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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
1933 Act
File No. 333-23913
1940 Act
File No. 814-00139
FORM N-2
(Check Appropriate Box or Boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
------
Post-Effective Amendment No. 2 [X]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [ ]
Amendment No. ______ [ ]
Technology Funding Venture Capital Fund VI, LLC
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(Exact Name of Registrant as Specified in Charter)
2000 Alameda de las Pulgas, Suite 250
San Mateo, California 94403
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(Address of Principal Executive Offices (Number, Street, City, State, Zip
Code))
(415)345-2200
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(Registrant's Telephone Number, Including Area Code)
The Corporation Trust Fund, Corporation Trust Center,
1209 Orange Street, New Castle County, Wilmington, Delaware 19801
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(Name and Address (Number, Street, City, State, Zip Code) of Agent For Service)
As soon as practicable after the effective date hereof.
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(Approximate Date of Proposed Public Offering)
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [X]
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It is proposed that this filing will become effective (check
appropriate box):
[ ] when declared effective pursuant to Section 8(c).
CALCULATION OF REGISTRATION FEE UNDER THE
SECURITIES ACT OF 1933
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Title of Securities Amount Being Proposed Maximum Proposed Maximum Amount Of
Being Registered Registered Offering Price Per Aggregate Offering Registration Fee
Share Price
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Shares 1,000,000 $100.00 $100,000,000 $30,303.03
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TECHNOLOGY FUNDING VENTURE CAPITAL FUND VI, LLC
CROSS REFERENCE SHEET
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N-2 ITEM NO. LOCATION
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PART A
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Item 1. Outside Front Cover. Cover Page of Prospectus
Item 2. Inside Front and Outside Back
Cover Page. Not Applicable
Item 3. Fee Table and Synopsis. Cover Page of Prospectus
Item 4. Financial Highlights. Not Applicable
Item 5. Plan of Distribution. How to Subscribe; Terms of the Offering;
Suitability Requirements
Item 6. Selling Shareholders. Not Applicable
Item 7. Use of Proceeds. Use of Proceeds
Item 8. General Description of the Registrant. Business of the Fund; Risk Factors;
Additional Aspects of the Fund;
Item 9. Management. Management of the Fund; The Investment
Managers; The Fund Directors; Key
Personnel of the Investment Managers
Item 10. Capital Stock, Long-Term Debt, and Portfolio Valuation; Additional Aspects of
Other Securities. the Fund; Distributions
Item 11. Defaults and Arrears on Senior
Securities. Not Applicable
Item 12. Legal Proceedings. Not Applicable
Item 13. Table of Contents of the Statement of
Additional Information. Not Applicable
PART B
Item 14. Cover Page. Not Applicable
Item 15. Table of Contents Not Applicable
Item 16. General Information and History. Prior Funds; Management of the Fund (Part A)
Item 17. Investment Objective and Policies. Portfolio Strategy and Policy; Summary of
the Offering; Business of the Fund (Part A)
Item 18. Management. The Fund Directors (Part A)
Item 19. Control Persons and Principal Holders Management of the Fund; Key Personnel of
of Securities the Investment Managers (Part A)
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Item 20. Investment Advisory and Other Services. Management of the Fund; Other Aspects of
the Fund (Part A)
Item 21. Brokerage Allocation and Other Business of the Fund (Part A)
Practices.
Item 22. Tax Status. Tax Information; Federal Income Taxation
of the Funds Investors Generally; Taxation
of Fund Operations; Alternative Minimum
Tax; Tax Treatment of Foreign Investors;
State Law Considerations; Tax Shelter
Compliance Provisions (Part A)
Item 23. Financial Statements. Not Applicable
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PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
* Pursuant to General Instruction on Form N-2, all information required
to be set forth in Part B: Statement of Additional Information has been
included in Part A: The Prospectus. All items required to be set forth in
Part C are set forth in Part C.
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$100,000,000
1,000,000 SHARES OF FUND INTEREST IN
TECHNOLOGY FUNDING VENTURE CAPITAL FUND VI, LLC
MINIMUM SUBSCRIPTION: TEN SHARES ($1,000)
BECAUSE OF CHANGES IN FEDERAL LAW, SUITABILITY REQUIREMENTS IMPOSED IN
CONNECTION WITH PRIOR TECHNOLOGY FUNDING SPONSORED BUSINESS DEVELOPMENT
COMPANIES HAVE NOT BEEN IMPOSED ON THIS OFFERING.
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 persons investing in the Fund ("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.
Accordingly, Investors will not be able to withdraw their investments prior to
the dissolution of the Fund without the approval of the Investment Managers (as
defined below).
