ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
Renaissance Capital Partners II, Ltd. (sometimes referred to as the "Registrant" or the "Partnership") is a Texas limited partnership, (organized as of January 14, 1991 with commencement of operations on January 6, 1992), that has elected to operate as a business development company (sometimes referred to herein as a "Business Development Company" or a "BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). On January 23, 1991, the Partnership filed a registration statement on Form N-2 for the sale of up to 50,000 Limited Partnership Units at an offering price of $1,000 per Unit. The Partnership continued the offering until March 31, 1992 at which time the offering was closed.
The investment objective of the Partnership is to provide investors with current income and long-term capital appreciation by investing primarily in private placement convertible debt securities (the "Debentures") of small and medium size public companies ("Portfolio Companies"). The Partnership's stated goal is to achieve a 10% annual current return to the holders of limited partnership interests (the "Interests"); provided, however, that such current return will be increased or decreased from time to time, dependent upon the actual operating results of the Partnership.
Renaissance Capital Group, Inc. ("Renaissance Group"), a Texas corporation, serves as the managing general partner (the "Managing General Partner") and as investment adviser to the Partnership. In these capacities, Renaissance Group is primarily responsible for the selection, evaluation, structure, and administration of the Partnership's investment portfolio. Renaissance Group is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act") and the Texas Securities Act. However, these activities are subject to the supervision of two Independent General Partners of the Partnership who provide guidance with respect to the operations of the Partnership (the "Independent General Partners") (see "Item 10. Directors and Executive Officers of Registrant").
Generally, investments will be made in companies that have their common stock registered for public trading under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or that have made arrangements, satisfactory to the Partnership, for commencement of such registration in conjunction with the financing. The terms of the documents evidencing the Partnership's investment ("Portfolio Investments") in Portfolio Companies generally provide that the Partnership will have the right to convert its Debentures into or otherwise acquire common stock in exchange for its Debentures. Each financing has been, and it is generally contemplated will continue to be, a direct placement with the Portfolio Company.
Accordingly, while such common stock of the Portfolio Company may be publicly traded, the common stock to be acquired by the Partnership is generally unregistered. Therefore, such securities are restricted from distribution or sale to the public except in compliance with certain holding periods and exemptions under the Securities Act of 1933, as amended (the "Securities Act"), or after registration pursuant to the Securities Act.
On January 6, 1992 the minimum offering requirements had been met and the first closing of the sale of Units occurred in the amount of $2,808,000. Following the initial closing, the Partnership commenced carrying forward its plan of business operations. The Partnership directs its investment efforts to small and medium sized Portfolio Companies.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Partnership has no concentrated industry segments. The Partnership does not contemplate specializing in any particular industry but instead has diversified its investments to a variety of industries.
NARRATIVE DESCRIPTION OF THE BUSINESS
The Partnership, as a Business Development Company under the 1940 Act, is engaged primarily in investments in convertible debentures of small and medium sized public companies.
Under the provisions of the 1940 Act, a Business Development Company must invest at least 70% of its funds in "eligible portfolio investments," such being generally defined, as direct placements to qualifying companies and temporary investments in "cash items" pending other investments. However, under and pursuant to the provisions of the 1940 Act, a Business Development Company may invest up to 30% of its funds in "Other Investments" that is, investments that do not qualify as "eligible portfolio investments," such exception allowing, up to the specified maximum amount, for example, open market purchases or participation in public offerings.
Pending investment in convertible debenture securities of eligible Portfolio Companies or other investments as provided under the 1940 Act, the Partnership's funds were invested in "Temporary Investments" consisting primarily of money market funds.
At December 31, 1996 the Partnership's investment assets were classified by amount as follows:
Classification Cost Percentage
-------------- ---- of Investments -------------- Eligible Portfolio Companies $23,363,737 100 %
Other Portfolio Companies none 0 %
INVESTMENT OBJECTIVES
The investment objective of the Partnership is to provide its Limited Partners with both current income and long-term capital appreciation.
The Partnership seeks to provide current cash returns to investors through a priority distribution on each Limited Partner's Capital Contribution of current investment interest income (as defined in the Partnership's Restated Agreement of Limited Partnership) (the "Partnership Agreement") while providing opportunities for capital gains appreciation through appreciation in values of convertible debenture securities.
The Partnership Agreement provides for a quarterly distribution to the Limited Partners, to be made within 30 days of the end of each quarter. Distributions will be made in such amounts as shall at the determination of the Managing General Partner, reflect the current earnings of the Partnership. Distributions may be made from capital. Distributions are not required if, after the proposed distribution, the assets would not be sufficient to pay the debts and obligations of the Partnership.
As a result of decreasing cash resources in 1995 and 1996, the distributions to the Limited Partners were discontinued. As the Partnership's investments are liquidated, or other cash resources obtained, the Partnership expects to reinstate such payments in whole or in part based upon the cash resources.
Optionally, in addition to the quarterly distributions, the Managing General Partner may make distributions of realized gains or of securities that have appreciated in value.
GENERAL INVESTMENT POLICIES
As a general matter, the Partnership has considered, and it is contemplated will continue to consider, the following factors in deciding whether to make or to continue holding any investment :
(i) Publicly-held Company - each Portfolio Company should be a
company whose common stock is registered for public trading under the Exchange Act or that has made arrangements,
satisfactory to the Partnership, for such registration so that such company meets this criteria at the time the Partnership
acquires common stock upon conversion of the Debentures;
(ii) Earnings History - the Partnership prefers the existence of a history of profitable operations or, alternatively, a
reasonable expectation that with the contemplated use of the proceeds, the Portfolio Company's future operations will be
conducted at a level of profitability and cash flow to satisfactorily service the Partnership's Debentures.
Generally, debt repayment under the Debentures will be geared to the anticipated earnings ability of the Portfolio Company as
contrasted to a proposed refinancing or sale of assets. Notwithstanding the foregoing, because of the diversity of
investments to be considered, the Managing General Partner has not established fixed financial ratios (such as an earnings
coverage, debt to worth, or current assets to current liabilities ratios) as investment criteria;
(iii) Management - the Partnership will seek companies with competent senior managers and ideally, a vested interest in the equity
growth of the company; (iv) Nature of the business and industry - the Partnership will seek
companies that have a recognized market for their products or services in a stable or growing industry;
(v) Management Involvement - the Partnership will seek companies
that are willing to permit the Partnership to take a substantial equity position in the company and have
representation on its board of directors. Generally, each Portfolio Company will be required to accept either a
Partnership nominee or an advisory director to its Board of Directors;
(vi) Lack of Investment Concentration - Portfolio Investments must generally be varied as to both company and industry. As a
general principle, approximately ten percent (10%) (a range of 8% to 12%) of the Portfolio Investments will be invested in any
one Portfolio Company. However, a larger percentage of the initial capital may be invested in any one company so long as
the General Partners have reason to believe that sufficient funds will be available to subsequently obtain a spreading of
investment funds.
The Partnership's nominees to the boards of directors of Portfolio Companies will generally be selected from among the officers of the Managing General Partner. When, in the discretion of the Managing General Partner, a suitable nominee is not available from among its officers, the Managing General Partner will select, as alternate nominees, outside consultants who have had prior experience as an independent outside director of a public company.
REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940
The 1940 Act was enacted to regulate investment companies. In 1980, the 940 Act was amended by the adoption of the Small Business Investment Incentive Act. The purpose of the amendment was to remove regulatory burdens on professionally managed investment companies engaged in providing capital to smaller companies. The Small Business Investment Incentive Act established a new type of investment company specifically identified as a Business Development Company as a way to encourage financial institutions and other major investors to provide a new source of capital for small developing businesses.
BUSINESS DEVELOPMENT COMPANY
A BDC basically:
(1) is a closed-end management company making 70% of its investments only in certain companies (identified as "Eligible Portfolio
Companies"), and in "cash items" pending other investments. Under the regulations established by the SEC under the 1940 Act only
certain companies may qualify as "Eligible Portfolio Companies." These qualifications are:
(A) it must be organized under the laws of a state or states, (B) it may not be an investment company (except for a wholly owned Small Business Investment Company), and
(C) it must generally fall into one of three following categories: (1) companies that do not have a class of securities registered on a national securities exchange or are listed on the
Federal Reserve OTC margin list, (2) companies that are actively controlled by the BDC either
alone or as part of a group (for this purpose, control is presumed to exist if the BDC or group in which the BDC is a
member owns 25% or more of the voting securities), or (3) it meets such other criteria as established by the SEC.
(2) must be prepared to provide "Significant Managerial Assistance" to such Portfolio Companies. Significant Managerial Assistance means,
as to the Partnership: (A) any arrangement whereby the Partnership, through its officers,
employees, or General Partners, seeks to provide significant guidance concerning management, operations, objectives or
policies of the Portfolio Company, or (B) the exercise of a controlling influence over the Portfolio
Company.
Therefore, the General Partners believe that "Eligible Portfolio Companies" are, generally, those companies that, while being publicly held, may not have or do not have a broad based market for their securities, or the securities that they wish to offer are restricted from public trading until registered.
Further, the regulations generally provide that the securities must be obtained in direct transactions with the Portfolio Company and as such are generally restricted from transferability in the public markets.
Further, while the 1940 Act allows a BDC to "control" a Portfolio Company, it will not be the general policy of the Partnership to acquire a controlling position in its Portfolio Companies. The Partnership will only provide managerial assistance, and will seek to limit its "control" position by requiring only that a designee of the Partnership be elected to the board of directors of the Portfolio Company, or be selected an advisory director. While these will be the Partnership's general policies, the application of these policies will of necessity vary with each investment situation.
1940 ACT REQUIREMENTS
The BDC election exempts the Partnership from some provisions of the 1940 Act. However, except for those specific provisions, the Partnership will continue to be subject to all provisions of the 1940 Act not exempted, including the following:
(1) restrictions on the Partnership from changing the nature of business so as to cease to be, or to withdraw its election as, a
BDC without the majority vote of the Interests; (2) restrictions against certain transactions between the Partnership
and affiliated persons; (3) restrictions on issuance of senior securities, such not being
prohibited by the 1940 Act but being restricted as a percentage of capital;
(4) compliance with accounting rules and conditions as established by the SEC, including annual audits by independent accountants;
(5) compliance with fiduciary obligations imposed under the 1940 Act; (6) requirement that the Limited Partners ratify the selection of the
Partnership's independent public accountants and the approval of the investment advisory or similar contracts and amendments
thereto; and (7) restrictions on purchases of Units by the Partnership.
NON-QUALIFYING BDC INVESTMENTS
Further, under the 1940 Act, the Partnership may only acquire qualifying and certain assets necessary for its operations (such as office furniture, equipment and facilities) if, at the time of any proposed acquisition, not less than 70% of the value of the Partnership assets consists of qualifying assets. Qualifying assets include, inter alia, Eligible Portfolio Companies; "follow-on" financing to Portfolio Companies in which the BDC is a principal security holder; cash items; U.S. governmental securities; and high-quality, short-term debt securities.
INVESTMENT ADVISERS ACT OF 1940 AND INVESTMENT ADVISERS AGREEMENT
The Managing General Partner is the investment adviser to the Partnership pursuant to the Investment Advisory Agreement, as amended on March 7, 1994 and ratified by a majority of the holders of Units on April 22, 1994, (the "Investment Advisory Agreement") and is registered as an investment adviser under the Advisers Act, subject to the reporting and other requirements thereof. The Advisers Act also provides restrictions on the activities of registered advisers to protect its clients from manipulative or deceptive practices. While the Advisers Act generally restricts performance compensation, the Advisers Act was amended to allow an investment adviser to a BDC to receive performance compensation of up to 20% on realized capital gains computed net of all realized capital losses and unrealized capital depreciation.
The Investment Advisory Agreement provides that the Managing General Partner is entitled to receive an annual management fee of 2% of the Partnership's assets, provided, however that to the extent any portion of such fee is based on an increase in Net Asset Value attributable to non- realized appreciation of securities or other assets that exceed capital contributions, such portion of the fee shall be deferred and not earned or payable until such time as appreciation or any portion thereof is in fact realized and then such deferred fees shall be earned and paid in proportion to the gains in fact realized, In addition, the Managing General Partner is entitled to receive an incentive fee ("Incentive Fee") in an amount equal to 20% of the Partnership's realized capital gains computed net of all realized capital losses and unrealized depreciation and after the Limited Partners have received a sum equal to a ten percent (10%) annual return on their Capital Contributions (as defined in the Restated Partnership Agreement to mean Limited Partner capital contributions reduced by brokerage commissions and fees incurred by the Partnership on behalf of such Limited Partner or Partners). The Managing General Partner is entitled to receive a fee equal to one-half of one percent (0.5%) of the initial limited partnership contributions and is entitled to receive a quarterly fees thereafter equal to 0.5% of Net Assets, as defined in the Partnership Agreement. For the years ended December 31, 1996, 1995 and 1994, the Managing General Partner elected to calculate the quarterly fees based on the lesser of contributed capital or Net Assets. Had the Managing Partner elected to calculate the quarterly fee solely based on Total Assets, the fee would have been approximately $153,000 greater than the cumulative fee charged.
Investment advisory agreements are further subject to the 1940 Act, which requires that the agreement, in addition to having been approved by the majority of the outstanding Interests, shall precisely describe all compensation to be paid; shall be approved annually by a majority vote of either the Independent General Partners or of the Interests; may be terminated without penalty on not more than 60 days' notice by a vote of a majority of the Interests; and shall terminate automatically in the event of assignment. The Managing General Partner has agreed that the Partnership Agreement and the Investment Advisory Agreement shall constitute the Partnership's advisory agreements and shall at all times be construed so as to comply with the Advisers Act and the 1940 Act.
PARTNERSHIP TERM
The Partnership Agreement provides for a term of eight (8) years from the final closing of the initial offering which was March 31, 1993, subject however to the right of the Managing General Partner with the concurrence of at least one Independent General Partner to extend the term for up to two (2) additional one-year periods.
PARTNERSHIP PORTFOLIO INVESTMENTS
As of December 31, 1996 the Partnership has made ten (10) Portfolio Investments of which seven (7) are active.
AMERISHOP, INC.
AmeriShop provides incentive merchandising and membership buying programs.
