Unassociated Document
Securities
and Exchange Commission
Washington,
D. C. 20549
Form
10-K
Mark
One
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the Fiscal Year Ended December 31, 2005
or
|
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
|
Commission
File No. 33-75758
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
(Exact
name of Registrant as specified in its charter)
Texas
|
75-2533518
|
(State
of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
Suite
210, LB 59, 8080 North Central Expressway, Dallas,
Texas
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75206
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code (214) 891-8294
Securities
Registered Pursuant to Section 12(b) of the Act:
|
Name
of each exchange
|
Title
of each class
|
on
which registered
|
None
|
None
|
Securities
Registered Pursuant to Section 12(g) of the Act:
Common
Stock ($1.00 par value)
(Title
of
Class)
Indicate
by check mark whether the Registrant is a well-known seasoned issuer as defined
in Rule 405 of the Securities Act.
Yes
o
No x
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o No x
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
o No x
Indicate
by check mark if disclosure by delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any statement to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (Check one):
Large
Accelerated Filer o
Accelerated
Filer o
Non-accelerated
filer x
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act.
Yes
o No
x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates, based on the closing price of such the Registrant’s Common Stock
as of June 30, 2006, was $43,467,879. As of September 1, 2006, there were
4,463,967 of Registrant’s Common Stock outstanding.
TABLE
OF CONTENTS
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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20
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Item
2.
|
Properties
|
23
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Item
3.
|
Legal
Proceedings
|
23
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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24
|
|
|
|
PART
II
|
Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
24
|
Item
6.
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Selected
Financial Data
|
26
|
Item
7.
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Management’s
Discussion and Analysis of Financial Condition
|
28
|
|
and
Results of Operations
|
|
Item
7A.
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Quantitative
and Qualitative Disclosure About Market Risk
|
30
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Item
8.
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Financial
Statements and Supplementary Data
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31
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and
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31
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|
Financial
Disclosure
|
|
Item
9A.
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Controls
and Procedures
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32
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Item
9B.
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Other
Information
|
32
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|
PART
III
|
Item
10.
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Directors
and Executive Officers of Registrant
|
32
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Item
11.
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Executive
Compensation
|
37
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management
|
38
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Item
13.
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Certain
Relationships and Related Transactions
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38
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Item
14.
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Principal
Accountant Fees and Services
|
39
|
|
|
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PART
IV
|
Item
15.
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Exhibits,
Financial Statement Schedules
|
40
|
Signatures
|
42
|
Index
to Financial Statements
|
F-1
|
Financial
Statements
|
F-2
TO F-26
|
Part
I
Certain
of the statements included below, including those regarding future financial
performance or results that are not historical facts, contain “forward-looking”
information as that term is defined in the Securities Exchange Act of 1934,
as
amended. The words “expect,” “believe,” “anticipate,” “project,” “estimate,” and
similar expressions are intended to identify forward-looking statements. The
Fund cautions readers that any such statements are not guarantees of future
performance or events and that such statements involve risks, uncertainties
and
assumptions, including but not limited to industry conditions, general economic
conditions, interest rates, competition, ability of the Fund to successfully
manage its growth, and other factors discussed or included by reference in
this
Annual Report on Form 10-K. Should one or more of these risks or uncertainties
materialize or should the underlying assumptions prove incorrect, those actual
results and outcomes may differ materially from those indicated in the
forward-looking statements.
Item
1. Business.
GENERAL
Renaissance
Capital Growth & Income Fund III, Inc., (the “Fund” or the “Registrant”) is
a non-diversified, closed-end fund that has elected to be treated as a business
development company (a “BDC”) under the Investment Company Act of 1940, as
amended (the “1940 Act”). The Fund, a Texas corporation, was organized and
commenced operations in 1994.
Our
Internet website address is www.rencapital.com/index2.html.
You can
review the filings we have made with the U.S. Securities and Exchange Commission
(“SEC”), free of charge, by linking to the Electronic Data Gathering, Analysis,
and Retrieval System of the SEC (“EDGAR”) at www.sec.gov/index.htm. From EDGAR,
you should be able to access our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act
of 1934.
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 securities and equity securities of emerging growth
companies.
The
Fund
seeks to provide returns to shareholders through cash dividends of net
investment income and through distributions of realized gains. Pursuant to
its
annual distribution policy, the Fund currently pays to its shareholders a
minimum annual distribution of $0.40 per share, payable quarterly. Through
December 31, 2005, the Fund had declared a total of $13.41 per share in cash
to
its shareholders since inception in 1994.
RENN
Capital Group, Inc. (“RENN Group” or the “Investment Adviser”), a Texas
corporation, 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 Investment Advisers Act of 1940,
as
amended (the “Advisers Act”).
Generally,
investments are, and will continue to be, in companies that have their common
stock registered for public trading under the Securities Exchange Act of 1934,
as amended (the “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 company the Fund holds in its portfolio (“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 Securities Act of 1933, as amended (the “1933 Act”), or after registration
pursuant to the 1933 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, 2005, the Fund had made investments in seventy
(70) different Portfolio Companies having an aggregate cost of $92,701,305.
The
Fund had active investments in twenty-seven (27) Portfolio Companies at December
31, 2005. The Fund does not focus on particular industry segments. Instead,
the
Fund makes investment decisions using a bottom-up analysis of the potential
Portfolio Company, with no predetermined industry bias.
Under
the
provisions of the 1940 Act, a Business Development Company generally is required
to invest at least 70% or more of its assets in “Eligible Portfolio
Investments,” defined generally as direct placements to “Eligible Portfolio
Companies” and temporary investments in “cash items” pending other investments.
The Fund determines whether any prospective investment is in an “Eligible
Portfolio Company” at the time the investment is made, and the calculation of
the requisite percentage is also made at that time and is based on the most
recent valuation of the Fund’s assets. Under and pursuant to the provisions of
the 1940 Act, a Business Development Company may invest up to 30% of its funds
in 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 the Fund will be prohibited from making non-eligible
investments until such time as the percentage of eligible investments again
are
at least equal to the 70% threshold.
Pending
investment in securities of eligible Portfolio Companies or other Portfolio
Companies, the Registrant’s funds are invested in short-term investments
consisting primarily of cash or U.S. Government and agency
obligations.
At
December 31, 2005, the Fund’s investment assets were classified by amount as
follows:
|
|
|
|
Percentage
|
|
Classification
|
|
Value
|
|
Of
Assets
|
|
|
|
|
|
|
|
Eligible
Portfolio Investments
|
|
$
|
55,225,509
|
|
|
88.5
|
%
|
(including
cash and cash equivalents)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Portfolio Investments
|
|
|
7,173,042
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
$
|
62,398,551
|
|
|
100.0
|
%
|
INVESTMENT
OBJECTIVE
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
securities 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.
The
Fund
has elected the special income tax treatment available to a regulated investment
company (“RIC”) under Subchapter M of the Internal Revenue 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 Internal Revenue Code,
the RIC 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 distribution to shareholders.
GENERAL
INVESTMENT POLICIES
The
Fund
invests in the securities of emerging growth 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.
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 that 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,
the securities of Portfolio Companies have an initial fixed term of five to
seven years, with no amortization of the principal amount for the initial two
to
three years. Further, privately-placed 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
Fund’s securities of Portfolio Companies are generally 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 seek to limit its investment in
securities of any single Portfolio Company to approximately 15% of the Portfolio
Company’s net assets at the time of the investment.
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. At December 31, 2005, officers of the
Fund
served as directors of seven of the Fund’s portfolio companies. The Fund makes
available significant managerial assistance to its portfolio companies through
participating 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.
It
is the
policy of the Fund not to structure off-balance sheet arrangements.
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 investment
company that generally makes 70% or more of its investments in “Eligible
Portfolio Companies” and “cash items” pending other investment. 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:
|
·
|
it
must be organized under the laws of, and has its principal place
of
business in, any state or states of the United States of
America;
|
|
·
|
it
is neither an investment company as defined in Section 3 of the 1940
Act
(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 development company) nor a company which would be an investment
company under the 1940 Act except for the exclusion from the definition
of
investment company in Section 3(c) of the 1940 Act; and
|
|
·
|
it
satisfies one of the following:
|
|
Ø
|
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;
|
|
Ø
|
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;
|
|
Ø
|
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 Securities and Exchange Commission (the “SEC”) 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
|
|
Ø
|
it
meets such other criteria as the SEC 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, varies
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:
|
·
|
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;
|
|
·
|
restrictions
against certain transactions between the Fund and affiliated
persons;
|
|
·
|
restrictions
on issuance of senior securities, such not being prohibited by the
1940
Act but being restricted as a percentage of
capital;
|
|
·
|
compliance
with accounting rules and conditions as established by the SEC, including
annual audits by independent
accountants;
|
|
·
|
compliance
with fiduciary obligations imposed under the 1940 Act;
and
|
|
·
|
requirement
that the shareholders ratify the selection of the Fund’s independent
public accountants and the approval of the Fund’s Advisory Agreement with
the Investment Adviser or similar contracts and amendments
thereto.
|
CO-INVESTMENTS
WITH ADVISOR AFFILIATED FUNDS
In
accordance with the conditions of an exemptive order of the SEC permitting
co-investments (the “Co-investment Order”), many of the Fund’s acquisitions and
dispositions of investments are made in participation with two funds that are
advised or managed by RENN Group (“Advisor Affiliated Funds”).
The
Co-investment Order provides that the Investment Adviser will review private
placement investment opportunities on behalf of the Fund, including investments
being considered on behalf of its Advisor Affiliated Funds. If the Investment
Adviser determines that any such investment 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
that 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.
INVESTMENT
ADVISERS ACT OF 1940 AND THE ADVISORY AGREEMENT
RENN
Group is the investment adviser to the Fund pursuant to the Advisory Agreement,
as amended (the “Advisory Agreement”). RENN Group is registered as an investment
adviser under the Advisers Act and is subject to its filing and other
requirements. The Advisers Act also provides restrictions on the activities
of
registered advisers in order to protect clients from manipulative or deceptive
practices.
The
Advisory Agreement is further subject to the 1940 Act, which requires that
the
Advisory Agreement, in addition to having to be initially ratified by the
holders of a majority of the outstanding shares of the Fund, must precisely
describe all compensation to be paid to RENN Group, must be approved annually
by
a majority vote of the Board of Directors of the Fund, may be terminated without
penalty on not more than 60 days notice by a vote of the holders of a majority
of the outstanding shares of the Fund, and must automatically terminate in
the
event of assignment. The Board of Directors has determined that the Advisory
Agreement shall be construed in compliance with the applicable provisions of
the
Advisers Act and the 1940 Act.
FUND
PORTFOLIO INVESTMENTS
At
December 31, 2005, the Fund had active investments in the following
companies:
AdStar,
Inc. (NASDAQ:ADST)
4553
Glencoe Avenue, Suite 325, Marina del Rey, CA 90292
AdStar,
Inc. is a leading provider of remote advertising technology products and
services to the classified advertising industry. AdStar transforms publishers’
websites into full service classified ad sales channels for their print and
on-line classified ad departments.
At
December 31, 2005, the Fund owned 269,231 shares of common stock in the company,
having a cost basis of $350,000.
Advance
Nanotech, Inc. (OTCBB:AVNA)
600
Lexington Avenue, 29th
Floor,
New York, New York 10022
Advance
Nanotech, Inc. is working on the development and commercialization of
nanotechnology. The company focuses its research on nano-enabled electronics,
biopharma and materials. Advanced Nanotech has established relationships with
academic institutions.
In
the
first quarter of 2005, the Fund acquired 165,000 shares of the company’s common
stock and warrants to purchase 82,500 shares of the company’s common stock at
$3.00 per share.
At
December 31, 2005, the Fund owned 165,000 shares of common stock and warrants
to
purchase 82,500 shares of common stock. These securities have a cost basis
of
$330,000.
Bovie
Medical Corporation (AMEX:BVX)
734
Walt
Whitman Road, Melville, NY 11747
Bovie
Medical Corporation manufactures, markets and develops medical products and
related technologies. The company also manufactures a variety of specialty
lighting instruments for use in ophthalmology, general surgery, hip replacement
surgery and for the placement of endotracheal tubes.
During
the second quarter of 2005, the Fund acquired 100,000 shares of the company’s
common stock. During the third quarter of 2005, the Fund acquired an additional
100,000 shares of the company’s common stock.
At
December 31, 2005, the Fund owned 500,000 shares of common stock in the company,
having a cost basis of $904,545.
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
December 31, 2005, the Fund owned a warrant to purchase 4,587 shares of the
company’s common stock at an exercise price of $4.36 per share.
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.
At
December 31, 2005, the Fund held a $250,000 promissory note. The Fund also
owned
3,539,414 shares of common stock in the company having a basis of $5,275,000.
Additionally, the Fund owned warrants to purchase 2,052,779 shares common at
exercise prices ranging from $0.53 per share to $1.11 per share, with varying
expiration dates, and options to purchase 120,700 shares common with strike
prices ranging from $0.41 per share to $0.95 per share.
CNE
Group, Inc. (AMEX:CNE)
200
West
57th
Street,
Suite 507, New York, NY 10019
CNE
Group, Inc., through its subsidiaries, is a provider of solar-powered wireless
communication solutions for the intelligent traffic systems market.
At
December 31, 2005, the Fund owned warrants to purchase 125,000 shares of the
company’s common stock with an exercise price of $3.00 per share.
Comtech
Group, Inc. (Nasdaq:COGO)
Room
1001
Tower C Skyworth Building High-Tech Industrial Park Nanshan, Shenzhen, China
518057
Comtech
Group, Inc. provides design solutions to telecom equipment, mobile device and
consumer electronic manufacturers in China.
During
the first quarter of 2005, the Fund declared a 1-for-2 reverse stock split.
Immediately after the split, the Fund held 240,000 shares of common stock.
During the second quarter of 2005, the Fund purchased 60,000 shares of the
company’s common stock in the open market.
At
December 31, 2005, the Fund held 300,000 shares of the company’s common stock,
with a cost basis of $1,186,019.
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 an electronic format.
