<PAGE> 1
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there by any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to the registration or qualification under the securities
laws of any such state.
SUBJECT TO COMPLETION , 1997
$100,000,000
1,000,000 SHARES OF LIMITED FUND INTEREST IN
TECHNOLOGY FUNDING VENTURE CAPITAL FUND VI, LLC
MINIMUM SUBSCRIPTION: TEN SHARES ($1,000)
Shares are hereby offered in Technology Funding Venture Capital Fund VI,
LLC (the "Fund"), a Delaware limited liability company that has elected to be
regulated as a business development company ("BDC") under the Investment Company
Act of 1940 (the "Investment Company Act"). The address and telephone number of
the Fund are 2000 Alameda de las Pulgas, Suite 250, San Mateo, California 94403
and (415) 345-2200, respectively. The Fund's investment objectives are long-term
capital appreciation from venture capital investments in emerging growth
companies ("Portfolio Companies") and preservation of investor capital through
risk management and active involvement with such companies. Generating current
income for distribution to Investors will not be a factor in the selection of
investments. See "Business of the Fund." There is no public or secondary market
for the Shares, and none is likely to develop.
THERE IS NO ASSURANCE THAT THESE INVESTMENT OBJECTIVES CAN BE ATTAINED. THESE
ARE SPECULATIVE SECURITIES. THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS."
Technology Funding Inc. ("TFI") and Technology Funding Ltd. ("TFL") are the
Investment Managers of the Fund (collectively, the "Investment Managers" or
"Technology Funding") and are responsible for the Fund's venture capital
investments. See "Management of the Fund." The Fund will be a nondiversified
company as such term is defined in the Investment Company Act.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Prospective investors are
advised to read this Prospectus carefully and to retain it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION ("SEC") OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Shares are being offered directly by Technology Funding Venture Capital
Fund VI, LLC. See "Terms of the Offering."
The Fund is offering 1,000,000 Shares to the public. The proceeds of the
offering are expected to total $100 million before reimbursement to the
Investment Managers for the Offering Expenses they incur on behalf of the Fund.
Such reimbursement may not exceed .25% of the gross proceeds of the offering;
any such costs in excess of this percentage limitation will be paid by the
Investment Managers. See "Use of Proceeds." The Fund will reimburse the
Investment Managers the actual costs for all Organizational Expenses.
This offering will terminate at the discretion of the Investment Managers
but in no event later than two years from the date hereof. The Fund will
dissolve December 31, 2007, subject to the right of the Independent Directors
(as defined herein) to extend the term of the Fund for up to two additional
two-year periods.
The date of this Prospectus is , 1997.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary of the Offering.......................................................... 4
Suitability Considerations....................................................... 6
How to Subscribe................................................................. 6
Risk Factors..................................................................... 7
Venture Capital Risks............................................................ 7
Risks of the Fund................................................................ 9
Compensation of the Investment Managers, their Affiliates, and the Independent
Directors...................................................................... 12
Allocation of Profits and Losses................................................. 14
Distributions.................................................................... 14
Use of Proceeds.................................................................. 15
Business of the Fund............................................................. 16
Investment Objectives............................................................ 16
Portfolio Strategy and Policies.................................................. 16
Venture Capital Operations....................................................... 19
Management of the Fund........................................................... 21
The Investment Managers.......................................................... 21
The Fund Directors............................................................... 21
Key Personnel of the Investment Managers......................................... 22
Prior Funds...................................................................... 22
Conflicts of Interest............................................................ 26
Indemnification.................................................................. 28
Tax Information.................................................................. 28
Fund Status...................................................................... 29
Federal Income Taxation of Funds and Investors Generally......................... 30
Taxation of Fund Operations...................................................... 31
Limitations on Deduction of Fund Losses.......................................... 31
Sale of an Interest in the Fund.................................................. 32
Fund Organizational and Syndication Expenditures................................. 32
Management Fee................................................................... 32
Alternative Minimum Tax.......................................................... 32
Miscellaneous Provisions......................................................... 33
Tax Treatment of Foreign Investors............................................... 33
State Law Considerations......................................................... 33
Investment Company Act Regulation................................................ 34
Terms of the Offering............................................................ 35
Additional Aspects of the Fund................................................... 35
Portfolio Valuation.............................................................. 39
Reports, Accounting, and Audit................................................... 39
Selling Materials................................................................ 40
Legal Matters.................................................................... 40
Custodian........................................................................ 40
Tax Shelter Compliance Provisions................................................ 40
Additional Information........................................................... 40
Operating Agreement.............................................................. Exhibit A
Financial Statements............................................................. Exhibit B
Subscription Agreement and Power of Attorney..................................... Exhibit C
</TABLE>
2
<PAGE> 3
No broker-dealer, salesman, or any other person is authorized to give any
information or to make any representation not contained in this Prospectus or
the authorized selling materials described herein in connection with the offer
contained herein, and, if given or made, such information or representation must
not be relied upon as having been authorized by the Fund or the Investment
Managers. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any of the securities covered by this
Prospectus in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction.
The Fund will furnish to each Investor an annual report containing audited
financial statements and quarterly reports for each of the first three quarters
of each fiscal year containing unaudited financial statements. Each Investor
will consent to delivery of these reports by either having the reports posted on
an internet site to which the Investor will have access or via electronic mail.
Upon receipt of such consent these reports will be furnished via the chosen
method until the Fund is notified by an Investor of his or her desire to choose
an alternative method. Absent consent to delivery of these reports by either an
internet site or electronic mail each Investor will be entitled to delivery of
these reports via First Class Mail. See "Reports, Accounting, and Audit."
The use of forecasts in this offering is prohibited. Any representations to
the contrary and any predictions, written or oral, as to the amount or certainty
of any present or future cash benefit or tax consequence that may flow from an
investment in this Fund is not permitted.
3
<PAGE> 4
SUMMARY OF THE OFFERING
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
APPEARING ELSEWHERE IN THE PROSPECTUS. Capitalized terms not defined herein are
defined in Article 2 of the Operating Agreement (the "Operating Agreement")
attached as Exhibit A.
THE OFFERING. The Fund is offering 1,000,000 Shares in the Fund in an
aggregate amount of $100,000,000. No Shares will be sold below net asset value.
The minimum purchase is ten Shares payable in cash upon subscription. Shares
will be sold only to investors who confirm that they have reviewed the
suitability considerations and believe that this is an appropriate investment
and who are accepted by the Fund. There is no public or secondary market for the
Shares, and none is likely to develop. See "Suitability Considerations" and
"Terms of the Offering."
The offering will terminate at the discretion of the Investment Managers
but in no event later than two years from the date hereof. Until the termination
of this offering (the "Closing Date"), additional Investors will be admitted as
their subscriptions are accepted. See "Terms of the Offering."
THE FUND. The Fund is a Delaware limited liability company formed on
February 27, 1997. The Fund has been organized to provide investors with the
opportunity to participate with a modest amount in venture capital investments
that are generally not available to the public and that typically require
substantially larger financial commitments. The Operating Agreement of the Fund
permits the Fund to offer different series of the Shares. In addition, the Fund
will provide professional management and administration that might otherwise be
unavailable to investors if they were to engage directly in venture capital
investing. The Fund has elected to be regulated as a BDC under the Investment
Company Act, and will operate as a nondiversified company as that term is
defined in the Investment Company Act. See "Risk Factors" and "Investment
Company Act Regulation."
LEGAL AND TAX STATUS. The Fund has been formed as a limited liability
company and as such is governed by an Operating Agreement which defines many of
the rights and responsibilities of the Directors, Investment Managers, and
Investors. The Directors intend to operate the Fund so that it will qualify for
tax treatment as if it were a partnership. See "Tax Information."
INVESTMENT OBJECTIVES. The investment objectives of the Fund are long-term
capital appreciation from venture capital investments in emerging growth
companies and preservation of Investor capital through risk management and
active involvement with such companies. These venture capital investments are
expected to be primarily in the form of common stock, preferred stock, or debt
securities convertible into or warrants or options exercisable for common stock.
Generating current income for distribution to Investors will not be a factor in
the selection of investments. The Fund expects that by the end of the two-year
period beginning on the Closing Date, at least 50% of its total assets will be
invested in securities designed to meet its business purpose in accordance with
Sections 2(a)(48) and 55(a)(1)-(3) of the Investment Company Act. THERE IS NO
ASSURANCE THAT THE FUND'S INVESTMENT OBJECTIVES CAN BE ACHIEVED. See "Risk
Factors," "Business of the Fund," and "Prior Funds."
CO-INVESTMENT. The Investment Managers expect that many of the Fund's
investments will be made in conjunction with other venture capital funds, which
may include other funds managed by the Investment Managers. Any co-investments
made in a Portfolio Company at the same time with other funds managed by the
Investment Managers will be on substantially the same terms and conditions. The
Fund also might invest in follow-on fundings of Portfolio Companies in which
other funds managed by the Investment Managers previously invested. Such
investments can be made without any approval of the Investors. However, such
investments would require the approval of a majority of the Independent
Directors and generally would require an exemptive order from the SEC, for which
the Investment Managers intend to apply. There can be no assurance that such
order will be issued by the SEC.
SENIOR SECURITIES; BORROWING. The Fund does not intend to issue senior
interests or debt securities and does not intend to use significant leverage. In
order to maximize the internal rate of return to Investors, the Fund may elect
to obtain and utilize a line of credit secured by the assets of the Fund, in an
amount not to
4
<PAGE> 5
exceed 50% of Aggregate Capital Contributions. Such a line of credit could be
used for operating expenses, follow-on investments, or other general Fund
purposes.
RISKS; CONFLICTS OF INTEREST. The economic benefit from an investment in
the Fund depends on many factors beyond the control of the Investment Managers.
The purchase of Shares involves a number of significant risks. Venture capital
investments involve a high degree of business and financial risk and may result
in substantial losses. See "Risk Factors" and "Business of the Fund."
Prospective investors should also read the information regarding conflicts of
interest that exist. See "Conflicts of Interest."
MANAGEMENT. The Operating Agreement provides that the Fund will be managed
by the Directors, initially five in number, three of whom will not be
"interested persons" of the Fund or its Affiliates as that term is defined in
the Investment Company Act (herein, the "Independent Directors") and two being
representatives of the Investment Managers (herein, the "Affiliated Directors").
The Investment Managers, subject to the supervision of the Directors, will be
responsible for finding, evaluating, structuring, monitoring, and liquidating
the Fund's venture capital investments and will be compensated as described in
"Compensation of the Investment Managers, their Affiliates, and the Independent
Directors." The Investment Managers act as Managing General Partners or Managing
Directors for a number of other public and private Funds (see "Prior Funds").
See "Management of the Fund" for a description of the Investment Managers and
the Investment Managers' key personnel.
TERM OF THE FUND. The Fund will dissolve December 31, 2007, subject to the
right of the Directors to extend the term for up to two additional two-year
periods if they determine such extensions are in the best interest of the Fund.
COMPENSATION TO INVESTMENT MANAGERS. In addition to the Investment
Managers' distributive shares of Fund profits, losses, and distributions
detailed below, the Fund will reimburse and pay the Investment Managers, on the
commencement date and as additional Investors are accepted, reimbursement for
Offering Expenses of the Fund that the Investment Managers and their Affiliates
have incurred (but not to exceed .25% of total Investor Capital Contributions),
actual Organizational Expenses incurred on behalf of the Fund, and a Management
Fee for each year during the Offering Period equal to 2% of total Investor
Capital Contributions. Thereafter, the Fund will pay the Investment Managers an
annual Management Fee equal to 2% of Adjusted Capital Contributions for each
subsequent year. "Adjusted Capital Contributions" equal total Investor Capital
Contributions reduced by the cost basis of any Portfolio Company securities (i)
distributed to, or liquidated and the proceeds distributed to, the Investors, or
(ii) written off with no further attempt being made by the Investment Managers
to aid the Portfolio Company, but not reduced by net operating losses of the
Fund. A full year's Management Fee will be paid on the commencement date for
each Investor whose subscription has been accepted by the Fund as of that date
and thereafter as each additional Investor is admitted to the Fund, without
proration for the amount of time such Investor was an Investor. For subsequent
years, the Management Fee will be payable monthly in arrears. The Investment
Managers will also be reimbursed by the Fund for Operational Costs incurred on
behalf of the Fund. Based on their experience, the Investment Managers expect
annual Operational Costs (excluding the Management Fee) to be approximately 3%
of the total capital being sought by the Fund. Actual Operational Costs in any
particular year may exceed this estimate. Thus, the Fund may be expected to pay
approximately 5% of total Investor Capital Contributions for Management Fees and
Operational Costs in each year of Fund operations. See "Compensation of the
Investment Managers, their Affiliates, and the Independent Directors."
ALLOCATION OF PROFITS AND LOSSES. The Net Profit of the Fund will be
allocated first (i) to those Investors with deficit Capital Account balances
until the deficits have been eliminated, then (ii) to the Investors as necessary
to offset any Net Loss previously allocated to such Investors until each
Investor has been allocated cumulative Net Profit equal to the cumulative Net
Loss previously allocated to such Investor, and finally (iii) 80% to the
Investors to be allocated in proportion to Shares held and 20% to the Investment
Managers. Net Loss will generally be allocated 99% to the Investors and 1% to
the Investment Managers; provided, that, if Net Profit had previously been
allocated under (iii) above, Net Loss will first be allocated to the Investors
as necessary to offset the Net Profit previously allocated until each Investor
has been allocated cumulative Net Loss equal to cumulative Net Profit previously
allocated to such Investor under (iii) above.
5
<PAGE> 6
Special allocations also are provided to prevent an Investor from having a
deficit Capital Account. See "Allocation of Profits and Losses."
DISTRIBUTIONS. Gross income earned by the Fund from short-term investments
will be used to offset operating expenses, and the primary source of
distributable cash will be proceeds from the liquidation of venture capital
investments not reinvested. It is unlikely that any significant distributions of
proceeds from venture capital investments will be made in the first four to five
years of the Fund's operation. Distributions will be made, to the extent of Cash
and Securities Available for Distribution, 99% to the Investors and 1% to the
Investment Managers until Investors have received distributions (in cash or
securities valued at the date of distribution) equal to their Capital
Contributions. Thereafter, distributions will be made 80% to Investors and 20%
to the Investment Managers. Distributions to Investors will be made in
proportion to the Investors' respective Capital Account balances. Prior to
liquidation, the Directors, in their sole discretion, will determine the amount
and timing of any distribution of cash or portfolio securities. As soon after
the date of dissolution as possible, the Investors will receive a liquidating
distribution of the remaining assets of the Fund based on their allocable share
thereof. See "Distributions."
SUITABILITY CONSIDERATIONS
Shares in the Fund may be an appropriate investment for a person who wants
to place a small portion of his or her portfolio in an aggressive growth
investment that further diversifies his or her holdings. Professionally managed
venture capital funds that have invested in a broad group of emerging companies
typically have produced significant returns but also entail significant risks.
Investment in the Fund is appropriate only for persons who have no need for
liquidity of their investment for a number of years. See "Risk Factors."
Prospective investors should consider whether the purchase of Shares is suitable
in light of their individual investment objectives and their current and
expected tax situations.
TAX CONSIDERATIONS. The "Tax Information" section in this Prospectus
applies mainly to Investors who are individuals and not to trusts, pension and
profit-sharing plans, or corporations. Because actual tax consequences will
depend on each Investor's unique circumstances, each prospective investor is
advised to seek independent tax and financial counsel in evaluating the
individual merits and suitability of this investment.
TRANSFERS. The Fund may require assurances before agreeing to any transfer
of Shares. In any event, there are significant restrictions on an Investor's
ability to transfer Shares. See "Risks of the Fund -- Lack of Liquidity" within
the "Risk Factors" section.
HOW TO SUBSCRIBE
Each prospective investor who desires to purchase at least ten Shares
($1,000) must complete, execute, and submit to Technology Funding Venture
Capital Fund VI, LLC, the Subscription Agreement located on this website and
authorize a payment mechanism in the amount of the full purchase price. At any
time during the Offering Period, Investors may subscribe for any additional
number of whole shares by executing an additional Subscription Agreement.
Payment methods are described more fully in the Subscription Agreement.
A subscriber's payment will be returned promptly in full if their
Subscription is not accepted by the Fund. All information provided by Investors
will be kept confidential and disclosed only to the Investment Managers and
their Affiliates, consultants, or service providers except as required by
appropriate governmental, administrative, and regulatory authorities.
6
<PAGE> 7
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD READ ALL SECTIONS OF THIS PROSPECTUS AND
CONSULT WITH THEIR ADVISORS REGARDING THE RISKS OF AN INVESTMENT IN THE FUND.
In addition to risks identified elsewhere in this Prospectus, risks
relating to an investment in the Fund can generally be classified as venture
capital risks of the Portfolio Companies (i.e., risks that are inherent in
equity investments in emerging growth companies) and risks of the Fund (i.e.,
risks that arise from the proposed structure of Fund operations or the nature of
Fund investments). Prospective investors should carefully consider the risks
that are described below, as well as the information set forth under "Conflicts
of Interest."
VENTURE CAPITAL RISKS
Substantial appreciation of the equity securities of Portfolio Companies is
essential to achieving the Fund's return objectives with respect to its venture
capital investments.
NATURE OF VENTURE CAPITAL RISKS. Although venture capital investments
offer the opportunity for significant gains, each investment involves a high
degree of business and financial risk that can result in substantial losses.
Among these are the risks associated with investing in companies in an
early-stage of development or with little or no operating history, companies
operating at a loss or with substantial variations in operating results from
period to period, and companies with the need for substantial additional capital
to support expansion or to achieve or maintain a competitive position. Such
companies may face intense competition, including competition from companies
with greater financial resources, more extensive development, manufacturing,
marketing, and service capabilities, and a larger number of qualified managerial
and technical personnel. The Fund anticipates that it may make significant
equity investments in companies in rapidly changing high-technology fields; such
companies may face special risks of product obsolescence and may encounter
intense competition from other companies. These risks are explained in more
detail below.
TECHNOLOGY. Particularly in early-stage companies, a major risk is the
potential inability of a Portfolio Company to commercialize its technology or
product concept with the resources it has available. Although many of the
Portfolio Companies may be later-stage companies that have developed products,
the ultimate success of such companies will depend to a large extent on their
ability to continue to create new products and improve existing ones. There can
be no assurance that the development efforts of any Portfolio Company will be
successful or, if successful, will be completed within the budget or time period
originally estimated. Additional funds may be necessary to complete such
development, and there is no assurance that such funds will be available from
any source.