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," "VENTURE CAPITAL RISKS," "RISKS OF THE FUND," AND
"PORTFOLIO STRATEGIES AND POLICIES."
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 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.
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PRICE PROCEEDS
TO PUBLIC SALES LOAD(1) TO FUND(2)(3)
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Per Share........................ $ 100 0 $ 100
Total Minimum Offering........... $ 0 0 $ 0
Total Maximum Offering(4)........ $100,000,000 0 $100,000,000
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(1) The Shares are being offered on a "best efforts" basis through Technology
Funding Securities Corporation ("TFSC"), a wholly-owned subsidiary of TFI,
and a member of the National Association of Securities Dealers, Inc.
("NASD"). TFSC will not receive a sales commission. See "Terms of the
Offering."
(2) Before reimbursement to the Investment Managers for the Organizational
Expenses they incur on behalf of the Fund. Organizational Expenses are
expected to total $250,000. See "Use of Proceeds."
(3) Before reimbursement to TFSC for marketing and promotional expenses.
Marketing and promotional expenses are expected to total $800,000. See "Use
of Proceeds."
(4) The Fund is offering a maximum of 1,000,000 shares to the public.
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 on December 31, 2007, subject to the right of the 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 December 5, 1997.
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TABLE OF CONTENTS
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PAGE
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Summary of the Offering.......................................................... 4
Fee Table........................................................................ 7
Suitability Considerations....................................................... 7
How to Subscribe................................................................. 8
Risk Factors..................................................................... 8
Venture Capital Risks............................................................ 8
Risks of the Fund................................................................ 10
Compensation of the Investment Managers, Their Affiliates, and the Independent
Directors...................................................................... 14
Allocation of Profits and Losses................................................. 15
Distributions.................................................................... 16
Use of Proceeds.................................................................. 17
Business of the Fund............................................................. 17
Investment Objectives............................................................ 18
Portfolio Strategy and Policies.................................................. 18
Venture Capital Operations....................................................... 21
Management of the Fund........................................................... 22
The Investment Managers.......................................................... 23
The Fund Directors............................................................... 23
Key Personnel of the Investment Managers......................................... 24
Prior Funds...................................................................... 25
Conflicts of Interest............................................................ 29
Indemnification.................................................................. 31
Tax Information.................................................................. 31
Fund Status...................................................................... 32
Federal Income Taxation of Funds and Investors Generally......................... 33
Taxation of Fund Operations...................................................... 34
Limitations on Deduction of Fund Losses.......................................... 34
Sale of an Interest in the Fund.................................................. 35
Fund Organizational Expenditures................................................. 35
Management Fee................................................................... 35
Alternative Minimum Tax.......................................................... 36
Miscellaneous Provisions......................................................... 36
Tax Treatment of Foreign Investors............................................... 36
State Law Considerations......................................................... 37
ERISA Considerations............................................................. 37
Investment Company Act Regulation................................................ 38
Terms of the Offering............................................................ 39
Additional Aspects of the Fund................................................... 40
Portfolio Valuation.............................................................. 43
Reports, Accounting, and Audit................................................... 44
Selling Materials................................................................ 44
Legal Matters.................................................................... 44
Custodian........................................................................ 44
Tax Shelter Compliance Provisions................................................ 44
Additional Information........................................................... 45
Operating Agreement.............................................................. Exhibit A
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2
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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 all reports as required by
applicable laws. Each Investor will be asked to consent to delivery of these
reports and all other communications of the Fund by either having the reports
posted on the Fund's web site to which the Investor will have access or via
electronic mail. Upon receipt of such consent all communications will be
furnished electronically until the Fund is notified by an Investor of his or her
desire to rescind that election. Each Investor may at any time make an
affirmative election not to receive information electronically. In that case
only those items required by statute or the Operating Agreement will be
delivered 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> 8
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 an aggregate amount
of up to $100,000,000. No Shares will be sold below net asset value. Shares will
be sold by TFSC on a best-efforts basis. The minimum purchase is ten Shares
payable upon subscription in cash, by Automated Clearing House ("ACH") transfer,
or by check. The Fund intends to allow Investors to purchase Shares by credit
card in the future. Shares will be sold only to Investors who confirm that they
have reviewed the suitability considerations and they acknowledge that they meet
or exceed the suggested suitability standards. See "Suitability Considerations"
and "Terms of the Offering." The Operating Agreement of the Fund permits the
Fund to offer different series of the Shares.
The Fund has not been capitalized prior to the offering. There will be no
minimum offering. If the Fund is unable to sell 1,000,000 shares, the Fund will
have fewer investments and higher risk than the Investment Managers anticipate.