At
December 31, 2005, the Fund owned 10,680 shares Series A Convertible Preferred
Stock; 25,646 shares Series B Convertible Preferred Stock; 51,249 shares Series
C Convertible Preferred Stock; 16,057 shares of the company’s Series D
Convertible Preferred Stock; warrants to purchase 2,258 shares of Series A
Convertible Preferred Stock at an exercise price of $16.12 per share and
warrants to purchase 15,530 shares of common stock of the company at exercise
prices ranging from $16.12 to $31.14 per share. The aggregate cost basis is
$6,872,270.
Gaming
& Entertainment Group, Inc. (OTC:GMEI)
6094
South Sandhill Road, Suite 400, Las Vegas, NV 89120
Gaming
& Entertainment Group, Inc. designs and develops gaming systems, software,
game content and networks. The company is a supplier of gaming systems and
interactive electronic bingo games to the Native American gaming markets in
the
United States and Canada. The company’s gaming systems and game libraries are in
amusement arcades, casinos, betting shops and bingo halls.
During
the first quarter of 2005, the Fund received 112,500 shares of the company’s
common stock because the company incurred a penalty related to its offering.
At
December 31, 2005, the Fund owned 612,500 common shares having a cost of
$550,625 and warrants to purchase 500,000 common shares at $1.50 per
share.
Gasco
Energy, Inc. (AMEX:GSX)
14
Inverness 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 in the Rocky Mountain
regions of Utah and Wyoming.
During
the third quarter of 2005, the Fund sold 500,001 shares of the company’s common
stock. During the fourth quarter of 2005, the Fund sold 249,999 shares of the
company’s common stock.
At
December 31, 2005, the Fund owned 1,541,667 shares of common stock (acquired
via
private placements) having a cost of $1,250,000. The fund also held options
to
buy 18,751 shares of the company’s common stock at exercise prices ranging from
$1.00 to $2.15.
Global
Axcess Corporation (OTCBB:GAXC)
14
Inverness Drive East, Suite H-236, Englewood, CO 80112
Global
Axcess Corporation provides turnkey ATM management solutions that include cash,
project and account management services. The company currently owns and operates
over 1,600 ATM’s in its national network spanning 39 states, and provides
proprietary ATM branding and processing for 35 financial institutions with
over
360 branded sites nationwide. Additionally, the company provides traditional
transaction processing to its customers.
On
April
28, 2005, the company declared a 1-for-5 reverse stock split. On May 17, 2005,
Robert C. Pearson was appointed to the company’s board of
directors.
At
December 31, 2005, the Fund owned 953,333 shares of common stock having a cost
basis of $1,261,667, and warrants to purchase 1,486,667 shares of common stock
at prices ranging from $1.75 per share to $5.00 per share.
Hemobiotech,
Inc. (OTCBB:HMBT)
14221
Dallas Parkway, Suite 1500, Dallas, TX 75254
Hemobiotech,
Inc. is a biopharmaceutical company that develops blood substitutes. The
company’s product, HemoTech, is an oxygen-carrying solution that performs like
red blood cells.
In
the
third quarter of 2005, the Fund acquired 255,045 shares of the company’s common
stock through the conversion of a promissory note.
At
December 31, 2005, the Fund owned 549,165 shares of common stock and warrants
to
purchase 588,240 shares of common stock at $1.06. These securities had a cost
basis of $520,347.
i2Telecom
International, Inc. (OTCBB:ITUI)
1200
Abernathy Road, Suite 1800, Atlanta, GA 30328
i2Telecom
International, Inc. is a telecommunications service provider employing voice
over internet protocol technology. The company has operations in Florida,
Georgia and California in the United States and in Malaysia and The People’s
Republic of China. i2Telecom controls its own proprietary technology and
outsources its production and service functions to strategic
partners.
In
the
first quarter of 2005, the Fund bought 125 shares of the company’s 7% Series D
convertible preferred stock for $118,750. The company also received warrants
to
purchase 78,125 shares of the company’s common stock.
At
December 31, 2005, the Fund owned 625 shares of preferred stock convertible
into
781,250 shares of common stock and warrants to purchase 390,625 shares of common
stock at $0.96 per share. These securities had a cost basis of
$618,750.
iLinc
Communications, Inc. (AMEX:ILC)
2999
North 44th
Street,
Suite 650, Phoenix, AZ 85018
iLinc
Communications, Inc. provides web conferencing, virtual classroom and web
collaboration software. The company’s software and services enable sales,
training, marketing and support professionals to collaborate in real-time via
the internet. iLinc distributes its products and services in several different
languages in North America and worldwide.
In
the
fourth quarter of 2005, the Fund sold 25,000 shares of the company’s common
stock for a net loss of $9,000.
At
December 31, 2005, the Fund owned a total of 23,266 shares of common stock
having a cost basis of $13,908. In addition, the Fund owned a $500,000 12%
Convertible Subordinated Note convertible into ILC common at a rate of $1.00
per
share.
Information
Intellect, Inc. (Private)
1351
Dividend Drive, Suite G, Marietta, GA 30067
Information
Intellect, Inc. delivers enterprise asset management solutions through the
integration of software applications and services. The company’s solutions
enable customers to manage their asset portfolios to meet their strategic
objectives such as improving cash flow, cutting capital and O&M
expenditures, enhancing workforce productivity, reducing equipment downtime
and
measuring project/asset performance.
In
the
fourth quarter of 2005, the Fund bought 666,666 shares of the company’s Series A
preferred stock for $999,999.
At
December 31, 2005, the Fund owned 666,666 shares of Series A preferred stock
convertible to common stock at $1.50 per share.
Integrated
Security Systems, Inc. (OTC:IZZI)
8200
Springwood Drive, Suite 230, Irving, TX 75063
Integrated
Security Systems, Inc. is a 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.
In
the
second quarter of 2005, the Fund bought a $175,000 promissory note and warrants
to purchase 257,353 shares of common stock. The Fund also received common stock
of the company as payment in kind for interest on 8% Promissory Notes owned
by
the Fund. The Fund received 143,108 shares of IZZI having an imputed cost of
$41,885. The company incurred an extension fee related to previously issued
notes and, as a result, the Fund received 19,079 shares of common stock.
Finally, Russell Cleveland received his director’s fee in the form of 15,019
shares of common stock. He assigned those shares to the Fund.
In
the
third quarter of 2005, the Fund received common stock of the company as payment
in kind for interest on 8% Promissory Notes owned by the Fund. The Fund received
63,016 shares of IZZI having an imputed cost of $15,112.
In
the
fourth quarter of 2005, the Fund received common stock of the company as payment
in kind for interest on 8% Promissory Notes owned by the Fund. The Fund received
285,118 shares of IZZI having an imputed cost of $35,066. Russell Cleveland
received his director’s fee in the form of 18,013 shares of IZZI common stock.
He assigned those shares to the Fund. The Fund also bought a $500,000 promissory
note. Finally, the Fund bought 3,120,000 shares of the company’s common stock.
At
December 31, 2005, the Fund owned $900,000 of promissory notes, $500,000 of
convertible promissory notes, 187,500 shares of 9% preferred stock, convertible
at $0.80 per share, with a cost basis of $150,000, 30,737,482 shares of common
stock with a cost basis of $5,846,422, options to purchase 41,034 shares of
common stock with exercise prices ranging from $0.21 to $0.49 per share,
warrants to purchase 257,353 shares of common stock at $0.34 per share and
warrants to purchase 250,000 shares of common stock at exercise price of $0.40
per share.
Intrusion,
Inc. (Nasdaq:INTZ)
1101
East
Arapaho Road, Richardson, TX 75081
Intrusion,
Inc. provides enterprise security products that help businesses protect critical
information assets. The company’s products detect, analyze and respond to
network- and host-based attacks. Intrusion’s products include intrusion
detection and vulnerability assessment systems and modular, scalable, security
appliances.
In
the
first quarter of 2005, the Fund converted its preferred stock into 159,033
shares of common stock. The Fund then sold that common stock for a net gain
of
$240,361.
At
December 31, 2005, the Fund owned warrants to purchase 55,662 shares of common
stock at $3.144 per share.
Inyx,
Inc. (OTCBB:IYXI)
801
Brickell, 9th
Floor,
Miami, FL 33131
Inyx,
Inc. is a developer and manufacturer of specialized drug delivery pharmaceutical
products.
At
December 31, 2005, the Fund owned 300,000 shares of the company’s common stock
having a cost basis
of
$300,000, and owned 150,000 warrants to purchase common stock, with half being
exercisable at $1.00 per share, and half being exercisable at $1.35 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.
During
the first quarter of 2005, the Fund was issued options to buy 4,923 shares
of
the company’s common stock.
At
December 31, 2005, the Fund owned 600,000 shares of common stock having a
cost basis
of
$750,000, and options to purchase 30,000 shares at $4.19 per share, which were
received by assignment from Robert Pearson, who earned the options as a member
of the company’s Board of Directors.
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.
In
the
fourth quarter of 2005, the Fund sold 4,900 shares of common stock for a net
gain of $45,155.
At
December 31, 2005, the Fund owned a total of 20,100 shares of MDCI common stock
having a cost basis of $237,209.
Metasolv,
Inc. (Nasdaq:MSLV)
5556
Tennyson Parkway, Plano, TX 75024
Metasolv,
Inc. provides order management and service fulfillment solutions to next
generation communications providers. The company’s telecom business solution
software integrates a communications provider’s business from network planning
and engineering to operations and customer care. Metasolv operates offices
in
the United States, Latin America and England.
In
the
second quarter of 2005, the Fund bought 100,000 shares of common stock for
$210,838.
At
December 31, 2005, the Fund owned a total of 100,000 shares of MSLV common
stock
having a cost basis of $210,838.
PhotoMedex,
Inc. (Nasdaq:PHMD)
147
Keystone Drive, Montgomeryville, PA 18936
PhotoMedex,
Inc. manufactures excimer laser and fiber-optic systems used to treat
dermatological conditions such as psoriasis, vitiligo, atopic dermatisitis
and
leukoderma. The company offers products and services on contract to
dermatologists and hospitals. PhotoMedex develops skin health, haircare and
wound care products based on its copper peptide technology.
At
December 31, 2005, the Fund owned a total of 70,000 shares of PHMD common stock
having a cost basis of $176,400.
PracticeXpert,
Inc. (OTCBB:PXPT)
10833
Washington Boulevard, Culver City, CA 90232
PracticeXpert,
Inc. provides healthcare technology and services to medical practitioners.
The
company’s services revolve around its hand-held patient encounter system,
Pxpert, and include medical billing, transcription, collections, clinical trial
accruals, contracting and practice management.
At
December 31, 2005, the Fund owned 4,166,667 shares of common stock and warrants
to purchase 4,166,667 shares of the company’s common stock at $0.30 per share,
having a cost basis of $500,000.
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, 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.
During
the second quarter of 2005, the Fund bought in the open market 471,983 shares
of
the company’s common stock.
During
the third quarter of 2005, the Fund bought in the open market 127,317 shares
of
the company’s common stock.
At
December 31, 2005, the Fund owned a total of 800,000 shares of the company’s
common stock having a cost basis of $1,998,894.
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.
In
the
second quarter of 2005, the Fund received warrants to purchase 66,666 shares
of
the company’s common stock at $0.50 per share.
In
the
fourth quarter of 2005, the Fund purchased 3,125,000 shares of the company’s
common stock for $500,000.
At
December 31, 2005, the Fund owned $1,000,000 in 7.5% convertible debentures
having a conversion rate of $0.31 per share and 4,675,661 shares of common
stock
having a basis of $1,195,000. The Fund also owned warrants to purchase 316,666
shares, 125,000 of which are convertible at $1.50 per share, 125,000 at $1.25
per share and 66,666 at $0.50 per share. Finally, the fund held options to
purchase 5,288 shares at $0.17 per share and options to purchase 9,188 shares
at
$1.16 per share.
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 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
December 31, 2005, the Fund owned 110,000 shares of the company’s common stock
having a cost basis of $535,587 or $4.87 per share.
Vaso
Active Pharmaceuticals, Inc. (NASDAQ:VAPH)
99
Rosewood Drive, Suite 260, Danvers, MA 01923
Vaso
Active Pharmaceuticals, Inc. holds the exclusive, worldwide license to
commercialize, sell and distribute over-the-counter pharmaceutical products
incorporating the patented trans dermal drug delivery technology of its parent
company, BioChemics, Inc.
At
December 31, 2005, the Fund owned 150,000 shares of the company’s common stock
having a cost basis
of
$250,000.
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 of the Fund. The valuation principles
are described below.
|
v
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The
common stock of companies listed on an exchange, Nasdaq or in the
over-the-counter market is valued at the closing price on the date
of
valuation.
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|
v
|
The
unlisted preferred stock of companies with common stock listed on
an
exchange, Nasdaq or in the over-the-counter market is valued at the
closing price of the common stock into which the preferred stock
is
convertible on the date of valuation. If the preferred stock is
redeemable, the preferred stock is valued at the greater of cost
or
market.
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v
|
Debt
securities are valued at the greater of (i) cost or (ii) the market
value
of the underlying common stock into which the debt instrument is
convertible. In cases where the debt instrument is in default or
the
company is in bankruptcy, the value will be (i) the value of the
underlying common stock, (ii) the value of the collateral, if secured,
or
(iii) zero, if the common stock has no value and there is no collateral.
|
|
v
|
The
unlisted in-the-money options or warrants of companies with the underlying
common stock listed on an exchange, Nasdaq or in the over-the-counter
market are valued at the positive difference between the closing
price of
the underlying common stock and the strike price of the warrant or
option.
An out-of-the money warrant or option has no intrinsic value; thus,
we
assign no value to it.
|
|
v
|
If
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 to independent third parties by the entity governs
the
value of that enterprise. This valuation method causes the Fund’s initial
investment in the private entity to be valued at cost. Thereafter,
new
issuances or offers of equity or equity-linked securities by the
portfolio
company to new investors will be used to determine enterprise value
as
they will provide the most objective and independent basis for determining
the worth of the issuer. Where a private entity does not have an
independent value established over an extended period of time, then
the
Investment Adviser will determine fair value on the basis of appraisal
procedures established in good faith and approved by the Board of
Directors.
|
COMPETITION
FOR INVESTMENTS
The
Fund
has significant competition for investment proposals. Competitive sources for
growth capital for the industry include insurance companies, banks, equipment
leasing firms, investment bankers, venture capital and private equity funds,
money managers, hedge funds, and private investors. Many of these sources have
substantially greater financial resources than are available to the Fund.
