02 125,000 161,563 0.30
Convertible note(2) 8.00 09/30/02 250,000 288,125 0.53
Dexterity Surgical, Inc. -
Convertible debenture(2) 9.00 12/19/04 1,329,577 1,329,577 2.44
Display Technologies, Inc. -
Convertible debenture(2)(4) 8.75 03/02/05 1,750,000 0 0.00
eOriginal, Inc. -
Promissory note(1) 12.00 06/30/02 500,000 500,000 0.92
Integrated Security Systems, Inc. -
Promissory notes(2) 8.00 01/25-05/14/02 200,000 200,000 0.37
Laserscope -
Convertible debenture(2) 8.00 02/11/07 1,500,000 2,770,000 5.08
Northwestern Steel & Wire Corp. -
Debt(3) N/A N/A 127,500 127,500 0.23
---------- ---------- -----
$5,898,744 $5,527,557 10.14
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities under Rule 144 (note 7).
(3) Company is liquidating in bankruptcy.
(4) Interest payments under the terms of the convertible debentures are delinquent as of December 31,
2001.
F-16
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2001
--------------------------------------------------------
Fair % of Net
Rate Due Date Cost Value Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory Notes
CareerEngine Network, Inc. -
Convertible debenture(2) 12.00 03/31/10 $ 250,000 $ 250,000 0.46
Play by Play Toys & Novelties -
Convertible debenture(3)(4) 10.50 12/31/00 2,425,748 500,000 0.92
RailAmerica, Inc. -
Convertible debenture 6.00 07/31/04 500,000 715,770 1.31
---------- ---------- ----
$3,175,748 $1,465,770 2.69
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities under Rule 144 (note 7).
(3) Company is liquidating in bankruptcy.
(4) Interest payments under the terms of the convertible debentures are delinquent as of
December 31, 2001.
F-17
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2001
----------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Bentley Pharmaceuticals, Inc. -
Common stock 400,000 $ 500,000 $4,035,240 7.40
CaminoSoft Corp. -
Common stock 1,750,000 4,000,000 2,858,625 5.24
Common stock(2) 708,333 875,000 1,048,625 1.92
Dexterity Surgical, Inc. -
Preferred stock - A(2) 500 500,000 5,769 0.01
Preferred stock - B(2) 500 500,000 5,769 0.01
Common stock(2) 260,000 635,000 0 0.00
Display Technologies, Inc. -
Common stock(2) 127,604 500,000 0 0.00
eOriginal, Inc. -
Series A, preferred stock(1) 6,000 1,500,000 4,794,000 8.79
Series B-1, preferred stock(1) 1,785 392,700 1,426,215 2.62
Series B-3, preferred stock(1) 447 107,280 357,153 0.65
Series C-1, preferred stock(1) 2,353 2,000,050 2,000,050 3.67
Fortune Natural Resources Corp. -
Common stock 1,322,394 545,500 209,467 0.38
F-18
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2001
------------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Integrated Security Systems, Inc. -
Common stock 393,259 215,899 159,624 0.29
Common stock - PIK(2) 13,463 3,366 5,189 0.01
Series D, preferred stock(2) 187,500 150,000 92,250 0.17
Series F, preferred stock(2) 2,714,945 542,989 1,046,339 1.92
Series G, preferred stock(2) 18,334,755 3,666,951 7,016,215 12.86
JAKKS Pacific, Inc. -
Common stock 87,347 521,172 1,638,674 3.00
Poore Brothers, Inc. -
Common stock(2) 1,931,357 1,963,170 4,488,689 8.23
Simtek Corp. -
Common stock(2) 1,000,000 195,000 394,800 0.72
ThermoView Industries, Inc. -
Common stock(2) 31,851 415,384 27,433 0.05
Verso Technologies, Inc. -
Common stock(2) 179,375 512,500 219,196 0.40
Miscellaneous Securities 5,915 1,040,722 1.91
----------- ----------- -----
$20,247,876 $32,870,044 60.27
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities under Rule 144 (note 7).
(3) Company is liquidating in bankruptcy.
(4) Interest payments under the terms of the convertible debentures are delinquent as
of December 31, 2001.