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, additional Investors will be admitted as their subscriptions
are accepted. See "Terms of the Offering."
NO TRADING MARKET. There is no public or secondary market for the Shares,
and none is likely to develop. See "Terms of the Offering." An affiliate of TFSC
will act as transfer agent for the Fund's securities, but will not engage in any
market-making, repurchase program, or secondary market purchases or sales of
Fund Shares.
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. 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 have elected to treat the Fund as a partnership for tax
purposes and do not intend to elect otherwise. The Fund will not seek a ruling
from the Internal Revenue Service concerning the Fund's tax status. 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 preferred or
common stock. Generating current income for distribution to Investors will not
be a factor in the selection of investments. By the end of the two and one half
year period after the commencement of the initial public offering of Shares, the
Fund intends to invest at least 50% of the Fund's 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. 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
4
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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 exemptive 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 exceed 50% of Aggregate Capital Contributions. Such a line of
credit could be used for any Fund purpose.
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 both terms are defined in
the Investment Company Act (herein, the "Independent Directors") and two being
affiliated with 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 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
and its Investors.
COMPENSATION TO INVESTMENT MANAGERS. In addition to the Investment
Managers' distributive shares of Fund profits, losses, and distributions
detailed below, the Fund will pay the Investment Managers a Management Fee equal
to 2% of total Investor Capital Contributions for each year of Fund operations
during the Offering Period and thereafter, an annual Management Fee equal to 2%
of Adjusted Capital Contributions. "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. To the extent permitted by applicable law, a
full 2% Management Fee shall be payable by 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. All Management Fees shall be due and
payable monthly in arrears. Prior to the Closing Date and as of the date of each
Investor's subscription agreement is accepted, the Management Fee will be
assessed for the period from the Commencement Date to the date of acceptance.
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 2% of the total capital being sought by the Fund. Actual
Operational Costs in any particular year may exceed this estimate. The
Investment Managers will also be reimbursed for actual Organizational Expenses,
and TFSC and TFI will be reimbursed for actual costs incurred in distribution of
the Fund's shares. TFI will receive 100% of the Management Fee due to the
Investment Managers to the extent of its costs. TFL will receive the remainder
of the Management Fee. TFL will receive 99% of the profit allocation due to the
Investment
5
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Managers with TFI receiving the additional 1%. 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. 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. The Fund will seek an exemptive order under Section 206A of the
Investment Advisers Act of 1940 ("Advisers Act") exempting the Fund from Section
205(a)(1) of the Act. The exemption will allow the Fund to distribute securities
in-kind and deem as realized gains or losses on such securities distributed to
the Investors. At such time as the Fund receives this exemptive order, it
intends to distribute securities in-kind. See "Distributions."
6
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FEE TABLE
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Annual Expenses (as a percentage of aggregate Capital Contributions of the
Investors)
Management Fees................................................................ 2.00%
Interest Payments on Borrowed Funds(1)......................................... 0.00%
Other Expenses................................................................. 2.00%(2)
Total Annual Expenses.......................................................... 4.00%(3)
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EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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An Investor would pay the following expenses on a $1,000
investment, assuming a 5% annual return: $50 $130 $211 $416
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(1) Assumes no leverage. However, the Fund is authorized to borrow money in an
amount up to 50% of total Investor Capital Contributions. In the event that
the Fund engages in borrowing the Fund will incur the expense of interest
payments. See "Risks of the Fund -- Borrowing" and "Portfolio Strategy and
Policies -- Indebtedness."
(2) Based on estimated amounts for the respective fiscal years, and assumes
subscription proceeds of $100 million. "Other Expenses," expressed as a
percentage amount, will be higher with lower subscription proceeds.
(3) The Fund will pay the Investment Managers a Management Fee equal to 2% of
total Investor Capital Contributions for the first two years of Fund
operations, and thereafter, and an annual Management Fee equal to 2% of
Adjusted Capital Contributions. Does not include the Investment Manager's
20% allocation of net profits. See "Compensation of the Investment Managers,
Their Affiliates, and the Independent Directors" and "Allocation of Profits
and Losses."
The purpose of this table is to assist Investors in understanding the
various costs and expenses that an Investor in the Fund will bear directly or
indirectly. See "Compensation of the Investment Managers, Their Affiliates, and
the Independent Directors," "Allocation of Profits and Losses," and "Use of
Proceeds."
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. Prospective investors will
be required to have a net worth (exclusive of home, furnishings, and automobiles
and any liabilities secured by those assets) of at least $45,000 and expect to
have annual gross income from any source of at least $45,000; or have a net
worth (as computed above) of at least $150,000. The Investor may invest no more
than 10% of his or her net worth in the Fund. During the distribution of Shares,
TFSC will comply with the requirements of Rule 2810(b)(2)(B) of the NASD Conduct
Rules.