Therefore, the Fund will have to compete for investment opportunities based
on
its ability to respond to the needs of the prospective portfolio company and
its
willingness to provide management assistance. In some instances, the Fund’s
requirements that the Fund provide management assistance will cause the Fund
to
be non-competitive.
PERSONNEL
The
Fund
has no direct employees, but instead has contracted RENN Group pursuant to
the
Advisory Agreement to provide all management and operating activities. RENN
Group currently has nine 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.
No
accurate data or estimate is available as to the percentage of time,
individually or as a group, that will be devoted to the affairs of the Fund.
The
officers and employees have and will devote such time as is required, in their
sole discretion, for the conduct of business, including the provision of
management services to Portfolio Companies.
RENN
Group currently serves as the Investment Manager to Renaissance US Growth
Investment Trust PLC (“RUSGIT”). RUSGIT is a public limited company registered
in the United Kingdom and listed on the London Stock Exchange. RUSGIT invests
in
privately placed convertible securities issued by companies similar to the
investments of the Fund. RUSGIT invest pari-passu with the Fund on all relevant
terms, except that amounts invested may differ.
RENN
Group also serves as the Investment Adviser to BFS US Special Opportunities
Trust PLC (“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 invests on a pari-passu basis with
the
Fund as to all relevant terms of the investment, except that amounts invested
may differ.
CODE
OF
ETHICS
The
Fund
and RENN Group have adopted a Code of Ethics pursuant to Rule 17j-1 under
the 1940 Act applicable to all of their respective officers and employees.
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:
[email protected], or by writing the Commission’s Public Reference Section,
Washington, D.C. 20549-0102.
Item
1A. Risk Factors.
You
should carefully consider the risks described below and all other information
contained in this annual report on Form 10-K, including our consolidated
financial statements and the related notes thereto before making a decision
to
purchase our common stock. The risks and uncertainties described below are
not
the only ones facing us. Additional risks and uncertainties not presently known
to us, or not presently deemed material by us, may also impair our operations
and performance. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. If that happens, the trading price of our common stock could decline,
and you may lose all or part of your investment.
Failure
to Meet Listing Standards.
It
is
uncertain whether our common stock will meet the requirements for listing on
Nasdaq, or any other stock exchange or quotation service.
In
July
2004, due to our inability to complete our audit and file our Form 10-K for
the
year ended December 31, 2003 in a timely manner, the Fund’s common stock was
delisted from Nasdaq. As we become current with the delinquent filings, we
will
attempt to relist with Nasdaq or a national stock exchange, but there is no
certainty that we will be able to do so.
Our
Growth is Dependent on Investing in Quality Deals.
Sustaining growth depends on our ability to identify, evaluate, finance, and
invest in companies that meet our investment criteria. Accomplishing such
results on a cost-effective basis is a function of our marketing capabilities
and skillful management of the investment process. Failure to achieve future
growth could have a material adverse effect on our business, financial
condition, and results of operations.
Failure
to Invest Capital Effectively May Decrease Our Stock Price.
If we
fail to invest our capital effectively, our return on equity may be decreased,
which could reduce the price of the shares of our common stock.
Highly
Competitive Market for Investments.
We
compete with a number of private equity funds, other investment entities and
individuals for investment opportunities. Some of these competitors are
substantially larger and have greater financial resources, and some are subject
to different and frequently less stringent regulation. As a result of this
competition, we may not be able to take advantage of attractive investment
opportunities from time to time and there can be no assurance that we will
be
able to identify and make investments that satisfy our objectives.
Lack
of Publicly Available Information on Certain Portfolio
Companies.
Some of
the securities in our portfolio are issued by privately held companies. There
is
generally little or no publicly available information about such companies,
and
we must rely on the diligence of our management to obtain the information
necessary for our decision to invest. There can be no assurance that such
diligence efforts will uncover all material information necessary to make fully
informed investment decisions.
Dependence
on Key Management.
Selecting, structuring and closing our investments depends upon the diligence
and skill of our management, which is responsible for identifying, evaluating,
negotiating, monitoring and disposing of our investments. Our management's
capabilities will significantly impact our results of operations. If we lose
any
member of our management team and he/she cannot be promptly replaced with an
equally capable team member, our results of operations could be significantly
impacted.
Failure
to Deploy Capital may Lower Returns.
Our
failure to successfully deploy sufficient capital may reduce our return on
equity.
Results
May Fluctuate.
Our
operating results may fluctuate materially due to a number of factors including,
among others, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter competition in
our
portfolio companies’ markets, the ability to find and close suitable
investments, and general economic conditions. As a result of these factors,
results for any period should not be relied upon as being indicative of
performance in future periods.
Uncertain
Value of Certain Restricted Securities.
Our net
asset value is based on the values assigned to the various investments in our
portfolio, determined in good faith by our board of directors. Because of the
inherent uncertainty of the valuation of portfolio securities which do not
have
readily ascertainable market values, our fair value determinations may differ
materially from the values which would be applicable to unrestricted securities
having a public market.
Illiquid
Securities May Adversely Affect Our Business.
Our
portfolio contains securities which are subject to restrictions on sale because
they were acquired from issuers in "private placement" transactions or because
we are deemed to be an affiliate of the issuer. Unless an exemption from the
registration requirements of the Securities Act of 1933 is available, we will
not be able to sell these securities publicly without the expense and time
required to register the securities under applicable federal and state
securities laws. In addition, contractual or practical limitations may restrict
our ability to liquidate our securities in portfolio companies, because we
may
own a relatively large percentage of the issuer's outstanding securities. Sales
may also be limited by unfavorable market conditions. The illiquidity of our
investments may preclude or delay the disposition of such securities, which
may
make it difficult for us to obtain cash equal to the value at which we record
our investments.
Regulated
Industry.
Publicly
traded investment funds are highly regulated. Changes in securities laws or
regulations governing our operations or our failure to comply with those laws
or
regulations may adversely affect our business.
Failure
to Qualify for Favorable Tax Treatment.
We may
not qualify for conduit tax treatment as a Regulated Investment Company ("RIC")
if we are unable to comply with the requirements of Subchapter M of the Internal
Revenue Code. If we fail to satisfy such requirements and cease to qualify
for
conduit tax treatment, we will be subject to federal taxes on our net investment
income. The loss of this pass-through tax treatment could have a material
adverse effect on the total return, if any, obtainable from an investment in
our
common stock.
Highly
Leveraged Portfolio Companies.
Some of
our portfolio companies could incur substantial indebtedness in relation to
their overall capital base. Such indebtedness often has a term that will require
the balance of the loan to be refinanced when it matures. If portfolio companies
cannot generate adequate cash flow to meet the principal and interest payments
on their indebtedness, the value of our investments could be reduced or
eliminated through foreclosure on the portfolio company's assets or by the
portfolio company's reorganization or bankruptcy.
Our
Common Stock Often Trades at a Discount.
Our
common stock often trades at a discount from net asset value.
Our
common stock is traded over-the-counter in the pink sheets. Stockholders
desiring liquidity may sell their shares at current market value, which has
often been below net asset value. Shares of closed-end investment companies
frequently trade at discounts from net asset value, which is a risk separate
and
distinct from the risk that a fund's performance will cause its net asset value
to decrease.
Nature
of Investment in Our Common Stock.
Our
stock is intended for investors seeking long-term capital appreciation. Our
investments in portfolio securities generally require some time to reach
maturity, and such investments generally are illiquid. An investment in our
shares should not be considered a complete investment program. Each prospective
purchaser should take into account his or her investment objectives as well
as
his or her other investments when considering the purchase of our
shares.
Our
Stock Price May Fluctuate Significantly.
The
market price of our common stock may fluctuate significantly.
The
market price and marketability of shares of our common stock may from time
to
time be significantly affected by numerous factors, including our investment
results, market conditions, and other influences and events over which we have
no control and that may not be directly related to us.
Item
2. Properties
The
Fund’s business activities are conducted from the offices of RENN Group, which
offices are currently leased until November 30, 2010 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 Advisory Agreement.
Item
3. Legal Proceedings
On
December 1, 2005, the Investment Adviser consented, without admitting or denying
the findings, to the entry of an order by the SEC instituting public
administrative and cease and desist proceedings and imposing remedial sanctions
(the “Order”). A Form 8-K detailing the settlement was filed on December 6, 2005
by the Fund. This can be viewed by going to the SEC website.
In
summary, the dispute concerned the definition of the wording of the incentive
fee calculation in the Advisers Act. Under Section 205(b)(3) of the Advisers
Act, a performance fee may be earned. The Investment Adviser, for many years,
believed the word “capital” referred to the Fund’s shareholders’ equity as a
whole. In 2004, the SEC informed the Investment Adviser that capital
depreciation in the formula referred only to unrealized capital losses on
marketable securities in the portfolio and therefore the calculations in
previous years were incorrect. In the Order, the SEC states that in calculating
a performance-based fee under Section 205(b)(3), an investment adviser must
account for its client’s assets on a security-by-security basis and may not take
into consideration unrealized capital appreciation on any individual security
or
the portfolio as a whole. Section 205(b)(3) does not require that fees earned
in
one period be subject to repayment based upon performance in a subsequent
period. If the performance fee is calculated on a cumulative basis and is based
on the period since inception, then unrealized capital depreciation may be
calculated for each calculation period by subtracting each security’s valuation
at the end of the applicable calculation period from the original cost, as
adjusted, to the BDC of purchasing that security. In practice, the Investment
Adviser also took into account unrealized capital appreciation, which offset
unrealized capital depreciation, to calculate its performance-based fee. Thus,
beginning in fiscal year 1996, the first period in which the Fund realized
capital gains, the Investment Adviser’s formula for calculating that fee was not
consistent with the formula permitted under Section 205(b)(3).
As
part
of the settlement of the SEC proceedings, the Investment Adviser agreed to
pay
$2,851,362 plus prejudgment interest of $924,509 and a fine of $100,000 to
the
Fund. The Investment Adviser satisfied this obligation in full as of December
8,
2005. The financial statements included as part of this Annual Report reflect
all financial aspects of the settlement, including the fine which was paid and
recorded in the Fund’s financial statements for 2005.
No
action
was brought against the Fund.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Part
II
Item
5. Market for Registrant’s Common Equity and Related Stockholder
Matters
TRADING
The
Fund’s common stock was previously traded on the Nasdaq National Market System
(“NMS”) under the trading symbol RENN. As a result of the Fund’s inability to
complete the audit of its financial statements and file its Form 10-K for the
fiscal year ended December 31, 2003 in a timely manner (see “Item 3. Legal
Proceedings”), in July 2004 the Fund’s common stock was delisted from NMS and is
currently trading over-the-counter in the pink sheets.
The
following table sets forth, for the periods indicated, the high and low closing
sale prices for the Common Stock as reported on Bloomberg.
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
First
quarter
|
|
$
|
13.85
|
|
$
|
11.25
|
|
Second
quarter
|
|
$
|
12.00
|
|
$
|
10.40
|
|
Third
quarter
|
|
$
|
11.55
|
|
$
|
10.70
|
|
Fourth
quarter
|
|
$
|
11.80
|
|
$
|
10.32
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2004
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
18.65
|
|
$
|
13.02
|
|
Second
quarter
|
|
$
|
17.75
|
|
$
|
13.15
|
|
Third
quarter
|
|
$
|
13.25
|
|
$
|
10.00
|
|
Fourth
quarter
|
|
$
|
14.90
|
|
$
|
11.00
|
|
NUMBER
OF
HOLDERS
As
of
December 31, 2005, there were approximately 481 record holders of the Fund’s
common stock. This total does not include shareholders with shares held under
beneficial ownership in nominee name or within clearinghouse positions of
brokerage firms or banks.
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
Subchapter M 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.
At
December 31, 2005, the Fund had declared a total of $13.41 per share in cash
to
its shareholders since inception in 1994. There is no assurance that the Fund
will continue to make the distributions or cash payments described herein.
Because the Fund may not earn the same return of capital in the future, the
Fund
may not continue to make distributions and cash payments as described herein.
DIVIDEND
REINVESTMENT PLAN. Pursuant
to the Dividend Reinvestment 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 (each, a “Participant”) 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 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 Plan Agent 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 Plan Agent has completed
the
purchases the market price exceeds the net asset value, the Plan Agent may
suspend purchasing in the market and the Fund will issue new shares at net
asset
value to fulfill the purchase requirements. The Fund has no current intention
to
register more shares in connection with the Reinvestment Plan; instead, the
Fund
will buy the shares in the open market.
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 Plan Agent, American Stock Transfer & Trust Co., will typically use all
funds received from Participants to purchase Fund shares in the open market,
so
long as Fund shares are trading at a discount. 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.
Item
6. Selected Financial Data.
The
following selected financial data for the period January 1, 2005 through
December 31, 2005 is derived from the Fund’s audited Financial Statements and
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” included in Item 7 of this Annual Report on Form 10-K.
The selected financial data for the periods ended December 31, 2002 and 2001
is
unaudited.