MARKETING. The markets for new products and services may be highly
competitive, rapidly changing, or both. Commercial success is frequently
dependent on marketing and support resources, the effectiveness and sufficiency
of which are very difficult to predict accurately. While this is a significant
risk for all Portfolio Companies, it is one of the principal economic risks of
second- and third-stage Portfolio Companies, which are anticipated to receive a
large portion of the Fund's equity investments. There can be no assurance that
the marketing efforts of any particular Portfolio Company will be successful or
that any such company's products or services can be sold at a price and volume
that will allow it to be profitable. High technology products and services often
have a limited market or life-span. No assurance can be given that the products
or services of a particular Portfolio Company will not become obsolete or
require significantly more capital to obtain or maintain an adequate market
share for the success of the business.
PERSONNEL. The success of any venture is dependent upon the availability
of qualified personnel. The day-to-day operations crucial to success will be in
the hands of the management of each Portfolio Company. Each company's management
must have a philosophy and personality appropriate for that company's particular
stage of development. Early-stage companies typically need entrepreneurial
talents, while more mature companies require a higher level of infrastructure
and managerial coordination. Competition for qualified personnel is intense at
any stage of development. High turnover of personnel has become endemic in many
rapidly growing industries and could severely disrupt a Portfolio Company's
implementation of its
7
<PAGE> 8
business plan. Similarly, the ability of a Portfolio Company's personnel,
particularly its founders, to accept and make the difficult transitions that
occur as the company matures is hard to predict or manage. No assurance can be
given that the Portfolio Companies will be able to attract and retain the
qualified personnel necessary for success, or that the Investment Managers can
select Portfolio Companies that have, or can obtain, the necessary management
resources.
MANAGEMENT. The success of the Fund will depend upon the success of the
Portfolio Companies and, in great part, upon the abilities of their management.
Although the Investment Managers, in conjunction with other venture capital
investors, expect to provide Portfolio Companies with a great deal of assistance
(particularly with regard to capital formation, major personnel decisions, and
strategic planning), the day-to-day operations will be in the hands of the
management of the Portfolio Companies. As the Portfolio Companies have yet to be
identified, Investors must rely upon the Investment Managers to select Portfolio
Companies that have, or can obtain, the necessary management resources. There
can be no assurance that such selection will be successful. See "Business of the
Fund" and "Prior Funds."
COMPETITION. Most emerging markets are highly competitive. The Fund
anticipates that nearly all Portfolio Companies will compete against firms with
more experience and greater financial resources than such companies.
ADDITIONAL CAPITAL. The Investment Managers expect that most Portfolio
Companies will require additional equity financing to satisfy their working
capital requirements. The amount of additional equity financing needed will
depend upon the maturity and objectives of the particular company. Each round of
venture financing (whether from the Fund or other investors) is typically
intended to provide a Portfolio Company with enough capital to reach the next
major valuation milestone. See "Business of the Fund." If the funds provided are
not sufficient, a company may have to raise additional capital at a price
unfavorable to the existing investors, including the Fund. The availability of
capital is generally a function of capital market conditions that are beyond the
control of the Fund or any Portfolio Company. There can be no assurance that the
Investment Managers or the Portfolio Companies will be able to predict
accurately the future capital requirements necessary for success or that
additional funds will be available from any source.
TIME REQUIRED TO MATURITY OF INVESTMENT. The Investment Managers intend to
invest funds available for equity investments as rapidly as is consistent with
the investment objectives of the Fund. However, it is anticipated that there
will be a significant period of time (up to three or four years) before the Fund
has completed the initial selection of Portfolio Companies for its first round
of equity investments. Venture capital investments typically take from four to
eight years from the date of initial investment to reach a state of maturity at
which liquidation can be considered. In light of the foregoing, it is unlikely
that any significant distributions of the proceeds from the liquidation of
equity investments will be made until the later years of the Fund.
ILLIQUIDITY OF VENTURE CAPITAL INVESTMENTS. It is anticipated that most of
the holdings in Portfolio Companies will be securities that are subject to
restrictions on resale. Generally, unless the securities are subsequently
registered under the Securities Act of 1933 (the "Securities Act"), the Fund
will not be able to sell these securities unless it meets all of the conditions
of Rule 144 or another rule under the Securities Act that permits limited sales
under specified conditions. When restricted securities are sold to the public,
the Fund may be deemed an "underwriter," or possibly a controlling person, with
respect thereto for the purpose of the Securities Act and may be subject to
liability as such under the Securities Act.
Other practical limitations may inhibit the Fund's ability to sell or
distribute the securities of Portfolio Companies. For example, the Fund may own
a relatively large percentage of a Portfolio Company's outstanding securities,
or customers, other investors, financial institutions, or management may be
relying on the Fund's continued investment. Sales of securities of Portfolio
Companies may also be limited by the overall condition of the securities market.
In the past few years, the market for equity securities has been volatile,
especially for securities of high-technology companies. Accordingly, the market
price for public portfolio securities may be adversely affected by factors
unrelated to the operating performance of the Portfolio Companies. The above
limitations on liquidity of the Fund's equity investments could prevent a
successful sale thereof, result in delay of any sale, or reduce the amount of
proceeds that might otherwise be realized.
8
<PAGE> 9
NEED FOR FOLLOW-ON INVESTMENTS. Following its initial investment in
Portfolio Companies, the Fund anticipates that it will be called upon to provide
additional funds to Portfolio Companies or have the opportunity to increase its
investment in a successful situation. See "Business of the Fund." Although the
Fund intends to maintain reasonable reserves and may borrow to make follow-on
equity investments, there is no assurance that the Fund will make follow-on
investments or that the Fund will have sufficient funds to make all such
investments. If the Fund is unwilling or unable to make a follow-on equity
investment, the negative impact on a Portfolio Company in need of such
investment may be substantial. The Fund's failure to make a follow-on investment
may also result in a significant reduction in the Fund's ownership percentage in
a Portfolio Company or a missed opportunity for the Fund to increase its
participation in a successful situation.
RISKS OF THE FUND
PORTFOLIO COMPANIES UNIDENTIFIED. As of the date of this Prospectus, the
Fund has not made any equity commitments to any Portfolio Company. Therefore,
prospective investors will not have an opportunity to evaluate specific
Portfolio Companies prior to making an investment in the Fund and will be
entirely dependent upon the Investment Managers for selecting and negotiating
with potential Portfolio Companies. If the Fund makes material financing
commitments to Portfolio Companies before the Closing Date, this Prospectus will
be supplemented to include information about such companies.
MINIMUM PROCEEDS; FUNDING AND PORTFOLIO BALANCE. The Fund will begin
investment operations immediately. The number of investments, portfolio balance,
and potential profitability of the Fund could be affected by the amount of funds
at its disposal and, if it were to continue investment operations with only the
initial capitalization, the Fund's investment return might be adversely affected
by a single investment decision. At a lower funding level the number and
diversity of investments will be smaller.
SUBSTANTIAL INITIAL LOSSES. It is anticipated that most of the
capitalization of the Fund, except for operating cash reserves and funds set
aside for follow-on investments in then-existing Portfolio Companies, will be
expended or committed by the end of the year 2001, which is expected to be prior
to the receipt of any substantial realized gains by the Fund. The Investment
Managers anticipate that the Fund and a number of the Portfolio Companies will
sustain substantial losses in the initial three or four years of operation. It
is possible that these losses may never be recovered. There can be no assurance
that the Fund will ever be profitable.
RELIANCE ON MANAGEMENT. All decisions with respect to the management of
the Fund will be made exclusively by the Directors. Investors, except for the
Investment Managers, will have no right or power to take part in the management
of the Fund and will not receive any of the detailed financial information
issued by Portfolio Companies that is available to the Directors and the
Investment Managers.
NEW BUSINESS. Although the key personnel of the Investment Managers have
considerable prior venture capital investment experience (see "Management of the
Fund" and "Prior Funds"), the Fund itself has recently been formed and has no
operating history.
COMPETITION FOR INVESTMENTS. The Fund expects to encounter competition
from other entities having similar investment objectives (including others that
are affiliated with the Investment Managers). Historically, the primary
competition for venture capital investments has been from venture capital funds
and corporations, venture capital affiliates of large industrial and financial
companies, small business investment companies, and wealthy individuals.
Additional competition is anticipated from foreign investors and from large
industrial and financial companies investing directly rather than through
venture capital affiliates. Many of the Fund's competitors are subject to
regulatory requirements substantially different from those to which the Fund is
subject, and, as a consequence, they may have a competitive advantage to the
extent that the regulations under which the Fund operates restrict its abilities
to take certain actions. The Fund will frequently be a co-investor with other
professional venture capital groups, and these relationships with other groups
may expand the Fund's access to investment opportunities.
FEDERAL INCOME TAX RISKS. The Fund is organized as a limited liability
company, and the Directors intend to operate the Fund to qualify as a
partnership for federal tax purposes. The principal tax risks to the
9
<PAGE> 10
Investors are that: (i) the Fund could be classified as a publicly-traded
partnership taxable as a corporation rather than as a partnership for purposes
of federal income tax law, which would require the Fund to pay income tax at
corporate tax rates on its net income, would prevent the Investors from
deducting their distributive share of losses, and would cause any distributions
to Investors to be taxed to Investors as dividend income to the extent of
earnings and profits of the Fund; (ii) the allocation of Fund items of income,
gain, loss, and deduction in the Operating Agreement may not be respected for
federal income tax purposes; (iii) all or a portion of the Fund's expenses could
be considered either investment expenses (which would be deductible by an
Investor only to the extent the aggregate of such expenses exceeded 2% of such
Investor's adjusted gross income) or as nondeductible items that must be
capitalized; (iv) all or a substantial portion of the Fund income could be
deemed to constitute unrelated business taxable income, such that tax-exempt
Investors could be subject to tax on their respective portions of such income;
(v) a portion of the losses, if any, allocated to the Investors could be
"passive losses" and thus deductible by the Investor only to the extent of
passive income; and (vi) the Investors could have capital losses in excess of
the amount that is allowable as a deduction in a particular year.
Although the Fund has obtained an opinion of counsel that the Fund will be
treated as a partnership for federal income tax purposes rather than a publicly
traded partnership taxable as a corporation, the Fund will not obtain a ruling
from the Internal Revenue Service (the "IRS") regarding this or any other
matter. See "Tax Information." The tax consequences of investing in the Fund
could be altered at any time by legislative, judicial, or administrative action.
Prospective investors are urged to consult their own tax advisors prior to
investing in the Fund.
The IRS may audit the Fund's tax returns. Any audit issues will be
determined at the Fund level. If adjustments are made by the IRS, corresponding
adjustments will be required to be made to the federal income tax returns of the
Investors, which may require payment of additional taxes, interest, and
penalties. Audit of a Fund return may result in examination and audit of an
Investor's return that otherwise might not have occurred, and such audit may
result in adjustments to items in the Investor's return that are unrelated to
the Fund. Each Investor must bear the expenses associated with an audit of that
Investor's return.
THE FOREGOING IS A SUMMARY OF CERTAIN SIGNIFICANT FEDERAL INCOME TAX RISKS
RELATING TO AN INVESTMENT IN THE FUND. THIS SUMMARY SHOULD NOT BE INTERPRETED AS
A REPRESENTATION THAT THE MATTERS REFERRED TO HEREIN ARE THE ONLY TAX RISKS
INVOLVED IN THIS INVESTMENT OR THAT THE MAGNITUDE OF SUCH RISKS IS NECESSARILY
EQUAL. FOR A MORE DETAILED DISCUSSION OF THESE AND OTHER FEDERAL INCOME TAX
RISKS OF AN INVESTMENT IN THE FUND, SEE "TAX INFORMATION."
DILUTION. Investors are not subject to any mandatory assessments except as
provided in the Operating Agreement; however, the Directors might have to make a
voluntary capital call on the Investors to meet Fund needs. An Investor who
declined to participate in such a call would not suffer any forfeiture, but such
Investor's percentage interest in the Fund would be reduced by the additional
investment made by others.
DISTRIBUTIONS. There can be no assurance that any distributions to the
Investors will be made by the Fund or that aggregate distributions, if any, will
equal or exceed the Investors' investment in the Fund. Sales of Portfolio
Company securities will be the principal source of distributable cash to the
Investors. The Directors have absolute discretion in the timing of distributions
to the Investors, but the income tax liability of the Investors depends on the
profits of the Fund, regardless of whether distributions are made. Securities
acquired by the Fund through equity investments will be held by the Fund and
will be sold or distributed at the sole discretion of the Directors. See
"Allocation of Profits and Losses" and "Distributions."
BORROWING. The Fund may borrow (but not in excess of 50% of Investors'
Capital Contributions) and, in connection with loans, may mortgage, assign, or
otherwise encumber any Fund asset. Such borrowings may be used for any Fund
purpose, including working capital or follow-on investments in Portfolio
Companies. The Investment Managers may consent to or guarantee any necessary
Portfolio Company borrowings so long as the aggregate guarantees outstanding
plus Fund borrowing at any time do not exceed 50% of Investors' Capital
Contributions. Although Investors generally will not be liable for Fund
borrowings or guarantees beyond the
10
<PAGE> 11
amount of their Capital Contributions, any borrowings would be Fund obligations
to be repaid from Fund assets, which would reduce the cash available for
distribution to Investors and could result in taxable income to Investors
without cash distributions. The use of such leverage would exaggerate increases
or decreases in the Fund's net asset value as contrasted to the value of its
total assets. Although the Investment Company Act permits the Fund to issue
multiple classes of senior debt and a single class of interests senior to the
Shares, the Investment Company Act limits distributions while such securities
are outstanding unless certain conditions are satisfied. See "Investment Company
Act Regulation."
PORTFOLIO COMPANY LIABILITIES. The Fund will participate actively in the
management of many Portfolio Companies, often having representatives serve as a
member of a Portfolio Company's Board of Directors. Consequently, the Fund may
be subject to liability from lawsuits against its representatives as directors.
Because director liability insurance is typically not available at a reasonable
price, the Fund's assets, including assets not related to those Portfolio
Companies, may be exposed to the claims of creditors of such Portfolio
Companies. The Investment Managers will try to limit Fund exposure to such
claims and liabilities where practical; however, such efforts may not be
successful. Although Investors generally will be liable only for the respective
amounts of their Capital Contributions, liability for Portfolio Company claims
or liabilities would adversely affect the amount of cash available for
distribution to the Investors.
LIABILITY OF INVESTORS. The Fund has been formed under the Delaware
Limited Liability Company Act, as amended from time to time (the "Act").
Generally, the liability of an Investor will be limited, except to the extent
provided in the Operating Agreement and under Delaware law, to the amount of
such Investor's Capital Contribution plus such Investor's share of any assets
and undistributed profits of the Fund.
LACK OF LIQUIDITY. There is no public or secondary market for the Shares,
nor is one likely to develop. Federal and state laws impose restrictions on the
resale of the Shares. In addition, the Operating Agreement prohibits certain
types of transfers in order to prevent the development of a secondary market for
the Shares and resultant adverse tax consequences. The Operating Agreement also
places restrictions on transferability and sale of Shares, including the
requirement that the admission of an assignee to the Fund as a Substituted
Investor may occur only with the consent of the Directors, which consent is at
their sole discretion. Consequently, investment in the Fund will have little, if
any, collateral value or liquidity and should be made only as a long-term
investment. See "Suitability Requirements" and "Additional Aspects of the Fund."
EXPENSE OF REMOVING INVESTMENT MANAGERS AND OTHER INVESTOR VOTES. Although
the Operating Agreement provides that the Investors may remove the Investment
Managers under certain circumstances, such removal is not a simple process, may
require substantial expenditures, and could have negative financial and other
consequences for the Fund. The removal of the Investment Managers and various
other actions that Investors are able to take under the Operating Agreement
require Investor votes to accomplish.
LACK OF SEPARATE REPRESENTATION. Counsel for the Fund in connection with
this offering is also counsel to the Investment Managers. The attorneys and
other professionals who perform services for the Fund also perform services for
the Investment Managers and other funds managed by the Investment Managers. If a
conflict of interest arises and cannot be resolved, or if the consent of the
respective parties cannot be obtained to the continuance of such dual
representation after full disclosure of such conflict, such professionals will
withdraw from the representation of one or both of the conflicting interests
with respect to the matter involved. See "Conflicts of Interest."
CONFLICTS OF INTEREST. The Investment Managers will be subject to various
conflicts of interest in managing the investments of the Fund. The Investment
Managers and their Affiliates have organized, and will continue to organize,
entities to provide various forms of financing to emerging companies. Such
entities may fund companies similar to the Portfolio Companies of this Fund
resulting in competition to the Fund. The Fund may co-invest in some Portfolio
Companies with other funds managed by the Investment Managers and may
participate in follow-on investments in such Portfolio Companies, subject to a
majority vote of the Independent Directors and, if necessary, an exemptive order
from the SEC. The principals of the Investment Managers themselves have
invested, and may make future investments, in emerging growth companies. The
Operating Agreement and the Investment Company Act place restrictions upon the
ability of the Investment Managers to invest Fund assets in such companies. See
"Investment Company Act Regulation." None of the
11
<PAGE> 12
personnel of the Investment Managers or their Affiliates will devote their
entire time to the Portfolio Companies or the Fund.
REGULATION. The Fund has elected to be regulated as a BDC under the
Investment Company Act, which imposes numerous restrictions on the activities of
the Fund, including restrictions on the nature of its investments, its use of
leverage, and its issuance of securities, options, warrants, or rights. Among
the restrictions is the requirement that a majority of the Directors be
individuals who are not "Interested Persons" of the Fund as defined in the
Investment Company Act and that the Fund generally must invest at least 70% of
its assets in securities of nonpublic companies or shares of public companies
which shares are not eligible for margin loans under the rules of the Federal
Reserve Board. In addition, a BDC must make significant managerial assistance
available to the Portfolio Companies whose securities it purchases. Although the
Directors and Investment Managers believe that the constraints applicable to
BDCs are consistent with the objectives of the Fund, such constraints could
prohibit the Fund from investing in some potentially attractive situations that
might otherwise be available if such an investment would not disqualify the Fund
from its status as a BDC. See "Investment Company Act Regulation."
Because there are no judicial and few administrative interpretations of
portions of the Investment Company Act legislation applicable to the Fund, there
is no assurance that the legislation will be interpreted or administratively
implemented in a manner consistent with the Fund's objectives and intended
manner of operation. In the event the Directors determine that the Fund cannot
operate effectively under the Investment Company Act, it may at some future date
decide to withdraw the Fund's election as a BDC and transform the Fund into an
operating company not subject to regulation under the Investment Company Act or
cause the Fund to liquidate. These changes may not be effected without the
approval of a Majority in Interest of the Investors.