On July 10, 1992, the Partnership invested $750,000 in a 12.5% convertible debenture issued by AmeriShop, Inc. ("AmeriShop") of Grand Rapids, Michigan as the first disbursement under a $1,500,000 loan agreement pursuant to which the Partnership had the option to invest an additional $750,000 subject to certain conditions. During 1993, the Partnership advanced additional money in the form of convertible debentures and as of December 31, 1996, holds $2,000,000 in convertible debentures from AmeriShop. On January 21, 1994, the Partnership advanced AmeriShop $250,000, which note was subsequently rolled into a note in the face amount of $410,000. On March 21, 1994, June 7, 1994, and August 17, 1994 the Partnership provided a 12.5% short term promissory note financing in the amount of $225,000, $300,000 and $300,000 respectively. These advances, along with $193,448 in unpaid past due interest, were rolled over into a single 12.5% short term promissory note in the amount of $1,428,448 due on or before July 1, 1995.
Interest is payable monthly. The debentures are non-callable for three years, provide for monthly principal installments commencing on July 1, 1995, which installments will amortize approximately one/half of the principal with the balance due at maturity on July 1, 1999. At the option of the Partnership, the debentures are convertible at any time into AmeriShop common stock at $0.56 per share. The Partnership has the right to demand stock registration and certain piggyback stock registration rights, and after April 10, 1995, is entitled to at least one such registration at AmeriShop's expense.
During 1995, the Partnership made additional investments of $125,000 and $75,000 in the form of 10% promissory notes due March 31, 1996 and on October 4, 1996, the Partnership advanced an additional $100,000 evidenced by a 10% promissory note due October 5, 1997. This last advance results in an aggregate promissory note of $1,728,448.
As of December 31, 1996, all accrued interest due on the debentures and notes have been fully reserved. AmeriShop is not in compliance with its loan covenants, nor is it in compliance with its principal and interest payment requirements. The Partnership has waived default by the Company until March 31, 1997.
The valuation reserve was increased from $500,000 to $1,000,000 at December 31, 1996.
James Kenney, formerly an officer of the Managing General Partner was elected to the Board of Directors of AmeriShop as a Partnership Director Designee. While Mr. Kenney now serves as a consultant to the Partnership from time to time, the Partnership does not now have a Director Designee on AmeriShop's Board of Directors.
BIODYNAMICS INTERNATIONAL, INC.
Biodynamics processes, manufactures and distributes worldwide, specialty surgical products for neuro, orthopedic, cardiovascular, reconstructive and general surgical applications. Its major business is the processing of tissue using the "Tutoplast" process, a patented method of sterilizing and preserving skin and bone tissue for wound-care treatment. The Company is establishing a tissue processing facility in connection with the University of Florida Tissue Bank.
On March 29, 1993, the Partnership invested $2,500,000 in a 11% convertible debenture issued by Biodynamics International, Inc. ("Biodynamics"). On November 11, 1994, the Partnership invested an additional $1,250,000 and exchanged the convertible debenture holdings along with accrued interest of $115,274 for 351,388 shares of the Biodynamic's 9% Series "B" Convertible Preferred Stock. Effective November 30, 1995, the Partnership exchanged the 351,388 shares of Series "B" 9% Convertible Preferred Stock along with the accumulated dividends due in the amount of $299,552 for 32,665 shares of Series "C" 9% Convertible Preferred Stock, stated value $127.50 per share. This Series "C" Preferred Stock is convertible into the Company's common stock at a rate of $0.85 per share or into 4,899,750 shares of common stock. This transaction lowered the conversion price per share of common stock from $1.10 to $0.85.
In addition to the above stock conversion, under a Senior B Loan Agreement on November 22, 1995, the Partnership advanced DM271,358 ($189,131) and on March 22, 1996, and additional DM271,358 ($184,933) was advanced bringing total mezzanine loans to $374,064. The Notes have a 10% interest rate and are convertible into Series C Preferred Stock at a rate of DM1.435 per US$1.00.
The Partnership has the right to demand stock registration and certain piggyback stock registration rights, and after October 9, 1995, is entitled to at least one such registration at Biodynamic's expense.
Elroy G. Roelke, Senior Vice President and General Counsel (until his retirement on December 31, 1996) of the Managing General Partner, and currently a Director and Shareholder of the Managing General Partner is a member of the Board of Directors of Biodynamics International, Inc. as the Partnership's Director Designee.
CODED COMMUNICATIONS, INC.
Coded is a manufacturer of digital transmission systems for mobile fleet operations.
On October 9, 1992, the Partnership invested $2,500,000 in a 12% convertible debenture issued by Coded Communications, Inc. ("Coded") of Carlsbad, California as the first disbursement under a $3,500,000 loan agreement pursuant to which the Partnership had the option to invest an additional $1,000,000 subject to certain conditions. This additional investment of $1,000,000 was made on July 21, 1993 and then a further follow- on investment of $500,000 was made on September 24, 1993. Additionally, a $100 option premium was capitalized during 1993. On October, 28, 1994, the Partnership made a $750,000 Bridge Loan, secured by accounts receivable as well as by all of the assets of Coded. This loan was due on January 1, 1995.
Interest is payable monthly. The debenture is non-callable for three years and provides for monthly principal installments commencing on October 1, 1995, which installments will amortize approximately one/half of the principal with the balance due at maturity on October 1, 1999. At the option of the Partnership, the Debenture is convertible at any time into Coded common stock at $1.50 per share.
In connection with a program to down-size operations, the Partnership advanced an additional $250,000 on April 18, 1995 and extended payment of the prior bridge loans to April 17, 1996. In connection with this financing, the Partnership received warrants for 2,000,000 shares at $0.50 per share and a reduction of the conversion price of the debentures from $1.50 to $0.50 per share. No cost has been allocated to the Warrants.
As part of a restructuring plan in March 1995, the Company began the process of completing a non-judicial reorganization with the help of the San Diego Credit Association. Under the plan, unsecured creditors of the Company would be termed out over a multi year period and would be paid approximately $0.50 on the dollar.
On September 27, 1996, final documentation was completed on a March of 1996, agreement with Grupo Information, Satellites and Advertising S.A. de C.V. ("ISA"), the Bridge Lenders, Renaissance Capital Partners II, Ltd. and Coded. Pursuant to the terms and conditions, ISA received approximately 49,000,000 shares of Coded Communications, Inc. common stock, representing approximately 67% ownership in the Company. In return, Coded received (i) $400,000 in cash; (ii) a guarantee that ISA will place not less than $10,000,000 in orders for Coded's mobile data communications systems and products over an 18 month period, secured by 50% of ISA's shares in Coded; and (iii) a working capital loan from ISA to Coded for $1 million that was converted into common stock at a price of $0.25 per share.
As of September 27, 1996, holders of Coded's $1,800,000 Senior Secured Bridge Loan, which included the Partnership, delivered all debentures, notes and derivative shares held in Coded and in return received; 1) $400,000 in cash, 2) $600,000 6% Promissory Note, interest payable quarterly. The Promissory Note is due in full the earlier of September 27, 1997, or on the sale of DeCom Systems. The Promissory Note is due in full the earlier of September 27, 1997, or on the sale of DeCom Systems. The Note is convertible into common shares of Coded at a price of $0.25 per share. The conversion price is protected by limited anti-dilution provisions and the Note is secured, subject to subordination of up to $5 million of working capital loans if such are obtained by Coded, and 3) 8,000 shares of Series A Cumulative Convertible Preferred Stock with a face value of $800,000. The stock pays an 8% dividend, of which 50% is cash and 50% is common stock of Coded. The Series A Cumulative Preferred Stock is convertible into 2,400,000 shares of Coded common stock.