F-19
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2001
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Bentley Pharmaceuticals, Inc. -
Common stock 524,979 $ 1,470,478 $ 5,296,037 9.71
Dave & Busters, Inc. -
Common stock 100,000 653,259 621,720 1.14
Display Technologies, Inc. -
Common stock(2) 13,880 549,741 0 0.00
Preferred stock(2) 5,000 500,000 0 0.00
Dwyer Group, Inc. -
Common stock 675,000 1,966,631 3,307,838 6.07
EDT Learning, Inc. -
Common stock 31,600 16,590 45,988 0.08
Precis, Inc. -
Common stock 6,200 36,740 74,884 0.14
RailAmerica, Inc. -
Common stock 40,000 500,000 493,696 0.91
Miscellaneous Securities 0 58,806 0.11
----------- ---------- -----
$ 5,693,439 $ 9,898,969 18.15
----------- ---------- -----
$35,015,807 $49,762,340 91.24
=========== =========== =====
F-20
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments (continued)
December 31, 2002 and 2001
2001
----------------------------------------------
Fair % of Net
Shares Cost Value Assets
Allocation of Investments -
Restricted Shares, Unrestricted
Shares, and Other Securities
Restricted Securities Under Rule 144 $17,030,345 $19,500,331 35.76
Unrestricted Securities 13,352,018 19,957,562 36.59
Other Securities(5) 4,633,444 10,304,447 18.89
(1) Valued at fair value as determined by the Investment Adviser (note 6).
(2) Restricted securities under Rule 144 (note 7).
(3) Company is liquidating in bankruptcy.
(4) Interest payments under the terms of the convertible debentures are delinquent as
of December 31, 2001.
(5) Includes Miscellaneous Securities, securities of privately owned companies; and
securities for which there is no market.
F-21
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
STATEMENTS OF OPERATIONS
-----------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 2002 2001 2000
-----------------------------------------------------------------------------------------------
Income:
Interest $ 347,486 $ 278,573 $ 423,002 $ 1,468,068
Dividend income 1,161,230 70,640 195,453 114,455
Commitment and other fees 1,553 28,442 3,100 112,375
----------------------------------- ----------- ------------- ----------- -----------
1,510,269 377,655 621,555 1,694,898
----------------------------------- ----------- ------------- ----------- -----------
Expenses (note 4):
General and administrative 193,180 484,121 411,348 422,554
Incentive fee 196,260 0 919,429 1,611,135
Interest expense 38,444 61,071 123,199 0
Legal and professional fees 80,514 109,927 128,323 121,187
Management fees 386,878 860,834 912,544 1,056,783
----------------------------------- ----------- ------------- ----------- -----------
895,276 1,515,953 2,494,843 3,211,359
----------------------------------- ----------- ------------- ----------- -----------
Net investment income (loss) 614,993 (1,138,298) (1,873,288) (1,516,461)
Realized and unrealized gain (loss)
on investments:
Net unrealized appreciation 8,500,437 8,205,633
(depreciation) on investments 9,365,167 (1,507,015)
Net realized gain on
investments 981,299 3,429,593 2,054,836 8,055,679
----------------------------------- ----------- ------------- ----------- -----------
Net gain on investments 9,481,736 (11,635,226) 11,420,003 6,548,664
----------------------------------- ----------- ------------- ----------- -----------
Net income 10,096,729 ($12,773,524) $ 9,546,715 $ 5,032,203
----------------------------------------------------------------------------------------------
Net income per share (note 2(e)) $ 2.32 ($ 2.93) $ 2.19 $ 1.18
----------------------------------------------------------------------------------------------
See accompanying notes to financial statements
F-22
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 2002 2001 2000
-----------------------------------------------------------------------------------------------------
From operations:
Net investment income (loss) $ 614,993 $ (1,138,298) $ (1,873,288) $ (1,516,461)
Net realized gain on investments 981,299 (3,429,593) 2,054,836 8,055,679
Increase (decrease) in unrealized
appreciation on investments 8,500,437 (8,205,633) 9,365,167 (1,507,015)
-------------------------------------- ------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 10,096,729 (12,773,524) 9,546,715 5,032,203
-------------------------------------- ------------ ------------ ------------ ------------
From distributions to stockholders:
Common dividends from net
investment income (870,344) 0 0 (140,900)
Common dividends from realized
gains 0 (2,355,274) (6,239,230) 0
Common dividends from other
sources 0 (435,172) 0 0
-------------------------------------- ------------ ------------ ------------ ------------
Net decrease in net assets
resulting from distributions (870,344) (435,172) (2,355,274) (6,380,130)
-------------------------------------- ------------ ------------ ------------ ------------
From capital transactions:
Shares issued 0 0 0 2,759,688
Purchase of treasury stock 0 (69,746) 0 0
-------------------------------------- ------------ ------------ ------------ ------------
Net increase (decrease)
in net assets resulting
from capital contributions 0 (69,746) 0 2,759,688
-------------------------------------- ------------ ------------ ------------ ------------