COMPENSATION OF THE INVESTMENT MANAGERS,
THEIR AFFILIATES, AND THE INDEPENDENT DIRECTORS
INVESTMENT MANAGERS. In addition to their distributive shares of Fund
profits, losses, and distributions (see "Allocation of Profits and Losses" and
"Distributions"), the Investment Managers will receive from the Fund in
connection with the activities of the Fund certain fees and compensation, which
are described below:
(i) ORGANIZATIONAL EXPENSE PAYMENTS to reimburse the Investment Managers
for actual expenses paid or incurred by the Investment Managers or
their Affiliates in connection with organizing the Fund, including
legal, accounting, and publishing expenses relating to this Prospectus,
registration statement, and related filings.
(ii) OFFERING EXPENSE PAYMENTS NOT TO EXCEED .25% OF TOTAL INVESTOR CAPITAL
CONTRIBUTIONS in connection with offering the Shares.
(iii) A MANAGEMENT FEE EQUAL TO 2% OF TOTAL INVESTOR CAPITAL CONTRIBUTIONS
FOR EACH YEAR OF FUND OPERATIONS DURING THE OFFERING PERIOD AND 2% OF
ADJUSTED CAPITAL CONTRIBUTIONS FOR EACH YEAR to compensate the
Investment Managers. A full 2% Management Fee shall be payable for
each Investor whose subscription is accepted by the Fund without
proration for the amount of time such Investor was an Investor during
the Offering Period. To the extent such payment is determined to be a
payment in advance prohibited by regulation, the advance portion of
the payment will be deferred as necessary to avoid such determination.
The Management Fees for the years after the Closing Date shall be
payable monthly in arrears, beginning with the month following the
Closing Date. To the extent Fund cash reserves are insufficient to pay
the entire Management Fee when due, the unpaid fee shall be carried
forward and paid when cash reserves are sufficient to allow the
payment.
The Investment Managers will pay all Offering Expenses even if those costs
or expenses exceed the amount of the corresponding payments or reimbursements
from the Fund. All Operational Costs incurred for the benefit or on behalf of
the Fund will be paid, or reimbursed to the Investment Managers, by the Fund.
12
<PAGE> 13
Operational Costs whether paid directly by the Fund or reimbursed to the
Investment Managers include, without limitation, consultants' fees, legal and
accounting fees (other than those included in Organizational Expenses and
Offering Expenses), and the costs of goods, materials, and services used for the
benefit of the Fund and obtained from entities unaffiliated with the Investment
Managers. The Fund will also reimburse the Investment Managers or their
Affiliates for Fund Operational Costs incurred by the Investment Managers or
their Affiliates necessary to the operation of the Fund, provided that the
reimbursement is at the lower of the Investment Managers' or their Affiliates'
actual cost or the amount the Fund would be required to pay to independent
parties for comparable services in the same geographic location.
No reimbursement will be permitted for services for which an Investment
Manager is entitled to compensation by way of a separate fee. Excluded from the
allowable reimbursement are expenses of a general and administrative nature that
are specifically incurred by the Investment Managers solely for their own
accounts and are not attributable to services provided to or for the Fund.
"Offering Expenses," "Organizational Expenses," and "Operational Costs," are
defined in greater detail in the Operating Agreement. See Exhibit A.
The audited financial statements of the Fund will include all costs
reimbursed to the Investment Managers or their Affiliates.
SUMMARY OF INVESTMENT MANAGER COMPENSATION AND ALLOCATIONS*
<TABLE>
<S> <C>
Reimbursement of Offering Expenses Up to .25% of total Capital Contributions*
Reimbursement of Organizational Expenses Actual expenses as incurred
Reimbursement of Operational Costs Actual expenses as incurred
Management Fees 2% of total Capital Contributions for each
year of the Offering Period
2% of Adjusted Capital Contributions per
year thereafter**
Investment Manager Profit Allocation 20% of profits***
</TABLE>
- ---------------
* Percentages are based on aggregate Capital Contributions of the Investors
unless otherwise indicated.
** "Adjusted Capital Contributions" equal total Investor Capital Contributions
raised in the Offering reduced by the cost basis of any Portfolio Company
securities (i) distributed to, or liquidated and the proceeds distributed
to, the Investors, or (ii) written off with no further attempt being made by
the Investment Managers to aid the Portfolio Company, but not reduced by net
operating losses of the Fund.
*** The Investment Managers generally have only a 1% interest in profits to the
extent that there have been losses that were allocated 99% to the Investors
and 1% to the Investment Managers and such losses have not been offset by
profits allocated 99% to the Investors and 1% to the Investment Managers.
See "Allocation of Profits and Losses" and "Distributions."
INDEPENDENT DIRECTORS. Each Independent Director will receive from the
Fund in connection with the activities of the Fund certain fees and
compensation, which are described below:
(i) ANNUAL FEE of $6,000 per year, payable in quarterly installments;
(ii) INDEPENDENT DIRECTORS MEETING FEE of $1,000 per meeting of the
Independent Directors attended up to an annual limit of $4,000;
(iii) COMMITTEE MEETING FEE of $1,000 per meeting of a committee (e.g.,
an Audit Committee) of the Independent Directors attended up to an
annual limit of $4,000, unless held on the same day and place as
an Independent Directors meeting, in which case no additional fee
will be paid; and
(iv) EXPENSE REIMBURSEMENT of out-of-pocket expenditures relating to
meetings of the Independent Directors or any separate committee
meeting.
13
<PAGE> 14
The Operating Agreement allows the Independent Directors to increase their
compensation only with the approval of a Majority in Interest of the Investors.
ALLOCATION OF PROFITS AND LOSSES
Net Profits and Net Losses of the Fund will initially be allocated 99% to
the Investors and 1% to the Investment Managers. When the cumulative Net Profits
exceed the cumulative Net Losses and Offering Costs, Net Profits and Net Losses
will be allocated 80% to the Investors and 20% to the Investment Managers. Net
Profits and Net Losses allocated to the Investors as a group will be allocated
to each Investor in proportion to the number of Shares held by the Investors.
For this allocation, the Shares purchased by the Investment Managers will be
treated the same as Shares purchased by other Investors.
The Operating Agreement also provides for a special allocation to the
Investment Managers of any Net Losses in excess of the positive capital account
of the Investors. If the allocation of Net Losses has resulted in the Investment
Managers having a deficit Capital Account balance, subsequent Net Profits will
be specially allocated to the Investment Managers until the deficits have been
eliminated.
The intent of these Net Profit and Net Loss allocations is to provide that
the Investors receive 99% of the gains and losses until the Fund's cumulative
profits exceed its cumulative expenses and investment losses, and that the
Investment Managers are ultimately allocated up to 20% of the Net Profits of the
Fund only after taking into account all cumulative Net Losses.
The following example illustrates the operation of such allocation
formulas. The dollar amounts used in the example have been chosen completely
arbitrarily and solely for the purposes of illustration, and are not meant to
reflect the actual expected results of Fund investments. The example does not
take into account the Investment Managers' interest in Fund capital.
EXAMPLE. The Fund incurs a Net Loss of $100 in year 1. There is no Net
Profit or Net Loss in years 2-5. In year 6, the Fund has a Net Profit of $600.
In year 7, the Fund liquidates and realizes a Net Loss of $50 on liquidation.
The Net Loss of $100 incurred in year 1 is allocated $99 (99%) to the Investors
and $1 (1%) to the Investment Managers. In year 6, the Net Profit of $600 is
allocated in the following manner: (i) the first $100 is allocated $99 to the
Investors (i.e., until the Net Loss previously allocated to them has been
offset) and $1 to the Investment Managers (also to offset the Net Loss
previously allocated to them); (ii) the remaining $500 are allocated $400 (80%)
to the Investors and $100 (20%) to the Investment Managers. Upon liquidation,
Net Loss of $50 is allocated $40 (80%) to the Investors and $10 (20%) to the
Investment Managers. Accordingly, in this example, the Fund would have had an
overall profit of $450, which was allocated $360 to the Investors and $90 to the
Investment Managers.
DISTRIBUTIONS
All Cash and Securities Available for Distribution, as determined by the
Directors, shall be distributed no less frequently than annually. Short-term
investment income earned will be retained by the Fund to offset operating
expenses. The primary source of distributable cash will be proceeds from the
disposition of venture capital investments not reinvested. To the extent the
Fund incurs indebtedness, the Investment Company Act prohibits distributions to
Investors unless the Fund's asset coverage ratio (as defined in the Investment
Company Act) is at least 200% at the time of the distribution.
Because most venture capital investments are illiquid until they mature, no
significant distributions should be expected in the early years of the Fund.
Distributions made prior to liquidation of the Fund will be paid 99% to the
Investors to the extent of their cash capital contributions and 1% to the
Investment Managers until the Investors have received distributions equal to
their Capital Contributions. Thereafter, distributions will be made 80% to the
Investors as a group and 20% to the Investment Managers. Of that portion
distributed to Investors, distributions will be made to the Investors in
proportion to their respective Capital Account balances. The Directors shall
endeavor to make a
14
<PAGE> 15
minimum distribution no later than 90 days after the fiscal year end to the
extent of cash available for distribution to cover the tax liability of the
Investors and Investment Managers for any allocations of Net Profit assuming an
effective tax rate equal to the sum of the maximum Federal tax rate for
individuals plus the maximum California tax rate for individuals.
Distributions upon liquidation of the Fund will be paid to the Investors
and Investment Managers either 99% and 1% or 80% and 20% and then to the
Investors in proportion to their respective positive capital account balances.
USE OF PROCEEDS
The proceeds of the offering will be applied in the estimated amounts set
forth below.
<TABLE>
<CAPTION>
AMOUNT PERCENT
------------ -------
<S> <C> <C>
Gross Offering Proceeds(1)........................................... $100,000,000 100.00%
Offering Expenses(2)................................................. $ (250,000) .25%
------------
Amount Available for Fund
Operations and Investment............................................ $ 99,750,000 99.75%
First-year Management Fee(3)......................................... $ (2,000,000) 2.00%
------------
Amount Available for Investment, Subsequent Years' Management Fees
and Fund Operational Costs, and Organizational Costs............... $ 97,750,000 97.75%
</TABLE>
- ------------------
(1) Includes the Investment Managers' Capital Contributions. The Investment
Managers have contributed to the Fund its initial capital of $100,000.
(2) The Fund will reimburse the Investment Managers for Offering Expenses, but
not in excess of .25% of total Investor Capital Contributions. The
Investment Managers have agreed to pay, without recourse to or reimbursement
from the Fund, any offering expenses in excess of the .25%.
(3) The First Year Management Fee equals 2% of Investors' Initial Capital
Contributions.
Pending their investment as described herein, the Fund will invest its
available funds in interest-bearing bank accounts, money market mutual funds
(including the proposed Technology Funding Venture Money Fund), Treasury
securities and/or certificates of deposit with maturities of less than one year.
The Fund may also invest such funds in commercial paper (rated or unrated) and
other short-term securities. Cash, cash items, securities issued or guaranteed
by the United States Treasury or United States government agencies and high
quality debt securities (commercial paper rated in the two highest rating
categories by Moody's Investor Services, Inc. or Standard & Poor's Corporation
or, if not rated, issued by a company having an outstanding debt issue so rated
or corporate bonds rated at least AA) with maturities of less than one year at
the time of investment will qualify for determining whether the Fund has 70% of
its total assets invested in types of assets specified in Section 55 of the
Investment Company Act. See "Investment Company Act Regulation."
The Fund expects substantially all of its available funds (other than
reserves maintained for follow-on investments and operating expenses) will be
invested or committed by the end of the three-year period following the Closing
Date. However, depending on opportunities for investment, a significant portion
of the Fund's capital may be invested in temporary investments of the foregoing
types during such three-year period.
In addition, the Fund intends to apply for an exemptive order from the SEC
to allow the Fund to invest either uncommitted reserves or committed reserves
not immediately required for investment in qualifying assets in mutual funds
sponsored by the Investment Managers including Technology Funding Post-IPO
Venture Fund, a smallcap aggressive growth fund advised by the Investment
Managers. The investment objectives of the mutual funds in which the Fund might
invest pursuant to such an order include long term capital appreciation from
investments in securities of public companies in industries similar to those of
the private companies in which the Fund is expected to invest.
15
<PAGE> 16
BUSINESS OF THE FUND
The Fund is in the business of venture capital, which is providing growth
capital to emerging growth companies and actively helping to build those
companies. In the past twenty years, venture capital has become a multibillion
dollar industry that is recognized as one of the country's primary sources of
new economic growth. The principal reasons for this dramatic growth have been
(i) the venture capital industry's investment rate of return and (ii) the
industry's ability to demonstrate that the high risks of loss inherent in
investing in unproven companies can be significantly mitigated through investing
in a number of companies in a balanced portfolio, and through active
professional management of the investments in the individual Portfolio
Companies. Historical industry performance is not an indication of future
industry performance or Fund performance. The Investment Managers intend to
utilize many of the risk management and investment strategies common to the
industry. See "Investment Objectives" and "Portfolio Strategy and Policies"
below.
INVESTMENT OBJECTIVES
CAPITAL APPRECIATION. The primary investment objective of the Fund is to
seek long-term capital appreciation from venture capital investments in emerging
growth companies. The Fund may also invest in established companies that the
Investment Managers believe offer special opportunities for growth. Generating
current income for distribution to investors will not be a factor in the
selection of investments.
CAPITAL PRESERVATION. A second investment objective is to preserve
investor capital through risk management and active involvement with Portfolio
Companies. Risk management will be accomplished in several ways, including (i)
investing in a number of companies serving different markets and at different
stages of maturity, (ii) limiting the Fund's investments in very early-stage
companies, and (iii) investing in Portfolio Companies with other professional
venture capital investors. The Investment Managers also believe that active
involvement with Portfolio Companies is essential to achieving the Fund's
investment objectives. Any single venture capital investment is risky. Many will
not provide any gain, and some will be complete losses. Professional venture
capital investors expect, however, that the gains on successful investments will
offset the losses and provide a satisfactory percentage return on the entire
portfolio. See "Portfolio Strategy and Policies" below.
THERE IS NO ASSURANCE THAT EITHER OF THE FUND'S PRINCIPAL INVESTMENT
OBJECTIVES WILL BE ATTAINED. SEE "RISK FACTORS."
PORTFOLIO STRATEGY AND POLICIES
To meet the Fund's investment objectives, the Investment Managers must (i)
identify and invest in prospective Portfolio Companies whose equity has the
potential for significant appreciation, and (ii) minimize portfolio losses by
careful selection of Portfolio Companies, risk management, and active
participation with the Portfolio Companies.
PORTFOLIO COMPANIES. The Fund will take substantial equity positions in
emerging growth companies that the Investment Managers believe have outstanding
growth and profit potential.
Investments may also be made to a lesser extent in established
publicly-held or privately-held companies that the Investment Managers believe
constitute special situations offering opportunities for capital appreciation.
Direct investments in companies with operating histories may involve businesses
that are marginally profitable or incurring losses, that have negative net
worth, that have products, services, and/or technologies for which market
conditions are changing dramatically, or that are involved in bankruptcy or
reorganization proceedings. These companies can require significant managerial
assistance, and investments in these special situations will be made where the
Investment Managers have identified a specific strategy to improve operating
performance.
The Fund may occasionally make investments in publicly-traded securities of
emerging growth companies that the Investment Managers believe have long-term
growth possibility. The proportion of the Fund's
16
<PAGE> 17
portfolio that such securities may represent is limited by the Investment
Company Act. See "Investment Company Act Regulation."
STRUCTURE OF INVESTMENTS. The Fund's venture capital investments will
typically be structured in negotiated, private transactions directly with the
issuer. The securities acquired will primarily be common stocks and securities
convertible into common stocks, but may also include a combination of equity and
debt securities and warrants, options, and other rights to acquire such
securities, or limited partnership or joint venture interests. The Fund may also
make loans to Portfolio Companies to address temporary cash flow problems and
may provide guarantees to Portfolio Company creditors. Most of the venture
capital investments made by the Fund will be in private companies or restricted
securities of publicly-traded companies and will generally be restricted as to
resale or disposition. Consequently, most Portfolio Company equities will be
illiquid.
FOLLOW-ON INVESTMENTS. After its initial investment, the Fund anticipates
that it will typically provide additional or "follow-on" financings for a
Portfolio Company. See "Risk Factors -- Need for Follow-On Investments."
Follow-on investments may be made pursuant to rights to acquire additional
securities or otherwise to increase the Fund's ownership position in a
successful or promising Portfolio Company. The Fund may also be called upon to
provide follow-on investments for a number of other reasons, including providing
additional capital to a Portfolio Company to implement the company's business
plan, to develop a new line of business, or to recover from unexpected business
problems.
INDEBTEDNESS. The Fund is permitted to use leverage (i.e., borrowed funds
or senior securities) to raise all or a portion of the funds required to make
follow-on investments and to meet operating expenses. Such borrowing would
normally occur in the later years of Fund operations when the Fund's portfolio
may have significant value but no liquidity. The Fund may also borrow funds
during the offering period to allow it to participate in investment
opportunities in anticipation of additional Capital Contributions. The Fund will
not otherwise incur indebtedness except as a temporary measure for extraordinary
or emergency purposes. The amount of borrowing may not exceed 50% of Investor
Capital Contributions.
RESERVE MANAGEMENT. The Fund must retain significant reserves for a number
of years after the Closing Date in order to have sufficient funds for
equity-oriented follow-on investments in Portfolio Companies. In order to
enhance the rate of return on these reserves and increase the amounts ultimately
available for equity-oriented investments and Fund operating expenses, the Fund
will engage in a reserve management strategy that may include making secured
loans to Portfolio Companies, potential Portfolio Companies, or similar types of
corporations. The Fund also expects to invest some portion of these reserves in
either publicly traded securities or in mutual funds managed by the Investment
Managers, subject to applicable legal limits or SEC exemptive orders.
AVERAGE INVESTMENT. The amount of funds committed to a Portfolio Company
and the ownership percentage received will vary depending on the maturity of the
company, the quality and completeness of the management team, the perceived
business opportunity, the capital required compared to existing capital, and the
potential return. Although investment amounts will vary considerably, the
Investment Managers expect that the average investment (including follow-on
investments) will be between $750,000 and $2,500,000.
INVESTMENT PERIOD. The Investment Managers intend to invest the proceeds
as rapidly as is consistent with the investment objectives of the Fund. The Fund
expects to invest at least 50% of the increase in its total assets in each
calendar month during the Offering Period by the final day of that same calendar
month two years later and thus to have invested or committed in excess of 50% of
its total assets in securities designed to meet its business purpose in
accordance with sections 2(a)(48) and 55(a)(1)-(3) of the Investment Company Act
by the end of the two-year period beginning on the Closing Date. If, after the
end of the two-year period, less than 50% of the Fund's total assets have been
invested or committed for investment in Portfolio Companies, the Fund, unless a
Majority in Interest of the Investors direct otherwise, will make a distribution
of capital to its Investors so that, after such distribution, at least 50% of
total assets are invested or committed for investment as described in the
Prospectus. However, any net offering proceeds invested in Portfolio Companies
that are liquidated during said two-year period may be reinvested as described
in the Prospectus within the period ending on the later of the end of the
two-year period or the twelve-month period
17
<PAGE> 18
following such liquidation. Any portion of such proceeds not so reinvested or
committed for reinvestment, to the extent not utilized or reserved for expenses
or follow-on investments, will be distributed to Investors as soon thereafter as
practicable.