Selected
Financial Data
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Gross
income (loss), including net realized gain (loss)
|
|
|
6,569,365
|
|
|
14,514,741
|
|
|
11,670,287
|
|
|
(2,856,608
|
)
|
|
2,863,162
|
|
Net
unrealized appreciation
(depreciation)
on investments
|
|
|
(19,537,884
|
)
|
|
9,397,996
|
|
|
20,137,393
|
|
|
(8,380,055
|
)
|
|
11,570,203
|
|
Net
income (loss)
|
|
|
(16,023,666
|
)
|
|
18,971,481
|
|
|
28,741,964
|
|
|
(12,837,439
|
)
|
|
12,379,821
|
|
Net
income (loss) per share
|
|
|
(3.60
|
)
|
|
4.36
|
|
|
6.60
|
|
|
(2.94
|
)
|
|
2.84
|
|
Total
assets
|
|
|
62,548,375
|
|
|
117,387,109
|
|
|
101,866,011
|
|
|
55,592,067
|
|
|
82,092,106
|
|
Net
assets
|
|
|
54,188,943
|
|
|
74,582,499
|
|
|
69,405,964
|
|
|
46,103,648
|
|
|
59,446,006
|
|
Net
assets per share
|
|
|
12.14
|
|
|
17.14
|
|
|
15.95
|
|
|
10.59
|
|
|
13.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Per Share Data
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Investment
income
|
|
|
0.14
|
|
|
0.15
|
|
|
0.46
|
|
|
0.13
|
|
|
0.19
|
|
Operation
expenses
|
|
|
(0.66
|
)
|
|
(1.12
|
)
|
|
(0.70
|
)
|
|
(0.36
|
)
|
|
(0.45
|
)
|
Interest
expense
|
|
|
(0.02
|
)
|
|
(0.02
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.03
|
)
|
Net
investment loss
|
|
|
(0.54
|
)
|
|
(0.98
|
)
|
|
(0.25
|
)
|
|
(0.24
|
)
|
|
(0.29
|
)
|
Tax
return of capital
|
|
|
0.00
|
|
|
0.00
|
|
|
0.00
|
|
|
(0.10
|
)
|
|
0.00
|
|
Distributions
from net capital gains
|
|
|
(1.33
|
)
|
|
(3.17
|
)
|
|
(1.25
|
)
|
|
0.00
|
|
|
(0.54
|
)
|
Net
realized gain (loss) on investments
|
|
|
1.33
|
|
|
3.18
|
|
|
2.22
|
|
|
(0.79
|
)
|
|
0.47
|
|
Net
increase (decrease) in unrealized appreciation of
investments
|
|
|
(4.38
|
)
|
|
2.16
|
|
|
4.64
|
|
|
(1.91
|
)
|
|
2.66
|
|
Increase
(decrease) in net asset value
|
|
|
(4.92
|
)
|
|
1.19
|
|
|
5.36
|
|
|
(3.04
|
)
|
|
2.30
|
|
Capital
stock transactions
|
|
|
0.35
|
|
|
0.00
|
|
|
0.00
|
|
|
(0.02
|
)
|
|
0.00
|
|
Effect
of share change
|
|
|
(0.43
|
)
|
|
0.00
|
|
|
0.00
|
|
|
0.02
|
|
|
0.00
|
|
Net
Asset Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
17.14
|
|
|
15.95
|
|
|
10.59
|
|
|
13.63
|
|
|
11.33
|
|
End
of year
|
|
|
12.14
|
|
|
17.14
|
|
|
15.95
|
|
|
10.59
|
|
|
13.63
|
|
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL
The
primary 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
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. 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 types of revenue.
Director’s compensation received by RENN Group (or its personnel) for services
to a Portfolio Company on behalf of the Fund, is paid to the Fund.
LIQUIDITY
AND CAPITAL RESOURCES
During
the year ended December 31, 2005, the Fund invested $2,043,338 in four (4)
new
portfolio investments and invested an additional $2,995,128 in follow-on
investments in eight (8) portfolio companies. Distributions declared to
investors in 2005 amounted to $5,931,273 or $1.33 per share, which was capital
gain. During 2005, gains were realized from the sale of securities of Cybex
International, Dave & Busters, Inc., Gasco Energy, Inc., Interpool, Inc.,
Intrusion, Inc., Poore Brothers, Inc., and from bankruptcy distributions from
Dexterity Surgical, Inc. offset by realized losses taken on investments in
Cybex
International, Digital Learning Institute, iLink Communications, Inc., Stonepath
Group, Inc., Tarantella, Inc., Thermoview Industries, Inc., and Advanced
Refractive Technologies, Inc. (formally VisiJet, Inc). Net loss for 2005 was
$(16,023,666) and net cash used in operating activities was $(16,604,357).
The
Fund issued 112,249 new shares pursuant to the dividend reinvestment plan in
receipt of $1,561,383 in capital. Remaining dividend reinvestment shares were
purchased in the open market. At December 31, 2005, the Fund had $8,396,052
in
cash and cash equivalents, offset with $8,359,432 in liabilities. RENN
Group believes that current cash and securities levels are sufficient to pay
expenses as they come due and to make investments.
The
majority of the Fund’s investments in Portfolio Companies are individually
negotiated, non-registered for public trading, and are 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 or securities 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 when purchased. These investments qualify for investment as permitted
in
Section 55(a)(1) through (5) of the 1940 Act. These securities are generally
valued at market price as market prices are generally available for these
securities.
RESULTS
OF OPERATIONS
2005
Compared to 2004
During
the year ended December 31, 2005, the Fund made additional portfolio investments
aggregating $5,038,466 compared to $9,786,957 in 2004. The Fund realized
proceeds from the sale of investments in the amount of $13,632,705 compared
to
$19,289,611 in 2004. The Fund’s 2005 net loss of $(16,023,666) is due to a
combination of a net investment loss of $(2,417,103), net unrealized
depreciation on investments of $(19,537,884), and net realized gain on
investments of $5,931,321.
Interest
income decreased 46.15% for the year in comparison to 2004. In 2005, the Fund
realized a loss on interest receivable for Digital Learning and Advanced
Refractive Technologies (formerly VisiJet), and there were fewer debt
investments than in 2004. Dividend income during 2005 was $193,402 compared
to
$184,522 for 2004. Commitment and other fee income increased to $255,146 in
2005
from $126,326 in 2004 primarily as a result of the SEC Settlement Order with
affiliate.
General
and administrative expenses, including interest expense and legal fees, but
excluding incentive and management fees, decreased 26.22%, from $983,616 in
2004
to $725,753 for 2005. Incentive fees decreased 51.29%, $1,216,467 in 2005
compared to $2,497,422 in 2004 because there were greater net realized capital
gains achieved on investments during 2004. Management fees decreased to
$1,112,927 in 2005 from $1,460,218 in 2004, a decrease
of 23.78% due to lower portfolio values.
Net
income of $18,971,481 in 2004 decreased to a net loss of $(16,023,666) in 2005.
In 2005, the Fund had a net realized gain on investments of $5,931,321, compared
to $13,852,016 in 2004. The Fund experienced a decrease in net unrealized
appreciation on investments from $9,397,996 in 2004, compared to a net
unrealized depreciation on investments in 2005 of $(19,537,884).
2004
Compared to 2003
During
the year ended December 31, 2004, the Fund made additional portfolio investments
aggregating $9,786,957 compared to $9,062,799 in 2003. The Fund realized
proceeds from the sale of investments in the amount of $19,289,611 compared
to
$17,794,507 in 2003. The Fund’s realized net income of $18,971,481 is due to a
combination of a net investment loss of $(4,278,531), net unrealized
appreciation on investments of $9,397,996, and net realized gain on investments
of $13,852,016.
Interest
income decreased 51.84% for the year in comparison to 2003. In 2003 the Fund
received payment in kind of interest upon the reorganization of eOriginal,
Inc.
and interest accrued due
to
the SEC settlement offer. Dividend income decreased 84.94% to $184,522 in 2004
from $1,225,139 in 2003 due primarily to the 2003 dividends paid upon the
reorganization of investments in eOriginal, Inc. and Integrated Security
Systems, Inc. Commitment and other fee income increased to $126,326 in 2004
from
$33,579 in 2003 primarily as a result of an increase in early conversion fees
and due diligence fee income.
General
and administrative expenses, including interest expense and legal fees, but
excluding incentive and management fees, increased 68.23% to $983,616 in 2004
from $584,690 in 2003. Incentive fees increased 171.10%, $2,497,422 in 2004
compared to $921,231 in 2003 because there were greater net realized capital
gains achieved on investments during 2004. Management fees increased to
$1,460,218 in 2004 from $1,071,708 in 2003, an increase
of 36.25% due to higher portfolio values.
Net
income decreased to $18,971,481 in 2004 from $28,741,964 in 2003. In 2004,
the
Fund had a net realized gain on investments of $13,852,016, compared to
$9,680,859 in 2003. Likewise, the Fund experienced a decrease in net unrealized
appreciation on investments to $9,397,996 in 2004, compared to the net
unrealized appreciation on investments in 2003 of $20,137,393.
CONTRACTUAL
OBLIGATIONS
The
Fund
has a contract for the purchase of services under which it will have future
commitments: the investment advisory agreement, pursuant to which RENN Capital
Group, Inc. has agreed to serve as the Fund’s investment adviser. Such agreement
has contractual obligations with fees which are based on values of the portfolio
investments which the Fund owns. For further information regarding the Fund’s
obligations under the investment advisory agreement see Note 4 of the Financial
Statements.
Because
the Fund does not enter into other long-term debt obligations, capital lease
obligations, operating lease obligations, or purchase obligations that would
otherwise be reflected on the Fund’s Statement of Assets and Liabilities, a
table of contractual obligations has not been presented.
Item
7A. Quantitative and Qualitative Disclosure About 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 consist 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 they 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.
A
small
percentage of the Fund’s net assets consist of equity investments in private
companies. The Fund would anticipate no impact on these investments 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.
Item
8. Financial Statements and Supplementary Data.
The
financial statements filed as part of this report are listed in “Index to
Financial Statements” on page F-1 hereof.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
On
January 19, 2006, the Audit Committee of the Fund dismissed Ernst & Young
LLP (“E&Y”) as the Fund’s independent registered public accounting firm
because E&Y advised the Audit Committee that E&Y would not be able to
begin the audit engagement until May 2006.
The
audit
reports of E&Y on the financial statements of the Fund for the fiscal years
ended December 31, 2002 and 2001 did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. E&Y did not complete the audit of the
Fund’s financial statements for fiscal years ended after December 31,
2002.
As
disclosed in a Current Report on Form 8-K filed by the Fund on June 18, 2004,
E&Y declined to issue a report on the Fund’s financial statements for the
year ended December 31, 2003 unless E&Y received an opinion of legal counsel
to the effect that the possibility of a material adverse effect to the Fund
as a
result of a comment received from the SEC staff that the Advisory Agreement
might be invalid would be “remote” as defined in an accounting pronouncement
that the Fund and E&Y agreed was not applicable. The Fund and E&Y were
unable to agree on proposed legal opinion language.
As
further disclosed in a Current Report on Form 8-K filed by the Fund on December
6, 2005, the Investment Adviser entered into a settlement agreement with the
SEC
with respect to the calculation of advisory fees under the Advisory Agreement.
As a result of the settlement agreement, the disagreement noted above has been
rendered moot. The Fund has authorized E&Y to respond fully to the inquiries
of the successor accountant named below concerning this subject.
Other
than as described in the two preceding paragraphs, during the fiscal years
ended
December 31, 2005 and 2004 and the period from January 1, 2006 through January
19, 2006, there were no disagreements with E&Y on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or
procedure, which disagreements if not resolved to the satisfaction of E&Y,
would have caused E&Y to make reference to such disagreements in its reports
on the financial statements for such periods.
On
January 19, 2006, the Audit Committee of Board of Directors of the Fund approved
the engagement of KBA Group LLP (“KBA”) to serve as the Fund’s independent
registered public accounting firm. We engaged KBA on January 19, 2006 to serve
as our independent registered public accounting firm for the fiscal year ending
December 31, 2005. The Audit Committee has also engaged KBA to complete the
audits for the fiscal years ended December 31, 2004 and 2003.
Item
9A. Controls and Procedures.
The
Fund
has in place systems relating to disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the 1934 Act). Our principal executive
officer and principal financial officer evaluated the effectiveness of these
disclosure controls and procedures as of the end of our fiscal year ended
December 31, 2005 in connection with the preparation of this report. They
concluded that the controls and procedures were effective and adequate at that
time. There were no significant changes in the Fund’s internal control over
financial reporting during the fourth quarter of fiscal 2005 that have
materially affected, or are reasonably likely to materially affect the Fund’s
control over financial reporting.
Item
9B. Other Information.
None.
Part
III
Item
10. Directors and Executive Officers of Registrant.
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. The term of office of the Class One director was to
have
expired at the annual meeting of shareholders to have been held in 2004, the
term of office of the Class Two directors was to have expired at the annual
meeting of shareholders to have been held in 2005, and the term of office of
the
Class Three directors was to expire at the annual meeting of shareholders to
be
held in 2006.
Because
the Board of Directors is divided into classes, only those directors in a single
class may be changed in any one year. Consequently, changing a majority of
the
Board of Directors would require two years (although under Texas law, procedures
exist to remove directors, even if they are not then standing for reelection
and, under SEC regulations, procedures exist for including appropriate
shareholder proposals in the annual proxy statement). Having a classified Board
of Directors, which may be regarded as an “anti-takeover” provision, may make it
more difficult for shareholders of the Fund to change the majority of directors,
thus having the effect of maintaining the continuity of management.
Class
One Director - Term was to have expired at the 2004 Annual
Meeting
Peter
Collins,
age 61,
has been a financial and management consultant to closely-held businesses for
the past ten years in the USA, the UK, and Europe, in areas of finance,
start-ups, joint ventures, and mergers and acquisitions. He has advised
companies in every segment of industry (including manufacturing, distribution,
service, agriculture, construction, and multimedia) and in all stages of
development (from start-up to bankruptcy). Mr. Collins was educated in England,
where he received a B.Sc. in Civil Engineering from Liverpool University and
an
M.Sc. in Business Administration from The City University, London. He has served
as a Class One Director since 1994.
Class
Two Directors - Term was to have expired at the 2005 Annual
Meeting
Edward
O. Boshell, Jr.,
age 71,
is the retired Chairman of the Board and CEO of Columbia General Corporation
and
is a private investor.
Charles
C. Pierce, Jr.,
age 71,
is the retired Vice-Chairman of Dain Rauscher, Inc., and is a private
investor.
Class
Three Directors - Term Expires at 2006 Annual Meeting
Russell
Cleveland,
age 67,
is the President, Chief Executive Officer, and Director of the Fund since 1994.
He is a Chartered Financial Analyst with more than 35 years experience as a
specialist in investments in 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 is also the President, Chief
Executive Officer, sole Director, and the majority shareholder of RENN Group,
the investment adviser to the Fund. RENN Group is also the investment manager
of
Renaissance US Growth Investment Trust PLC (“RUSGIT”) and the investment adviser
to BFS US Special Opportunities Trust PLC (“BFS US”), investment trusts listed
on the London Stock Exchange. Mr. Cleveland also serves on the Boards of
Directors of RUSGIT, BFS US, Tutogen Medical, Inc., Cover-All Technologies,
Inc., Integrated Security Systems, Inc., and Digital Recorders,
Inc.