The Partnership had a 55.55% interest in the bridge loan and accordingly was to receive $222,200 of cash; $333,300 of the 6% promissory notes, and 4,445 shares of the Series A Cumulative Convertible Preferred Stock. The Partnership simultaneously agreed to sell $22,240 of its 6% Promissory Note to another bridge loan holder and therefore, its amount of cash increased and its balance due on the notes decreased.
In the September 27, 1996 Agreement, the Partnership exchanged its $4,000,000, 12% convertible debenture and $800,000 of accrued interest for a $4,800,000 6% convertible debenture, with interest due semi-annually, payable 50% in cash and 50% in common stock of Coded. The debenture is convertible into 48,000 shares of new Series B Preferred Stock once vendor claims against Coded were reduced below $1 million.
On September 27, 1996, the Partnership received 200,000 shares of common stock as interest from the date of the Agreement in March to September 27, 1997.
The $4,800,000 6% convertible debentures were converted into 48,000 shares of Series B Preferred Stock on December 18, 1996. Simultaneously with this conversion, the Partnership converted, 1,225 shares of its Series B Stock into 200,006 shares of common stock of Coded. The remaining 46,775 shares of Series B Preferred Stock may be converted into 7,636,954 shares of common stock.
In December 1996, in accordance with the agreement with ISA, the Partnership received 111,000 shares of common stock of Coded applicable to its bridge loan and 800,000 shares of common stock applicable to its original debentures. These shares were issued pursuant to a provision in the Agreement which provides that up to 3 million additional shares of common stock would be issued if certain market prices were established for Coded's stock. One million shares were to be issued once the market price of Coded's stock was $0.25 per share for a period of twenty (20) consecutive trading days following issuance of Coded's 10Q's or 10K's. One million shares are to be issued when the price reaches $0.50 and the last one million shares when the price reaches $1.00. The $0.25 price was established and the shares issued in 1996. Additional shares may be issued if the $0.50 or $1.00 levels are reached. On December 18, 1996, the Partnership received 73,585 shares of common stock representing payment of dividends.
U.S. FAX/COMPUTER AUTOMATION, INC., ACTION FAX, INC. AND PROTECH, INC.
Computer Automation was seeking to develop a facsimile ("fax") management system to provide lower cost fax management for multinational companies. Additionally, it provided a maintenance and repair business for it's installed base of process control computers.
Prior to 1993, the Company also manufactured a line of automatic test equipment for circuit board manufactures. This product line was discontinued during the year and was sold to Protech, Inc. of San Antonio, Texas .
On February 10, 1992, the Partnership invested $1,750,000 in a 12.5% convertible debenture issued by Computer Automation, Inc. ("Computer Automation") of Richardson, Texas. On July 20, 1992, a $1,000,000 follow on disbursement was made and the loans were restructured in a new convertible debenture. Subsequently, in September, October and November, interim loan financing aggregating $650,000 was provided for a total financing of $3,400,000 as of December 12, 1992.
During 1993, the Partnership advanced $775,000 of additional convertible debentures to Computer Automation. Subsequently, the Partnership restructured its position with Computer Automation. As a result, $3,500,000 of the debentures were converted into 4,000,000 shares of common stock with an assigned cost of $1,250,000; 40,000 shares of convertible preferred stock convertible into 4,000,000 shares of common stock with an assigned cost of $1,250,000; 3,36,123 shares of common stock of a company affiliated with Computer Automation, Protech, Inc., with an assigned cost of $850,000; a secured convertible note from Protech, Inc. with an assigned cost of $150,000, and 356,000 common stock warrants of Protech, Inc. with no cost assigned. Additionally, $250,000 of accrued interest due to the Partnership at December 31, 1992 was forgiven.
As of December 31, 1994, shares and receivables from Computer Automation were partially reserved and have a fair value of $584,500. In 1993, Protech, Inc. filed for liquidation pursuant to Chapter 11 of the Bankruptcy Code and as of December 31, 1994, all shares and receivables have been fully reserved.
As of January 21, 1994, Computer Automation entered into an agreement with Fax Access Xchange, Inc. ("FAX Inc.") pursuant to which its operating subsidiaries along with certain operations of FAX, Inc. would be merged to form Action Fax International, Inc., ("Action Fax") a new company organized to provide an array of fax services, fax management services and fax switching systems. Subsequently, the Board of Directors of Computer Automation approved the dissolution of the Company. In connection with this re-organization, the Partnership received approximately 675,000 Action Fax shares now in payment of the principal and interest of the short term notes.
In 1995, prior to the exchange with U.S. Fax, the Partnership advanced under four separate term notes an additional $350,000 to ActionFax. In May 1995, as part of a recapitalization of the ActionFax investment, the Partnership exchanged all of its ActionFax Notes and its 675,000 shares of ActionFax International for 3,547,972 shares in U.S. Fax Inc. with a cost of $1,625,000. U.S. Fax is a non-reporting public company which anticipates raising additional capital to execute its business plan.
On October 6, 1995, the Partnership advanced U.S. Fax $100,000 under a secured loan agreement providing for interest at 12% per annum payable in monthly installments beginning November 1, 1995.
In July, 1996, U.S. Fax, Inc. notified the Partnership of its intentions to rescind the May, 1995 agreement with ActionFax, Inc. The Partnership has fully reserved the investment prior to this notice and has realized the loss on the investment at December 31, 1996. Any recovery is anticipated to be nominal.
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
CHCA operates physical therapy regabilitation centers.
On December 29, 1992, the Partnership invested $2,500,000 in a 11% convertible debenture issued by Consolidated Health Care Associates, Inc.("CHCA") of Franklin, Massachusetts. Further, on December 30, 1993, the Partnership provided an additional $500,000 in convertible debentures and $500,000 in a 11% promissory note.
On June 30, 1994, as part of an overall restructuring of the investment, the Partnership converted its $3,000,000 in convertible debentures, $500,000 term note, and accrued interest of approximately $195,984 for 5,000,000 shares of common stock and 1,195,984 shares of Series A Preferred Stock convertible into 1,594,232 shares of CHCA common stock ($0.75 per share). The Series A Preferred stock pays a 6% dividend payable quarterly, has a mandatory conversion feature in the event that CHCA raises at least $1,500,000 in cash equity at a price greater to or equal to $0.75 per share and the conversion price is subject to certain anti-dilution rights. As part of this overall restructuring, the CHCA entered into an agreement to repurchase or to arrange for the placement of a substantial block of stock as part of a contract settlement with the CHCA former chairman and CEO. The Partnership loaned the CHCA $100,000 and agreed to disburse an additional $400,000, such financing in the aggregate amount of $500,000 to be consolidated into the issuance of the Series B Convertible Preferred Stock with a conversion price of $0.33 per share. This final disbursement was made on October 24, 1994 at which time the Partnership received 500,000 share of Series B Preferred Stock. The Series B Preferred stock has a 6% coupon payable quarterly, has a mandatory conversion feature in the event that CHCA raises at least $1,500,000 in cash equity at a price greater to or equal to $0.75 per share and the conversion price is subject to certain anti-dilution rights. The Partnership did not receive dividend payments from CHCA during the year ended December 31, 1994 or 1995.