Total increase in net assets 9,226,386 (13,278,442) 7,191,441 1,411,761
Net assets:
Beginning of year 41,259,065 54,537,508 47,346,067 45,934,306
----------------------------------------------------------------------------------------------------
End of year $ 50,485,451 $ 41,259,066 $ 54,537,508 $ 47,346,067
----------------------------------------------------------------------------------------------------
See accompanying notes to financial statements
F-23
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 2002 2001 2000
-------------------------------------------------------------------------------------------------------
Cash flows from operation activities:
Net income $ 10,096,729 ($12,773,524) $ 9,546,715 $ 5,032,203
Adjustments to reconcile net
income to net cash provided by
(used in) operations:
Net unrealized (appreciation)
depreciation on investments (8,500,437) 8,205,633 (9,365,167) 1,507,015
Net realized (gain) loss on
investments (981,299) 3,429,593 (2,054,836) (8,055,679)
Amortization of organization cost 0 0 0 0
(Increase) decrease in interest
and dividends receivable (465,646) 61,177 349,571 (239,827)
(Increase) decrease in other
receivables (110,381) 0 0 0
(Increase) decrease in other
assets 37,191 (26,206) 25,949 28,685
Increase (decrease) in accounts
payable 9,526 (1,366) (610) (97,626)
Increase (decrease) in accounts
payable - affiliate 121,367 (45,156) 33,115 22,037
Increase in accounts payable -
brokerage 25,490,441 (13,195,983) 5,715,122 16,482,024
-------------------------------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 25,697,491 (14,345,832) 4,249,859 14,678,832
-------------------------------------- ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of investments (3,676,266) (6,851,707) (3,509,674) (7,838,711)
Proceeds from sale of investments 3,031,501 4,911,282 10,364,052 10,366,539
Repayment of debentures and notes 22,457 633,250 170,423 0
-------------------------------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (622,308) (1,307,175) 7,024,801 2,527,828
-------------------------------------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of shares 0 0 0 2,759,688
Purchase of treasury shares 0 (69,746) 0 0
Cash dividends (870,344) (435,172) (2,355,274) (6,845,848)
-------------------------------------- ------------ ------------ ------------ ------------
Net cash used in financing
activities (870,344) (504,918) (2,355,274) (4,086,160)
-------------------------------------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 24,204,839 (16,157,925) 8,919,386 13,120,500
Cash and cash equivalents at
beginning of year 10,968,001 27,125,926 18,206,540 5,086,040
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end
of period $ 35,172,840 $ 10,968,001 $ 27,125,926 $ 18,206,540
-----------------------------------------------------------------------------------------------------
Cash paid during the year for interest $ 38,444 $ 61,071 $ 123,199 $ 0
Cash paid during the year for
income/excise tax $ 1,671 $ 1,671 $ 23,068 $ 24,297
See accompanying notes to financial statements
F-24
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statement of Cash Flows (continued)
Periods ended June 30, 2003 and December 31, 2002, 2001 and 2000
Noncash investing and financing activities:
During the quarter ended March 31, 2003, the Fund received common stock in
settlement of amounts due from interest and dividends totaling $891,417.
During the quarter ended June 30, 2003, the Fund received common stock in
settlement of amounts due from interest totaling $1,994.
During 2002, the Fund received common stock in settlement of amounts due
from interest totaling $18,148 and from dividends totaling $6,805.
During 2001, the Fund received common stock in settlement of amounts due
form dividends totaling $3,366.
During 2000, the Fund received common stock in settlement of amounts due
from interest totaling $3,500 and received common stock in prepayment of
interest totaling $135,000. The Fund also received common stock totaling
$42,000 as a commitment fee.
See accompanying notes to financial statements.
F-25
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
June 30, 2003, December 31, 2002, 2001 and 2000
(1) ORGANIZATION AND BUSINESS PURPOSE
Renaissance Capital Growth & Income Fund III, Inc. (the Fund), is a
non-diversified, closed-end fund that has elected to be treated as a
Business Development Company under the Investment Company Act of 1940, as
amended (1940 Act). The Fund, a Texas corporation, was organized in 1994
and commenced operations in 1995. The investment objective of the Fund is
to provide its shareholders with current income and long-term capital
appreciation by investing primarily in privately-placed convertible and
equity securities of emerging growth public companies (portfolio
companies). The Fund's investment adviser is RENN Capital Group, Inc.
(Investment Adviser).
(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 Adviser (note 6). 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) OTHER
The Fund follows industry practice and records security transactions
on the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded as earned on the accrual basis.