Ernest
C. Hill,
age 65,
has a broad background in convertible securities analysis with major NYSE
brokerage firms and institutional investors. He specializes in computer-aided
investment analysis and administrative procedures. Mr. Hill was awarded a Ford
Fellowship to the Stanford School of Business, where he received an MBA, with
honors, in Investment and Finance. Mr. Hill’s prior experience included service
as Assistant Professor of Finance, Southern Methodist University and Associate
Director of the Southwestern Graduate School of Banking.
The
Board
of Directors has determined that all of the Fund’s directors, other than Russell
Cleveland, the President and Chief Executive Officer of the Fund, are
independent directors. Certain information concerning the Fund’s directors is
set forth below:
Name,
Address(1)
and
Age
|
|
Positions
Held
with
Fund
|
|
Director’s
Term
of
Office
and
Length
of
Time
Served
|
|
Principal
Occupation(s)
During
Past
5
Years
|
|
Number
of Portfolios in Fund Complex Overseen by
Director
|
|
Other
Director-
ships
Held by Director
|
Peter
Collins
Age
61
|
|
Director
|
|
Class
One Director since 1994. Term was to have expired in 2004.
|
|
Consultant
|
|
1
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
Edward
O. Boshell, Jr.
Age
71
|
|
Director
|
|
Class
Two Director since 1998. Term was to have expired in 2005.
|
|
Retired
Chairman of the Board and CEO of Columbia General and private
investor
|
|
1
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
Charles
C. Pierce, Jr.
Age
71
|
|
Director
|
|
Class
Two Director since 2002. Term was to have expired in 2005.
|
|
Retired
Vice-Chairman of Dain Rauscher and private investor
|
|
1
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
Ernest
C. Hill
Age
65
|
|
Director
|
|
Class
Three Director since 1994. Term expires 2006.
|
|
Consultant
|
|
1
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
Interested
Director:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell
Cleveland(2)
Age
67
|
|
President,
Chief
Executive
Officer,
and
Director
|
|
Class
Three Director since 1994. Term expires 2006
|
|
President
& Chief Executive Officer of RENN Group
|
|
3
|
|
RUSGIT,
BFSUS, Tutogen Medical, Inc., CaminoSoft Corp., Cover-All Technologies,
Inc., Integrated Security Systems, Inc., Precis, Inc. and Digital
Recorders, Inc.
|
(1)
The
address of all such persons is c/o RENN Capital Group, Inc., 8080 North Central
Expressway, Suite 210, LB-59, Dallas, Texas 75206.
(2)
Mr.
Cleveland is also President and CEO of RENN Capital Group, Inc. See “Information
About the Fund’s Officers and the Investment Advisor”
Name
of
Director
|
|
Dollar
Range*
of
Equity Securities
in
the Fund
|
|
Aggregate
Dollar Range
of
Equity Securities in
Funds
in
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
December 31, 2005
Committees
and Meetings
The
Board
of Directors held fifteen (15) meetings or executed consent actions in lieu
of
meetings during 2005, and each director attended or executed at least
seventy-five per cent (75%) of these meetings and consent actions.
The
Audit Committee
During
2005, the Audit Committee consisted of Ernest C. Hill, Chair, Peter Collins,
Charles C. Pierce, Jr. and Edward O. Boshell, Jr., and held six (6) meetings
in
2005. Edward O. Boshell, Jr. has been designated by the Board of Directors
as
the Audit Committee financial expert. The Audit Committee is comprised entirely
of independent directors. The Audit Committee is appointed by the Board of
Directors to assist the Board in fulfilling its oversight responsibilities.
The
Audit Committee’s primary duties and responsibilities are to:
|
·
|
Appoint
and approve the compensation of the Fund’s independent auditors, including
those to be retained for the purpose of preparing or issuing an audit
report or performing other audit review or attest services for the
Fund;
|
|
·
|
Review
the scope of their audit services and the annual results of their
audits;
|
|
·
|
Monitor
the independence and performance of the Fund’s independent
auditors;
|
|
·
|
Oversee
generally the accounting and financial reporting processes of the
Fund and
the audits of its financial statements, generally;
|
|
·
|
Review
the reports and recommendations of the Fund’s independent auditors;
|
|
·
|
Provide
an avenue of communication among the independent auditors, management
and
the Board of Directors; and
|
|
·
|
Address
any matters between the Fund and its independent auditors regarding
financial reporting.
|
The
Fund’s independent auditors must report directly to the Audit
Committee.
The
Nominating and Corporate Governance Committee
The
Nominating and Corporate Governance Committee was created in January 2004 and
is
responsible for nominating individuals to serve as directors. The Nominating
and
Corporate Governance Committee is composed entirely of independent Fund
directors.
Its
members are Charles C. Pierce, Jr., Chair, Edward O. Boshell, Jr., Ernest C.
Hill and Peter Collins.
The
Committee considers and recommends nominees for election as directors of the
Fund. Stockholders wishing to recommend qualified candidates for consideration
by the Fund may do so by writing to the Secretary of the Fund at the address
shown in the Notice providing the candidate’s name, biographical data and
qualifications. In its assessment of each potential candidate, the Committee
reviews the nominee’s judgment, experience, independence, financial literacy,
knowledge of emerging growth companies, understanding of the Fund and its
investment objectives and such other factors as the Committee may determine.
The
Committee also takes into account the ability of a director to devote the time
and effort necessary to fulfill his or her responsibilities. At the direction
of
the Board of Directors, the Committee also considers various corporate
governance policies and procedures.
Officers
Russell
Cleveland,
age 67,
has served as President, Chief Executive Officer, and a Class Three director
of
the Fund since 1994. He has also served as the President, Chief Executive
Officer, sole Director, and the majority shareholder of RENN Group since 1994.
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 also serves on the
Boards of Directors of Renaissance US Growth Investment Trust PLC, BFS US
Special Opportunities Trust PLC, CaminoSoft Corp., Integrated Security Systems,
Inc., Tutogen Medical, Inc., Digital Recorders, Inc., and Cover-All
Technologies, Inc.
Barbe
Butschek,
age 51,
has served as Secretary and Treasurer of the Fund since 1994. She currently
serves as Senior Vice-President, Secretary and Treasurer of RENN Group and
has
served with RENN Group in various capacities since 1977.
Robert
C. Pearson,
age 70,
has served as Vice President of the Fund since April 1997. He joined RENN Group
in April 1997 and is Senior Vice-President - Investments. Mr. Pearson brought
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 Digital Learning Management Corp., eOriginal,
Inc., CaminoSoft Corp., Laserscope, Simtek Corporation, and Advanced Power
Technologies, Inc.
Scott
E. Douglass,
age
47,
has served as a Vice President of the Fund since November 2004. He has worked
for three sell-side firms in the roles of institutional sales and investment
banking. Prior to that he was a commercial loan officer for the First National
Bank of Boston and Fleet Financial Group which are now part of Bank of America.
He holds a Masters Degree in Business Administration from the Olin Graduate
School of Business at Babson College.
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Fund's
officers and directors and persons who own more than 10% of a registered class
of the Fund's equity securities to file reports of ownership and changes in
ownership with the SEC. Officers, directors, and greater than 10% beneficial
owners are required by SEC regulations to furnish the Fund with copies of all
Section 16(a) forms they file. The Fund believes that during the fiscal year
ended December 31, 2005, all Section 16(a) filings relating to the Fund's Common
Stock applicable to its officers, directors, and greater than 10% beneficial
owners were timely filed.
Item
11. Executive 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 quarterly valuation
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, 2005, 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 is set forth below:
Name
of Director
|
|
Aggregate
2005
Compensation
from
Fund
|
|
Pension
or
Retirement
Benefits
Accrued
as
Part
of Fund
Expenses
|
|
Estimated
Annual
Benefits
upon
Retirement
|
|
Total
2005
Compensation
from
Fund
and
Fund
Complex
|
|
Russell
Cleveland (1)
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
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.
|
|
$
|
20,250
|
|
$
|
0
|
|
$
|
0
|
|
$
|
20,250
|
|
|
(1)
|
Mr.
Cleveland is President and Chief Executive Officer of RENN Group.
See
“Information about the Fund’s Principal Officers and Investment Adviser -
RENN Group.”
|
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.
Item
12. Security Ownership of Certain Beneficial Owners and
Management.
The
following table sets forth certain information known to the Fund with respect
to
beneficial ownership of the Fund’s Common Stock as of December 31, 2005 (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 and nominee for director of the Fund,
and (iii) all executive officers and directors of the Fund as a
group:
Name
of Beneficial Owner
|
|
Number
of Shares
Beneficially
Owned
Directly
or Indirectly
|
|
Percent
of
Class
|
|
Russell
Cleveland, President, Chief
Executive
Officer, and Director(1)
|
|
|
334,650(2)
|
|
|
7.5
|
%
|
Edward
O. Boshell, Jr., Director
|
|
|
29,923(3)
|
|
|
0.7
|
%
|
Peter
Collins, Director
|
|
|
2,480(4)
|
|
|
0.1
|
%
|
Charles
C. Pierce, Jr., Director
|
|
|
2,165
|
|
|
0.0
|
%
|
Ernest
C. Hill, Director
|
|
|
0
|
|
|
0.0
|
%
|
All
directors and officers of
the
Fund as a group (8 persons)
|
|
|
381,080
|
|
|
8.5
|
%
|
(1) |
“Interested
person” as defined by the 1940 Act.
|
(2)
|
Consists
of 30,140 shares owned by the Cleveland Family Limited Partnership
and
304,510 shares owned by Renn Investment Limited
Partnership.
|
(3)
|
Shares
owned indirectly through Columbia General Investments,
L.P.
|
(4)
|
Includes
130 shares owned by Hilary Collins, Mr. Collins’
spouse.
|
Item
13. Certain Relationships and Related Transactions.
RENN
Group provides investment advisory services to the Fund pursuant to the Advisory
Agreement between the Fund and RENN Group. The Advisory Agreement is reviewed
and approved annually by the Fund’s Board of Directors, including its
independent directors. Pursuant to the Advisory Agreement, RENN Group received
a
management fee equal to a quarterly rate of 0.4375% 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. In addition, under the Advisory Agreement,
RENN Group received 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 on the portfolio investments
of
the Fund. The incentive fee is calculated and paid on an annual basis. See
Item
3, Legal Proceedings, for a discussion of proceedings with the SEC regarding
the
calculation of the incentive fee.
In
2005,
the Fund incurred to RENN Group $1,112,927 as its management fee of which
$936,189 was paid and $1,216,467 as its incentive fee of which $0 was paid.
The
Fund also received director’s fees from portfolio companies with respect to Mr.
Cleveland’s and Mr. Pearson’s services as a director. 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. The Board of Directors
has
determined that the Advisers Agreement be construed in compliance with
applicable provisions of the Advisers Act and the 1940 Act.
Item
14. Principal Accountant Fees and Services.
As
disclosed in Item 9, Ernst & Young LLP was dismissed as the Fund’s auditor
and did not complete the audit for the fiscal year ended December 31, 2003.
KBA
Group LLP was subsequently engaged in January 2006 to complete the audit, and
therefore received no fees for professional services for the fiscal years ended
December 31, 2005 and 2004.
The
following table presents fees paid by the Fund for professional services
rendered by Ernst & Young LLP for the fiscal years ended December 31, 2004
and 2005.
Fee
Category
|
|
Fiscal
2005
Fees
|
|
Fiscal
2004
Fees
|
|
|
|
|
|
|
|
Audit
Fee
|
|
$
|
0
|
|
$
|
56,000
|
|
Audit-Related
Fees
|
|
|
0
|
|
|
0
|
|
Tax
Fees
|
|
|
10,380
|
|
|
2,000
|
|
All
Other Fees
|
|
|
3,633
|
|
|
0
|
|
Total
Fees
|
|
$
|
14,013
|
|
$
|
58,000
|
|
Audit
Fees
were for
professional services rendered for the audit of the Fund’s financial statements
and review of the interim financial statements included in quarterly reports
and
services that are normally provided by Ernst & Young LLP in connection with
statutory and regulatory filings or engagements. In March 2006, the Fund
received a refund of $56,000 of the audit fees previously paid in
2004.
No
Audit-Related Fees
were
paid by the Fund to Ernst & Young LLP for the fiscal years ended December
31, 2005 or 2004.
Tax
Fees
were for
the preparation of income and excise tax returns.
All
Other Fees
were for
services other than the services reported above. In fiscal year 2005, these
services included accounting consultations relating to the proposed SEC
Settlement Order.
The
Audit
Committee concluded that the provision of the non-audit services described
above
did not impair the independence of Ernst & Young LLP. The Audit Committee
has adopted a pre-approval policy that provides for the prior consideration
by
the Audit Committee of any audit or non-audit services that may be provided
by
its independent auditor to the Fund.
Part
IV
Item
15. Exhibits, Financial Statement Schedules.
DOCUMENTS
FILED AS PART OF THIS FORM 10K
Financial
Statements:
The
financial statements filed as part of this report are listed in “Index to
Financial Statements” on page F-1 hereof.
Financial
Schedules:
There
are
no schedules presented since none are applicable.
EXHIBITS
3.1 |
Restated
Articles of Incorporation1
|
10.1 |
Dividend
Reinvestment Plan3
|
10.2 |
Amendment
No. 1 to Dividend Reinvestment Plan4
|
10.3 |
Investment
Advisory Agreement5
|
10.4 |
Amendment
No. 1 to Investment Advisory Agreement6
|
10.5 |
Custodial
Agreement with The Frost National Bank7
|
31.1 |
Certification
of the principal executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
31.2 |
Certification
of the principal financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32.1
|
Certification
of the principal executive officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
32.2 |
Certification
principal financial officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
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 N-2 as filed with the Securities and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
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 (File No.
001-11701).
7
Incorporated by reference from Form 10-K for the year ended December 31, 2000
as
filed with the Securities and Exchange Commission (File No.
001-11701).
8
Incorporated by reference from Form 10-Q for the quarter ended June 30, 2002
as
filed with the Securities and Exchange Commission (File No.
811-08376).
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
Date:
September 22, 2006
|
|
|
|
Renaissance
Capital Growth & Income Fund III, Inc.
(Registrant)
|
|
|
|
|
By: |
/s/
Russell Cleveland |
|
Russell
Cleveland, Chairman and President |
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Fund in the capacities
and on the date indicated Signatures.