TFSC has reasonable grounds to believe that all material facts are
adequately and accurately disclosed and provide a basis for evaluating the
program in accordance with Rule 2810(b)(3) of the NASD Conduct Rules. This
investment cannot be executed in discretionary accounts without prior written
approval by the Investor.
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 that there will be no adverse
tax or regulatory consequences to the Fund before agreeing to any transfer of
Shares. In any event, there are significant restrictions on an Investor's
ability to transfer Shares by an Investor. See "Risks of the Fund -- Lack of
Liquidity".
7
<PAGE> 12
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.
Alternatively, a prospective investor may print out a subscription agreement,
complete it offline and forward it, along with a check made payable to
Technology Funding Venture Capital Fund VI, LLC, c/o Technology Funding, 2000
Alameda de Las Pulgas, Suite 250, San Mateo, CA 94403. 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
available to the Investor are ACH transfer and check. The Fund intends to allow
Investors to purchase Shares by credit card in the future. All payments are
directly deposited into the Fund's account directly upon receipt.
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.
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD READ ALL SECTIONS OF THIS PROSPECTUS AND
CONSULT WITH THEIR FINANCIAL, TAX AND LEGAL 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 investments by the Fund may be necessary to
complete such development, and there is no assurance that such funds will be
available from any source.
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<PAGE> 13
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 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 Fund, in conjunction with other venture capital investors, expects
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. During the
Offering Period the Investment Managers will post a listing of Portfolio
Companies as capital of the Fund is committed to such companies. There can be no
assurance that such selections 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
9
<PAGE> 14
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.
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 end of the Offering Period, such
additional investments will be disclosed on the Fund's web site and within the
Fund's annual or quarterly report as required by the 1934 Act and delivered on
the web site.
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 will be affected by the amount of funds
at its disposal. At a lower funding level the Fund will have fewer investments
and greater risk and its investment return might be adversely affected by a
single investment decision. In addition, expenses expressed as a percentage of
the Fund's assets will be higher at lower subscription levels.
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.
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<PAGE> 15
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.
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 have elected to treat the Fund as a partnership for
federal tax purposes. It is not anticipated, and the Directors do not foresee
the possibility of making an alternative election. The principal tax risks to
the 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.
The Fund has elected to be treated as a partnership for federal income tax
purposes and does not believe that it will be treated as 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
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<PAGE> 16
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."
ERISA CONSIDERATIONS. In considering an investment in the Fund by a
tax-exempt entity such as an employee benefit plan or individual retirement
account subject to the requirements of the Employee Retirement Income Security
Act of 1974 ("ERISA"), the fiduciary acting on behalf of such entity should be
satisfied that such an investment is consistent with Sections 404 and 406 of
ERISA and that the investment is prudent in light of the entity's cash flow and
other objectives. To this end the Department of Labor has issued regulations
that would characterize the assets of certain entities in which tax-exempt
entities invest as "plan assets." Because the Fund is expected to qualify as a
"venture capital operating company" and the Shares are "publicly offered
securities" within the meaning of the regulations, the Fund assets should not be
considered plan assets. However, fiduciaries of tax-exempt entities are urged to
consult their own advisors prior to investing in the Fund.
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 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
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<PAGE> 17
and resultant adverse tax consequences. The Operating Agreement also places
restrictions on the 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 Considerations" 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 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.
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<PAGE> 18
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 and accounting expenses incurred in connection with the Formation
of the Fund.
(ii) A MANAGEMENT FEE EQUAL TO 2% OF TOTAL INVESTOR CAPITAL CONTRIBUTIONS
FOR EACH OF THE YEARS OF FUND OPERATION DURING THE OFFERING PERIOD; AND
2% OF ADJUSTED CAPITAL CONTRIBUTIONS FOR EACH SUBSEQUENT YEAR is
payable by the Fund. To the extent permitted by applicable law, a full
2% Management Fee shall be payable by 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. All Management
Fees shall be due and payable monthly in arrears. Prior to the Closing
Date and as of the date of each Investor's subscription agreement is
accepted, the Management Fee will be assessed for the period from the
Commencement Date to the date of acceptance. 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. In the event that such fees are
carried forward, the Fund will incur an interest expense. TFI will
receive 100% of the Management Fee due to the Investment Managers to
the extent of its costs. TFL will receive the remainder of the
Management Fee. TFL will receive 99% of the profit allocation due to
the Investment Managers with TFI receiving the additional 1%.