It is expected that it may take up to three years from the Closing Date for
the Fund to complete the investment of all of its initial capital (other than
reserves maintained for follow-on investments and operating expenses). However,
it is expected that the total amount invested by the Fund over its life in
equity-oriented Portfolio Company investments will equal at least 70% of total
Investor Capital Contributions. Equity-oriented investments will include common
stocks, securities convertible into common stocks, combinations of equity and
debt securities and warrants, options and other rights to acquire securities, or
limited partnership or joint venture interests, but will not include short-term
or long-term debt instruments that have the primary purpose of income generation
and that are temporary investments pending final placement of Fund capital in
equity-oriented investments.
RISK MANAGEMENT. The Investment Managers believe that risk management is
essential to achieving the Fund's objective of capital preservation. Risk
management will include:
(i) PORTFOLIO MANAGEMENT. The Investment Managers expect to balance the
Fund's portfolio in several ways.
(a) INDUSTRY. The Fund anticipates investing in Portfolio Companies
in a number of different industries, which may include, without
limitation, computers and software, electronics,
telecommunications, semiconductor manufacturing and equipment,
medical and health care products, advanced materials,
environmental technologies, and industrial technologies (e.g.,
factory automation and process control). Such assortment of
industries reduces the potential portfolio impact of adverse
developments in a particular industry.
(b) COMPANY. Assuming full funding, the Investment Managers expect
that the Fund will invest in as many as 30 to 40 Portfolio
Companies. The actual number of Portfolio Companies will be a
function of total funds available, and the average investment
size will be adjusted to compensate for funds available. Assuming
full funding, no more than 20% of the Fund's assets will be
committed to any one Portfolio Company.
(c) MATURITY OF PORTFOLIO COMPANIES. The Fund will also seek a
range of Portfolio Company maturities. More mature companies
often represent less risk, as they have already survived many of
the hazards of growth; however, the price of such companies'
equity typically is higher than that of earlier-stage companies
that have greater risk but higher appreciation potential. The
Investment Managers believe the best balance of risk and reward
changes according to industry, technology, and several business
and investing cycles. When the Fund's assets are fully invested,
however, the Investment Managers anticipate that no more than
one-third of the Fund's capital investments will be in seed- or
first-stage companies.
Actual portfolio composition may be dictated by market conditions
and funding opportunities that are beyond the Investment Managers'
control. Consequently, there can be no assurance that these
portfolio management objectives can be met.
(ii) CO-INVESTMENT. The Investment Managers expect that most of the
Fund's investments will be made in conjunction with other venture
capital funds, which may include other venture capital funds
managed by the Investment Managers. Most later-stage Portfolio
Companies require levels of funding in excess of what the Fund
could prudently provide by itself. In earlier-stage investments,
co-investment allows a greater number of investments, sharing of
necessary follow-on investment requirements, and joint involvement
in building the Portfolio Company. The investment position of the
Fund, along with its co-investors, will typically involve a
substantial, and often controlling, interest in the Portfolio
Company. By sharing opportunities with other investors, the Fund
not only expands the financial and managerial resources available
to the Portfolio Company, but also increases referrals to the Fund
from other venture investors,
18
<PAGE> 19
particularly those who concentrate their investments in seed-stage
companies that may subsequently need later-stage financings
provided by the Fund. Prior Funds managed by the Investment
Managers have co-invested with more than 100 private venture
capital firms and corporate or institutional investors.
ACTIVE PARTICIPATION. Active involvement with Portfolio Companies and
their management is essential to meeting the Fund's objectives. The ability and
necessity for such assistance is a major differentiating factor between mutual
funds investing passively in securities of publicly traded companies and
traditional venture capital firms. This role is more fully discussed in "Venture
Capital Operations" below.
CHANGE OF POLICY; PORTFOLIO TURNOVER. The Fund may not change its
investment objectives and policies so as to cease to be, or withdraw its
election as, a BDC under the Investment Company Act unless authorized by a
Majority in Interest of the Investors. Because venture capital investments are
generally for a relatively long period, it is expected that the Fund's rate of
portfolio turnover will be low. The short-term nature of the money market
securities or other publicly traded securities or mutual funds in which the Fund
will invest pending completion of its venture capital investments will result in
higher portfolio turnover in that segment of the portfolio. The Fund will not
purchase any securities on margin (except for use of short-term credit necessary
for the clearance of transactions), make short sales of securities (unless
assets are sufficiently segregated or the Fund otherwise owns the securities),
or purchase or sell commodities or commodity contracts (other than financial
futures contracts) except as permitted by the Investment Company Act or any
order issued by the SEC thereunder. By virtue of the election by the Fund to be
treated as a BDC under the Investment Company Act, there are certain limitations
on the Fund's choice of investments. See "Investment Company Act Regulation."
VENTURE CAPITAL OPERATIONS
The investment operations of the Fund in the venture capital area will
consist of the following basic activities:
(i) INVESTMENT DEVELOPMENT. Investment proposals may come to the
attention of the Investment Managers from many sources, including
unsolicited proposals from the public, personal contacts of the
Investment Managers, and referrals from banks, lawyers,
accountants, and other members of the financial community.
However, the principal sources of new investment opportunities are
expected to be other professional venture capital firms.
(ii) INVESTMENT RESEARCH -- EVALUATING INVESTMENT OPPORTUNITIES. Prior
to committing funds to an investment opportunity, investigation
and research will be conducted by the Investment Managers to
assess the prospects and risks of the potential investment. The
experience and expertise of the officers and partners of the
Investment Managers will be essential to the evaluation of
products, markets, industry trends, financial requirements,
competition, and the entrepreneurial group associated with a
prospective investment. Where appropriate, the Investment Managers
may hire, on behalf of the Fund, outside consultants to provide
expertise in specialized areas.
(iii) INVESTMENT STRUCTURING. An important factor in successful venture
capital investing is proper structuring of the transaction in
terms of price, type of security, restrictions on use of funds,
commitments or rights to provide additional financing, control and
involvement in the issuer's business, and liquidity. Most of the
Fund's venture capital investments will be acquired in
transactions that generally are negotiated directly with the
Portfolio Company. The Investment Managers will be responsible for
conducting such negotiations on behalf of the Fund and will seek
to structure the terms of the investment so as to provide for the
capital needs of the issuer, while maximizing the Fund's
opportunity for long-term capital appreciation. Where appropriate,
the Fund, the Investment Managers, or their Affiliates may receive
structuring fees, transaction fees, breakup fees, workout fees, or
other similar fees for providing such services to potential
Portfolio Companies.
19
<PAGE> 20
(iv) INVESTMENT MANAGEMENT -- ASSISTING AND PARTICIPATING IN PORTFOLIO
COMPANIES. Once an investment is made, success often depends on
the venture investors having active and significant participation
and influence on major business decisions. Representatives of the
Investment Managers, and/or a venture capital co-investor with the
Fund, will frequently serve as members of the boards of directors
of Portfolio Companies. The Fund will not rely totally on its
co-investors to provide managerial assistance for the Portfolio
Companies. Neither the Investment Managers nor their affiliates
expect to receive significant fees or compensation directly or
indirectly from Portfolio Companies. This board representation, as
well as the Investment Managers' close working relationships with
the Portfolio Companies' respective management teams, should
enable the Fund to exercise significant influence and to provide
management assistance with respect to such matters as capital
structure, budgets, profit goals, diversification strategy,
financing requirements, management additions or replacements, and
disposition strategy. Where necessary, the Investment Managers may
also assign professional consultants with financial or management
expertise to assist on specific company problems. The close
tracking of internal financial statements and progress reports, as
well as an active working relationship with management teams, form
the essential ingredients of effective monitoring and risk
control.
(v) INVESTMENT LIQUIDATION AND EXIT. In order to realize the
investment objective of capital gains within the limited duration
of the Fund, the venture capital investments must be sold. The
method and timing of the disposition of investments are critical
elements of maximizing portfolio return. The Fund expects to
liquidate its investments through a variety of transactions,
including mergers, acquisitions of Portfolio Companies by third
parties, sales in registered underwritten offerings, sales in the
public market pursuant to exemptions from registration, and
negotiated private sales to the Portfolio Companies, other
investors in the Portfolio Companies, or other venture capital
investors. In addition, the Operating Agreement provides that
distributions may be made in cash or securities. The SEC has
granted the Fund an exemptive order under Section 206A of the
Advisers Act of 1940 ("Advisers Act") exempting the Fund from
Section 205(a)(1) of that act. The exemption allows the Fund to
deem as realized gains or losses on securities distributed in-kind
to the Investors.
The effect of the exemptive order is to allow the Fund to
distribute to Investors any portfolio securities that are no longer
considered venture capital investments and are traded on any
nationally recognized exchange or market. All securities
distributed pursuant to the exemptive order will be valued at the
average of the closing bid and asked prices at which the relevant
securities were quoted on the relevant exchange or market during
the five trading days immediately preceding the distribution.
Investors will be able to liquidate any securities distributed
in-kind.
The Investment Managers anticipate that the Fund may enter into
arrangements to facilitate the eventual sale of securities
distributed to Investors at reduced transaction costs to the
Investors. However, the Investment Managers also anticipate that
Investors who might otherwise receive a relatively small and
possibly unwieldy amount of stock pursuant to any distribution
proposed to be made in-kind will instead receive only cash
distributions which may represent the proceeds of a sale of a block
of securities by the Fund or may be cash otherwise made available
from operations. For each distribution which could be made partly
or wholly in-kind, the Investment Managers will weigh the Fund's
ability to liquidate stock efficiently against the Investors'
opportunity to control the timing and amount of any gain or loss to
be realized on the securities.
Investors who receive distributions in-kind may be able to affect
both the amount and timing of the recognition of any gain or loss
on the security for income tax purposes. For distributions made
partly in cash and partly in-kind, allocations of Net Profit and
Net Loss will be allocated in an amount and manner sufficient to
equalize Capital Accounts per Share pursuant to Article 8 of the
Operating Agreement.
20
<PAGE> 21
MANAGEMENT OF THE FUND
The Directors will be responsible for management of the Fund. Although the
resignation or withdrawal of a Director could temporarily reduce the number of
Directors and although the Operating Agreement permits the addition of further
Directors, no such changes are presently expected. Subject to the authority and
supervision of the Directors, the Investment Managers, TFI and TFL, will be
responsible for (i) day-to-day management of the Fund, including analysis and
selection of the Portfolio Companies, (ii) negotiation and structuring of
financing arrangements, (iii) oversight of the Portfolio Companies, and (iv)
day-to-day administration of Fund affairs.
The day-to-day operations of the Portfolio Companies will be primarily the
responsibility of the managements of those companies. The Investment Managers
expect to provide assistance to the Portfolio Companies when needed,
particularly in the areas of management selection, market analysis, business
review, and the formulation of marketing and financing strategies. Where
appropriate, representatives of the Investment Managers will serve as Fund
representatives on the boards of directors or management committees of Portfolio
Companies. Material actions usually will require concurrence of those Fund
representatives or the investor group as a whole.
The Directors have exclusive control of the management of the Fund.
Investors, except the Investment Managers, will have no right to participate in
the control of the Fund.
Both Investment Managers hold positions as Investment Managers until their
successors have been elected to serve. In the event that the Investment Managers
are not re-elected and the Investment Managers are not reconfirmed, the Fund
will have to seek alternate arrangements with respect to its venture capital
portfolio.
THE INVESTMENT MANAGERS
TECHNOLOGY FUNDING INC. is a California corporation formed in 1979 to act
as Managing General Partner or Investment Manager of investment funds providing
capital to high technology companies. Its address is 2000 Alameda de las Pulgas,
Suite 250, San Mateo, California 94403. In conjunction with TFL, TFI has
organized and managed 21 other Funds. See "Prior Funds." TFI is registered as an
investment adviser under the Investment Advisers Act of 1940. TFI currently has
four senior officers whose backgrounds and experience are outlined in "Key
Personnel of the Investment Managers" below. Each is an affiliated person of TFI
and the Fund. TFI currently employs 39 persons, including TFI's senior officers.
TFI uses consultants and outside counsel extensively to provide expertise in
specific areas. TFI is one of the nation's most active venture capital
investors, ranking among the top 25% of the industry for assets under management
and annual investment activity. TFI is wholly owned by TFL.
TECHNOLOGY FUNDING LTD. is a California limited partnership formed in 1980
that serves as co-General Partner or Investment Manager with TFI in the various
Funds sponsored by Technology Funding. Its address is 2000 Alameda de las
Pulgas, Suite 250, San Mateo, California 94403. TFL is also registered as an
investment adviser under the Investment Advisers Act of 1940. TFL has two
General Partners, two Venture Partners, and 24 limited partners. Each General
Partner and Venture Partner is an affiliated person of TFL and the Fund. Charles
R. Kokesh is the Managing General Partner of TFL. The General Partners and
Venture Partners of TFL are all officers of TFI; Mr. Kokesh is also a director
of TFI.
THE FUND DIRECTORS
At the outset, the Fund will have five Directors -- three Independent
Directors and two Affiliated Directors. As required by the Investment Company
Act, a majority of the Directors, must be individuals who are not "interested
persons" of the Fund (as defined in the Investment Company Act). Such Directors
will be referred to as the Independent Directors. The three Independent
Directors are , , and . The
two Affiliated Directors are Charles R. Kokesh and Gregory T. George, whose
biographical information is included in "Key Personnel of the Investment
Managers."
21
<PAGE> 22
KEY PERSONNEL OF THE INVESTMENT MANAGERS
CHARLES R. KOKESH, FOUNDER AND MANAGING GENERAL PARTNER OF TECHNOLOGY
FUNDING, is responsible for the overall direction of Technology Funding and the
portfolio strategy and investment decisions for the Technology Funding Venture
Capital Funds. During the last 18 years, Mr. Kokesh has been directly involved
in investing more than $300 million in more than 240 companies. He has also
served on the board of directors or the management committee for a number of
those companies. Prior to starting Technology Funding in 1979, Mr. Kokesh was a
Vice President of Bank of America, where he was responsible for Global Treasury
Management Services. He has also held executive positions at Levi Strauss & Co.,
Ernst & Young, and Citibank. Mr. Kokesh received an A.B. from Harvard College,
an M.B.A. from Harvard Business School, and a J.D. from Boalt Hall School of
Law, University of California, Berkeley.
GREGORY T. GEORGE, GENERAL PARTNER OF TECHNOLOGY FUNDING, is directly
involved in identifying and qualifying new investment opportunities. He serves
as a director of a number of portfolio companies. His technology background
allows him to play a critical role in the successful development of these
companies. Before joining Technology Funding, Mr. George was an independent
management consultant specializing in the technical and strategic analysis of
venture-backed software companies. He adds an entrepreneurial perspective gained
from founding two successful ventures. He was a co-founder and Vice President
and Director of Technical Services at The Planning Economics Group and was
co-founder and Manager of Timesharing Services and Director of Technical
Consulting at Data Resources, Inc. Mr. George has an A.B. from Harvard College.
THOMAS J. TOY, VENTURE PARTNER AND MANAGING DIRECTOR OF CORPORATE FINANCE,
manages investment activities for Technology Funding. He has been instrumental
in the success of a number of top performing portfolio companies. He also serves
as a director of a number of portfolio companies. Previously, Mr. Toy managed
large corporate high technology and general industry relationships as a Vice
President of Bank of America. He handled all banking activities for these
clients including loans, cash management, investment banking, and international
requirements. Mr. Toy holds a B.A. and an M.M. from Northwestern University.
PETER F. BERNARDONI, A VENTURE PARTNER OF TECHNOLOGY FUNDING, is
responsible for due diligence, financial analysis, and maintaining ongoing
relations with Technology Funding's medical and healthcare companies, along with
ventures in consumer electronics and advanced materials. He plays an active role
and serves as a director for a number of portfolio companies. Before joining
Technology Funding in 1988, Mr. Bernardoni held several positions at IBM
Corporation. He began his career as a design engineer in disk drive products. He
moved into Sales and Marketing where he managed a sales team that targeted key
pharmaceutical and health care providers. Mr. Bernardoni earned his B.S. from
Santa Clara University and his M.S. from Stanford University, both in Mechanical
Engineering.
PRIOR FUNDS
INVESTORS IN THIS FUND WILL NOT BE ACQUIRING OWNERSHIP IN ANY OF THE FUNDS
DESCRIBED BELOW. INCLUSION OF THESE SUMMARIES DOES NOT IMPLY THAT THE FUND WILL
HAVE COMPARABLE RESULTS.
Since 1979, the Investment Managers or their principals have organized and
managed 21 other funds -- 11 public funds and 10 private funds. Technology
Funding's 11 public funds and 10 private funds had raised a total of
approximately $315 million from more than 42,400 investors and had provided
financing to 241 companies as of December 31, 1996.
Eight of the public funds and the two equity-oriented private funds are
entities that have provided, and in the most recent cases are continuing to
provide, equity capital for high technology companies. Three of the four most
recent public funds are BDCs similar to the Fund; these three entities are
described more fully below. The remaining BDC has a more narrow investment focus
concentrating on medically-oriented growth companies.
22
<PAGE> 23
The four earliest of the eight public funds had investment objectives
similar to those of the Fund; however, unlike the Fund, they primarily financed
and were actively involved in the management of equity partnerships or joint
ventures and were structured to provide investors with certain tax benefits as
well as capital appreciation. Two private equity-oriented funds were formed to
provide follow-on equity financing to companies in which prior public funds had
invested.
Taken as a group, all ten funds with investment objectives and policies
somewhat similar to those of the Fund have made a total of 141 equity-oriented
investments. Of the 141 investments, 27 have been completely sold and 33 have
failed. At December 31, 1996, there remained 67 active portfolio companies, 27
of which were publicly traded (10 of these had been partially sold) and 14 were
investments in other venture capital firms, of which all are still active.
Three of the eleven public funds, Technology Funding Secured Investors I,
Technology Funding Secured Investors II and Technology Funding Secured Investors
III, An Income and Growth Fund, L.P., primarily provided secured loans to high
technology companies. These three public funds were structured to provide
regular quarterly distributions to their investors. Technology Funding Secured
Investors I, II, and III had committed loans to 100 companies as of December 31,
1996. Eight of the 10 private funds were formed between 1979 and 1982, primarily
to finance product development for individual high technology companies. All
eight of these private funds have been liquidated.