(c) CASH AND CASH EQUIVALENTS
The Fund considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(d) FEDERAL INCOME TAXES
The Fund has elected the special income tax treatment available to
"regulated investment companies" ("RIC") 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 taxable
investment income to its shareholders. It is the intent of management
to comply with all IRC requirements as they pertain to a RIC. Failure
to qualify as a RIC would subject the Fund to federal income tax as if
the Fund were an ordinary corporation. This could result in a
substantial reduction in the Fund's net assets as well as the amount
of income available for distribution to shareholders.
Therefore, no federal income tax provision is included in the
accompanying financial statements.
F-26
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (continued)
June 30, 2003, December 31, 2002, 2001 and 2000
(e) NET INCOME PER SHARE
Net income per share is based on the weighted average of shares
outstanding of 4,351,718 at June 30, 2003, 4,359,748 during 2002,
4,361,618 during 2001, and 4,253,475 during 2000.
(f) USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions as to the valuation of
investments that effect the amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
(3) DUE TO BROKER
The Fund conducts business with a broker for its investment activities. The
clearing and depository operations for the investment activities are
performed pursuant to agreements with this broker. Due to broker represents
a margin loan payable to the broker, which is secured by investments in
securities maintained with the broker. Cash and cash equivalents related to
the margin loan payable are held by the broker as collateral for the margin
loan. The Fund is subject to credit risk to the extent the broker is unable
to deliver cash balances or securities, or clear security transactions on
exposure to the broker and believes the likelihood of loss under those
circumstances is remote.
(4) MANAGEMENT AND INCENTIVE FEES
The Investment Adviser for the Fund is registered as an investment adviser
under the Investment Advisers Act of 1940. Pursuant to an Investment
Advisory Agreement (the Agreement), the Investment Adviser performs certain
services, including certain management, investment advisory and
administrative services necessary for the operation of the Fund. In
addition, under the Agreement, the Investment Adviser is reimbursed by the
Fund for certain administrative expenses. A summary of fees and
reimbursements paid by the Fund under the Agreement, the Prospectus and the
original offering document are as follows:
o The Investment Adviser receives a management fee equal to a quarterly
rate of 0.4375% (1.75% annually) of the Fund's Net Assets, as
determined at the end of such quarter with each such payment to be due
as of the last day of the calendar quarter. The Fund incurred
$386,878, $860,834, $912,544 and $1,056,483, for the periods ended
June 30, 2003, and December 31, 2002, 2001 and 2000, respectively, for
such management fees. Amounts payable for such fees at June 30, 2003,
December 31, 2002 and 2001 were $223,901, $191,651 and $239,560,
respectively, and are included in Accounts payable - affiliate on the
statements of assets and liabilities.
o The Investment Adviser receives an incentive fee in an amount equal to
20% of the Fund's realized capital gains in excess of realized capital
losses of the Fund after allowance for any unrealized capital losses
in excess of unrealized capital gains on the portfolio investments of
the Fund. The incentive fee is calculated, accrued and paid on a
quarterly basis. The Fund incurred $196,260, $0, $919,429 and
$1,611,135, during the periods ended June 30, 2003, and December 31,
2002, 2001 and 2000, respectively, for such incentive fees. The amount
payable for such fees at June 30, 2003 was $30,097 and is included in
Accounts payable - affiliate on the statements of assets and
liabilities.
F-27
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
June 30, 2003, December 31, 2002, 2001 and 2000
(4) MANAGEMENT AND INCENTIVE FEES (CONTINUED)
o The Investment Adviser was reimbursed by the Fund for administrative
expenses paid by the Investment Adviser on behalf of the Fund. Such
reimbursements were $49,279, $83,443, $117,894 and $101,929, for the
periods ended June 30, 2003, and December 31, 2002, 2001 and 2000,
respectively, and are included in general and administrative expenses
in the accompanying statements of operations.
(5) ELIGIBLE PORTFOLIO COMPANIES AND INVESTMENTS
(a) ELIGIBLE PORTFOLIO COMPANIES
The Fund invests primarily in convertible securities and equity
investments of companies that qualify as eligible portfolio companies
as defined in Section 2(a)(46) of the 1940 Act or in securities that
otherwise qualify for investment as permitted in Section 55(a)(1)
through (5). Under the provisions of the 1940 Act at least 70% of the
Fund's assets, as defined under the 1940 Act, must be invested in
eligible portfolio companies. In the event the Fund has less than 70%
of its assets in eligible portfolio investments, then it will be
prohibited from making non-eligible investments until such time as the
percentage of eligible investments again exceeds the 70% threshold.