TFSC and TFI will pay all Distribution Expenses and will be reimbursed by
the Fund for its actual costs. 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. 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
Distribution 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'
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 or for
the benefit of the Fund. "Distribution 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.
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<PAGE> 19
SUMMARY OF INVESTMENT MANAGER COMPENSATION AND ALLOCATIONS*
<TABLE>
<S> <C>
Reimbursement of Distribution Expenses Actual expenses as incurred by TFSC and TFI
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
of the years of Fund Operations during
the Offering Period
2% of Adjusted Capital Contributions per
year thereafter**
Investment Managers 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 $10,000 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 Directors or any separate committee meeting.
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.
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<PAGE> 20
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
(e.g., their stock is publicly traded), 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 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
("tax distributions"). The Directors are authorized to make tax distributions to
the Investment Managers prior to each of the due dates for making estimated tax
payments, based on projected net profit for the taxable year. The Fund intends
to seek an exemptive order under Section 206A of the Advisers Act, which will
exempt the Fund from Section 205(a)(1) of that act. The exemption will allow the
Fund to distribute securities in-kind and deem as realized gains or losses on
securities distributed.
Distributions upon liquidation of the Fund will be paid to the Investors
and the Investment Managers, in proportion to their respective positive capital
account balances.
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<PAGE> 21
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.............................................. $100,000,000 100.00%
First-year Management Fee(1)......................................... $ (2,000,000) 2.00%
------------
Amount Available for Investment, Subsequent Years' Management Fees
and Fund Operational Costs, Organizational Costs, and Distribution
Expenses........................................................... $ 98,000,000 98.00%
</TABLE>
- ------------------
(1) The First Year Management Fee equals 2% of Investors' 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."
By the end of the two and one-half year period following the initial public
offering of Shares at least 50% of the Fund's 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. 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 two and
one-half year period.
In addition, the Fund will 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 the proposed Technology Funding
Post-IPO Venture Fund, a smallcap aggressive growth fund which will be advised
by the Investment Managers. The investment objectives of the mutual funds in
which the Fund might invest pursuant to such an order will include long term
capital appreciation from investments in securities of public companies in
industries which will be similar to those of the private companies in which the
Fund is expected to invest.
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.
17
<PAGE> 22
INVESTMENT OBJECTIVES
CAPITAL APPRECIATION. The first 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. The 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 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.
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<PAGE> 23
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) for any Fund purpose. 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. See "Risks of the Fund -- Borrowing."
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 which may or may not be
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 and one-half years later and thus will 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 and one-half year period after its initial
public offering of Shares. If, after the end of the two and one-half 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 and one-half year period may be reinvested as described in the
Prospectus within the period ending on the later of the end of the two and
one-half year period or the twelve-month period 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,
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
19
<PAGE> 24
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 business 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, 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. The
Fund will seek to be included in an exemptive order under Rule 17d-1
of the 1940 Act to permit it to co-invest with affiliated BDCs. At
such time as the Fund is included in this exemptive order, it will
co-invest with those affiliated BDCs.
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.
20
<PAGE> 25
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.
(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 Fund nor its affiliates expect to receive
significant fees or compensation directly or indirectly from
Portfolio Companies. This board representation, as well as the
Fund's close working relation-
21
<PAGE> 26
ships 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 Fund
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 Fund will seek
an exemptive order under Section 206A of the Advisers Act to exempt
the Fund from Section 205(a)(1) of that act. At such time as the
Fund receives an exemptive order under Section 206A, it may
distribute securities in-kind and 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.
MANAGEMENT OF THE FUND
The Directors will be responsible for management of the Fund. The Directors
will initially be 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 affiliated with the
Investment Managers (herein the "Affiliated Directors"). Although the
resignation or withdrawal of a
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<PAGE> 27
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 management of those companies. The Fund will 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
Fund will serve as 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 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 and its subsidiaries currently employ 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 capital
raised. TFI is wholly-owned by TFL. Certain administrative functions and other
activities on behalf of the Fund and other funds managed by the Investment
Managers are performed by Technology Funding Capital Corporation, a wholly-owned
subsidiary, located in Santa Fe, New Mexico.
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 Advisers Act. TFL has two General Partners, two
Venture Partners, and 18 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 Robert E. Jackson, Jr., Ph.D., Selena A. Lantry, M.D., and Deborah
J. Freehling, M.D. The two Affiliated Directors are Charles R. Kokesh and
Gregory T. George, whose biographical information is included in "Key Personnel
of the Investment Managers."