During 1995, the Company raised additional capital from another investor which triggered the anti-dilution protection found in the Convertible Preferred Stock. The Partnership chose to partially waive those rights for the transaction and in consideration received a reduction in the conversion price of the Series A Preferred Stock from $0.75 to $0.57 per share and with respect to the Series B Preferred Stock a reduction from $0.33 to $0.25 per share.
During 1996, the Partnership made advances totaling $265,000 under a multiple advance Promissory Note and Security Agreement dated April 25, 1996, as amended January 30, 1997. The Note provides for interest at a rate of 10% payable monthly, and is secured by all assets of the Company, subject to senior debt. In addition, the Partnership received 6/10ths of a share of CHCA's common stock for each dollar of principal loaned. The Note is due on April 17, 1999.
James Kenney, formerly an officer of the Managing General Partner, was elected to the Board of Directors of CHCA as the Partnership's Director. While Mr. Kenney now serves as a consultant to the Partnership from time to time, the Partnership does not now have a Director Designee to the Company's Board of Directors.
INDUSTRIAL HOLDINGS, INC.
On October 8, 1992, the Partnership invested $2,500,000 in a 12% convertible debenture issued by Industrial Holdings, Inc. ("IHI") of Houston, Texas.
IHI is engaged in the manufacture and distribution of industrial supplies.
Interest is payable monthly. The debenture is non-callable for three years and provides for monthly principal installments commencing on October 1, 1995, which installments will amortize approximately one/half of the principal with the balance due at maturity on October 1, 1999. At the option of the Partnership, the Debenture is convertible at any time into IHI common stock at $3.26 per share. The Partnership has the right to demand stock registration and certain piggyback stock registration rights, and after October 8, 1995, at least one such registration at the Company's expense.
On March 15, 1996, the Company paid $625,000 of principal, leaving a Debenture principal balance of $1,875,000. At that time, the Partnership received warrants to purchase 50,000 shares of the Company's common stock at $4.00 per share. These warrants expire on March 31, 1999. The Partnership exercised these warrants in December, 1996, and sold the underlying stock at a gain of $243,750.
In September, 1996, the Partnership converted $815,000 of the 12% debentures into 250,000 shares of the Company's common stock leaving a principal balance in debentures of $1,060,000. These shares were sold in block sales and generated a capital gain of approximately $964,000.
On January 10, 1997, the Partnership converted $360,000 of the Debentures into 110,429 shares of IHI common stock. The Partnership has continued to sell this stock in 1997.
James Kenney, formerly an officer of the Managing General Partner was elected to the Board of Directors of IHI as the Partnership's Director Designee. While Mr. Kenney now serves as a consultant to the Partnership from time to time, the Partnership does not now have a Director Designee to the Company Board of Directors.
PRISM GROUP, INC.
Prism is engaged in the computer disk duplication business.
On November 11, 1992, the Partnership invested $2,500,000 in a 12% convertible debenture issued by Prism Group, Inc. ("Prism") of Woodinville, WA. On June 1, 1994, the Partnership invested $1,000,000 in a 12% convertible debenture.
Interest is payable monthly. The debentures are non-callable for three years and provide for monthly principal installments commencing on January 1, 1995, which installments will amortize approximately one/half of the principal with the balance due at maturity on January 1, 2000. At the option of the Partnership, the $2,500,000 12% convertible debenture is convertible at any time into Prism common stock at $3.00 per share. The $1,000,000 12% convertible debenture is convertible at $1.50 per share. The Partnership has the right to demand stock registration and certain piggyback stock registration rights, and after November 30, 1995 at least one such registration at the Company's expense.
During 1995, the Company restructured its secured lending base. As part of this restructuring, on June 30, 1995, the Partnership converted its convertible debenture position into 2,500,000 shares of common stock with a cost basis of $0.50 per share, 12,500 shares of Series A Convertible Preferred Stock, par value of $100, with a conversion rate of $0.50 and a new secured convertible debenture in the face amount of $1,288,516, that yields 12% and is also convertible into common stock at $0.50 per share. Both the debentures and preferred stock have anti-dilution provisions. In addition to using the face of its existing convertible debentures, the Partnership capitalized $288,516 of accrued but unpaid interest into the new debenture.
Prism Group, Inc.'s manufacturing subsidiary, Prism Software Production, L.L.C. (PSP) sold some of its operating assets to PAC Services, Inc. on July 30, 1996, and on August 29, 1996. The balance of the assets were sold at a public auction and PSP placed in bankruptcy. On October 10, 1996, the Partnership foreclosed on the assets of Prism Group, Inc. and its subsidiaries. On December 31, 1996, the Partnership realized its loss on this investment. At the time of foreclosure, it was estimated a recovery of approximately $200,000 would be recovered on this investment. As of December 31, 1996, $142,954 in cash had been recovered leaving a balance in foreclosed assets of $57,046.
SCIENTIFIC SOFTWARE/INTERCOMP, INC.
SSI provides data processing software for the petroleum industry.
On October 30, 1992, the Partnership invested $2,500,000 in a 11% convertible debenture. Series #A, issued by Scientific Software/Intercomp, Inc.("SSI") of Denver, Colorado Further, on September 30, 1993, the Partnership provided an additional $1,000,000 in a 11% convertible debentures, designated as Series #B.
On June 27, 1994, the Partnership converted $1,750,000 of its $2,500,000 in a 11% convertible debenture Series #A at a conversion price of $2.67. This conversion netted the Partnership 653,846 shares of common stock, which the Partnership simultaneously sold as part of a larger secondary offering completed by SSI at $4.50 per share net to the Partnership. As part of this
transaction, the conversion price of the remaining $1,750,000 in convertible debentures was changed to $2.39. Interest shall continue to accrue on the remaining debentures.
Interest is payable monthly. The remaining principal on the Series #A debentures is non-callable for three years and provides for monthly principal installments commencing on October 1, 1995, which installments will amortize approximately one/half of the principal with the balance due at maturity on October 1, 1999. At the option of the Partnership, the debenture is convertible at any time into SSI common stock at $2.39 per share. The Partnership has the right to demand stock registration and certain piggyback stock registration rights, and after October 30, 1995, at least one such registration at the SSI's expense. Except for the maturity date of October 1, 2000, the Series #B debentures are on terms equal to the initial debentures.
Effective April 15, 1996, as part of a capital restructuring which provided $5,000,000 to the Company, the Partnership entered into an agreement which restructured the convertible debentures held by the Partnership. In combination with the new financing and issued on a basis pursuant to the same terms as all parties, the Partnership's $1,750,000 of convertible debentures were converted into the following: (i) a non-convertible secured $1,500,000 Promissory Note paying 7% interest, due April 30, 2001; (ii) a warrant to purchase 450,000 shares of common stock at a price of $3.00 per share on or before April 30, 2001; and (iii) 282,218 shares of common stock of Scientific Software, Inc. with a cost assignment of $250,000.
On December 31, 1996, the Partnership purchased an additional 115,000 shares of common stock in the market for $55,610.
Russell Cleveland, the President and director of the Managing General Partner, has been designated as the Partnership's Director Designee and serves as an Advisory Director of the Company.
APPOINT TECHNOLOGIES, INC. (formerly Standard Logic, Inc.)