(b) INVESTMENTS
Investments are carried in the statements of assets and liabilities as
of June 30, 2003, December 31, 2002, 2001 and 2000, at fair value, as
determined in good faith by the Investment Adviser. The convertible
debt securities held by the Fund generally have maturities between
five and seven years and are convertible into the common stock of the
issuer at a set conversion price at the discretion of the Fund. The
common stock underlying these securities is generally unregistered and
thinly to moderately traded, but is not otherwise restricted.
Generally, the Fund may register and sell such securities at any time
with the Fund paying the costs of registration. Interest on
convertible securities is generally payable monthly. The convertible
debt securities generally contain embedded call options giving the
issuer the right to call the underlying issue. In these instances, the
Fund has the right of redemption or conversion. The embedded call
option will generally not vest until certain conditions are achieved
by the issuer. Such conditions may require that minimum thresholds be
met relating to underlying market prices, liquidity, and other
factors.
(6) VALUATION OF INVESTMENTS
On a quarterly basis, RENN Group prepares a valuation of the assets of the
Fund subject to the approval of the Board of Directors. The valuation
principles are as follows:
o Generally, the guiding principle for valuation is the application of
objective standards. The objective standards for determining market
prices and applying valuation methodologies will govern in all
situations except where a debt issuer is in default.
o Generally, the fair value of debt securities and preferred securities
convertible into common stock is the sum of (a) the value of such
securities without regard to the conversion feature, and (b) the
value, if any, of the conversion feature. The fair value of debt
securities without regard to conversion features is determined on the
basis of the terms of the debt security, the interest yield, and the
F-28
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (continued)
June 30, 2003, December 31, 2002, 2001 and 2000
(6) VALUATION OF INVESTMENTS (CONTINUED)
financial condition of the issuer. The fair value of preferred
securities without regard to conversion features is determined on the
basis of the terms of the preferred security, its dividend, and its
liquidation and redemption rights and absent special circumstances
will typically be equal to the lower of cost or 120% of the value of
the underlying common stock. The fair value of the conversion features
of a security, if any, are based on fair values of the derivative
securities as of the relevant date less an allowance, as appropriate,
for costs of registration, if any, and selling expenses.
o Portfolio investments 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 or in the
over-the-counter market 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 that do not have a closing price
on, or the last trading day prior to, the date of valuation are valued
at the weighted 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 value 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.
o Because there is no independent and objective pricing authority (i.e.
a public market) for investments in privately held entities, the
latest sale of equity securities by the entity governs the value of
the enterprise. This valuation method causes the Fund's initial
investment in the private entity to be valued at cost. Thereafter, new
issuances of equity or equity-linked securities by a portfolio company
will be used to determine enterprise value as they will provide the
most objective and independent basis for determining the worth of the
issuer.
There can be no assurance that stated market fair values for private
equities will stay constant, or that future equity raises will value
the portfolio company at levels equal to or greater than the prior
equity financing for the issuer. As a result, the Fund's valuation of
a privately held portfolio company may be subject to downward
adjustment that would directly impact the Fund's net asset value and
which could result in a substantial reduction in the fund's net
assets.
o Where a portfolio company is in default on a debt instrument held by
the Fund, and no market exists for that instrument, the fair value for
the investment is determined on the basis of appraisal procedures
established in good faith by the Investment Adviser. This type of fair
value determination is based upon numerous factors such as the
portfolio company's earnings and net worth, market prices for
comparative investments (similar securities in the market place), the
terms of the Fund's investment, and a detailed assessment of the
portfolio company's future financial prospects. In the event of
unsuccessful operations by a portfolio company, the appraisal may be
based upon an estimated net realizable value when that investment is
liquidated
As of June 30, 2003, and December 31, 2002 and 2001, the net
unrealized appreciation associated with investments held by the Fund
was $15,041,337, $6,540,900, and $14,746,533 respectively.
F-29
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (continued)
June 30, 2003, December 31, 2002, 2001 and 2000
(7) RESTRICTED SECURITIES
As indicated on the statements of investments as of June 30, 2003, December
31, 2002 and 2001, the Fund holds investments in shares of common stock,
the sale of which is restricted. These securities have been valued by the
Investment Adviser after considering certain pertinent factors relevant to
the individual securities (note 6).
(8) PURCHASE OF ADDITIONAL SHARES
In accordance with Fund guidelines, certain shareholders reinvested their
dividends in the Fund, purchasing 218,676 Fund shares issued directly by
the Fund in 2000. The Fund issued no shares in 2003, 2002 or 2001 under the
dividend reinvestment plan.