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<PAGE> 28
ROBERT E. JACKSON, JR., PH.D., 47, is a senior member of the technical
staff of Computer Sciences Corporation on contract at the Space Telescope
Science Institute where he specializes in applying new software development and
internet information system technologies to Hubble Space Telescope observation
planning and information access problems. Prior to joining Computer Sciences
Corporation in 1984 and while completing his doctorate, Dr. Jackson worked as a
research assistant for the Lick Observatory and at Kaiser Sand and Gravel. He is
a Member of the American Astronomical Society and holds a Ph.D. from the
University of California at Santa Cruz, and a B.S. from the California Institute
of Technology.
SELENA A. LANTRY, M.D., 38, is in private Obstetrics/Gynecology practice in
Glendale, California. She completed her residency in 1996 at White Memorial
Medical Center. During the academic years 1991-1992 and 1987-1988, Dr. Lantry
was an instructor in the Department of Pediatrics at Loma Linda University
School of Medicine. Previously, she worked as a Pediatric Clinic Physician at
three different facilities of the Kaiser Permanente Medical Group from 1985 to
1991, and as Chief Resident for the Loma Linda University Department of
Pediatrics in 1987 and 1988. Dr. Lantry has a B.S. from Pacific Union College
and an M.D. from Loma Linda University School of Medicine.
DEBORAH J. FREEHLING, M.D., 42, is in private practice in Los Altos,
California, and has been since 1995. Additionally, she was with the California
Ear Institute at Stanford Hospital, Stanford, California, from 1995 to 1996.
From 1986 to 1995 she was a Career Physician at The Permanente Medical Group
located in Santa Clara, California. From 1989 to 1994 she was Assistant Chief,
Department of Otolaryngology-Head and Neck Surgery in Santa Clara, California.
Dr. Freehling was Clinical Assistant Professor at Stanford University School of
Medicine, Stanford, California from 1992 to 1996. She completed her residency in
Ears, Nose and Throat/Head and Neck Surgery at Harvard Medical
School/Massachusetts Eye and Ear Infirmary in 1986. Dr. Freehling has a B.S.
from Champaign-Urbana College of L.A.S., and an M.D. from Abraham Lincoln School
of Medicine, University of Illinois.
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.
24
<PAGE> 29
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 OR WILL INVEST IN ANY OF THE SAME COMPANIES.
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 June 30, 1997.
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.
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
25
<PAGE> 30
$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 are
available for review 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 are available for review
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 are available for review from the SEC's EDGAR site at www.sec.gov.
The funds included in the following table are only those with objectives
most similar to the Fund. The companies included in the table have been
categorized based on particular industries and do not reflect which fund held
which company. The Fund may not acquire interests in any of these companies,
until such time as it receives an exemptive order from the SEC allowing it to
co-invest with other funds managed by the Investment Manager. See "Conflicts of
Interest."
26
<PAGE> 31
INDUSTRY TRACK RECORD AS OF 9/30/97(1)
<TABLE>
<CAPTION>
DATE OF TOTAL
INITIAL LIQUIDATION CASH
INVESTMENT DATE STATUS (2) INVESTED
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
ENVIRONMENTAL AND INDUSTRIAL
Avalon Imaging, Inc. ................... 12/94 Act $ 1,403,225
* Bolder Technologies Corporation....... 9/94 Pub 625,213
* Conversion Technologies Intl, Inc. ... 5/95 Pub 2,565,000
Evans BioControl, Inc. ................. 2/89 6/90 Liq 400,000
GRC Environmental, Inc. ................ 6/90 (7) Liq 565,605
Naiad Technologies, Inc. ............... 12/95 Act 450,615
Nanodyne Inc. .......................... 7/93 Act 698,478
Portable Energy Products, Inc. ......... 5/95 Act 1,519,535
SRG Holdings, Inc. ..................... 9/93 Act 1,430,692