On September 4, 1992, the Partnership invested $1,250,000 in a 12% convertible debenture issued by Appoint Technologies, Inc. (formerly Standard Logic, Inc. and herein referred to as "ATI") of Anaheim, California as the first disbursement under a $3,000,000 loan agreement pursuant to which the Partnership had a standby commitment to invest an additional $750,000 subject to certain conditions and a follow-on option to invest a further $1,000,000. Subsequently, on December 6, 1992, January 21, 1993 and February 11, 1993 disbursements respectively of $250,000, $500,000 and $550,000 respectively, were made as portions of the follow-on option.
ATI is engaged in the manufacturing of wire wrap assemblies and related material on a custom basis. In addition, it entered into an agreement to acquire Appoint, Inc. of Paso Robles, California on a stock acquisition basis. Appoint, Inc. is a manufacturer of computer data entry devices. This acquisition was completed on April 15, 1993 and a disbursement of $450,000 was made as the final portion of the initial commitment.
Subsequently, on June 1, June 30, June 30, August 10, and September 27, 1993 further debenture investments of $1,100,000, $150,000, $250,000, $150,000 and $350,000, respectively were made under the convertible debenture Loan Agreement as amended.
At December 31, 1993, ATI was in default on payment of accrued interest and was not in compliance with certain loan covenants. By agreement with the Company, the Partnership foreclosed on certain collateral relating to its Appoint subsidiary and sold such collateral to the management of the subsidiary in consideration of 2,000,000 shares of ATI stock and 4,558,875 shares of preferred stock which in convertible into common stock at $0.20 per share. This resulted in $3,625 reduction of the principal obligation due to the Partnership from ATI.
On August 10, 1994, a term loan of $150,000 was made secured by a lien on certain receivables. Subsequently, the Company determined to seek a reorganization pursuant to Chapter 11 of the Bankruptcy Code.
On September 30, 1995, the Partnership realized a loss on its investment in Appoint Technologies, Inc. and its related investment in ATI. Both of these investments were fully reserved in 1994. The Partnership has received $169,769 of Appoint foreclosed assets. As of December 31, 1996, the Partnership realized the balance of its loss on this investment, after converting all remaining foreclosed assets to cash with the exception of stock held in Starcom Communications, Inc., valued at $30,000.
TRICOM CORP.
Tricom is engaged in LAN construction, telephone line construction auditing, parking meter auditing and the provision of coin box services for the pay telephone and parking meter industries.
On November 11, 1992, the Partnership invested $1,000,000 in a 12% convertible debenture issued by Tricom Corp. ("Tricom") of Santa Monica, California. as the first disbursement under a $2,000,000 loan agreement pursuant to which the Partnership has the follow-on option to invest a further $1,000,000. An initial follow on disbursement of $500,000 was made on March 26, 1993. Subsequently, on June 27, 1994 and December 30, 1994, further disbursements of $200,000 and $50,000 respectively were completed.
Interest is payable monthly. The debentures are non-callable for three years and provide for monthly principal installments commencing on November 1, 1995 which installments will amortize approximately one/half of the principal with the balance due at maturity on November 1, 1999. At the option of the Partnership, the debenture is convertible at any time into Tricom common stock at $0.50 per share. The Partnership has the right to demand stock registration and certain piggyback stock registration rights, and after November 11, 1995, at least one such registration at the Company's expense.
During 1995, additional funds were advanced in the amounts of $54,000, $30,000 and $150,000. In connection with the loan of $150,000 in December, 1995, the Partnership received 100,002 warrants to purchase the Company's common stock at $1.50 per share and will be reduced to $1.00 per share should the Company not complete an IPO by November 15, 1996.
The Partnership, other bridge loan holders, new investors and the Company have entered into n tentative agreement in 1997, to recapitalize the Company. It is anticipated the Partnership will exchange its 12% $1,500,000 debentures and the unpaid interest on all debt totaling $403,600, for 21,536 shares of Tricom preferred stock, par value $100 ($2,153,600). This capitalized the interest of $403,600.
In addition, the plan calls for the Partnership to exchange its $54,000 Note and $30,000 Note for 186,667 shares of Tricom common stock. The bridge loan of $150,000 debentures and the 1994 promissory notes of $200,000 and $50,000 together with accrued and unpaid interest on all debt totaling $403,600 for 21,536 shares of Tricom preferred stock, par value $100 ($2,153,600). This capitalized the interest of $403,600.
In addition, the plan calls for the Partnership to exchange its $54,000 Note and $30,000 Note for 186,667 shares of Tricom common stock. The bridge loan of $150,000 will be converted into 333,333 shares of Tricom common stock and earlier warrants canceled. The Partnership would waive its right to anti-dilution protection with the execution of the Agreement. For this, Tricom will issue a three year Warrant to purchase 250,000 shares at $2.00 per share. If the Company has not raised more than $2,000,000 in new equity capital by December 31, 1998, the Warrant shall be exercisable by tendering 5,000 shares of preferred stock on that date.
The preferred stock, at the option of holder, is to be convertible at any time into common stock at $4.00 per share. A one time conversion price adjustment to $2.00 per share will be made if Tricom has not raised more than $2,000,000 by December 31, 1998. The common stock underlying the preferred stock shall have one demand registration right and certain anti-dilution provision.
The Partnership agreed to purchase 35,555 shares of common stock for $16,000 in January 1997.
James Kenney, formerly an officer of the Managing General Partner was initially elected to the Board of Directors of ATI as a Partnership Director Designee. Elroy G. Roelke, the Vice President, General Counsel and a Director of the Managing General Partner was also elected to the Board of Directors of Tricom as a Partnership Director Designee. Subsequently, Mr. Roelke resigned from the Tricom Board of Directors. Further, while Mr. Kenney now serves as a consultant to the Partnership from time to time, the Partnership does not now have a Director Designee to the Company Board of Directors.
COMPETITION FOR INVESTMENTS
The Partnership has significant competition for investment proposals. Competitive sources for growth capital for the industry include insurance companies, banks, equipment leasing firms, investment bankers and private investors. Many of these sources have substantially greater financial resources than is contemplated will be available to the Partnership.
Therefore, the Partnership will have to compete for investment opportunities based on its ability to respond to the needs of the prospective borrower and its willingness to provide management assistance.
In some instances, the Partnership's requirements as to provision of management assistance will cause it to be non-competitive.
PERSONNEL
The Partnership has no direct employees but instead has contracted with the Managing General Partner pursuant to the Partnership Agreement and the Investment Advisory Agreement to provide all management and operation activities. The Managing General Partner currently employs twelve persons who are engaged in performing the duties and functions required by the Partnership. At the present time, a substantial portion of the Managing General Partner's staff time is devoted to activities of the Partnership. However, because of the diversity of skills required, the Partnership cannot afford to employ all these persons solely for its own needs, and therefore, these employees are not engaged solely in activities of the Partnership.