(9) DISTRIBUTIONS TO SHAREHOLDERS
The tax character of distributions paid by the Fund were as follows:
2003 -- Not determinable until year-end $ 870,344 (through June 30)
2002 -- Tax return of capital $ 435,172
2001 -- Capital gains dividends $2,355,274
There were no undistributed earnings on a federal tax basis at the enc of
both 2002 and 2001. The Capital loss carry over of $3,429,593 will expire
on 2010. The tax cost of securities is identical to the book cost.
(10) FINANCIAL HIGHLIGHTS
Selected per share data and ratios for each share of common stock
outstanding throughout the six months ended June 30, 2003, and the year
ended December 31, 2002 and 2001, are as follows:
JUNE 30, DECEMBER 31, DECEMBER 31,
2003 2002 2001
-------- ------------ ------------
Net asset value, beginning of period $ 9.48 $12.50 $10.86
Net investment income (loss) 0.14 (0.26) (0.43)
Net realized and unrealized
gain (loss) on investments 2.18 (2.66) 2.61
------ ------ ------
Total return from investment
Operations 2.32 (2.92) 2.18
Distributions (0.20) (0.10) (0.54)
------ ------ ------
Net asset value, end of period $11.60 $ 9.48 $12.50
------ ------ ------
Per share market value, end of period $ 9.35 $ 7.86 $10.31
Portfolio turnover rate 7.15% 12.13% 6.72%
Six-month/Annual return(a) 18.96% (23.76%) 14.56%
F-30
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (continued)
June 30, 2003, December 31, 2002, 2001 and 2000
(10) FINANCIAL HIGHLIGHTS (CONTINUED)
JUNE 30, DECEMBER 31, DECEMBER 31,
2003 2002 2001
-------- ------------ ------------
Ratio to average net assets (b):
Net investment loss 1.44% (2.31%) (3.69%)
Expenses, excluding incentive fees 1.64% 3.07% 3.10%
Expenses, including incentive fees 2.10% 3.07% 4.91%
(a) Six-month/Annual return was calculated by comparing the common stock
price on the first day of the period to the common stock price on the
last day of the period.
(b) Average net assets have been computed based on quarterly valuations.
F-31
No dealer, salesperson or any other person has
been authorized to give any information or to make
any representations other than those contained in
this Prospectus in connection with the offer made
by this Prospectus and, if given or made, such
information or representations must not be relied
upon as having been authorized by the Fund or the
Investment Adviser. This Prospectus does not
constitute an offer to sell or the solicitation of
any offer to buy any security other than the
shares of Common Stock offered by this Prospectus, 1,450,572 SHARES OF COMMON STOCK
nor does it constitute an offer to sell or a Issuable upon the Exercise of Transferable
solicitation of any offer to buy the shares of Rights to Subscribe for such Shares
Common Stock by anyone in any jurisdiction in
which such offer or solicitation is not
authorized, or in which the person making such
offer of solicitation is not qualified to do so,
or to any such person to whom it is unlawful to
make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create
any implication that information contained herein
is correct as of any time subsequent to the date
hereof. However, if any material change occurs
while this Prospectus is required by law to be
delivered, the Prospectus will be amended or
supplemented accordingly.
---------------------------------------------
Page
SUMMARY..............................................4
FEE TABLE AND EXAMPLE................................8
SELECTED FINANCIAL DATA.............................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............11
MARKET RISK.........................................14
TRADING AND NET ASSET VALUE INFORMATION.............15
DIVIDENDS AND DIVIDEND REINVESTMENT PLAN............16 [LOGO]
RISK FACTORS........................................17
THE OFFERING........................................22
USE OF PROCEEDS.....................................32
THE FUND............................................33
INVESTMENT OBJECTIVES...............................38
MANAGEMENT..........................................48 RENAISSANCE CAPITAL GROWTH & INCOME FUND
INFORMATION ABOUT THE FUND'S OFFICERS AND THE III, INC.
INVESTMENT ADVISER................................51
PRINCIPAL SHAREHOLDERS..............................53
FEDERAL INCOME TAX CONSIDERATIONS...................54
DESCRIPTION OF COMMON STOCK.........................59
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING ________________, 2003
AGENT AND REGISTRAR...............................60
EXPERTS.............................................60
LEGAL MATTERS.......................................61
REPORTS TO SHAREHOLDERS.............................61
FURTHER INFORMATION.................................61
INDEX TO FINANCIAL STATEMENTS......................F-1
INDEX OF EXHIBITS..................................I-1
---------------------------------------------
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
1. Financial Statements
See "Index to Financial Statements" in the Prospectus.