SunPower Corp. ......................... 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............................... $16,987,462
===========
INFORMATION TECHNOLOGY AND
COMMUNICATIONS
AG Processing Technology................ 6/90 6/96 Liq $ 1,312,898
Ascent Logic Corporation................ 4/92 Act 953,167
Bridgestone Management Group, Inc. ..... 5/88 Liq 551,110
* Cadence............................... 7/96 Pub 311,875
Coded Communications Corp. ............. 4/93 12/96 Liq 999,999
* Electronic Designs, Inc. ............. 5/89 Pub 2,958,084
* GeoWorks Inc. ........................ 8/89 Pub 3,830,302
Hunter Systems.......................... 6/90 4/93 Liq 4,072,324
IBIS Technology Corp. .................. 8/89 10/95 Liq 281,435
KOR Electronics Inc. ................... 12/89 Act 4,248,021
Mosaic Systems, Inc. ................... 7/87 (7) Liq 985,487
MultiPort, Inc. ........................ 6/93 Act 1,097,400
NetChannel, Inc. ....................... 10/96 Act 1,881,901
Phoenix Technologies, Ltd. ............. 6/88 12/92 Liq 249,900
* Photon Dynamics, Inc. ................ 7/96 Pub 300,000
Pilot Network Services, Inc. ........... 5/95 Act 946,105
Pinterra Corp. ......................... 10/90 12/96 Liq 500,000
Positive Communications, Inc. .......... 8/94 Act 1,186,127
Quintar Holdings Corp. ................ 12/89 Act 1,776,267
Reflection Technology, Inc. ............ 5/90 Act 2,987,441
Sequoia Systems, Inc. .................. 10/87 3/91 Liq 817,702
* Synopsis ............................. 7/96 Pub 1,077,379
Tessera, Inc. .......................... 4/92 Act 903,000
UTStarCom, Inc. ........................ 6/94 Act 750,000
Velocity Inc. .......................... 9/93 Act 9,250,000
VOIS Corporation........................ 8/96 Act 612,500
WIRE Networks........................... 2/96 Act 1,316,685
WorldRes, Inc........................... 1/97 Act 1,000,000
-----------
Total............................... $47,157,109
===========
<CAPTION>
CASH ANNUALIZED
TOTAL CASH UNREALIZED RECEIVED PLUS INTERNAL
RECEIVED TO VALUE OF UNREALIZED RATE OF
DATE (3) HOLDINGS (4) VALUE (5) RETURN (6)
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
ENVIRONMENTAL AND INDUSTRIAL
Avalon Imaging, Inc. ................... $ 0 $ 1,393,896 $ 1,393,898 -0.4%
* Bolder Technologies Corporation....... 3,002,080 0 3,002,080 98.4%
* Conversion Technologies Intl, Inc. ... 263,281 788,524 1,051,805 -40.5%
Evans BioControl, Inc. ................. 190,010 0 190,010 -53.0%
GRC Environmental, Inc. ................ 0 0 0 -100.0%
Naiad Technologies, Inc. ............... 0 675,612 675,612 40.1%
Nanodyne Inc. .......................... 27,978 673,665 701,643 0.1%
Portable Energy Products, Inc. ......... 0 1,710,387 1,710,387 6.0%
SRG Holdings, Inc. ..................... 80,394 57,672 138,066 -56.8%
SunPower Corp. ......................... 13,762 3,294,320 3,308,082 18.7%
* Thermatrix Inc. ...................... 0 2,197,157 2,197,157 -13.0%
Transphase Systems, Inc. ............... 582,868 0 582,868 -62.1%
----------- ----------- ----------- ------
Total............................... $ 4,160,373 $ 10,791,233 $14,951,606 -3.6%
=========== =========== =========== ======
INFORMATION TECHNOLOGY AND
COMMUNICATIONS
AG Processing Technology................ $ 756,589 $ 0 $ 756,589 -9.2%
Ascent Logic Corporation................ 402,500 211,680 614,180 -19.3%
Bridgestone Management Group, Inc. ..... 0 0 0 -100.0%
* Cadence............................... 0 642,000 642,000 78.2%
Coded Communications Corp. ............. 141,403 0 141,403 -42.8%
* Electronic Designs, Inc. ............. 613 3,113,826 3,114,439 0.9%
* GeoWorks Inc. ........................ 13,316,113 1,884,926 15,201,040 47.5%
Hunter Systems.......................... 340,350 0 340,350 -100.0%
IBIS Technology Corp. .................. 298,238 0 298,238 1.0%
KOR Electronics Inc. ................... 1,517,342 847,793 2,365,135 -16.1%
Mosaic Systems, Inc. ................... 0 0 0 -100.0%
MultiPort, Inc. ........................ 368,404 1,920,707 2,289,111 21.0%
NetChannel, Inc. ....................... 0 2,547,811 2,547,811 51.5%
Phoenix Technologies, Ltd. ............. 176,400 0 176,400 -7.4%
* Photon Dynamics, Inc. ................ 0 371,900 371,900 18.8%
Pilot Network Services, Inc. ........... 0 4,009,743 4,009,743 82.2%