The Investment Advisor currently serves as General Partner and manager to Renaissance Capital Partners, Ltd. ("Renaissance I") and as the Investment Advisor to Renaissance Capital Growth & Income Fund III, Inc. ("Renaissance III") and Renaissance U.S. Growth & Income Trust PLC ("RUSGIT"). Renaissance I is a BDC with investment objectives similar to those of the Partnership. Renaissance I is not actively seeking additional investments. Renaissance III is also a BDC operating as a Registered Investment Company with investment objectives similar to those of the Partnership. It completed an offering in 1994, that raised approximately $39,352,000. As of December 31, 1996, Renaissance III had completed ten investments totaling approximately $25,709,000 and is actively seeking additional investment opportunities. RUSGIT is a public limited company registered in England and Wales, listed on the London Stock Exchange, which invests in privately placed convertible debentures issued by companies similar to the investments of the Partnership. RUSGIT will invest primarily on a pari-passu with Renaissance III. In 1996, RUSGIT raised a net investment of approximately $30,789,000 and invested in four companies totaling $9,000,000. In addition, Renaissance Capital Group, Inc. and its subsidiary may, from time to time, provide investment advisory services, management consulting services and investment banking services to other clients.
No accurate data or estimate is available as to the percentage of time, individually or as a group, that will be devoted to the affairs of the Partnership. Initially, and while the Partnership funds are in the process of being invested, a majority of the staff time of the Managing General Partner is employed in functions and activities of the Partnership. Thereafter, the officers and employees have and will devote such time as is required, in their sole discretion, for the conduct of business, including the provision of management services to Portfolio Companies.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
The Partnership does not contemplate making a substantial portion of its investments in foreign operations.
ITEM 2.
ITEM 2. PROPERTIES.
The Partnership's business activities are conducted from the offices of the Managing General Partner, which offices are currently leased until December 31, 1997 in a multi-story general office building in Dallas, Texas. The use of such office facilities, including office furniture, phone
services, computer equipment, and files are provided by the Managing General Partner at its expense pursuant to the Investment Advisory Agreement
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings currently pending with regard to the Partnership.
ITEM 4.
ITEM 4. SUMBISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of Limited Partners, through the solicitation of proxies or otherwise, during the fourth quarter of 1996.
Part II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES.
TRADING
There is no trading in the Interests and no established market exists. Interests are restricted from transfer except in the event of death or by action of law or except with the prior approval of the Managing General Partner.
NUMBER OF HOLDERS
As of December 31, 1996, there were approximately 1,800 beneficial holders of Limited Partners Interest; one holder of a Managing General Partner Interest; and two holders of Independent General Partners Interest.
DIVIDEND POLICY
The Partnership Agreement provided for an initial distribution to be made to the Limited Partners within 30 days after the end of the first quarter following closing of the offering, and thereafter, within 30 days of he end of each subsequent quarter, with the amount of the distributions to be determined at the discretion of the General Partners. It is generally the intention of the General Partners to distribute investment income net of expenses on a quarterly basis. Further, distributions of capital gains will be made as realized.
As the result of decreasing cash resources in 1995 and 1996, the distributions to the limited partners were discontinued. as the Partnership's investments are liquidated, or other cash resources obtained, the Partnership expects to reinstate such payments in whole or in part based upon the cash resources.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
For the years ended December 31, 1996, 1995, 1994, 1993 and 1992 through December 31, 1996:
(Continued)
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Investments, Continued
1 - Interest or dividend payments under the terms of the convertible debenture, note receivable or preferred stock are delinquent as of December 31, 1995.
See accompanying notes to financial statements.
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
[CAPTION]
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Cash Flows, Continued
Noncash investing transactions:
During 1996 and 1995, $932,746 and $838,067 of interest receivable was capitalized to convertible debentures, notes receivable or common stock, respectively.
During 1996 the Partnership received 8,333 shares of StarComm Products, Inc. common stock (value of $30,000) as settlement on foreclosed assets (included in other assets) with a book value of $66,068. The Partnership realized a loss of $35,477, net of transaction costs in the accompanying financial statements on such settlement.
During 1996, the Partnership wrote off its investment in Prism Group, Inc. The Partnership acquired $200,000 of foreclosed assets in settlement which are included in other assets in the accompanying financial statements.
The fourth quarter partnership distributions of $138 and $300,000 were accrued as of December 31, 1995 and 1994, respectively.
During 1995, certain investments were exchanged for other assets totaling $130,790.
See accompanying notes to financial statements.
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(1) ORGANIZATION AND BUSINESS PURPOSE
Renaissance Capital Partners II, Ltd. (the "Partnership"), a Texas limited partnership, was formed in 1991. The Partnership offered to sell units of limited partners' interest ("Units") in the Partnership. Net contributions of $39,064,847 from sale of Units had been received upon final closing of the Partnership on March 31, 1993. The Partnership seeks to achieve current income and capital appreciation potential by investing primarily in private placement convertible debt investments of small and medium size companies which are in need of capital and which the Managing General Partner believes offer the opportunity for growth. The Partnership has elected to be treated as a business development company under the Investment Company Act of 1940, ("1940 Act"), as amended. The Partnership will terminate upon liquidation of all of its investments, but no later than March 31, 2001, subject to the right of the Managing General Partner with the concurrence of at least one of the two independent general partners (the "Independent General Partners") to extend the term for up to two additional one-year periods if they determine that such extension is in the best interest of the Partnership.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) VALUATION OF INVESTMENTS
Portfolio investments are stated at quoted market or fair value as determined by the Managing General Partner and approved by the Independent General Partners (note 4). Most securities held by the Partnership are unregistered and their value does not necessarily represent the amounts that may be realized from their immediate sale or disposition.
(b) STATEMENTS OF CASH FLOWS
The Partnership considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
(c) NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
Net income (loss) per limited partnership unit is based on the weighted average number of limited partnership Units outstanding during the year. The weighted average limited partnership Units outstanding were 43,434.01 during 1996 and 1995 and 43,449.01 during 1994.
(d) FEDERAL INCOME TAXES
In accordance with Federal income tax regulations, no income taxes are levied in a partnership, but rather on the individual partners. Consequently, no Federal income taxes have been reflected in the accompanying financial statements.
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(e) SHORT TERM INVESTMENTS
Short term investments represented money market and mutual fund investments of excess cash. Such investments were valued at quoted market value. Realized and unrealized gains (losses) on such investments were recorded as loss on short term investments in the accompanying statements of operations and amounted to ($325,783) in realized losses in 1994.
(f) COMMITMENT, CLOSING AND MANAGEMENT FEES
Commitment, closing and management fees represent amounts charged to Eligible Portfolio Companies for commitments to fund additional amounts under convertible debenture agreements, closing of convertible debenture agreements and management services provided by the Managing General Partner to Eligible Portfolio Companies. Such fees are recognized as income based on the terms of the underlying convertible debenture agreements and management agreements.
(g) MANAGEMENT ESTIMATES
The financial statements have been prepared in conformity with generally accepted accounting principles. The preparation of the accompanying financial statements requires estimates and assumptions made by management of the Partnership that affect the reported amounts of assets and liabilities as of the date of the statements of assets, liabilities and partners' equity and income and expenses for the years. Actual results could differ significantly from those estimates.
(h) FINANCIAL INSTRUMENTS
In accordance with the reporting requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," the Partnership calculates the fair value of its financial instruments and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made.