2. Exhibits:
a. Amended Articles of Incorporation(1)
b. Bylaws(2)
d. *(d)(2)Form of Subscription Certificate
*(d)(3)Form of Notice of Guaranteed Delivery for Shares of Common
Stock
e.1 Dividend Reinvestment Plan(3)
e.2 Amendment No. 1 to Dividend Reinvestment Plan(4)
g.1 Investment Advisory Agreement(5)
g.2 Amendment No. 1 to Investment Advisory Agreement(6)
j.1 Custodial Agreement with The Frost National Bank(7)
j.2 *Information Agent Agreement
j.3 *Subscription Agent Agreement
l. *Opinion and Consent of Kirkpatrick & Lockhart LLP
n. Consent of Ernst & Young LLP
r. Code of Ethics(8)
-----------------
(1) Incorporated by reference from Form N-2 as filed with the Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
(2) Incorporated by reference from Form N-2 as filed with the Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
(3) Incorporated by reference from Form N-2 as filed with the Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
(4) Incorporated by reference from Form 10-Q for the quarter ended March 31,
2002 as filed with the Securities and Exchange Commission.
(5) Incorporated by reference from Form N-2 as filed with the Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
C-1
(6) Incorporated by reference from Form 10-K for the year ended December 31,
1999 as filed with the Securities and Exchange Commission.
(7) Incorporated by reference from Form 10-K for the year ended December 31,
2000 as filed with the Securities and Exchange Commission.
(8) Incorporated by reference from Form 10-Q for the quarter ended June 30,
2002 as filed with the Securities and Exchange Commission.
-----------------
*To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS.
----------------------
None.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-------------------------------------------
The following table sets forth the expenses to be incurred in connection
with the Offering described in this Registration Statement:
SEC Registration Fee $
Nasdaq National Market Listing Fees $
Printing $
Accounting fees and expenses $
Legal fees and expenses $
Subscription Agent fees and expenses $
Information Agent fees and expenses $
Miscellaneous $
---------------------
Total $
=====================
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
-------------------------------------------------------------
Affiliates of Russell Cleveland, the President and CEO of the Fund, are the
beneficial owners of 5.8% of the Fund's outstanding Common Stock. He also
owns eighty percent (80%) of the outstanding Common Stock of RENN Capital
Group, Inc., the investment adviser to the Fund and the investment manager
of two investment trusts listed on the London Stock Exchange. See
"Principal Shareholders," "Management - Information Concerning Directors"
and "Information About the Fund's Officers and the Investment Adviser" in
the Prospectus.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
-------------------------------
There are 863 holders of record of the Fund's Common Stock, as of September
30, 2003.
C-2
ITEM 29. INDEMNIFICATION.
---------------
Article Nine of the Articles of Incorporation provide that any director,
officer or employee of the Registrant shall be indemnified by Registrant
against reasonable expenses, including attorney's fees and amounts paid in
satisfaction of judgments or in settlement resulting from civil or criminal
action or proceeding, except in relation to matters in which such person is
liable for willful misfeasance, bad faith, gross negligence or reckless
disregarding the performance of his duties.
Paragraph 9 of the Investment Advisory Agreement provides that the
Registrant shall indemnify, to the extent permitted by law, the Adviser and
any of its Affiliates, who was, is or is threatened to be made a party to
any threatened, pending or completed action of proceeding whether civil,
criminal, administrative or investigative by reason of any actual or
alleged acts or omissions arising out of the activities of such person, if
such activities were performed in good faith either on behalf of the Fund
or in furtherance of the interest of the Fund, and in a manner reasonably
believed by such person to be within the scope of the authority conferred
by this Agreement or by law against losses, damages or expenses for which
such person has not otherwise been reimbursed (including, but not limited
to, accountants' and attorneys' fees, judgments, fines and amounts paid in
settlement) actually and reasonably incurred by such person in connection
with such action or proceeding, so long as such person was not guilty of
willful misfeasance, bad faith, gross negligence, or reckless disregard in
the performance of his obligations and duties under such contract, and,
with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
----------------------------------------------------
RENN Capital Group, Inc. serves as the investment adviser to the Fund and
is the investment manager of two investment trusts listed on the London
Stock Exchange.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
--------------------------------
The books, accounts and records of the Fund are located at the offices of
RENN Capital Group, Inc., 8080 N. Central Expressway, Suite 210, Dallas,
Texas 75206.