Signature
|
|
Capacity
in Which Signed
|
|
Date
|
|
|
|
|
|
/s/
Russell Cleveland
|
|
|
|
September
22, 2006
|
Russell
Cleveland
|
|
Chairman,
President and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Barbe Butschek
|
|
|
|
September
22, 2006
|
Barbe
Butschek
|
|
Secretary
and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Ernest C. Hill
|
|
|
|
September
22, 2006
|
Ernest
C. Hill
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Peter Collins
|
|
|
|
September
22, 2006
|
Peter
Collins
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Edward O. Boshell, Jr.
|
|
|
|
September
22, 2006
|
Edward
O. Boshell, Jr.
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Charles C. Pierce, Jr.
|
|
|
|
September
22, 2006
|
Charles
C. Pierce, Jr.
|
|
Director
|
|
|
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Report
of Independent
|
|
|
Registered
Public Accounting Firm
|
|
F-2
|
|
|
|
Statements
of Assets and Liabilities
|
|
|
December
31, 2005 and 2004
|
|
F-3
|
|
|
|
Schedules
of Investments
|
|
|
December
31, 2005 and 2004
|
|
F-4
through F-14
|
|
|
|
Statements
of Operations
|
|
|
Years
ended December 31, 2005, 2004, and 2003
|
|
F-15
|
|
|
|
Statements
of Changes in Net Assets
|
|
|
Years
ended December 31, 2005, 2004, and 2003
|
|
F-16
|
|
|
|
Statements
of Cash Flows
|
|
|
Years
ended December 31, 2005, 2004, and 2003
|
|
F-17
|
|
|
|
Notes
to Financial Statements
|
|
F-18
through F-26
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders
and Board of Directors
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. (the "Fund") including the schedules
of investments as of December 31, 2005 and 2004 and the related statements
of
operations, changes in net assets and cash flows for the years ended December
31, 2005, 2004 and 2003 and financial highlights for the years ended December
31, 2005 and 2004. These financial statements and financial highlights are
the
responsibility of the Fund’s management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have nor were we engaged to perform, an audit of
their internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Fund’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting
the
amounts and disclosures in the financial statements, 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 and financial highlights referred to above
present fairly, in all material respects, the financial position of Renaissance
Capital Growth & Income Fund III, Inc. as of December 31, 2005 and 2004 and
the results of its operations and its cash flows for the years ended December
31, 2005, 2004 and 2003 and the financial highlights for the years ended
December 31, 2005 and 2004 in conformity with accounting principles generally
accepted in the United States of America.
/s/
KBA GROUP LLP
KBA
Group
LLP
Dallas,
TX
July
17, 2006
Statements
of Assets and Liabilities
December
31, 2005 and 2004
ASSETS
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
8,396,052
|
|
$
|
37,278,871
|
|
Investments
at fair value, cost of $35,433,480 and
|
|
|
|
|
|
|
|
$38,096,398
in 2005 and 2004, respectively
|
|
|
54,002,499
|
|
|
76,203,302
|
|
Accounts
receivable-settlement with affiliate
|
|
|
-
|
|
|
3,775,872
|
|
Interest
and dividend receivables, net of reserves
|
|
|
48,226
|
|
|
95,689
|
|
Prepaid
and other assets
|
|
|
101,598
|
|
|
33,375
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,548,375
|
|
$
|
117,387,109
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND NET ASSETS
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Due
to broker
|
|
$
|
2,075,975
|
|
$
|
27,001,414
|
|
Accounts
payable
|
|
|
86,782
|
|
|
51,477
|
|
Accounts
payable - dividends
|
|
|
4,145,686
|
|
|
12,054,258
|
|
Accounts
payable - affiliate
|
|
|
2,050,989
|
|
|
3,697,461
|
|
|
|
|
|
|
|
|
|
|
|
|
8,359,432
|
|
|
42,804,610
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets:
|
|
|
|
|
|
|
|
Common
stock, $1 par value; authorized 20,000,000
|
|
|
|
|
|
|
|
shares;
4,673,867 and 4,561,618 issued; 4,463,967
|
|
|
|
|
|
|
|
and
4,351,718 shares outstanding
|
|
|
4,673,867
|
|
|
4,561,618
|
|
Additional
paid-in-capital
|
|
|
32,681,024
|
|
|
33,641,903
|
|
Treasury
stock at cost, 209,900 shares
|
|
|
(1,734,967
|
)
|
|
(1,734,967
|
)
|
Distributable
earnings
|
|
|
-
|
|
|
7,042
|
|
Net
unrealized appreciation of investments
|
|
|
18,569,019
|
|
|
38,106,903
|
|
Net
assets, equivalent to $12.14 and $17.14 per share
|
|
|
|
|
|
|
|
at
December 31, 2005 and 2004, respectively
|
|
|
54,188,943
|
|
|
74,582,499
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,548,375
|
|
$
|
117,387,109
|
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments
December
31, 2005 and 2004
|
|
2005
|
|
|
|
Interest
|
|
Due
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Rate
|
|
Date
|
|
Cost
|
|
Value
|
|
Assets
|
|
Eligible
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debentures and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CaminoSoft
Corp. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
note (4)
|
|
|
7.00
|
|
|
07/19/06
|
|
$
|
250,000
|
|
$
|
250,000
|
|
|
0.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iLinc
Communications, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory note (2)
|
|
|
12.00
|
|
|
03/29/12
|
|
|
500,000
|
|
|
500,000
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated
Security Systems, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
note (4)
|
|
|
8.00
|
|
|
09/30/06
|
|
|
525,000
|
|
|
525,000
|
|
|
0.97
|
|
Promissory
note (4)
|
|
|
7.00
|
|
|
09/30/06
|
|
|
200,000
|
|
|
200,000
|
|
|
0.37
|
|
Promissory
note (4)
|
|
|
8.00
|
|
|
09/30/06
|
|
|
175,000
|
|
|
175,000
|
|
|
0.33
|
|
Convertible
promissory note (2)
|
|
|
8.00
|
|
|
12/14/08
|
|
|
500,000
|
|
|
400,000
|
|
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Simtek
Corporation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debenture
|
|
|
7.50
|
|
|
06/28/09
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,150,000
|
|
$
|
3,050,000
|
|
|
5.65
|
%
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2005 and 2004
|
|
2005
|
|
|
|
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Shares
|
|
Cost
|
|
Value
|
|
Assets
|
|
Eligible
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, Preferred Stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Miscellaneous Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CaminoSoft
Corp. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
3,539,414
|
|
$
|
5,275,000
|
|
$
|
3,433,232
|
|
|
6.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
eOriginal,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A, preferred stock (1)(2)(3)
|
|
|
10,680
|
|
|
4,692,207
|
|
|
332,575
|
|
|
0.62
|
|
Series
B, preferred stock (1)(2)(3)
|
|
|
25,646
|
|
|
620,329
|
|
|
798,616
|
|
|
1.48
|
|
Series
C, preferred stock (1)(2)(3)
|
|
|
51,249
|
|
|
1,059,734
|
|
|
1,595,894
|
|
|
2.96
|
|
Series
D, preferred stock (1)(2)(3)
|
|
|
16,057
|
|
|
500,000
|
|
|
500,015
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
& Entertainment Group -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
612,500
|
|
|
550,625
|
|
|
79,625
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasco
Energy, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
1,541,667
|
|
|
1,250,000
|
|
|
10,067,086
|
|
|
18.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Axcess Corporation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
953,333
|
|
|
1,261,667
|
|
|
1,134,466
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hemobiotech,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
549,165
|
|
|
520,347
|
|
|
1,180,705
|
|
|
2.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information
Intellect -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (1)(2)(3)
|
|
|
666,666
|
|
|
999,999
|
|
|
999,999
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated
Security Systems, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
30,737,482
|
|
|
5,846,422
|
|
|
6,147,496
|
|
|
11.38
|
|
Series
D, preferred stock (2)
|
|
|
187,500
|
|
|
150,000
|
|
|
45,000
|
|
|
0.08
|
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2005 and 2004
|
|
2005
|
|
|
|
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Shares
|
|
Cost
|
|
Value
|
|
Assets
|
|
Eligible
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, Preferred Stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Miscellaneous Securities, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inyx,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
300,000
|
|
|
300,000
|
|
|
564,000
|
|
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laserscope
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
600,000
|
|
|
750,000
|
|
|
13,476,000
|
|
|
24.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PracticeXpert,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
4,166,667
|
|
|
500,000
|
|
|
108,333
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Simtek
Corp. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
1,550,661
|
|
|
695,000
|
|
|
449,692
|
|
|
0.83
|
|
Common
stock (2)
|
|
|
3,125,000
|
|
|
500,000
|
|
|
906,250
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
Securities
|
|
|
|
|
|
-
|
|
|
1,960,473
|
|
|
3.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,471,330
|
|
$
|
43,779,457
|
|
|
81.07
|
%
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2005 and 2004
|
|
2005
|
|
|
|
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Shares
|
|
Cost
|
|
Value
|
|
Assets
|
|
Other
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, Preferred Stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Miscellaneous Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AdStar,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
269,231
|
|
$
|
350,000
|
|
$
|
600,385
|
|
|
1.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance
Nanotech, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
165,000
|
|
|
330,000
|
|
|
341,550
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bovie
Medical Corporation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
500,000
|
|
|
904,545
|
|
|
1,490,000
|
|
|
2.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comtech
Group, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
300,000
|
|
|
1,186,019
|
|
|
1,863,000
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
i2
Telecom -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred (2)
|
|
|
625
|
|
|
618,750
|
|
|
50,781
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iLinc
Communications, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
23,266
|
|
|
13,908
|
|
|
6,282
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Action Industries, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
20,100
|
|
|
237,209
|
|
|
410,844
|
|
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metasolv,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
100,000
|
|
|
210,838
|
|
|
290,000
|
|
|
0.54
|
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2005 and 2004
|
|
2005
|
|
|
|
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Shares
|
|
Cost
|
|
Value
|
|
Assets
|
|
Other
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, Preferred Stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Miscellaneous Securities, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PhotoMedex,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
70,000
|
|
|
176,400
|
|
|
120,400
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precis,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
800,000
|
|
|
1,998,894
|
|
|
1,232,000
|
|
|
2.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Home Systems, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
110,000
|
|
|
535,587
|
|
|
701,800
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vaso
Active Pharmaceuticals, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
150,000
|
|
|
250,000
|
|
|
66,000
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,812,150
|
|
|
7,173,042
|
|
|
13.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,433,480
|
|
$
|
54,002,499
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Shares, Unrestricted Shares,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Other Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Securities (2)
|
|
|
|
|
$
|
14,018,375
|
|
$
|
15,411,591
|
|
|
28.54
|
%
|
Unrestricted
Securities
|
|
|
|
|
$
|
12,392,836
|
|
$
|
31,253,336
|
|
|
57.87
|
%
|
Other
Securities (5)
|
|
|
|
|
$
|
9,022,269
|
|
$
|
7,337,572
|
|
|
13.59
|
%
|
(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)
|
Includes
Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there
is
no market.