The following summaries provide additional information on the three public
BDCs with investment objectives similar to the Fund. Additional information
about these entities is available by clicking on the hot-links to related pages
on the Technology Funding web site.
TECHNOLOGY FUNDING VENTURE PARTNERS V, AN AGGRESSIVE GROWTH FUND, L.P.
("TFVP5"), a BDC, was organized to provide venture capital financing to
pre-public, emerging growth companies. It raised $40.0 million from over 6,500
investors between May, 1990 and December, 1992. As of December 31, 1996, TFVP5
had invested, committed or loaned approximately $34.8 million in 52 companies,
four of which have failed. As of December 31, 1996, TFVP5 had a cash balance of
approximately $1.6 million. TFVP5 has distributed $865,607 to its investors.
TFVP5 has investment objectives and operations similar to the Fund, and may co-
invest with other Technology Funding funds. TFVP5's portfolio companies, the
amounts invested, and the fair value of each investment are listed on TFVP5's
most recent Form 10-Q or 10-K which you can retrieve from the SEC's Electronic
Data Gathering Analysis and Retrieval ("EDGAR") site at www.sec.gov.
TECHNOLOGY FUNDING VENTURE PARTNERS IV, AN AGGRESSIVE GROWTH FUND, L.P.
("TFVP4"), a BDC, was organized to provide venture capital financing to
pre-public, emerging growth companies. It raised $40.0 million from over 7,700
investors between January, 1989 and June, 1990. As of December 31, 1996, TFVP4
had invested, committed or loaned approximately $41.3 million in 41 companies,
five of which have failed. As of December 31, 1996, TFVP4 had a cash balance of
approximately $1.4 million. TFVP4 has distributed $40.2 million to its
investors. TFVP4 has investment objectives and operations similar to the Fund,
and may co-invest with other Technology Funding funds. TFVP4's portfolio
companies, the amounts invested, and the fair value of each investment are
listed on TFVP4's most recent Form 10-Q or 10-K which you can retrieve from the
SEC's EDGAR site at www.sec.gov.
TECHNOLOGY FUNDING PARTNERS III, L.P. ("TFP3"), a BDC, was organized to
provide venture capital financing to pre-public, emerging growth companies. It
raised $40.0 million from over 5,400 investors between March, 1987 and January,
1989. As of December 31, 1996, TFP3 had invested, committed or loaned
approximately $49.6 million in 60 companies, nine of which have failed. As of
December 31, 1996, TFP3 had a cash balance of approximately $5.3 million. TFP3
has distributed $8.5 million to its investors. TFP3 has investment objectives
and operations similar to the Fund, and may co-invest with other Technology
Funding funds. TFP3's portfolio companies, the amounts invested, and the fair
value of each investment are listed on TFP3's most recent Form 10-Q or 10-K
which you can retrieve from the SEC's EDGAR site at www.sec.gov.
23
<PAGE> 24
INDUSTRY TRACK RECORD AS OF 12/31/96(1)
<TABLE>
<CAPTION>
DATE OF TOTAL
INITIAL LIQUIDATION CASH
INVESTMENT DATE STATUS INVESTED
---------- ----------- ------ -----------
<S> <C> <C> <C> <C>
ENVIRONMENTAL/INDUSTRIAL
Avalon Imaging, Inc. ................... 12/94 Act $ 1,000,002
* Bolder Technologies, Inc. ............ 9/94 Pub 625,213
* Conversion Technologies International,
Inc. ................................. 5/95 Pub 2,250,000
Evans BioControl, Inc. ................. 2/89 6/90 Liq 400,000
GRC Environmental (Galson Remed.)....... 6/90 (6) Liq 565,605
Naiad Technologies (TMC)................ 12/95 Act 450,615
Nanodyne, Inc. ......................... 7/93 Act 698,478
Portable Energy Products................ 5/95 Act 1,302,508
SRG Holdings, Inc. ..................... 9/93 Act 1,430,692
SunPower Corporation.................... 8/90 Act 1,184,500
* Thermatrix, Inc. ..................... 9/89 Pub 4,492,583
Transphase Systems, Inc. ............... 10/92 12/96 Liq 1,652,016
-----------
Total............................... $16,052,211
===========
INFORMATION TECHNOLOGY AND
COMMUNICATIONS
AG Processing Technology................ 6/90 6/96 Liq $ 1,312,898
Ascent Logic Corp. ..................... 4/92 Act 902,500
Bridgestone (Epyx, Inc.)................ 5/88 Liq 551,110
* Cadence............................... 7/96 Pub 311,875
Coded Communications Corporation........ 4/93 12/96 Liq 999,999
* Electronic Designs, Inc.
(Crystallume)......................... 5/89 Pub 2,958,084
* GeoWorks, Inc. ....................... 8/89 Pub 2,874,052
Hunter Systems.......................... 6/90 4/93 Liq 4,072,324
IBIS Technology Corp. .................. 8/89 10/95 Liq 281,435
KOR Electronics, Inc. (Incl.
Terrapin)............................. 12/89 Act 4,248,021
Mosaic Systems, Inc. ................... 7/87 (6) Liq 985,487
Multiport, Inc. ........................ 6/93 Act 1,097,400
NetChannel, Inc. ....................... 10/96 Act 499,998
Phoenix Technologies Ltd. .............. 6/88 12/92 Liq 249,900
* Photon Dynamics....................... 7/96 Pub 300,000
Pilot Network Services, Inc. ........... 5/95 Act 946,105
Pinterra................................ 10/90 12/96 Liq 500,000
Positive Communications, Inc. .......... 8/94 Act 1,186,127
Quintar Company ........................ 12/89 Act 1,776,267
Reflection Technology, Inc. ............ 5/90 Act 3,657,231
Sequoia Systems, Inc. .................. 10/87 3/91 Liq 817,702
* Synopsis.............................. 7/96 Pub 237,375
Tessera, Inc. (IST Associates).......... 4/92 Act 850,000
UTStarCom, Inc. (Unitech Telecom,
Inc.)................................. 6/94 Act 750,000
Velocity Development.................... 9/93 Act 9,183,000
Vois Corporation........................ 8/96 Act 250,000
Wire Networks, Inc. .................... 2/96 Act 1,316,685
-----------
Total............................... $43,115,577
===========
<CAPTION>
CASH ANNUALIZED
TOTAL CASH UNREALIZED RECEIVED PLUS INTERNAL
RECEIVED TO VALUE OF UNREALIZED RATE OF
DATE (2) HOLDINGS (3) VALUE (4) RETURN (5)
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
ENVIRONMENTAL/INDUSTRIAL
Avalon Imaging, Inc. ................... $ 0 $ 1,183,528 $ 1,183,528 14.9%
* Bolder Technologies, Inc. ............ 2,215,885 945,284 3,161,169 105.8%
* Conversion Technologies International,
Inc. ................................. 263,281 756,818 1,020,098 -40.4%
Evans BioControl, Inc. ................. 190,010 0 190,010 -53.0%
GRC Environmental (Galson Remed.)....... 0 0 0 -100.0%
Naiad Technologies (TMC)................ 0 675,612 675,612 127.2%
Nanodyne, Inc. ......................... 27,978 673,665 701,643 0.1%
Portable Energy Products................ 0 1,473,522 1,473,522 8.4%
SRG Holdings, Inc. ..................... 79,183 57,271 136,454 -65.9%
SunPower Corporation.................... 13,762 3,294,320 3,308,082 21.5%
* Thermatrix, Inc. ..................... 0 10,546,353 10,546,353 18.7%
Transphase Systems, Inc. ............... 582,868 0 582,868 -62.1%
------------- ------------ ------------- -----
Total............................... $ 3,372,967 $ 19,606,372 $ 22,979,339 10.8%
============= ============ ============= =====
INFORMATION TECHNOLOGY AND
COMMUNICATIONS
AG Processing Technology................ $ 756,589 $ 0 $ 756,589 -9.2%
Ascent Logic Corp. ..................... 402,500 186,170 588,670 -20.5%
Bridgestone (Epyx, Inc.)................ 0 0 0 -100.0%
* Cadence............................... 0 474,000 474,000 131.0%
Coded Communications Corporation........ 141,403 0 141,403 -42.8%
* Electronic Designs, Inc.
(Crystallume)......................... 0 2,389,110 2,389,110 -4.2%
* GeoWorks, Inc. ....................... 10,578,710 4,290,195 14,868,905 49.0%
Hunter Systems.......................... 340,350 0 340,350 -100.0%
IBIS Technology Corp. .................. 298,238 0 298,238 1.0%
KOR Electronics, Inc. (Incl.
Terrapin)............................. 1,516,944 847,793 2,364,737 -17.9%
Mosaic Systems, Inc. ................... 0 0 0 -100.0%
Multiport, Inc. ........................ 368,404 1,828,383 2,196,787 23.7%
NetChannel, Inc. ....................... 0 499,998 499,998 0.0%
Phoenix Technologies Ltd. .............. 176,400 0 176,400 -7.4%
* Photon Dynamics....................... 0 381,250 381,250 61.5%
Pilot Network Services, Inc. ........... 0 1,782,108 1,782,108 47.9%
Pinterra................................ 1 0 1 -100.0%
Positive Communications, Inc. .......... 0 1,439,771 1,439,771 8.9%
Quintar Company ........................ 0 2,448,767 2,448,767 5.5%
Reflection Technology, Inc. ............ 1,086,498 4,274,164 5,360,662 13.2%
Sequoia Systems, Inc. .................. 1,679,210 0 1,679,210 27.0%
* Synopsis.............................. 0 323,750 323,750 86.0%
Tessera, Inc. (IST Associates).......... 450,087 1,329,605 1,779,692 21.0%
UTStarCom, Inc. (Unitech Telecom,
Inc.)................................. 17,246 4,381,472 4,398,718 121.2%
Velocity Development.................... 1,667,006 0 1,667,006 -96.8%
Vois Corporation........................ 0 280,000 280,000 25.4%
Wire Networks, Inc. .................... 0 1,319,590 1,319,590 0.3%
------------- ------------ ------------- -----
Total............................... $ 19,479,586 $ 28,476,126 $ 47,955,712 3.5%
============= ============ ============= =====
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
DATE OF TOTAL
INITIAL LIQUIDATION CASH
INVESTMENT DATE STATUS INVESTED
---------- ----------- ------ -----------
<S> <C> <C> <C> <C>
MEDICAL & HEALTH CARE TECHNOLOGY
Acusphere, Inc. ........................ 5/95 Act $ 999,998
ADESSO Specialty Services Organization,
Inc. ................................. 7/95 Act 1,600,000
* Affymetrix............................ 7/96 Pub 225,000
Angenics, Inc. ......................... 1/88 9/95 Liq 1,201,800
Aprex Corp. ............................ 12/90 (6) Liq 1,855,809
Arcturus Pharmaceutical Corporation..... 8/92 Act 399,666
* Arris Pharmaceuticals (Khepri
Pharmaceuticals)...................... 11/94 Pub 500,000
Biex, Inc. ............................. 7/93 Act 1,688,363
Cardiometrics, Inc...................... 6/89 12/96 Liq 2,665,750
CareCentric Solutions, Inc. ............ 10/95 Act 704,499
Circadian, Inc. ........................ 12/92 (6) Liq 812,643
* CV Therapeutics, Inc. ................ 3/94 Pub 2,611,717
* ENDOcare, Inc. ....................... 8/96 Pub 600,000
Everest & Jennings Int'l., Ltd. ........ 3/92 12/96 Liq 1,912,553
GenMark, Inc. .......................... 6/91 (6) Liq 375,674
* Gilead................................ 7/96 Pub 347,500
ICU Medical, Inc. ...................... 6/88 12/95 Liq 5,103,763
Integra Life Sciences (Telios).......... 1/89 12/96 Liq 1,252,419
Intelliwire............................. 2/93 Act 5,230
* LifeCell Corporation (incl. non-pub
$).................................... 3/89 Pub 1,270,641
* Matrix Pharmaceutical, Inc. .......... 7/87 Pub 1,790,934
Megabios Corp. ......................... 8/94 Act 1,170,001
Molecular Geriatrics Corporation........ 9/93 Act 500,000
Neurocrine.............................. 7/96 12/96 Liq 241,875
OrthoLogic Corp. ....................... 4/91 3/95 Liq 210,124
Oxford Glycosciences PLC................ 8/93 Act 1,499,890
Pharmadigm Biosciences.................. 4/93 Act 1,413,134
Periodontix, Inc. ...................... 12/93 Act 351,000
* Pharmos Corporation (Oculon).......... 6/92 Pub 1,380,000
Pherin Corp. ........................... 6/91 Act 400,000
* Physiometrix, Inc. ................... 5/92 Pub 1,400,022
* PolyMedica Industries, Inc. .......... 3/89 Pub 3,243,108
Prolinx Biochemistry.................... 5/95 Act 1,100,000
Pyxis Corp. ............................ 9/89 9/93 Liq 4,675,303
R2 Technology, Inc. .................... 5/94 Act 537,080
RedCell, Inc. .......................... 12/94 Act 1,162,891
* Shaman Pharmaceuticals, Inc. ......... 8/89 Pub 3,446,739
Sleep Physiology Services, Inc. ........ 4/90 6/95 Liq 1,272,547
Spectrascan Imaging Services, Inc. ..... 7/88 Act 6,881,583
* Systemix, Inc. ....................... 6/90 Pub 3,446,622
* TheraTx, Inc. ........................ 8/91 Pub 2,489,572
* ThermoElectron Corporation
(Sensormedics)........................ 5/90 Pub 1,500,000
UroMed Corp............................. 10/92 3/95 Liq 700,001
-----------
Total............................... $66,945,449
===========
VENTURE CAPITAL
Alta IV, Limited Partnership............ 11/88 Ven $ 1,000,000
Batterson, Johnson, & Wang, L.P. ....... 1/89 Ven 500,000
Colorado Ventures Management IV, L.P. .. 7/93 Ven 150,000
Columbine Venture Fund II, L.P. ........ 12/88 Ven 750,000
Delphi Ventures, L.P. .................. 9/88 Ven 1,000,000
El Dorado Ventures III.................. 5/91 Ven 450,000
Medical Science Partners................ 1/90 Ven 1,000,000
Newtek Ventures II...................... 9/89 Ven 773,764
OW & W Pacrim Investments, Limited...... 5/93 Ven 375,000
Onset Enterprise Associates, L.P. ...... 10/89 Ven 455,000
Spectrum Equity Investors............... 5/94 Ven 330,525
Trinity Ventures IV, L.P. .............. 3/93 Ven 219,248
Utah Ventures........................... 3/89 Ven 250,000
-----------
Total............................... $ 7,253,537
===========
<CAPTION>
CASH ANNUALIZED
TOTAL CASH UNREALIZED RECEIVED PLUS INTERNAL
RECEIVED TO VALUE OF UNREALIZED RATE OF
DATE (2) HOLDINGS (3) VALUE (4) RETURN (5)
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
MEDICAL & HEALTH CARE TECHNOLOGY
Acusphere, Inc. ........................ $ 0 $ 1,202,499 $ 1,202,499 14.5%
ADESSO Specialty Services Organization,
Inc. ................................. 3,023 2,654,585 2,657,608 56.4%
* Affymetrix............................ 0 403,800 403,800 222.1%
Angenics, Inc. ......................... 17,153 0 17,153 -45.8%
Aprex Corp. ............................ 0 0 0 -100.0%
Arcturus Pharmaceutical Corporation..... 546,868 0 546,868 15.5%
* Arris Pharmaceuticals (Khepri
Pharmaceuticals)...................... 0 511,043 511,043 1.0%
Biex, Inc. ............................. 0 2,524,839 2,524,839 27.1%
Cardiometrics, Inc...................... 1,628,146 0 1,628,146 -7.0%
CareCentric Solutions, Inc. ............ 0 757,832 757,832 8.2%
Circadian, Inc. ........................ 0 0 0 -100.0%
* CV Therapeutics, Inc. ................ 0 936,374 936,374 -33.2%
* ENDOcare, Inc. ....................... 0 730,134 730,134 48.1%
Everest & Jennings Int'l., Ltd. ........ 537,468 0 537,468 -24.9%
GenMark, Inc. .......................... 0 0 0 -100.0%
* Gilead................................ 0 500,000 500,000 107.0%
ICU Medical, Inc. ...................... 6,853,200 0 6,853,200 10.5%
Integra Life Sciences (Telios).......... 2,626,707 0 2,626,707 18.9%
Intelliwire............................. 0 41,834 41,834 68.2%
* LifeCell Corporation (incl. non-pub
$).................................... 38,987 1,502,886 1,091,873 -2.4%
* Matrix Pharmaceutical, Inc. .......... 0 2,784,627 2,784,627 9.6%
Megabios Corp. ......................... 0 2,259,561 2,259,561 33.1%
Molecular Geriatrics Corporation........ 0 188,680 188,680 -24.3%
Neurocrine.............................. 383,750 0 383,750 533.6%
OrthoLogic Corp. ....................... 277,329 0 277,329 13.0%
Oxford Glycosciences PLC................ 0 696,697 696,697 -19.7%
Pharmadigm Biosciences.................. 0 2,026,237 2,026,237 14.6%
Periodontix, Inc. ...................... 0 501,000 501,000 18.8%
* Pharmos Corporation (Oculon).......... 0 265,879 265,879 -32.4%
Pherin Corp. ........................... 0 800,000 800,000 13.4%
* Physiometrix, Inc. ................... 282,773 1,952,342 2,235,115 15.5%
* PolyMedica Industries, Inc. .......... 3,394,075 1,998,834 5,392,909 17.2%
Prolinx Biochemistry.................... 0 1,100,000 1,100,000 0.0%
Pyxis Corp. ............................ 44,322,221 0 44,322,221 114.9%
R2 Technology, Inc. .................... 0 873,083 873,080 22.4%
RedCell, Inc. .......................... 0 1,179,605 1,179,605 0.8%
* Shaman Pharmaceuticals, Inc. ......... 5,807,578 4,406,250 10,213,828 21.9%
Sleep Physiology Services, Inc. ........ 754,003 0 754,003 -18.0%
Spectrascan Imaging Services, Inc. ..... 6,455,740 1,420,950 7,876,690 7.9%
* Systemix, Inc. ....................... 16,611,916 2,802,310 19,414,225 168.1%
* TheraTx, Inc. ........................ 8,484,545 615,000 9,099,545 75.4%
* ThermoElectron Corporation
(Sensormedics)........................ 2,042,558 1,085,618 3,128,175 26.3%
UroMed Corp............................. 2,346,542 0 2,346,542 75.9%
------------- ------------ ------------- -----
Total............................... $ 103,414,598 $ 38,272,494 $ 141,687,092 37.8%
============= ============ ============= =====
VENTURE CAPITAL
Alta IV, Limited Partnership............ $ 2,377,629 $ 351,656 $ 2,729,285 21.8%
Batterson, Johnson, & Wang, L.P. ....... 193,239 385,726 578,965 3.4%
Colorado Ventures Management IV, L.P. .. 0 132,851 132,851 -4.8%
Columbine Venture Fund II, L.P. ........ 0 835,375 835,375 2.1%
Delphi Ventures, L.P. .................. 1,153,582 744,938 1,898,520 13.6%
El Dorado Ventures III.................. 106,273 448,244 554,517 8.4%
Medical Science Partners................ 13,500 1,519,138 1,532,638 8.0%
Newtek Ventures II...................... 265,766 807,251 1,073,017 8.0%
OW & W Pacrim Investments, Limited...... 0 375,000 375,000 0.0%
Onset Enterprise Associates, L.P. ...... 263,544 1,019,461 1,283,004 25.9%
Spectrum Equity Investors............... 0 448,612 448,612 22.1%
Trinity Ventures IV, L.P. .............. 126,936 170,542 297,478 13.3%
Utah Ventures........................... 336,764 108,201 444,965 11.8%
------------- ------------ ------------- -----
Total............................... $ 4,837,233 $ 7,346,995 $ 12,184,228 12.4%
============= ============ ============= =====
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
DATE OF TOTAL
INITIAL LIQUIDATION CASH
INVESTMENT DATE STATUS INVESTED
---------- ----------- ------ -----------
<S> <C> <C> <C> <C>
OTHER
Carillon Technology, Inc. .............. 5/88 (6) Liq $ 2,000,333
Lynk Systems............................ 7/93 Act 350,000
Erox Corporation........................ 8/91 3/94 Liq 400,000
In-Store Advertising, Inc. ............. 5/88 (6) Liq 1,528,380
* Yes! Entertainment Corporation........ 1/93 Pub 1,400,000
-----------
Total............................... $ 5,678,313
===========
<CAPTION>
CASH ANNUALIZED
TOTAL CASH UNREALIZED RECEIVED PLUS INTERNAL
RECEIVED TO VALUE OF UNREALIZED RATE OF
DATE (2) HOLDINGS (3) VALUE (4) RETURN (5)
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
OTHER
Carillon Technology, Inc. .............. $ 0 $ 0 $ 0 -100.0%
Lynk Systems............................ 413,983 369,600 783,583 47.3%
Erox Corporation........................ 679,500 0 679,500 24.8%
In-Store Advertising, Inc. ............. 0 0 0 -100.0%
* Yes! Entertainment Corporation........ 0 1,001,768 1,001,768 -8.0%
------------- ------------ ------------- ------
Total............................... $ 1,093,483 $ 1,371,368 $ 2,464,851 -14.3%
============= ============ ============= ======
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Public company as of 12/31/96. Publicly traded stocks are valued at 12/31/96 closing prices and no liquidity
discounts have been taken. This differs from the accounting treatment used on fund Form 10-K reports, where
marketable securities are valued using a five-day trading average and liquidity discounts are applied on those
securities that have trading restrictions.
