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| RCG > SEC Filings for RCG > Form 10-K on 30-Mar-2009 | All Recent SEC Filings |
30-Mar-2009
Annual Report
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.
AMENDMENT TO ADVISORY AGREEMENT
On March 1, 2007, the Fund and RENN Group entered into an amendment to the Advisory Agreement. The amendment clarified that the Fund will pay RENN Group an incentive fee in an amount equal to 20% of all net realized capital gains, if any, computed net of all realized capital losses and unrealized capital depreciation of the Fund. The calculation of the incentive fee does not incorporate any offset of unrealized capital depreciation by unrealized capital appreciation. The effect of the use of this method to calculate the incentive fee is that each year, the cumulative performance of the Fund since its inception will provide the basis for the calculation of the incentive fee.
The Agreement also clarified that the base management fee paid to RENN Group will be assessed following the assessment of the incentive fee. Thus, the base management fee will be calculated net of any incentive fee payable.
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 primarily generates income through capital gains. Furthermore, 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, 2008, the Fund invested $1,000,000 in one (1) new portfolio investment and invested a total of an additional $1,141,220 in follow-on investments in eight (8) portfolio companies. Cash distributions paid to stockholders in 2008 amounted to $1,785,589. During 2008, gains were realized from the sale of securities of Gasco Energy, Inc., Medical Action Industries, Inc., Nutradyne Group, Inc., Pipeline Data, Inc., and Simtek Corporation, offset by realized losses from the sale of securities of AdStar, Inc., Advance Nanotech, Inc., Gaming & Entertainment Group, Inc., iLinc Communications, Inc., Riptide Worldwide, Inc., and US Home Systems, Inc. Net operating loss for 2008 was $17,992,940, and net cash provided by operating activities was $664,270. The Fund did not issue any new shares pursuant to the Dividend Reinvestment Plan during the year ended December 31, 2008. However, those stockholders who participated in the dividend reinvestment plan had 101,449 shares purchased on their behalf in the open market from cash distributions paid in 2008.
At December 31, 2008, the Fund had $2,558,630 in cash and cash equivalents and $192,145 in liabilities. The Fund 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, are initially not registered for public trading, and are subject to legal and contractual investment restrictions. Accordingly, many of the Portfolio Investments are considered non-liquid. This lack of liquidity primarily affects the ability of the Fund to exit from certain of its existing investments, and therefore its ability to make new investments.
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. At December 31, 2008, the Fund had no margin balances.
2008 Compared to 2007
During the year ended December 31, 2008, the Fund made additional portfolio investments aggregating $2,141,220 compared to $9,326,046 in 2007. During 2008, the Fund realized proceeds from the sale of investments in the amount of $5,238,491 compared to $8,792,947 in 2007. The Fund's 2008 net loss of $17,992,940 is due to a combination of a net investment loss of $771,010, net increase in unrealized depreciation on investments of $18,023,424, and net realized gain on investments of $801,494.
Interest income increased from $345,510 during 2007 to $454,420 primarily due to additional interest bearing investments during 2008. Dividend income during 2008 was $33,193 compared to $432,478 for 2007. The decrease in dividend income was primarily due to fewer dividends being earned on lower cash equivalent balances and fewer dividends being earned on certain investments. Other income increased to $87,730 in 2008 from $48,601 in 2007 as a result of the receipt of additional fee income for service on the boards of portfolio companies.
Legal and professional fees increased 15.7%, from $354,127 in 2007 to $409,836 for 2008, primarily due to an increase in legal services during 2008 offset by a reduction in professional fees relating to Sarbanes-Oxley compliance. There are no incentive fees due to the Adviser for the years ended December 31, 2008 and 2007. Management fees decreased to $455,005 in 2008 from $792,545 in 2007, a decrease of 42.6% due to the reduction in net asset values in 2008 primarily as a result of lower portfolio values in 2008.
The Fund experienced net loss of $17,992,940 in 2008 compared to a net loss of $10,161,897 in 2007. The Fund had a net realized gain on investments of $801,494 in 2008 compared to $3,388,730 (net of income tax paid on behalf of the stockholders of $1,485,135) in 2007. In 2008 the Fund's net change in unrealized depreciation on investments was $18,023,424, compared to $12,791,981 in 2007. The variance is primarily attributable to lower portfolio market values on investments held at year end.
2007 Compared to 2006
During the year ended December 31, 2007, the Fund made additional portfolio investments aggregating $9,326,046 compared to $4,116,806 in 2006. The Fund realized proceeds from the sale of investments in the amount of $8,792,947 compared to $20,932,760 in 2006. The Fund's 2007 net loss of $10,161,897 is due to a combination of a net investment loss of $752,646, net decrease in unrealized appreciation on investments of $12,797,981, and net realized gain on investments (net of income tax paid on behalf of the stockholders of $1,485,135) of $3,388,730.
Interest income increased from $340,145 during 2006 to $345,510 during 2007. Dividend income during 2007 was $432,478 compared to $584,139 for 2006. The decrease was primarily due to fewer dividends being earned on the lower cash equivalent balances. Commitment and other fee income increased to $48,601 in 2007 from $27,684 in 2006.
Legal and professional fees decreased 45.7%, from $651,701 in 2006 to $354,127 for 2007, primarily due to a reduction in audit and consulting services during 2007 (the Fund's 2003 through 2005 audits were completed during 2006). There is no incentive fee due to the Adviser for 2007 compared to $3,157,367 in 2006, primarily due to aggregate net realized gains being offset by capital unrealized depreciation in 2007. Management fees decreased to $792,545 in 2007 from $935,776 in 2006, a decrease of 15.3% due to the reduction in net asset values in 2007 as a result of capital gains dividends and lower portfolio values in 2007.
A net loss of $4,035,913 in 2006 increased to a net loss of $10,161,897 in 2007. The Fund had a net realized gain on investments (net of income tax paid on behalf of the stockholders of $1,485,135) of $3,388,730 in 2007, compared to $13,492,715 in 2006. In 2006 the Fund's net change in unrealized depreciation on investments was $13,339,923, compared to $12,797,981 in 2007. The variance is due to lower portfolio market values on investments held at year end.
The Fund has a contract for the purchase of services under which it will have future commitments: the Advisory Agreement, pursuant to which RENN Group 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.
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