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments
December
31, 2005 and 2004
|
|
2004
|
|
|
|
Interest
|
|
Due
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Rate
|
|
Date
|
|
Cost
|
|
Value
|
|
Assets
|
|
Eligible
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debentures and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CaminoSoft
Corp. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
note (4)
|
|
|
7.00
|
|
|
07/19/06
|
|
$
|
250,000
|
|
$
|
250,000
|
|
|
0.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
Learning, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debenture (2)
|
|
|
7.00
|
|
|
02/27/11
|
|
|
1,000,000
|
|
|
1,342,282 |
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hemobiotech,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
note (2)
|
|
|
10.00
|
|
|
10/15/08
|
|
|
250,000
|
|
|
250,000
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iLinc
Communications, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory note (2)
|
|
|
12.00
|
|
|
03/29/12
|
|
|
500,000
|
|
|
500,000
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated
Security Systems, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
note (4)
|
|
|
8.00
|
|
|
09/30/05
|
|
|
525,000
|
|
|
525,000
|
|
|
0.69
|
|
Promissory
note (4)
|
|
|
7.00
|
|
|
09/30/05
|
|
|
200,000
|
|
|
200,000
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Simtek
Corporation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debenture (2)
|
|
|
7.50
|
|
|
06/28/09
|
|
|
1,000,000
|
|
|
1,923,077
|
|
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,725,000
|
|
$
|
4,990,359
|
|
|
6.55
|
%
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2005 and 2004
|
|
2004
|
|
|
|
Interest
|
|
Due
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Rate
|
|
Date
|
|
Cost
|
|
Value
|
|
Assets
|
|
Other
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debentures and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interpool,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debenture (2)
|
|
|
9.25
|
|
|
12/27/22
|
|
$
|
375,000
|
|
$
|
375,000
|
|
|
0.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
375,000
|
|
$
|
375,000
|
|
|
0.49
|
%
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2005 and 2004
|
|
2004
|
|
|
|
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Shares
|
|
Cost
|
|
Value
|
|
Assets
|
|
Eligible
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, Preferred Stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Miscellaneous Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CaminoSoft
Corp. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
2,458,333
|
|
$
|
4,875,000
|
|
$
|
1,696,250
|
|
|
2.23
|
%
|
Common
stock (2)
|
|
|
1,081,081
|
|
|
400,000
|
|
|
745,946
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
eOriginal,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A, preferred stock (1)(3)
|
|
|
10,680
|
|
|
4,692,207
|
|
|
332,575
|
|
|
0.44
|
|
Series
B, preferred stock (1)(3)
|
|
|
25,646
|
|
|
620,329
|
|
|
798,616
|
|
|
1.05
|
|
Series
C, preferred stock (1)(3)
|
|
|
51,249
|
|
|
1,059,734
|
|
|
1,595,894
|
|
|
2.09
|
|
Series
D, preferred stock (1)(3)
|
|
|
16,057
|
|
|
500,000
|
|
|
500,015
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
& Entertainment Group -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
500,000
|
|
|
500,000
|
|
|
210,000
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasco
Energy, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
1,541,667
|
|
|
1,250,000
|
|
|
6,567,501
|
|
|
8.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Axcess Corporation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
4,766,667
|
|
|
1,261,667
|
|
|
1,716,000
|
|
|
2.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hemobiotech,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
294,120
|
|
|
250,000
|
|
|
250,000
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated
Security Systems, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
27,074,179
|
|
|
5,568,056
|
|
|
13,537,090
|
|
|
17.76
|
|
Series
D, preferred stock (2)
|
|
|
187,500
|
|
|
150,000
|
|
|
112,500
|
|
|
0.15
|
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2005 and 2004
|
|
2004
|
|
|
|
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Shares
|
|
Cost
|
|
Value
|
|
Assets
|
|
Eligible
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, Preferred Stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Miscellaneous Securities, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inyx,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
300,000
|
|
|
300,000
|
|
|
417,000
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laserscope
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
600,000
|
|
|
750,000
|
|
|
21,546,000
|
|
|
28.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Poore
Brothers, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
1,507,791
|
|
|
1,544,294
|
|
|
5,262,191
|
|
|
6.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PracticeXpert,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
4,166,666
|
|
|
500,000
|
|
|
562,500
|
|
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Simtek
Corp. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
550,661
|
|
|
500,000
|
|
|
330,397
|
|
|
0.43
|
|
Common
stock
|
|
|
1,000,000
|
|
|
195,000
|
|
|
600,000
|
|
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tarantella,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
714,286
|
|
|
1,000,000
|
|
|
1,200,000
|
|
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ThermoView
Industries, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
234,951
|
|
|
563,060
|
|
|
122,175
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
Securities
|
|
|
|
|
|
-
|
|
|
1,051,436
|
|
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,479,347
|
|
$
|
59,154,086
|
|
|
77.63
|
%
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2005 and 2004
|
|
2004
|
|
|
|
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Shares
|
|
Cost
|
|
Value
|
|
Assets
|
|
Other
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, Preferred Stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Miscellaneous Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AdStar,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
269,231
|
|
$
|
350,000
|
|
$
|
293,462
|
|
|
0.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bovie
Medical Corporation -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
300,000
|
|
|
525,000
|
|
|
762,000
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comtech
Group, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
480,000
|
|
|
840,000
|
|
|
1,435,200
|
|
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cybex
International -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
145,000
|
|
|
478,500
|
|
|
593,050
|
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dave
& Busters, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
100,000
|
|
|
653,259
|
|
|
2,020,000
|
|
|
2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iLinc
Communications, Inc. (formerly EDT Learning, Inc.) -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
48,266
|
|
|
27,033
|
|
|
22,685
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasco
Energy, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
750,000
|
|
|
639,105
|
|
|
3,195,000
|
|
|
4.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
i2
Telecom -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred (2)
|
|
|
500
|
|
|
500,000
|
|
|
500,000
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrusion,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (2)
|
|
|
159,033
|
|
|
500,000
|
|
|
500,000
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Action Industries, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
20,100
|
|
|
237,209
|
|
|
395,970
|
|
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PhotoMedex,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
70,000
|
|
|
176,400
|
|
|
189,000
|
|
|
0.25
|
|
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2005 and 2004
|
|
2004
|
|
|
|
|
|
|
|
Fair
|
|
%
of Net
|
|
|
|
Shares
|
|
Cost
|
|
Value
|
|
Assets
|
|
Other
Portfolio Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, Preferred Stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Miscellaneous Securities, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precis,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
200,700
|
|
|
1,372,417
|
|
|
533,862
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stonepath
Group, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
131,240
|
|
|
246,000
|
|
|
157,488
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tarantella,
Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
202,762
|
|
|
186,541
|
|
|
340,640
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Home Systems, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
110,000
|
|
|
535,587
|
|
|
676,500
|
|
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vaso
Active Pharmaceuticals, Inc. -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
150,000
|
|
|
250,000
|
|
|
69,000
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,517,051
|
|
|
11,683,857
|
|
|
15.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,096,398
|
|
$
|
76,203,302
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of Investments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Shares, Unrestricted Shares,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Other Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Securities (2)
|
|
|
|
|
$
|
19,542,517
|
|
$
|
39,385,196
|
|
|
51.69
|
%
|
Unrestricted
Securities
|
|
|
|
|
$
|
10,706,611
|
|
$
|
31,564,570
|
|
|
41.42
|
%
|
Other
Securities (5)
|
|
|
|
|
$
|
7,847,270
|
|
$
|
5,253,536
|
|
|
6.89
|
%
|
(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)
|
Includes
Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there
is
no market.
|
Renaissance
Capital Growth & Income Fund III, Inc.
Statements
of Operations
Years
ended December 31, 2005, 2004, and 2003
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
Interest
(1)
|
|
$
|
189,496
|
|
$
|
351,877
|
|
$
|
730,710
|
|
Dividends
|
|
|
193,402
|
|
|
184,522
|
|
|
1,225,139
|
|
Commitment
and other fees
|
|
|
255,146
|
|
|
126,326
|
|
|
33,579
|
|
|
|
|
638,044
|
|
|
662,725
|
|
|
1,989,428
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
General
and administrative (2)
|
|
|
336,601
|
|
|
346,552
|
|
|
338,418
|
|
Incentive
fee to affiliate
|
|
|
1,216,467
|
|
|
2,497,422
|
|
|
1,409,318
|
|
Interest
expense
|
|
|
93,847
|
|
|
70,931
|
|
|
64,852
|
|
Legal
expense
|
|
|
295,305
|
|
|
566,133
|
|
|
181,420
|
|
Management
fee to affiliate
|
|
|
1,112,927
|
|
|
1,460,218
|
|
|
1,071,708
|
|
|
|
|
3,055,147
|
|
|
4,941,256
|
|
|
3,065,716
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
|
|
|
(2,417,103
|
)
|
|
(4,278,531
|
)
|
|
(1,076,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Realized
and unrealized gain (loss) on
|
|
|
|
|
|
|
|
|
|
|
investments:
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized appreciation
|
|
|
|
|
|
|
|
|
|
|
(depreciation)
on investments
|
|
|
(19,537,884
|
)
|
|
9,397,996
|
|
|
20,137,393
|
|
Net
realized gain on investments
|
|
|
5,931,321
|
|
|
13,852,016
|
|
|
9,680,859
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain (loss) on investments
|
|
|
(13,606,563
|
)
|
|
23,250,012
|
|
|
29,818,252
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(16,023,666
|
)
|
$
|
18,971,481
|
|
$
|
28,741,964
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
$
|
(3.60
|
)
|
$
|
4.36
|
|
$
|
6.60
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
4,454,613
|
|
|
4,351,718
|
|
|
4,351,718
|
|
(1) |
Includes
$0, $0 and $183,254 from affiliate related
settlement.
|
(2) |
Includes
$386,809, $176,856 and $125,400 expenses to
affiliate.
|
Renaissance
Capital Growth & Income Fund III, Inc.
Statements
of Changes in Net Assets
Years
ended December 31, 2005, 2004, and 2003
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
From
operations:
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
|
|
$
|
(2,417,103
|
)
|
$
|
(4,278,531
|
)
|
$
|
(1,076,288
|
)
|
Net
realized gain on investments
|
|
|
5,931,321
|
|
|
13,852,016
|
|
|
9,680,859
|
|
Increase
(decrease) in unrealized
|
|
|
|
|
|
|
|
|
|
|
appreciation
on investments
|
|
|
(19,537,884
|
)
|
|
9,397,996
|
|
|
20,137,393
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in net assets
|
|
|
|
|
|
|
|
|
|
|
resulting
from operations
|
|
|
(16,023,666
|
)
|
|
18,971,481
|
|
|
28,741,964
|
|
|
|
|
|
|
|
|
|
|
|
|
From
distributions to stockholders:
|
|
|
|
|
|
|
|
|
|
|
Common
dividends declared from
|
|
|
|
|
|
|
|
|
|
|
realized
gains
|
|
|
(5,931,273
|
)
|
|
(13,794,946
|
)
|
|
(5,439,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
From
capital transactions:
|
|
|
|
|
|
|
|
|
|
|
Sale
of common stock
|
|
|
1,561,383
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
increase (decrease) in net assets
|
|
|
(20,393,556
|
)
|
|
5,176,535
|
|
|
23,302,316
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets:
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
74,582,499
|
|
|
69,405,964
|
|
|
46,103,648
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
$
|
54,188,943
|
|
$
|
74,582,499
|
|
$
|
69,405,964
|
|
See
accompanying notes
Renaissance
Capital Growth & Income Fund III, Inc.
Statements
of Cash Flows
Years
ended December 31, 2005, 2004, and 2003
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(16,023,666
|
)
|
$
|
18,971,481
|
|
$
|
28,741,964
|
|
Adjustments
to reconcile net income
|
|
|
|
|
|
|
|
|
|
|
(loss)
to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized (appreciation)
|
|
|
|
|
|
|
|
|
|
|
depreciation
on investments
|
|
|
19,537,884
|
|
|
(9,397,996
|
)
|
|
(20,137,393
|
)
|
Net
realized gain on investments
|
|
|
(5,931,321
|
)
|
|
(13,852,016
|
)
|
|
(9,680,859
|
)
|
(Increase)
decrease in interest and
|
|
|
|
|
|
|
|
|
|
|
dividend
receivables
|
|
|
47,463
|
|
|
137,512
|
|
|
(204,792
|
)
|
(Increase)
decrease receivable-settlement
|
|
|
3,775,872
|
|
|
-
|
|
|
(710,140
|
)
|
(Increase)
decrease in prepaid
|
|
|
|
|
|
|
|
|
|
|
and
other assets
|
|
|
(68,223
|
)
|
|
111,932
|
|
|
(105,239
|
)
|
Increase
(decrease) in accounts payable
|
|
|
35,306
|
|
|
(5,796
|
)
|
|
45,167
|
|
Increase
(decrease) in accounts payable -
|
|
|
|
|
|
|
|
|
|
|
affiliate
|
|
|
(1,646,472
|
)
|
|
1,994,063
|
|
|
1,228,248
|
|
Increase
(decrease) in due to broker
|
|
|
(24,925,439
|
)
|
|
998
|
|
|
17,999,253
|
|
Purchase
of investments
|
|
|
(5,038,466
|
)
|
|
(9,786,957
|
)
|
|
(9,062,799
|
)
|
Proceeds
from sale of investments
|
|
|
13,632,705
|
|
|
19,289,611
|
|
|
17,794,507
|
|
Repayment
of debentures
|
|
|
-
|
|
|
-
|
|
|
120,457
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
operating
activities
|
|
|
(16,604,357
|
)
|
|
7,462,832
|
|
|
26,028,374
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Sale
of common stock
|
|
|
1,561,383
|
|
|
-
|
|
|
-
|
|
Cash
distributions
|
|
|
(13,839,845
|
)
|
|
(5,439,648
|
)
|
|
(1,740,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(12,278,462
|
)
|
|
(5,439,648
|
)
|
|
(1,740,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents
|
|
|
(28,882,819
|
)
|
|
2,023,184
|
|
|
24,287,686
|
|
Cash
and cash equivalents at
|
|
|
|
|
|
|
|
|
|
|
beginning
of the year
|
|
|
37,278,871
|
|
|
35,255,687
|
|
|
10,968,001
|
|
Cash
and cash equivalents at
|
|
|
|
|
|
|
|
|
|
|
end
of the year
|
|
$
|
8,396,052
|
|
$
|
37,278,871
|
|
$
|
35,255,687
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$
|
93,847
|
|
$
|
70,931
|
|
$
|
64,852
|
|
Cash
paid during the year for
|
|
|
|
|
|
|
|
|
|
|
income/excise
taxes
|
|
$
|
6,824
|
|
$
|
6,041
|
|
$
|
2,019
|
|
Renaissance
Capital Growth & Income Fund III, Inc.
Notes
to
Financial Statements
December
2005, 2004 and 2003
(1) |
Organization
and Business Purpose
|
Renaissance
Capital Growth & Income Fund III, Inc. (the “Fund”), a Texas corporation,
was formed on January 20, 1994. The Fund seeks to achieve current income and
capital appreciation potential by investing primarily in unregistered equity
investments and convertible issues of small and medium size companies which
are
in need of capital and which RENN Capital Group, Inc. (the “Investment Adviser”)
believes offers the opportunity for growth. The Fund is a non-diversified
closed-end fund and has elected to be treated as a business development company
under the Investment Company Act of 1940, as amended (1940 Act).
(2) |
Summary
of Significant Accounting
Policies
|
|
(a) |
Valuation
of Investments
|
Portfolio
investments are stated at quoted market or fair value as determined by the
Investment 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.
The
Fund
follows industry practice and records security transactions on the trade date.
Dividend income is recorded on the record 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.
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 and to distribute all of the Fund’s taxable investment
income and long-term capital gains within the defined period under the IRC
to
(2) |
Summary
of Significant Accounting Policies,
continued
|
qualify
as a RIC. 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 the Fund’s net assets as well as the amount of income
available for distribution to shareholders.
Net
income per share is based on the weighted average number of shares outstanding
of 4,454,613 during 2005, 4,351,718 during 2004 and 2003.
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 affect the
amounts and disclosures in the financial statements. Actual results could differ
from these estimates.
The
Fund
conducts business with various brokers for its investment activities. The
clearing and depository operations for the investment activities are performed
pursuant to agreements with these brokers. Due to broker represents a margin
loan payable to one of these brokers, which is secured by investments in
securities maintained with the lending broker as collateral for the margin
loan.
Cash and cash equivalents related to the margin loan payable are held by the
lending broker. The Fund is subject to credit risk to the extent the brokers
are
unable to deliver cash balances or securities, or clear security transactions
on
the Fund’s behalf. The Investment Adviser actively monitors the Fund’s exposure
to these brokers and believes the likelihood of loss under those circumstances
is remote.