(1) The funds included in the above table (TFP3, TFVP4, TFVP5) are only those with objectives most similar to the
Fund.
(2) Represents the total cash received through 12/31/96 by the partnerships either upon the sale or partial sale
of their investment, acquisition of the portfolio company, or note repayments.
(3) For non-public companies, the value of portfolio company securities is generally based on the most recent
financing round in which third parties participated. The valuation may be further reduced based on the
Investment Managers' judgment.
(4) Represents the sum of "Total Cash Received to Date" and "Unrealized Value of Holdings."
(5) Represents the cumulative compounded rate of cash received on cash invested over the time period from the
first investment, as indicated, to 12/31/96, assuming that the "Unrealized Value of Holdings" was received in
cash on 12/31/96. This portfolio of investments would result in a significantly lower return to Investors
because of such Investors' payment of commissions, organization and offering costs, management fees, and
operating expenses.
(6) Since IRR is -100%, liquidation date is not relevant and, therefore, not presented.
</TABLE>
CONFLICTS OF INTEREST
The Investment Managers are subject to various conflicts of interest
arising out of their relationships with the Fund. Because the Fund was organized
and will be operated by the Investment Managers (subject to the supervision of
the Directors), these conflicts will not be resolved through arm's-length
negotiations but rather through the exercise of the Investment Managers'
judgment consistent with their fiduciary responsibilities (as described in the
Operating Agreement) to the Investors and with the Fund's investment objectives
and policies. See "Business of the Fund." These conflicts include the following:
TRANSACTIONS WITH THE FUND. The compensation described under "Compensation
of the Investment Managers and Their Affiliates" was not determined by
arm's-length negotiations, although the Directors believe that the amount of
such compensation and the other terms and conditions of their relationship with
the Fund are reasonable and fair to the Fund. Articles 3 and 4 of the Operating
Agreement imposes various constraints on the Investment Managers in their
dealings with the Fund, and the terms and conditions of and compensation for
services rendered by an Investment Manager to the Fund are intended to be
consistent with industry norms. Furthermore, the Investment Company Act contains
restrictions as to certain transactions between the Fund and its Affiliates. See
"Investment Company Act Regulation." Generally, transactions involving the Fund
and Affiliates thereof must receive the prior approval of the SEC and/or the
Independent Directors. Moreover, the Investment Managers will be subject to a
fiduciary duty (as described in the Operating Agreement) to the Fund in
evaluating the capabilities, services, and compensation of persons rendering
service to the Fund.
AFFILIATED ENTITY INVOLVED IN MANAGEMENT. TFI, a California corporation
formed in 1979, is a co-Investment Manager or co-General Partner with TFL in all
of the other public and private funds. Substantially all of the employees for
the affiliated group of Technology Funding entities are employed by TFI. These
entities and their employees may be hired by TFI for various management tasks
for the Fund.
DISTRIBUTION OF SHARES BY AN AFFILIATE. The distribution of the Shares by
the Fund will be managed by TFI employees working on behalf of the Fund. No
additional compensation will be paid for such efforts.
COMPUTER SERVICES PROVIDED BY AN AFFILIATE. Computer services for the Fund
will be provided by Technology Administrative Management ("TAM"), a division of
TFL. For a number of years, TAM has provided necessary computer services to
Technology Funding and its affiliated funds.
26
<PAGE> 27
The Investment Managers believe that, over the life of each Fund, TAM can
provide such services more effectively and at lower cost than outside service
bureaus. TAM accumulates computer costs and then allocates those costs to
Technology Funding and its affiliated funds on the basis of actual usage. As
part of their overall audits of these affiliated funds, the Investment Managers'
independent auditors review the costs allocated for compliance with the various
operating agreements.
INVESTMENT ACTIVITIES. The Investment Managers, their principals, and
other funds managed by the Investment Managers will be engaged in making
investments similar to the investments that the Fund is expected to make. They
may make such investments without making the investment opportunity available to
the Fund and without reporting such investments to the Investors, except that
investments that are suitable for the Fund will be made available to the funds
before they are made available to the Investment Managers. The Investment
Managers, upon the request of the Independent Directors, will promptly furnish
the Independent Directors with information on a confidential basis as to any
venture capital investments made by the Investment Managers for their own
account or for any fund for which they act as Investment Manager. Although the
other funds managed by the Investment Managers have somewhat differing portfolio
objectives or focuses, to the extent an investment opportunity is deemed
suitable for more than one fund that has uncommitted funds, the Investment
Managers will determine the fund for which the investment is most appropriate
based on each fund's existing portfolio and investment focus, and the potential
risks and returns of the opportunity. If, in the Investment Managers' opinion,
the investment is equally appropriate and co-investment is not advisable, the
investment will be made by the Fund whose funds have been uncommitted for the
longest period of time. The only other funds managed by the Investment Managers
with uncommitted funds currently available for investments similar to the Fund's
proposed equity capital investments are TFP3, TFVP4, TFVP5, and Technology
Funding Medical Partners I, L.P. These funds will continue to make investments,
and the Fund may desire to participate as a co-investor in certain of those
investments. See "Co-Investment With Related Funds."
CO-INVESTMENT WITH RELATED FUNDS. Any co-investments made in a Portfolio
Company at the same time with other funds managed by the Investment Managers
will be on substantially the same terms and conditions. The Fund also might
invest in follow-on fundings of Portfolio Companies in which other funds managed
by the Investment Managers have previously invested. Such investments can be
made without any approval of the Investors. However, they would require the
approval of a majority of the Independent Directors and generally would require
an exemptive order from the SEC. There can be no assurance that such order can
be obtained. Furthermore, even with such an order, the Fund will not invest in
such a Portfolio Company unless a nonaffiliated third party is investing at a
similar price.
OTHER ACTIVITIES OF THE INVESTMENT MANAGERS. The Fund will not have
independent management or employees and will rely upon the Directors and
Investment Managers for management and administration of the Fund and its
assets. As a result of their interests in other funds and because they have also
engaged in and will continue to engage in other business activities, the
Investment Managers and their Affiliates might have conflicts of interest in
allocating their time between the Fund and other funds and activities in which
they are involved. Conflicts of interest may arise in allocating management
time, services, or functions between the Fund and other entities for which the
Investment Managers and their Affiliates may provide services; nevertheless, the
Investment Managers believe that they and their Affiliates have or can attract
sufficient personnel to perform all their responsibilities to the Fund. Further,
the Investment Managers have legal and financial obligations with respect to
their other funds that are similar to their obligations with respect to the
Fund. As Investment Managers, they also have liability for the obligations of
such funds and of the Fund. The Operating Agreement provides that the Investment
Managers are required to devote only such time as they deem necessary to the
Fund. Thus, the Fund has no contractual or other right to such services prior to
any other party.
TIMING OF DISPOSITION OF FUND INVESTMENTS. The Investment Managers have an
interest in the profits and losses of the Fund as set forth under "Allocations
of Profits and Losses" and "Distributions." The Investment Managers' interests
may in some cases be inconsistent with the interests of the Investors with
respect to the timing of disposition of Fund investments; however, the acts of
the Investment Managers are subject to supervision by the Directors. The
Directors are subject to a fiduciary duty (as described in the
27
<PAGE> 28
Operating Agreement) to the Fund in evaluating decisions as to the retention and
disposition of the Fund's investments.
LEGAL AND ACCOUNTING REPRESENTATION. Counsel and accountants for the Fund
and for the Investment Managers and their Affiliates have generally been the
same. The attorneys and other professionals who perform services for the Fund
can be expected to continue to perform services for the Investment Managers. If
a conflict arises and cannot be resolved, or if the consent of the respective
parties cannot be obtained to the continuance of such dual representation after
full disclosure of such conflict, such professionals will withdraw from the
representation of one or both of the parties with conflicting interests with
respect to the matter involved. Counsel and accountants for the Fund and the
Investment Managers have not acted on behalf of prospective investors or
conducted a review or investigation on their behalf. Each prospective investor
should consult with its own counsel and investment advisors with respect to an
investment in the Fund.
CONFLICTS WITH PORTFOLIO COMPANIES. The interests of a particular
Portfolio Company may, from time to time, conflict with those of the Fund or the
Investors. If the Investment Managers become actively involved in the management
of a Portfolio Company, to the extent of their authority and consistent with
their fiduciary obligations, if any, to the Portfolio Company, the Investment
Managers intend to resolve such conflicts of interest in what they consider to
be the best interests of the Fund.
INVESTMENT MANAGERS' REPRESENTATION OF FUND IN TAX AUDIT PROCEEDINGS. TFI
is designated as the Fund's "Tax Matters Partner" and is authorized and directed
by the Operating Agreement to represent the Fund and its Investors in connection
with all examinations of the Fund's affairs by tax authorities, including
resulting administrative or judicial proceedings, and to expend Fund assets in
doing so. Such proceedings may involve or affect other funds for which the
Investment Managers act as Investment Managers. In such situations, the
positions taken by the Investment Managers with respect to the fund that is
subject to the examination may have a different or adverse effect on the Fund.
Any decisions made by the Investment Managers with respect to such matters will
be made in good faith consistent with the Investment Managers' fiduciary duties
to the Fund and its Investors being examined, as well as to all other funds and
their Investors, for which the Investment Managers may be acting as Investment
Managers.
INDEMNIFICATION
Article 10 of the Operating Agreement provides for indemnification of the
Investment Managers by the Fund as described in "Additional Aspects of the
Fund -- Indemnification and Limitation of Liability of the Investment Managers
by the Fund." Investors might have a more limited right of action against the
Investment Managers than they would ordinarily have absent these provisions in
the Operating Agreement. To the extent that such provisions purport to provide
indemnification for liabilities arising under the Securities Act of 1933, the
SEC is of the opinion that such indemnification is contrary to public policy and
therefore unenforceable. The extent to which such provisions are enforceable
under Delaware law is unclear.
TAX INFORMATION
The following discussion summarizes the significant federal income tax
considerations in connection with an investment in the Fund by individuals who
are United States citizens or resident aliens. It is not feasible to comment on
all of the federal, state, and local income tax consequences resulting from the
organization of the Fund and the conduct of its contemplated operations. THESE
TAX CONSEQUENCES CAN VARY SIGNIFICANTLY WITH THE PARTICULAR SITUATION OF EACH
INVESTOR. MOREOVER, THE RELEVANT TAX PROVISIONS ARE COMPLEX AND SUBJECT TO
CHANGE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT SUCH INVESTOR'S OWN TAX ADVISOR
AS TO THE INCOME AND OTHER TAX CONSEQUENCES TO SUCH INVESTOR OF AN INVESTMENT IN
THE FUND.
This discussion was reviewed by Morgan, Lewis & Bockius LLP ("MLB"),
counsel for the Fund, MLB believes that the discussion addresses the significant
federal income tax aspects of an investment in the Fund;
28
<PAGE> 29
however, MLB expresses no opinion regarding the outcome of specific issues,
except where opinions are expressly stated. This discussion and the opinion of
MLB referred to herein are based on the relevant provisions of the Internal
Revenue Code of 1986, as amended (the "IRC"), and on the applicable Treasury
regulations thereunder (including proposed regulations), administrative rulings
and procedures, and judicial decisions. There is no assurance that the present
federal income tax laws or regulations affecting the Fund and its proposed
operations will not be changed by new legislation or regulations that could
affect Investors adversely or that the IRS will agree with the interpretation of
the current federal income tax laws and regulations summarized below.
FUND STATUS
CLASSIFICATION OF THE FUND. Under regulations recently issued by the IRS,
the Fund will be classified as a partnership and not as an association taxable
as a corporation for federal income tax purposes.
PUBLICLY-TRADED FUNDS. The Revenue Act of 1987 ("1987 Tax Act") contains a
number of provisions affecting the tax treatment of so-called "publicly-traded"
partnerships ("PTPs"). Most significantly, under the 1987 Tax Act, a PTP is
generally treated as a corporation for federal income tax purposes. If the Fund
were treated as a corporation for federal income tax purposes, there would be
potentially adverse consequences to the Investors unless the Fund elected to be
treated as a regulated investment company ("RIC").
In particular, (i) an Investor's share of the income, gain, losses,
deductions, and tax credits of the Fund would not be includible in that
Investor's federal income tax return, (ii) any income or gain of the Fund would
be subject to federal income tax at the rates applicable to corporations, and
(iii) distributions by the Fund to the Investors, other than liquidating
distributions, would constitute dividend income to the extent of the earnings
and profits of the Fund. Distributions reclassified as dividends would be taxed
as ordinary income to the Investors, and the payment would not be deductible by
the Fund in computing its taxable income.
A Fund is considered "publicly-traded" only if (i) interests in such Fund
are traded on an established securities market or (ii) interests in such Fund
are readily tradable on a secondary market (or the substantial equivalent
thereof). The legislative history of the 1987 Tax Act states that an established
securities market includes any national securities exchange registered under the
Securities Exchange Act of 1934 or exempted from registration because of the
limited volume of transactions, any local exchange, and any over-the-counter
market. The Fund Shares will not be traded on an established securities market.
The legislative history of the 1987 Tax Act also states that a secondary
market in a Fund's interests is generally indicated by the existence of a person
making a market in such interests. The substantial equivalent of a secondary
market exists where the holder of an interest has a readily available, regular
and ongoing opportunity to sell or exchange his interest through a public means
of obtaining or providing information of offers to buy, sell or exchange
interests. However, unless the offers to buy or sell such interests are normally
accepted in a timeframe comparable to that which would be available on a
secondary market, the interests will not be considered readily tradable on the
substantial equivalent of a secondary market.
IRS regulations provide certain safe harbors that, if satisfied by a Fund,
will result in interests in the Fund not being treated as readily tradable on a
secondary market or the substantial equivalent thereof. The Operating Agreement
restricts sales of Fund Shares to the extent necessary to avoid the creation of
a secondary market (or the substantial equivalent thereof) for the Shares and is
designed to comply with the safe harbors of the IRS regulations. The Investment
Managers have represented that they intend to exercise their discretion
regarding transfers of Fund Shares in a manner designed to prevent the Fund from
becoming a PTP. Based on the Operating Agreement and these representations, MLB
is of the opinion that the Fund will be treated as a partnership for federal
income tax purposes rather than a publicly-traded partnership taxable as a
corporation.
29
<PAGE> 30
FEDERAL INCOME TAXATION OF FUNDS AND INVESTORS GENERALLY
INVESTORS, NOT FUND, SUBJECT TO TAX. Under present law, a LLC which is
treated for federal income tax purposes as a partnership incurs no federal
income tax liability. Instead, each Investor is required to report on such
Investor's federal income tax return such Investor's distributive share of the
Fund's income, gains, losses, deductions, and credits for the taxable year of
the Fund ending with or within such Investor's taxable year, without regard to
any Fund distributions. It is possible that an Investor could recognize income
from Fund operations but not receive any cash distributions from the Fund to pay
the tax with respect to that income. The receipt of a cash distribution from the
Fund by an Investor results in the recognition of gain to the Investor only to
the extent the cash distribution exceeds the Investor's adjusted tax basis for
that Investor's interest in the Fund.
ALLOCATIONS OF PROFIT AND LOSS. An Investor's distributive share of Fund
income, gain, deduction, loss, or credit for federal income tax purposes
generally is determined in accordance with the provisions of the Operating
Agreement; however, if an allocation in an Operating Agreement does not have
"substantial economic effect" under IRC Section 704, the IRS can reallocate the
items "in accordance with the Investor's interest in the Fund (determined by
taking into account all facts and circumstances)."
The regulations under IRC Section 704 provide three ways in which an
allocation contained in a Operating Agreement will be respected for federal
income tax purposes: first, if the allocation has substantial economic effect as
specifically determined thereunder; second, if, taking into account all facts
and circumstances, the allocation is in accordance with the Investor's interest
in the Fund; and third, if the allocation is deemed to be in accordance with the
Investor's interest in the Fund under certain special rules.