(3) MANAGEMENT AND ORGANIZATION FEES
Renaissance Capital Group, Inc. (the "Managing General Partner"), serves as the investment adviser for the Partnership. The Managing General Partner is registered as an investment adviser under the Investment Advisers Act of 1940. Pursuant to an Investment Advisory Agreement, the Managing General Partner performs certain services, including certain management, investment advisory and administrative services necessary for the operation of the Partnership. In addition, under this agreement the Managing General Partner is reimbursed by the Partnership for certain administrative expenses. A summary of fees and reimbursements paid by the Partnership under the Investment Advisory Agreement and the original offering document are as follows:
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
The Managing General Partner received a fee equal to one-half of one percent (0.5%) of the Net Assets after the initial closing date of the Partnership and is entitled to receive quarterly fees thereafter equal to 0.5% of Net Assets, as defined in the Partnership Agreement. The Partnership incurred, during the years ended December 31, 1996, 1995 and 1994, $559,571, $562,063 and $857,478, respectively, for such management fees. For the years ended December 31, 1996, 1995 and 1994, the Managing General Partner elected to calculate the quarterly fee based on the lesser of contributed capital or Net Assets. If the Managing General Partner had elected to calculate the quarterly fee solely based on Net Assets, the fee would have been approximately $153,000 greater than the cumulative fee charged.
The Managing General Partner was reimbursed by the Partnership for administrative expenses incurred by the Managing General Partner on behalf of the Partnership. Such reimbursements were $176,256, $290,728 and $108,489 for the years ended December 31, 1996, 1995 and 1994, respectively, and are included in general and administrative expenses in the accompanying statements of operations.
Each of the Independent General Partners receives a quarterly fee of $.24 per unit for the first 25,000 units and $.12 per unit for all units in excess of 25,000 and reimbursement of expenses incurred on behalf of the Partnership. Such amounts totaled $65,710 in 1996, 1995 and 1994 and are included in general and administrative expenses in the accompanying statements of operations.
(4) INVESTMENTS
The Partnership invests in convertible debentures and other securities of companies that qualify as Eligible Portfolio Companies as defined in Section 2(a)(46) of the 1940 Act or in securities that otherwise qualify for investment as permitted in Section 55(a)(1) through (5) of the 1940 Act. Under the provisions of the 1940 Act, as a business development company, at least 70% of the Partnership's funds must be invested in Eligible Portfolio Companies. Investments of the Partnership are carried in the statements of assets, liabilities, and partners' equity as of December 31, 1996 and 1995 at quoted market or fair value, as determined in good faith by the Managing General Partner and approved by the Independent General Partners.
The debentures and preferred stock held by the Partnership are convertible, at any time, into the common stock of the issuer at a set conversion price. The common stock acquired upon exercise of the conversion feature is generally unregistered and is thinly to moderately traded, but is not otherwise restricted. The Partnership generally may register and sell such securities at any time with the Partnership paying the costs of registration. Interest is generally payable monthly, and all debentures have sinking fund provisions beginning three to four years from issue date. The debentures generally have call options, usually commencing three years subsequent to issuance, at prices specified in the debenture agreements.
The Partnership Agreement and the original offering document specify that securities held by the Partnership shall be valued as follows:
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
The Managing General Partner will, on a quarterly basis, prepare a valuation of the Partnership assets, including the investment portfolio and any other investments.
For securities that are publicly traded and for which quotations are available, the Partnership will value the investments based on the closing sale as of the last day of the fiscal quarter, or in the event of an interim valuation, as of the date of the valuation. If no sale is reported on such date, the securities will be valued at the average of the closing bid and asked prices.
Initially the investments will be primarily in nonpublicly-traded convertible debentures, and in other instances the Partnership will hold restricted securities. Therefore, market quotations will not always be available for investment valuation. In such cases, the securities will be valued by the Managing General Partner at estimated fair value pursuant to the following standards:
Generally, debt securities will be valued at their face value. However, if the debt is impaired, an appropriate valuation reserve will be established or the investment discounted to estimated realizable value. For securities that are in a class of publicly traded securities that are restricted from free trading (such as Rule 144 securities), valuation will be established by appropriately discounting the closing sales or bid price to reflect the illiquidity caused by such restriction. Conversely, if the underlying stock has appreciated in value and the conversion feature justifies a premium value, such premium will of necessity be recognized. Further, if the known market value of a stock holding indicates that an appreciated value may be realized on sale of a restricted stock, such investment may be valued at such appreciated value regardless of the fact that certain open-market sale restrictions apply. The Managing General Partner, subject to the approval and supervision of the Independent General Partners, will be responsible for determining fair value. In the event that the Independent General Partners do not agree with the valuations established by the Managing General Partner, they may retain independent firms to review the Managing General Partner's methodology of valuation or to conduct a valuation, and such appraisal shall be binding on the Partnership.
As of December 31, 1996 and 1995, the Partnership held Eligible Portfolio Investments with a market or fair value, as determined in good faith by the Managing General Partner and approved by the Independent General Partners, of $24,042,843 and $28,598,520 , respectively. Such values were determined using the methodology noted above. The valuation methods, approved by the Independent General Partners, specifically include the following.
* Original cost * Quoted market value * The quoted market value of the underlying class of common stock that the convertible debt or preferred stock may be converted into, less estimated costs to sell and register the common stock
* Original cost less a valuation reserve for collectibility concerns
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
The financial statements include unregistered securities of publicly-held companies valued at $24,042,843 (89% of total assets) and $28,598,520 (96% of total assets) as of December 31, 1996 and 1995, respectively, whose values have been estimated by the Managing General Partner and approved by the Independent General Partners in the absence of readily ascertainable market values. Because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
As of December 31, 1996 and 1995, the net unrealized appreciation (depreciation) associated with investments held by the Partnership was $679,106 and $(369,985), respectively.
(5) PARTNERS' EQUITY
Pursuant to the terms of the Partnership Agreement, all items of income, gain, loss and deduction of the Partnership, other than any Capital Transaction, as defined in the Partnership Agreement, are allocated 1% to the Managing General Partner and 99% to the Limited Partners, except prior to the initial closing date when all items were allocated 99% to the Managing General Partner and 1% to the Initial Limited Partner. All items of net gain of the Partnership resulting from a Capital Transaction, defined in the Partnership Agreement as a sale or disposition of any portfolio investment (defined under the 1940 Act), are allocated such that first the Limited Partners receive a cumulative simple annual return of 10% on their gross capital contributions and any remaining capital gains (net of capital losses and unrealized depreciation) are allocated 20% to the Managing General Partner and 80% to the Limited Partners. All items of net capital loss resulting from Capital Transactions are allocated 1% to the Managing General Partner and 99% to the Limited Partners. As of December 31, 1996 ,1995 and 1994, the net unrealized appreciation or depreciation was allocated 99% to the Limited Partners. If the investments in convertible debentures had been disposed of at their estimated fair values, as determined by the Managing General Partner and approved by the Independent General Partners, there would have been no additional allocation to the Managing General Partner under the terms of the Partnership Agreement and Investment Advisory Agreement.
Distributions to the Limited Partners are made at the discretion of the Managing General Partner, in accordance with the Partnership Agreement. As a result of decreasing cash resources in 1996 and 1995, the distributions to the limited partners were discontinued. As the Partnership's investments are liquidated or other cash resources are obtained, the Partnership expects to reinstate such payments in whole or in part based upon Capital Transactions and the cash resources available. In addition, the Managing General Partner has the discretion to discontinue payment of the management fees or expense reimbursements if cash resources are further limited.