(4)
|
Management
and Incentive Fees and
Reimbursement
|
The
Investment Adviser for the Fund is registered as an investment adviser under
the
Investment Advisers Act of 1940. Pursuant to an 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 directly allocable 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:
(4)
|
Management
and Incentive Fees and Reimbursement,
continued
|
|
•
|
The
Investment Adviser receives a management fee equal to a quarterly
rate of
0.4375% 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 $1,112,927, $1,460,218, and $1,071,708
for
2005, 2004, and 2003, respectively, for such management fees.
|
|
•
|
The
Investment Adviser receives an incentive fee in an amount equal to
20% of
the Fund’s cumulative realized capital gains in excess of cumulative
realized capital losses of the Fund after allowance for any unrealized
capital depreciation on the portfolio investments of the Fund at
the end
of the period being calculated less cumulative incentive fees previously
accrued. Unrealized capital depreciation equals net unrealized capital
losses on each class of security without netting net unrealized gains
on
other classes of securities. The incentive fee is calculated, accrued,
and
paid on an annual basis as of year end. The Fund incurred, $1,216,467,
$2,497,422 and $1,409,318 during the years ended 2005, 2004, and
2003,
respectively, for such incentive
fees.
|
|
•
|
The
Investment Adviser was reimbursed by the Fund for directly allocable
administrative expenses paid by the Investment Adviser on behalf
of the
Fund. Such reimbursements were $386,809, $176,856, and $125,400,
for 2005,
2004, and 2003, respectively, and are included in general and
administrative expenses in the accompanying statements of
operations.
|
As
of
December 31, 2005 and 2004, the Fund had an account payable to the Investment
Advisor of $2,050,989 and $3,697,461, respectively, for the amount due for
the
fees and expense reimbursements above.
|
• |
As
explained in Note 10, the Investment Advisor resolved a dispute
with the
staff of the Securities and Exchange Commission involving the
appropriate
interpretation of section 205(b)(3) of the Advisors Act. As part
of the
settlement, the
Investment Advisor agreed to pay $2,851,362 as a reduction of
incentive
fees for the period from inception through December 31, 2003.
The actual
incentive fee that would have been calculated under the agreed
methodology
for incentive fee from inception through December 31, 2003, was
$3,388,269. The difference of $536,907 was reflected as additional
incentive fee expense of $488,087 and $48,819 in 2003 and 2001,
respectively. Because of the cumulative nature of the agreed
methodology,
the $536,907 served to reduce incentive fees during 2005. In
accordance
with Section 205(b)(3), the fees are not subject to repayment
in a
subsequent period and therefore were recorded as additional expense
during
2003 and 2001 due to the uncertainty of incurring future incentive
fees to
be offset.
|
The
Fund
reported a receivable of $3,775,872 as of December 31, 2004 to reflect the
settlement which included interest income receivable of $924,510, of which
$183,254 was reflected as income during 2003. The receivable was collected
in
2005.
(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 atleast
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 invested 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. The Fund was in compliance
with these provisions at December 31, 2005 and 2004.
Investments
are carried in the statements of assets and at fair value, as determined in
good
faith by the Investment Adviser, subject to the approval of the Fund’s Board of
Directors. 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. The Fund may register and
sell such securities at any time with the Fund paying the costs of registration.
Interest on the 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, the Investment Adviser prepares a valuation of the assets
of
the Fund subject to the approval of the Fund’s Board of Directors. The valuation
principles are as follows:
|
o
|
The
common stock of companies listed on an exchange, Nasdaq or in the
over-the-counter market is valued at the closing price on the date
of
valuation.
|
(6) |
Valuation
of Investments,
continued
|
|
o
|
The
unlisted preferred stock of companies with common stock listed on
an
exchange, Nasdaq or in the over-the-counter market is valued at the
closing price of the common stock into which the preferred stock
is
convertible on the date of valuation. If the preferred stock is
redeemable, the preferred stock is valued at the greater of cost
or
market.
|
|
o
|
The
unlisted in-the-money options or warrants of companies with the underlying
common stock listed on an exchange, Nasdaq or in the over-the-counter
market are valued at the positive difference between the closing
price of
the underlying common stock and the strike price of the warrant or
option.
An out-of-the money warrant or option has no intrinsic value; thus,
we
assign no value to it.
|
|
o
|
Debt
securities are valued at the greater of (i) cost or (ii) the market
value
of the underlying common stock into which the debt instrument is
convertible. In cases where the debt instrument is in default or
the
company is in bankruptcy, the value will be (i) the value of the
underlying common stock, (ii) the value of the collateral, if secured,
or
(iii) zero, if the common stock has no value and there is no collateral.
|
|
o
|
If
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 to independent third parties by the entity governs
the
value of that enterprise. This valuation method causes the Fund’s initial
investment in the private entity to be valued at cost. Thereafter,
new
issuances or offers of equity or equity-linked securities by the
portfolio
company to new investors will be used to determine enterprise value
as
they will provide the most objective and independent basis for determining
the worth of the issuer. Where a private entity does not have an
independent value established over an extended period of time, then
the
Investment Adviser will determine fair value on the basis of appraisal
procedures established in good faith and approved by the Board.
|
As
of
December 31, 2005 and 2004, the net unrealized appreciation associated with
investments held by the Fund was $18,569,019 and $38,106,903, respectively.
As
of December 31, 2005, the Fund had gross unrealized gains of $28,008,507 and
gross unrealized losses of $(9,439,488). As of December 31, 2004, the Fund
had
gross unrealized gains of $47,453,782 and gross unrealized losses of
$(9,346,879).
(7) |
Restricted
Securities
|
As
indicated on the schedule of investments as of December 31, 2005 and 2004,
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
|
During
2005, the Fund issued 112,249 new shares pursuant to the dividend reinvestment
plan in receipt of $1,561,383. Remaining dividend reinvestment shares were
purchased in the open market. The Fund issued no shares in 2004 under the
dividend reinvestment plan.
(9)
|
Distributions
to Shareholders
|
The
tax
character of distributions declared by the Fund was as follows:
2005
- Capital gain
|
|
$
|
5,931,273
|
|
|
|
|
|
|
2004
- Capital gain
|
|
$
|
13,794,946
|
|
|
|
|
|
|
2003
- Capital gain
|
|
$
|
5,439,648
|
|
As
of
December 2004, the Fund was committed to disburse to stockholders $7,042 as
a
distribution of net capital gains realized during 2004. These dividends were
declared and paid in February 2005. The tax cost of securities is identical
to
the book cost.
(10)
|
Settlement
with the Investment
Advisor
|
During
2004, the staff of the Securities and Exchange Commission (“SEC”) informed the
Fund’s counsel of potential significant regulatory issues in connection with the
Staff’s review of a registration statement for a proposed rights offering. On
December 1, 2005, the Investment Adviser consented, without admitting or denying
the findings, to the entry of an order by the SEC instituting public
administrative and cease and desist proceedings and imposing remedial sanctions
(the “Order”).
In
summary, the dispute concerned the definition of the wording of the incentive
fee calculation in with the Investment Adviser’s Act of 1940 (the “Advisers
Act”). Under Section 205(b)(3) of the Advisers Act, a performance fee may be
earned. The Investment Adviser, for many years, believed the word “capital”
referred to the Fund’s shareholders equity as a whole. In 2004, the SEC informed
the Investment Adviser that capital depreciation in the formula referred only
to
unrealized capital losses on marketable securities in the portfolio and
therefore the calculations in previous years were incorrect.
(10)
|
Settlement
with the Investment Advisor,
continued
|
In
the
Order, the SEC states that in calculating a performance-based fee under Section
205(b)(3), an Investment Adviser must account for its client’s assets on a
security-by-security basis and may not take into consideration unrealized
capital appreciation on any individual security or the portfolio as a whole.
Section 205(b)(3) does not require that fees earned in one period be subject
to
repayment based upon performance in a subsequent period. If the performance
fee
is calculated on a cumulative basis and is based on the period since inception,
the unrealized capital depreciation may be calculated for each calculation
period by subtracting each security’s valuation at the end of the applicable
calculation period from the original cost, as adjusted, of purchasing that
security. In practice, the Investment Adviser also took into account unrealized
capital appreciation, which offset unrealized capital depreciation, to calculate
its performance-based fee. Thus, beginning in fiscal year 1996, the first period
in which the Fund realized capital gains, the Investment Adviser’s formula for
calculating that fee was not consistent with the agreed formula permitted under
Section 205(b)(3).
As
part
of the settlement of the SEC proceedings, the Investment Adviser agreed to
pay
$2,851,362 for adjustments in the incentive fee from the inception through
December 31, 2003, plus prejudgment interest of $924,509 and a penalty of
$100,000 to the Fund.
The
Investment Adviser satisfied this obligation in full as of December 8,
2005.
|
The
effect of the SEC settlement, was reflected retroactively. As such
the
effect of the adjustments in incentive fees were reported in prior
years
as though the agreed methodology had been in place since inception.
Interest received by the fund upon settlement was allocated to the
years
in which it was earned. The penalty received upon settlement was
reflected
in the year settlement was reached
(2005).
|
(11) |
Commitments
and Contingencies
|
As
disclosed in Note 4, the Fund is obligated to pay to the Investment Advisor
an
incentive fee equal to 20% of the funds cumulative realized capital gains in
excess of cumulative capital losses of the Fund after allowance for any capital
depreciation on the portfolio investments of the Fund. As incentive fees on
capital gains are not due to the Investment Advisor until the capital gains
are
realized, any obligations for incentive fees based on unrealized capital gains
are not reflected in the accompanying financial statements as there is no
assurance that the unrealized gains as of the end of any period will ultimately
become realized. Had an incentive fee been accrued as a liability based on
all
unrealized capital gains, net assets of the Fund would have been reduced by
$5,509,555 and $9,447,335 as of December 31, 2005 and 2004,
respectively.
(12) |
Financial
Highlights
|
Selected
per share data and ratios for each share of common stock outstanding throughout
the year ended December 31, 2005 and 2004 are as follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
asset value, beginning of year
|
|
$
|
17.14
|
|
$
|
15.95
|
|
Effect
of share change
|
|
|
(.43
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
investment loss
|
|
|
(.54
|
)
|
|
(.98
|
)
|
Net
realized and unrealized gain (loss) on investments
|
|
|
(3.05
|
)
|
|
5.34
|
|
|
|
|
|
|
|
|
|
Total
return from investment operations
|
|
|
(3.59
|
)
|
|
4.36
|
|
|
|
|
|
|
|
|
|
Distributions:
|
|
|
|
|
|
|
|
From
net realized gains on investments
|
|
|
(1.33
|
)
|
|
(3.17
|
)
|
|
|
|
|
|
|
|
|
Contributions:
|
|
|
|
|
|
|
|
From
sale of common stock
|
|
|
.35
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
asset value, end of year
|
|
$
|
12.14
|
|
$
|
17.14
|
|
|
|
|
|
|
|
|
|
Per
share market value, end of year
|
|
$
|
11.00
|
|
$
|
12.95
|
|
|
|
|
|
|
|
|
|
Portfolio
turnover rate
|
|
|
8.30
|
%
|
|
14.58
|
%
|
|
|
|
|
|
|
|
|
Annual
return (a)
|
|
|
(15.06
|
)%
|
|
3.29
|
%
|
|
|
|
|
|
|
|
|
Ratio
to average net assets (b):
|
|
|
|
|
|
|
|
Net
investment loss
|
|
|
(3.81
|
)%
|
|
(5.52
|
)%
|
Expenses,
excluding incentive fees
|
|
|
2.90
|
%
|
|
3.15
|
%
|
Expenses,
including incentive fees
|
|
|
4.82
|
%
|
|
6.37
|
%
|
|
(a)
|
Annual
return was calculated by comparing the common stock price on the
first day
of the year to the common stock price on the last day of the
year.
|
|
(b) |
Average
net assets have been computed based on quarterly
valuations.
|
(13) |
Selected
Quarterly Data (Unaudited)
|
2005
|
|
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
Net
investment income (loss)
|
|
|
(336,818
|
)
|
|
(230,638
|
)
|
|
(484,802
|
)
|
|
(1,364,845
|
)
|
Net
unrealized appreciation (depreciation)
|
|
|
(17,259,989
|
)
|
|
908,112
|
|
|
583,607
|
|
|
(3,769,614
|
)
|
Net
realized gain (loss) on investments
|
|
|
4,093,083
|
|
|
96,312
|
|
|
1,304,189
|
|
|
437,737
|
|
Net
income (loss)
|
|
|
(13,503,724
|
)
|
|
773,786
|
|
|
1,402,994
|
|
|
(4,696,722
|
)
|
Net
income (loss) per share
|
|
|
(3.03
|
)
|
|
0.17
|
|
|
0.31
|
|
|
(1.05
|
)
|
Total
shares outstanding
|
|
|
4,463,967
|
|
|
4,463,967
|
|
|
4,463,967
|
|
|
4,463,967
|
|
2004
|
|
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
Net
investment income (loss)
|
|
|
(527,546
|
)
|
|
(570,707
|
)
|
|
(373,977
|
)
|
|
(2,806,301
|
)
|
Net
unrealized appreciation (depreciation)
|
|
|
10,292,651
|
|
|
(11,580,931
|
)
|
|
(6,313,300
|
)
|
|
16,999,576
|
|
Net
realized gain (loss) on investments
|
|
|
14,163,079
|
|
|
(1,462,277
|
)
|
|
258,022
|
|
|
893,192
|
|
Net
income (loss)
|
|
|
23,928,184
|
|
|
(13,613,915
|
)
|
|
(6,429,255
|
)
|
|
15,086,467
|
|
Net
income (loss) per share
|
|
|
5.50
|
|
|
(3.13
|
)
|
|
(1.48
|
)
|
|
3.47
|
|
Total
shares outstanding
|
|
|
4,351,718
|
|
|
4,351,718
|
|
|
4,351,718
|
|
|
4,351,718
|
|
INDEX
OF EXHIBITS
3.1
|
Restated
Articles of Incorporation1
|
|
|
3.2
|
Bylaws2
|
|
|
10.1
|
Dividend
Reinvestment Plan3
|
|
|
10.2
|
Amendment
No. 1 to Dividend Reinvestment Plan4
|
|
|
10.3
|
Investment
Advisory Agreement5
|
|
|
10.4
|
Amendment
No. 1 to Investment Advisory Agreement6
|
|
|
10.5
|
Custodial
Agreement with The Frost National Bank7
|
|
|
14
|
Code
of Ethics8
|
|
|
31.1
|
Certification
of the principal executive officer pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification
of the principal financial officer pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification
of the principal executive officer pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification
principal financial officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
______________________________________________
1
Incorporated by reference from Form N-2 as filed with the Securities
and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
2
Incorporatedby 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 N-2 as filed with the Securities
and
Exchange Commission February 25, 1994 (Registration No. 33-75758).
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 (File No.
001-11701).
7Incorporated
by reference from Form 10-K for the year ended December 31, 2000 as filed
with
the Securities and Exchange Commission (File No. 001-11701).
8
Incorporated by reference from Form 10-Q for the quarter ended June 30,
2002 as
filed with the Securities and Exchange Commission (File No.
001-11701).