In general, an allocation of income, gain, loss, or deduction (or item
thereof) to an Investor will have economic effect under the regulations if, and
only if, (i) the allocation is reflected in that Investor's capital account,
which capital account is maintained in accordance with the regulations; (ii)
liquidation proceeds are, throughout the term of the Fund, to be distributed in
accordance with the Investors' positive capital account balances; and (iii) any
Investor with a deficit in that Investor's capital account following the
liquidation of that Investor's interest is required to restore the amount of the
deficit to the Fund by the later of the end of the taxable year of the
liquidation or 90 days after the liquidation. Where an investor has no
obligation to restore a deficit in that Investor's capital account, an
allocation will still be considered to have economic effect if the Operating
Agreement contains a so-called "qualified income offset" and the allocation does
not cause or increase a deficit balance in such Investor's capital account.
In order for the economic effect of an allocation to be considered
substantial, the regulations require that the allocation must have a reasonable
possibility of substantially affecting the dollar amounts to be received by the
Investors, independent of tax consequences. In applying the substantiality test,
tax consequences that result from the interaction of the allocation with such
Investor's tax attributes that are unrelated to the Fund must be taken into
account.
Under the Operating Agreement, allocations are reflected by appropriate
adjustments to the Investors' capital accounts, and liquidation proceeds are
distributed in accordance with the Investors' positive capital account balances
throughout the term of the Fund. The Operating Agreement requires the
restoration of negative capital accounts by the Investment Managers upon
liquidation. Although the Investors are not obligated to restore any deficit
capital account balance on liquidation, such a deficit balance should not arise
since the Operating Agreement prohibits the allocation of losses to an Investor
to the extent such an allocation would result in a deficit capital account
balance. The Operating Agreement does contain a "qualified income offset"
provision as required by the regulations. In addition, it would appear that the
allocations under the Operating Agreement affect the dollar amounts to be
received by the Investors, independent of tax consequences. In the opinion of
MLB, allocations made pursuant to the Operating Agreement should be respected
for federal income tax purposes. If the IRS were successful in contending that
any Fund allocations should not be respected for federal income tax purposes,
such a determination could result in reallocation between the Investment
Managers and the Investors of a part of the Fund's income, gains, losses,
deductions, and credits in a manner that could have an adverse effect on the
Investors.
30
<PAGE> 31
TAXATION OF FUND OPERATIONS
GENERAL. One of the Fund's principal sources of income is expected to be
from the sale of equity interests in the Portfolio Companies. The sale by the
Fund of any equity interest purchased from a Portfolio Company should result in
capital gain or loss to the Investors. Net capital gains are currently taxed at
a preferential maximum rate of 28% for individuals.
LIMITATIONS ON DEDUCTION OF FUND LOSSES
ADJUSTED BASIS. An Investor is entitled to deduct on that Investor's
federal income tax return his or her distributive share of a Fund loss, but not
in excess of the Investor's adjusted basis for his or her interest in the Fund
(and subject to the other loss limitations discussed below). The adjusted basis
in an Investor's Fund interest is equal to the amount of cash and the adjusted
basis of any property net of liabilities which that Investor contributed to the
Fund, decreased (but not below zero) by distributions to the Investor from the
Fund (including constructive cash distributions resulting from a decrease in the
Investor's share of Fund liabilities), decreased by the Investor's distributive
share of Fund losses, and increased by that Investor's distributive share of
Fund taxable income.
If an Investor's distributive share of a Fund loss for any Fund taxable
year exceeds the adjusted basis in the Investor's Fund interest at the end of
that taxable year, such excess may not be deducted at that time but may be
carried over and deducted in any later year if, and to the extent, the adjusted
basis in the Investor's Fund interest at the end of the later taxable year
otherwise exceeds zero (and subject to the other loss limitations discussed
below).
PASSIVE LOSSES. IRC Section 469 provides, in part, that losses from trade
or business and related activities in which the taxpayer does not materially
participate -- so-called "passive losses" -- are deductible only up to the
aggregate income generated by those types of activities -- so-called "passive
income." Losses allocated to the Investors that are attributable to trade or
business expenses or losses of the Fund may constitute passive losses. These
losses will not be available to offset an Investor's income from wages,
portfolio investments (including interest on the Fund's uninvested funds), or
active trade or business activities in which such Investor materially
participates. Unused passive losses of an Investor can be carried over to offset
passive income received in future years. In addition, upon a fully taxable
disposition of a taxpayer's entire interest in a passive activity to an
unrelated party, the amount of any deferred losses will be allowed against
income that is not from a passive activity, after first being applied to passive
income in the year of disposition. See, however, the capital loss rules
discussed below.
Gain or loss from the sale or disposition of equity investments held by the
Fund likely will not constitute passive income or loss; thus, gain, if any, may
not be offset by an Investor's prior or current passive losses. See "Passive
Losses" above. Instead, such gain or loss likely will be considered attributable
to property held for investment.
CAPITAL LOSSES. Capital losses of individuals in excess of $3,000 are
deductible only against capital gains, although the excess capital losses may be
carried forward indefinitely.
NON-TRADE OR BUSINESS EXPENSES. Expenses incurred in connection with an
investment that is not considered a trade or business are deductible by
individuals, if at all, under IRC Section 212. Under IRC Section 67, IRC Section
212 expenses are deductible by an individual Investor only to the extent such
deductions (along with other so-called "miscellaneous itemized deductions")
exceed 2% of such Investor's adjusted gross income. The Fund expenses (including
fees) passed through to the Investors would be subject to this limitation if
they were considered not to be incurred in a trade or business.
There is substantial uncertainty whether the activities of the Fund will
constitute a trade or business as that concept has been interpreted by the IRS
and the courts. Because of the factual nature of this determination, MLB has
expressed no opinion on the extent to which the Fund's expenses would be
considered incurred in a trade or business. Potential investors should be aware
that all or a substantial portion of the Fund's expenses may be subject to the
limits of IRC Section 67; if so, such expenses would be
31
<PAGE> 32
deductible only to the extent that the Investor's aggregate miscellaneous
itemized deductions (including such expenses) exceeded 2% of such Investor's
adjusted gross income.
INVESTMENT INTEREST EXPENSE. IRC Section 163(d) generally limits the
amount of investment interest (i.e., interest incurred to purchase or carry
property held for investment) that a noncorporate taxpayer can deduct. The
deduction is limited to the amount of such taxpayer's investment income.
However, the investment interest deduction is not a miscellaneous itemized
deduction under IRC Section 67, and thus, is not subject to the limitation that
it exceed 2% of a taxpayer's adjusted gross income in order to be deductible.
Investment interest that cannot be deducted for federal income tax purposes for
any year because of the foregoing limitation may, subject to further
limitations, be carried over and treated as investment interest paid in
succeeding taxable years.
It should be anticipated that interest paid by the Fund on any borrowings,
as well as any interest paid by an Investor on borrowings incurred to purchase a
Share, may be considered "investment interest." Any investment income from the
Fund passed through to the Investors would qualify as investment income that
would increase the amount of investment interest that each Investor would be
able to deduct.
The foregoing rules will not apply to the extent losses from the Fund
constitute "passive losses" as described above. In such case, interest expense
(either of the Fund or of a Investor) attributable to the passive activity in
question will be treated as a passive activity deduction and not as investment
interest.
SALE OF AN INTEREST IN THE FUND
The sale or exchange of a Fund interest ordinarily results in a capital
gain or loss, but can result in the recognition of ordinary income under certain
circumstances. IRC Section 751 treats gain on the sale of a Fund interest that
is attributable to either (i) unrealized receivables of the Fund or (ii)
substantially appreciated Fund inventory as ordinary income. It is not
anticipated that the Fund will have significant amounts, if any, of unrealized
receivables or inventory.
FUND ORGANIZATIONAL AND SYNDICATION EXPENDITURES
Expenses of organizing the Fund (organizational expenses) are not
deductible by the Fund or any Investor. The Fund may elect to amortize
organizational expenses over a period of not less than 60 months.
MANAGEMENT FEE
The Operating Agreement provides for payment to the Investment Managers of
a Management Fee equal to 2% of total Investor Capital Contributions for each
year of Fund operations during the Offering Period and 2% of Adjusted Capital
Contributions for each year after the Closing Date. If the Management Fee is
deductible only under IRC Section 212, Investors would be subject to the
limitations under IRC Section 67 described above under "Limitations on Deduction
of Fund Losses -- Non-Trade or Business Expenses." The IRS could contend that a
portion of the Management Fee represents a nondeductible syndication cost or an
amortizable organizational expense. If the IRS were successful in this argument,
the deductions allocated to the Investors would be decreased.
ALTERNATIVE MINIMUM TAX
The IRC provides for an alternative minimum tax to be paid by corporate and
individual taxpayers to the extent such tax exceeds the taxpayer's regular
federal income tax liability. Alternative minimum taxable income is generally
the taxpayer's taxable income as recomputed using certain adjustments plus the
amount of the taxpayer's items of tax preference. In determining alternative
minimum taxable income, passive activity losses, as recomputed, are not
deductible. In addition, investment interest in excess of investment income is
not allowable as a deduction against alternative minimum taxable income even if
deductible in computing
32
<PAGE> 33
regular tax liability. In general, an investment in the Fund is not expected to
generate material items of tax preference for individuals.
The application of the alternative minimum tax depends on the facts and
circumstances of each taxpayer's situation and the computation of such tax is
complicated. Each prospective investor is urged to consult his or her tax
advisor to determine whether he or she will be subject to the alternative
minimum tax and the potential effects thereof on an investment in the Fund.
MISCELLANEOUS PROVISIONS
NO SECTION 754 ELECTION. Due to the tax accounting burden such election
imposes, the Fund does not intend to file an election under IRC Section 754 to
adjust the basis of Fund property in the case of a transfer of a Share or the
distribution of property by the Fund. As a consequence, a transferee might be
subject to tax upon the portion of the proceeds of a sale or disposition of Fund
equity securities that represents, as to that transferee, a return of capital.
This decision not to file an election may adversely affect the price that
potential transferees would be willing to pay for the Shares.
INTEREST AND PENALTIES. If Fund income or loss is subsequently adjusted by
the IRS, the Investors will be subject to interest on any deficiency from the
due date of the original return. Additionally, a penalty equal to 20% of the
understatement may be imposed for the "substantial understatement" of tax
liability even if the taxpayer was not negligent or fraudulent in filing the
taxpayer's tax return. "Substantial understatement" is defined as an
understatement for the taxable year that exceeds the greater of 10% of the
required tax or $5,000 ($10,000 for most corporations).
FUND AUDIT RULES. The tax treatment of Fund items of income and deduction
generally will be determined at the Fund level. Investors will be required to
file their tax returns in a manner consistent with the information returns filed
by the Fund, unless the Investor files a statement with such Investor's tax
return describing any inconsistency. In addition, TFI will be the Fund's "tax
matters partner" and as such will have authority to make certain decisions with
respect to any IRS audit and any court litigation relating to the Fund. In
general, the law limits the rights of less than one percent partners to
participate in such proceedings without notifying the IRS and the tax matters
partner.
POSSIBLE CHANGES IN FEDERAL INCOME TAX LAWS. The federal income tax
matters discussed herein and the opinion of MLB regarding federal income tax
matters are based on the laws in effect on the date of this Prospectus; however,
tax laws are subject to frequent changes. When these changes occur, the adopted
statutes, regulations, rulings, and judicial decisions may also be made
retroactive. Accordingly, there can be no assurance that future changes in the
IRC, Treasury regulations, IRS rulings, or judicial decisions will not adversely
affect an Investor's investment in the Fund. The content of any future tax
legislation is impossible to predict; therefore, prospective investors are urged
to consult their own tax advisors regarding the possible tax consequences of
future legislation on their investment in the Fund.
TAX TREATMENT OF FOREIGN INVESTORS
The federal income tax treatment of nonresident foreign individuals and
foreign corporations is complex and will vary according to each such Investor's
particular circumstances. Prospective foreign investors are urged to consult
their tax advisors with regard to (i) the tax treatment by their country of
residence and (ii) the impact of United States federal, state, and local income,
estate, and gift tax laws on an investment in the Fund. The Fund reserves the
right to refuse subscriptions from non U.S. residents.
STATE LAW CONSIDERATIONS
The Fund may operate in states and localities that impose a tax on the
Fund's assets or income based on the Fund's activities in those jurisdictions.
An Investor may be subject to an obligation to file tax returns and pay income
taxes (including, in some jurisdictions, a minimum tax) and estate or
inheritance taxes in states and localities in which the Fund does business as
well as in the Investor's own state of domicile. In particular,
33
<PAGE> 34
an Investor who is a nonresident of California may be required to file tax
returns in California and may be obligated to pay California income tax on that
Investor's share of Fund income attributable to California. Depending on
applicable state and local laws, deductions that are available to the Fund and
the Investors for federal income tax purposes may not be available for state and
local income tax purposes. In addition, corporations investing in the Fund may
become subject to a corporate income tax including a corporate minimum tax in
those states in which the Fund conducts business, as a result of their
investment in the Fund. Investors are urged to consult their tax advisors with
respect to these matters.
INVESTMENT COMPANY ACT REGULATION
The Small Business Investment Incentive Act of 1980 became law on October
21, 1980. This law modified the provisions of the Investment Company Act that
are applicable to an entity, such as the Fund, that elects to be treated as a
BDC. The Fund elected to be treated as a BDC on February 28, 1997, and, as such,
is considered to be a closed-end, nondiversified investment company as those
terms are defined under the Investment Company Act. The Fund may not withdraw
its election without first obtaining the approval of a Majority in Interest of
the Investors. The following is a brief description of the Investment Company
Act, as modified by the Small Business Investment Incentive Act of 1980, and is
qualified in its entirety by reference to the full text of the Investment
Company Act and the rules thereunder.
A BDC must be operated for the purpose of making investments in securities
of the types required by the Investment Company Act, which types include certain
present and former "eligible portfolio companies" and certain bankrupt or
insolvent companies. A BDC need not invest in all of the possible types of
securities. BDCs must also make available significant managerial assistance to
Portfolio Companies. An eligible Portfolio Company generally is a United States
company that is not an investment company (except for wholly-owned Small
Business Investment Companies licensed by the Small Business Administration) and
that (i) does not have a class of securities registered on a national securities
exchange or included in the Federal Reserve Board's over-the-counter margin
list, (ii) is actively controlled by the BDC either alone or as part of a group
acting together and an affiliate of the BDC is a member of the portfolio
company's board of directors, or (iii) meets such other criteria as may be
established by the SEC. Control, under the Investment Company Act, is presumed
to exist where the BDC owns 25% of the outstanding voting securities of the
investee.
The Investment Company Act prohibits or restricts the Fund from investing
in certain types of companies, such as brokerage firms, insurance companies, and
investment banking firms. Moreover, the Investment Company Act limits the type
of assets that the Fund may acquire to "qualifying assets" and certain assets
necessary for its operations (such as office furniture, equipment, and
facilities) if, at the time of the acquisition, less than 70% of the value of
the Fund's assets consists of qualifying assets. Qualifying assets include: (i)
securities of companies that were eligible Portfolio Companies at the time that
the Fund acquired their securities; (ii) securities of bankrupt or insolvent
companies that are not otherwise eligible Portfolio Companies; (iii) securities
acquired as follow-on investments in companies that were eligible at the time of
the Fund's initial acquisition of their securities but are no longer eligible,
provided that the Fund has maintained a substantial portion of its initial
investment in those companies; (iv) securities received in exchange for or
distributed on or with respect to any of the foregoing; and (v) cash items,
government securities, and high-quality, short-term debt. The Investment Company
Act also places restrictions on the nature of the transactions in which, and the
persons from whom, securities can be purchased in order for the securities to be
considered qualifying assets.
The Fund is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of Fund
interests senior to the Shares if its asset coverage, as defined in the
Investment Company Act, is at least 200% after the issuance of the debt or the
Fund interests. In addition, provision must be made to prohibit any distribution
to Investors or the repurchase of any Shares unless the asset coverage ratio is
at least 200% at the time of the distribution or repurchase.
After this offering, the Fund may sell its securities at a price that is
below the prevailing net asset value per Share only upon the approval of the
policy by the holders of a majority of its voting securities, including a
majority
34
<PAGE> 35
of the voting securities held by nonaffiliated persons, at its last annual
meeting. In addition, the Fund may repurchase its Shares, subject to the
restrictions of the Operating Agreement and Investment Company Act.
Under the Investment Company Act as amended by the Small Business
Investment Incentive Act of 1980, certain of the transactions involving the Fund
and its Affiliates (as well as Affiliates of those Affiliates) that would
previously have been prohibited without the prior approval of the SEC require
the prior approval of a majority of the Independent Directors and a majority of
the Independent Directors having no financial interest in the transactions.
Transactions involving certain closely affiliated persons of the Fund, including
its Investment Managers, still require the prior approval of the SEC. In
general, (i) any person who owns, controls, or holds with power to vote, more
than 5% of the outstanding Shares, (ii) any director, executive officer, or
general partner of that person, and (iii) any person who directly or indirectly
controls, is controlled by, or is under common control with, that person, must
obtain the prior approval of a majority of the Independent Directors and, in
some situations, the prior approval of the SEC, before engaging in certain
transactions involving the Fund or any Portfolio Company controlled by the Fund.
The Investment Company Act generally does not restrict transactions between the
Fund and its Portfolio Companies.
In accordance with the Investment Company Act, a majority of the Directors
are not interested persons as defined in the Act. See "Management of the Fund."
TERMS OF THE OFFERING
PLAN OF DISTRIBUTION. The Shares are being offered and sold directly by
the Fund.
No fractional Shares will be sold. Subscriptions may be rejected in whole
or in part by the Fund at any time within 30 days after the receipt by the Fund
of the Subscription Agreement. If any subscription is rejected, all monies paid
by the subscriber will be returned to the subscriber within 10 business days.
Subscriptions need not be accepted in the order received. The Fund reserves the
right to reduce any subscription and to allocate subscriptions received in the
event that the Shares are oversubscribed.
ADDITIONAL ASPECTS OF THE FUND
The Operating Agreement governs the relationships, rights, and obligations
of the Investors in the Fund. The following is intended only as a summary of
certain provisions of the Operating Agreement not discussed elsewhere in this
Prospectus. THE STATEMENTS MADE HEREIN DO NOT PURPORT TO BE COMPLETE AND ARE
QUALIFIED BY REFERENCE TO THE OPERATING AGREEMENT. PROSPECTIVE INVESTORS SHOULD
STUDY THE ENTIRE OPERATING AGREEMENT (ATTACHED AS EXHIBIT A) BEFORE SIGNING THE
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY.