ITEM 32. MANAGEMENT SERVICES.
-------------------
Not applicable.
ITEM 33. UNDERTAKINGS.
------------
(1) The Registration undertakes to suspend the offering of shares covered
hereby until it amends its prospectus contained herein if (i) subsequent to
the effective date of this Registration Statement, its net asset value
declines more than 10 percent (10%) from its net asset value as of the
effective date of this Registration Statement, or (ii) its net asset value
increases to an amount greater than its net proceeds as stated in the
prospectus contained herein.
(2) Not applicable.
C-3
(3) Not applicable.
(4) The Registrant undertakes:
a. to file, during any period in which offers or sales are being
made, a post-effective amendment to the registration statement:
(1) to include any prospectus required by Section 10(a)(3) of
the 1933 Act [15 U.S.C. 77j(1)(3)];
(2) to reflect in the prospectus any facts or events after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(3) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
b. that, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of those securities at that time shall be deemed to be the initial
bona fide offering thereof; and
c. to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the Offering.
(5) The Registrant undertakes that:
a. For the purpose of determining any liability under the 1933 Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant under Rule 497(h) under the 1933 Act
shall be deemed to be part of the Registration Statement as of the time it
was declared effective.
b. For the purpose of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof.
C-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Dallas and the State of
Texas, on the 29th day of October, 2003.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
By: /s/ Russell Cleveland
---------------------------------------------
Russell Cleveland
President and CEO
Each of the undersigned directors of RENAISSANCE CAPITAL GROWTH & INCOME FUND
III, INC., hereby constitute and appoint Russell Cleveland, his true and lawful
attorney-in-fact, with full power of substitution, to sign for him and in his
name, the Registration Statement on Form N-2, and any pre-effective amendments
and post-effective amendments to said Registration Statements, any supplements
or other instruments in connection therewith, and generally to do all such
things in his name and behalf in connection therewith as said attorney-in-fact
deems necessary or appropriate, to comply with the provisions of the Securities
Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and
all related requirements of the Securities and Exchange Commission. Each of them
hereby ratifies and confirms all that said attorney-in-fact or his or her
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form N-2 has been signed below by the following persons in their
capacities as officer and directors of the Registrant.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Russell Cleveland President, CEO and Director October 30, 2003
---------------------------- (Principal Executive Officer)
Russell Cleveland
/s/ Barbe Butschek Secretary and Treasurer October 30, 2003
---------------------------- (Principal Accounting
Barbe Butschek Officer)
/s/ Ernest C. Hill Director October 30, 2003
----------------------------
Ernest C. Hill
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Peter Collins Director October 30, 2003
----------------------------
Peter Collins
/s/ Edward O. Boshell, Jr. Director October 30, 2003
----------------------------
Edward O. Boshell, Jr.
/s/ Charles C. Pierce, Jr. Director October 30, 2003
----------------------------
Charles C. Pierce, Jr.
INDEX OF EXHIBITS
a. Amended Articles of Incorporation(1)
b. Bylaws(2)
d. *(d)(2)Form of Subscription Certificate
*(d)(3)Form of Notice of Guaranteed Delivery for Shares of Common Stock
e.1 Dividend Reinvestment Plan(3)
e.2 Amendment No. 1 to Dividend Reinvestment Plan(4)
g.1 Investment Advisory Agreement(5)
g.2 Amendment No. 1 to Investment Advisory Agreement(6)
j.1 Custodial Agreement with The Frost National Bank(7)
j.2 *Information Agent Agreement
j.3 *Subscription Agent Agreement
l. *Opinion and Consent of Kirkpatrick & Lockhart LLP
n. Consent of Ernst & Young LLP
r. Code of Ethics(8)
-----------------
(1) Incorporated by reference from Form N-2 as filed with the Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
(2) Incorporated by reference from Form N-2 as filed with the Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
(3) Incorporated by reference from Form N-2 as filed with the Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
(4) Incorporated by reference from Form 10-Q for the quarter ended March 31,
2002 as filed with the Securities and Exchange Commission.
(5) Incorporated by reference from Form N-2 as filed with the Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
(6) Incorporated by reference from Form 10-K for the year ended December 31,
1999 as filed with the Securities and Exchange Commission.
(7) Incorporated by reference from Form 10-K for the year ended December 31,
2000 as filed with the Securities and Exchange Commission.
(8) Incorporated by reference from Form 10-Q for the quarter ended June 30,
2002 as filed with the Securities and Exchange Commission.
-----------------
*To be filed by amendment.
I-1