FUND CAPITAL. Except as specifically provided in the Operating Agreement,
no Investor is entitled to interest on any Capital Contribution to the Fund or
on such Investor's Capital Account. Except as otherwise provided in the
Operating Agreement, no Investor has the right to withdraw, or to receive any
return of, such Investor's Capital Contribution. Without the consent of all
Investors, no Investor has the right to receive property other than cash in
return for such Investor's Capital Contribution. No Investor is required to make
any additional Capital Contributions to the Fund. See "Limited Liability of
Investors" below.
THE DIRECTORS. The Directors consist of the Independent Directors and the
Affiliated Directors. The Directors will call bi-annual meetings of the
Investors for the purpose of voting upon the approval and election of Directors.
At each bi-annual approval and election of Directors, the Directors will be
approved and elected to hold office for a term of two years from their approval
and election or until their successors are approved and elected. Directors may
succeed themselves in office. The Directors may designate successor Directors to
fill vacancies created by the retirement, withdrawal or removal of a Director by
the Directors pursuant to the Operating Agreement. The Investors may approve and
elect a successor to a removed Affiliated Director prior to or as of the
effective date of such removal by the consent or affirmative vote of a Majority
in Interest of the Investors, or such greater number as may be required by law
(in either case, subject to the condition described in "Voting Rights of
Investors" below).
35
<PAGE> 36
The number of Independent Directors will initially be three and will be
fixed from time to time by the Independent Directors. However, the number of
Independent Directors will not be less than three or more than nine. A majority
of the Directors will at all times be Independent Directors. If at any time the
number of Independent Directors is less than a majority of the Directors, the
remaining Directors will, within 90 days thereafter, designate one or more
successor Independent Directors so as to restore the number of Independent
Directors to a majority of the Directors. Any successor Independent Director
will hold office until his or her successor has been approved and elected or
until his or her removal or withdrawal. In the event that no Directors remain,
the Investment Managers will, within 90 days, call a meeting of Investors for
the purpose of approving and electing successor Independent Directors.
The Directors will have exclusive management and control of the business of
the Fund, and will have the authority, on behalf of the Fund, to do all things
that, in their sole judgment, are necessary or appropriate to carry out their
duties, except as the Operating Agreement may expressly limit such powers.
Subject to the asset coverage restrictions of the Investment Company Act, the
Directors have the power and authority to authorize the Investment Managers to
borrow on behalf of the Fund on such terms as they deem appropriate (but not in
excess of 50% of Investor Capital Contributions) and to secure such borrowings
by granting security interests in any Fund assets, including interests in the
Portfolio Companies. The Directors also have the power and authority to
authorize the Investment Managers to invest Fund capital as they deem
appropriate, and to sell, trade, or exchange any Fund assets (including the
Fund's interests in Portfolio Companies), or to abandon any of them, at such
times and for such consideration as they deem appropriate, subject only to
certain restrictions discussed below.
Subject to the supervision of the Directors, the Investment Managers have
exclusive power and authority, among other things, to manage and control the
venture capital investments of the Fund, including, but not limited to, the
power to make all decisions regarding the Fund's venture capital investment
portfolio and to find, evaluate, structure, monitor, sell and liquidate, upon
dissolution or otherwise, such investments, approve or guarantee Portfolio
Company borrowings, and provide, or arrange for the provision of, managerial
assistance to Portfolio Companies.
WITHDRAWAL AND REMOVAL OF THE INVESTMENT MANAGERS. The Investment Managers
have the right to withdraw from the Fund only if a Majority in Interest of the
Investors has consented to the appointment of a successor Investment Manager. A
Majority in Interest of the Investors has the power to remove both Investment
Managers and to admit another person or entity to be a successor Investment
Manager to the Investment Managers concurrently therewith being removed. A
majority of the Directors may also remove the Investment Managers.
Each of the Directors has the right to withdraw from the Fund at any time
by notice to the Directors. In such event, the remaining Directors will appoint
a replacement Director, who will hold office until such Director's successor has
been approved and elected.
In the event of the removal of the Investment Managers, the venture capital
investments of the Fund will be appraised by two independent appraisers, one
chosen by the Investment Managers and one by the Directors. Assuming the Fund
receives a favorable exemptive order from the SEC, the Investment Managers will
receive a final allocation of Net Profit or Net Loss as if all unrealized
capital gains or losses were realized and an allocation of Net Profit or Net
Loss was made at that time. If the Capital Accounts of the Investment Managers
have a positive balance after such allocation, the Fund will deliver a
promissory note (which note shall mature in not less than five years with equal
installments each year) in the amount of such balance, less their Capital
Contributions, to the Investment Managers payable out of 20% of any available
cash before any distribution. If such Capital Accounts have a negative balance,
the Investment Managers will pay cash to the Fund equal to such negative
balance. Thereafter, the Investment Managers' Fund interests will become
Investors' Fund interests.
INCAPACITY OF THE INVESTMENT MANAGERS. In the event of the incapacity of
an Investment Manager, the business of the Fund will be continued by the
remaining Investment Manager. The remaining Investment Manager will designate a
new Investment Manager, who will serve until the successor has been approved and
elected.
36
<PAGE> 37
VOTING RIGHTS OF INVESTORS. The Investors cannot participate in the
management or control of the Fund. However, the Operating Agreement provides
that, subject to certain conditions described below, the Investors may vote on
or approve certain Fund matters. Upon notification to the Investment Managers,
Investors may, at their expense, obtain a list of the names and addresses (if
known) of all of the Investors for a purpose reasonably related to such
Investor's interest as an Investor of the Fund.
Subject to the provisions described below, the Investors may: (i) approve
and elect or disapprove and remove the Directors and the Investment Managers;
(ii) approve or disapprove proposed changes in the nature of the Fund's business
so as to cause the Fund to cease to be, or to withdraw its election as, a BDC
under the Investment Company Act; (iii) approve or disapprove any proposed
investment advisory contract or management agreement or disapprove and terminate
any such existing contracts; provided, however, that such contracts are also
approved by a majority of the Directors; (iv) approve and ratify or disapprove
and reject the appointment of the independent accountants of the Fund; provided,
however, that such appointment is approved by a majority of the Directors; (v)
approve or disapprove the appointment of each successor Investment Manager; and
(vi) approve any other material matters related to the business of the Fund that
the Investment Company Act requires to be approved by the Investors so long as
the Fund is a BDC subject to the provisions of the Investment Company Act;
provided, however, that, prior to the exercise of any such right of approval,
the Directors amend the Operating Agreement to reflect such additional voting
right.
Notwithstanding any other provisions of the Operating Agreement, unless,
prior to the exercise by the Investors of the foregoing voting rights, the Fund
has obtained an opinion of counsel for the Fund, or counsel designated by
Investors owning an aggregate of at least 10% of the Shares, to the effect that
neither the possession of such right nor the exercise thereof will (i) violate
the provisions of the Act or the laws of the other jurisdictions in which the
Fund is then formed or qualified, (ii) adversely affect the limited liability of
the Investors, or (iii) adversely affect the treatment of the Fund as a
partnership for federal income tax purposes, the Directors and the Investment
Managers and/or the Investors, as the case may be, will be prohibited from
taking the proposed action or exercising such voting right unless such voting
right is mandated by the Investment Company Act.
AMENDMENTS TO THE OPERATING AGREEMENT. The Management Committee may amend
the Operating Agreement without the consent of the Investors subject to
authorization by the Directors to: (i) change the name of the Fund or the
location of its principal place of business; (ii) reflect the admission of a
Substituted Investor, additional Investors, or successor Director(s) and
Investment Manager(s) in accordance with the Operating Agreement; (iii) make any
change that is necessary to qualify the Fund as a limited liability company
under the laws of any state or that is necessary and advisable, in the opinion
of the Management Committee, to assure that the Fund will not be treated as an
association taxable as a corporation or as a publicly-traded partnership for
federal income tax purposes; (iv) make any change that is necessary and
advisable in the opinion of the Management Committee to prevent the assets of
the Fund from being classified as "plan assets" under ERISA; (v) make any change
required to comply with the Investment Company Act; (vi) replace the Investment
Managers with an entity that is affiliated with, otherwise related to or
succeeds in interest to one or both Investment Managers; and (vii) make any
other amendments similar to the foregoing.
Amendments to the Operating Agreement may be proposed by the Management
Committee or by Investors owning in the aggregate not less than 10% of the
Shares owned by all Investors. The Management Committee will submit any such
proposed amendment to all Investors and such proposed amendment will be
effective, except as provided below, if it is approved by at least a Majority in
Interest of the Investors. Unless approved by a majority of the Fund interests
affected thereby, no amendment will be permitted if, in the opinion of counsel
for the Fund (unless such counsel is disapproved by such majority), the effect
of any such amendment would be to: (i) increase the duties or liabilities of any
Investor; (ii) change the interest of any Investor in the assets, profits, or
losses of the Fund, except as otherwise provided in the Operating Agreement;
(iii) affect adversely the income tax status of the Fund or any rights of
Investors; or (iv) cause the Fund not to comply with the Investment Company Act.
TRANSFERABILITY OF SHARES. Article 13 of the Operating Agreement specifies
the conditions that must be met before a purported transfer of all or part of an
Investor's Shares will be valid as to the Fund and the
37
<PAGE> 38
Directors. The consent of the Management Committee is required for any assignee
of a Share of an Investor to be admitted to the Fund as a Substituted Investor.
INDEMNIFICATION AND LIMITATION OF LIABILITY OF THE INVESTMENT MANAGERS BY
THE FUND. The Operating Agreement provides that neither the Investment Managers
nor any of their Affiliates will be liable, responsible, or accountable in
damages or otherwise to the Fund or any Investor for any loss or damage incurred
by reason of any act performed by or omission of the Investment Managers or such
Affiliates in good faith in the furtherance of the interests of the Fund and
within the scope of the authority granted to the Investment Managers by the
Operating Agreement or by the Investors, provided that such acts of the
Investment Managers or such Affiliates did not constitute willful misfeasance,
reckless disregard, bad faith, negligence, misconduct, or any other material
breach of fiduciary duty (as described in the Operating Agreement) with respect
to such acts or omissions. The Fund, out of its assets and not out of the assets
of the Investment Managers, will, to the full extent permitted by law, indemnify
and hold harmless any Investment Manager and any of its Affiliates who were or
are parties or are threatened to be made parties to any threatened, pending, or
completed action, suit, or proceeding by reason of any acts, omissions, or
alleged acts or omissions arising out of such person's activities as an
Investment Manager, or as an Affiliate of such Investment Manager, if such
activities were performed in good faith in furtherance of the interests of the
Fund and were within the scope of the authority conferred to the Investment
Managers by the Operating Agreement or by the Investors against losses, damages,
or expenses for which such person has not otherwise been reimbursed, provided
that such acts of such person did not constitute willful misfeasance, reckless
disregard, bad faith, negligence, misconduct, or any other material breach of
fiduciary duty (as described in the Operating Agreement) with respect to such
acts or omissions and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. A successful
claim for indemnification by an Investment Manager would reduce the assets of
the Fund. Provisions reducing the liability or providing for indemnification of
the Investment Managers and their Affiliates may have the effect of encouraging
less prudent decisions because of the decreased likelihood of being held
accountable and may serve to deter derivative actions against the Investment
Managers and their Affiliates even though such actions if successful might
benefit the Fund.
LIMITED LIABILITY OF INVESTORS. An Investor's liability under the Act will
be limited, subject to certain possible exceptions, generally to the amount of
capital such Investor is obligated to contribute to the Fund in respect of such
Investor's Units plus such Investor's share of any assets and undistributed
profits of the Fund.
DISSOLUTION AND LIQUIDATION. The Fund will be dissolved on the first to
occur of (i) December 31, 2007 (or such later date to which the Directors extend
the Fund up to a limit of two two-year extensions), (ii) the incapacity of all
Directors and Investment Managers, (iii) the vote of a Majority in Interest of
the Investors, (iv) the withdrawal, retirement, or removal of both Investment
Managers, or the transfer or assignment by the Investment Managers of their
entire Fund interest, without designation of a successor prior to such
withdrawal, retirement, removal, transfer, or assignment, (v) the sale at any
one time of all or substantially all of the assets of the Fund, or (vi) the date
on which the Fund is dissolved by operation of law or judicial decree, provided
that, upon the occurrence of an event described in (ii) or (iv) above, the Fund
will not dissolve if (1) at the time there is a remaining Investment Manager who
carries on the business of the Fund, or (2) within 90 days after such event, all
Directors agree in writing to continue the business of the Fund and the
appointment, effective as of such date, of a successor Investment Manager.
Upon dissolution of the Fund, the affairs of the Fund will be wound up and
its assets distributed as provided in the Operating Agreement. The Operating
Agreement provides, in general, that in the event of dissolution and
liquidation, the assets of the Fund will be sold, and the Investors will receive
the net proceeds in proportion to the balances in their capital accounts.
Distributions may be made in kind if a sale would cause an undue loss. Any
Investment Manager with a negative capital account is required to restore the
deficit prior to liquidation. Investors may look only to the assets of the Fund,
not the assets of the Directors or Investment Managers, for payment on
liquidation.
COVENANTS OF INVESTORS. Article 16 of the Operating Agreement contains
various covenants and agreements required to be made by each Investor. The
covenants and agreements concern the transfer of
38
<PAGE> 39
Shares and an agreement by each Investor to advise the Fund of a breach of any
representations or warranties in the Operating Agreement or the Subscription
Agreement.
OTHER PROVISIONS OF THE OPERATING AGREEMENT. Each Investor is required to
give the Management Committee a personal power of attorney to execute documents
on such Investor's behalf, including the Operating Agreement and amendments
thereto. The books and records of the Fund must be kept in accordance with
generally accepted accounting practices and principles, and must be made
available, together with a list of the Investors, upon request by a Investor,
for any purpose reasonably related to the Investor's investment, including
without limitation any suit or other action by such Investor against the Fund.
However, the Management Committee may in their sole discretion elect not to
provide a list of the Investors if in their opinion provision of such a list for
a commercial purpose might jeopardize the Fund's status for tax purposes.
PORTFOLIO VALUATION
The valuation of the Fund's portfolio will be made quarterly by the
Investment Managers. Investments of the Fund for which market quotations are
readily available and that are freely marketable and not restricted as to
transfer will be valued at the average closing price (or at the bid/ask price
that is available on a national securities exchange or over-the-counter market)
for the last five trading days. For publicly-traded equity investments with
selling restrictions, an illiquidity discount will be applied when determining
fair market value.
Where market quotations are unavailable, valuation will be made in good
faith by the Investment Managers. The fair market value for equity venture
capital investments for which no market exists cannot be precisely determined.
In the early stages of development, venture capital investments will typically
be valued based upon their original cost to the Fund. Subsequently, these
investments will generally be valued utilizing subsequent rounds of third-party
financings.
Notes receivable will be valued to include accrued interest less any
discount related to warrants and the allowance for loan losses. This portfolio
valuation will approximate fair value through inclusion of an allowance for loan
losses. The allowance will be reviewed quarterly by the Investment Managers and
adjusted to a level deemed adequate to cover possible losses inherent in notes
and unfunded commitments.
In conjunction with possible notes receivable granted to Portfolio
Companies, the Fund may receive warrants to purchase certain shares of capital
stock of the Portfolio Companies. The cost basis of the warrants and the
resulting discount will be estimated by the Investment Managers to be 1% of the
principal balance of the original notes. The discount will be amortized over the
term of the loan and the warrants will be included in the equity investment
portfolio.
Securities with legal, contractual, or practical restrictions on transfer
may be valued at a discount from their value determined by the foregoing methods
to reflect the effect of such restrictions.
REPORTS, ACCOUNTING, AND AUDIT
The Fund will furnish to each Investor, within 120 days after the end of
each fiscal year of the Fund, a statement of the Fund's accounts as of the end
of such fiscal year (containing a balance sheet, statement of operations,
statement of Investors' capital, and statement of cash flows) audited by an
independent accounting firm that has been appointed by the Directors and
approved by a majority of the Directors or by a Majority in Interest of the
Investors. Within 75 days after the end of each of the first three fiscal
quarters of its fiscal year, the Fund will furnish each Investor with unaudited
quarterly financial information of the Fund. Within 75 days of the close of each
Fund year, the Fund will furnish to each Investor a statement setting forth all
information relating to the Fund's operations for such fiscal year as is
reasonably required by the Investors for the completion of their respective
federal and state income tax or information returns. The Fund will file all such
reports with all governmental authorities as required.
39
<PAGE> 40
SELLING MATERIALS
This offering is made only by means of this Prospectus, as amended and
supplemented, and any advertisements distributed by the Fund that comply with
either SEC Rule 134 or SEC Rule 482. Selling materials other than such
advertisements may be used in connection with the offering only when accompanied
or preceded by the delivery of this Prospectus. Only selling materials which
indicate that they are distributed by the Fund may be distributed to prospective
investors. These materials may include investor sales promotion brochures, web
sites, a question and answer sales booklet, and tombstone advertisements. Use of
any materials will be conditioned, if required, on filing with and clearance by
appropriate regulatory authorities. Such clearance does not mean that the agency
allowing use of the selling materials has passed on the merits of this offering
or the accuracy or adequacy of the selling materials.
LEGAL MATTERS
Certain legal matters relating to the Shares offered hereby have been
passed upon for the Fund by Morgan, Lewis & Bockius LLP which has also been
retained as Fund Counsel.
CUSTODIAN
The Fund will act as its own custodian of securities and will be subject to
the requirements of Rule 17f-2 under the Investment Company Act. It intends to
enter into safekeeping arrangements for those securities with Silicon Valley
Bank.
TAX SHELTER COMPLIANCE PROVISIONS
IRC Section 6111 requires "tax shelters" to be registered with the IRS and
to be assigned an identification number that must be furnished to investors and
included on their tax returns. Substantial penalties are provided for organizers
of tax shelters that fail to register or fail to supply registration numbers to
investors. Investors who fail, without reasonable cause, to include this number
on their returns will be subject to a $250 penalty. Investors also have certain
reporting obligations to the IRS and notice requirements to any person to whom
they transfer any part of their interest.
The Fund is not expected to generate significant tax advantages, and thus,
is not a "tax shelter" in the conventional sense. However, the language of IRC
Section 6111 and the temporary regulations issued thereunder is extremely broad
and may be read to include the Fund. Thus, the Investment Managers have
registered the Fund as a tax shelter.
ADDITIONAL INFORMATION
The Fund has filed with the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C., a Registration Statement (herein, together with
all amendments thereto, called the "Registration Statement") under the
Securities Act, with respect to the Shares offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
SEC. For further information pertaining to the Fund and the Shares, reference is
made to the Registration Statement and the exhibits filed as a part thereof,
which may be inspected at the offices of the SEC without charge. Copies thereof
may be obtained from the SEC upon payment of the prescribed fee.
40