Pinterra Corp. ......................... 1 0 1 -100.0%
Positive Communications, Inc. .......... 48,004 1,395,726 1,443,730 6.8%
Quintar Holdings Corp. ................ 2,147,372 0 2,147,372 3.1%
Reflection Technology, Inc. ............ 1,086,498 0 1,086,498 -33.6%
Sequoia Systems, Inc. .................. 1,679,210 0 1,679,210 27.0%
* Synopsis ............................. 630,000 595,000 1,225,000 32.1%
Tessera, Inc. .......................... 730,102 3,406,084 4,136,186 38.9%
UTStarCom, Inc. ........................ 17,246 5,300,432 5,317,678 93.6%
Velocity Inc. .......................... 1,667,006 0 1,667,006 -100.0%
VOIS Corporation........................ 0 1,111,250 1,111,250 97.5%
WIRE Networks........................... 0 1,980,968 1,980,968 29.5%
WorldRes, Inc........................... 0 1,000,000 1,000,000 0.0%
----------- ----------- ----------- ------
Total............................... $ 25,323,391 $ 30,339,846 $55,663,238 5.1%
=========== =========== =========== ======
</TABLE>
27
<PAGE> 32
<TABLE>
<CAPTION>
DATE OF TOTAL
INITIAL LIQUIDATION CASH
INVESTMENT DATE STATUS (2) INVESTED
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MEDICAL & HEALTH CARE TECHNOLOGY
Acusphere, Inc. ........................ 5/95 Act $ 999,998
ADESSO Specialty Services Org., Inc. ... 7/95 Act 2,700,004
Affymetrix.............................. 7/96 1/97 Liq 225,000
Angenics, Inc. ......................... 1/88 9/95 Liq 1,201,800
Aprex Corporation ...................... 12/90 (7) Liq 1,855,809
Arcturus Pharmaceutical Corporation..... 8/92 Act 399,666
* Arris Pharmaceutical Corporation........ 11/94 Pub 500,000
Biex, Inc. ............................. 7/93 Act 1,988,370
Cardiometrics, Inc...................... 6/89 12/96 Liq 2,665,750
CareCentric Solutions, Inc. ............ 10/95 Act 704,499
Circadian, Inc. ........................ 12/92 (7) Liq 812,643
* CV Therapeutics, Inc. .................. 3/94 Pub 2,611,717
* ENDOcare, INC. ......................... 8/96 Pub 860,000
GenMark, Inc. .......................... 6/91 (7) Liq 375,674
Gilead.................................. 7/96 1/97 Liq 347,500
Graham-Field Health Products, Inc. ..... 3/92 12/96 Liq 1,912,553
ICU Medical, Inc. ...................... 6/88 12/95 Liq 5,103,763
Integra LifeSciences Corp. ............. 1/89 12/96 Liq 1,252,419
Intella Interventional Systems, Inc. ... 2/93 Act 5,230
* LifeCell Corporation.................... 3/89 Pub 1,273,766
* 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 Biosciences.................. 7/96 12/96 Liq 241,875
OrthoLogic Corp. ....................... 4/91 3/95 Liq 210,124
Oxford GlycoSciences Ltd. .............. 8/93 Act 1,499,890
Periodontix, Inc. ...................... 12/93 Act 351,000
Pharmadigm Biosciences.................. 4/93 Act 1,728,135
* Pharmos Corp. .......................... 6/92 Pub 1,380,000
Pherin Corporation ..................... 6/91 Act 400,000
* Physiometrix, Inc. ..................... 5/92 Pub 1,391,570
* PolyMedica Industries, Inc. ............ 3/89 Pub 3,257,217
Prolinx, Inc. .......................... 5/95 Act 1,388,461
Pyxis Corporation....................... 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 4,810,071
Sleep Physiology Services, Inc. ........ 4/90 6/95 Liq 1,272,547
Spectrascan Health Services, Inc. ...... 7/88 Act 6,881,583
SyStemix, Inc. ......................... 6/90 1/97 Liq 3,446,622
TheraTx, Inc. .......................... 8/91 3/97 Liq 2,489,572
* ThermoElectron Corporation.............. 5/90 Pub 1,500,000
UroMed Corp. ........................... 10/92 3/95 Liq 700,001
-----------
Total............................... $70,581,038
===========
VENTURE CAPITAL
Alta IV, Limited Partnership............ 11/88 Ven $ 1,000,000
Batterson, Johnson, & Wang, L.P. ....... 1/89 Ven 500,000
Columbine Venture Fund II, L.P. ........ 12/88 Ven 750,000
CVM Equity Fund IV, Ltd. ............... 7/93 Ven 150,000
Delphi Ventures, L.P. .................. 9/88 Ven 1,000,000
El Dorado Ventures III, L.P. ........... 5/91 Ven 500,000
Medical Science Partners, L.P. ......... 1/90 Ven 1,000,000
Newtek Ventures II, L.P. ............... 9/89 Ven 803,764
OW & W Pacrim Investments, Limited...... 5/93 Ven 412,345
Onset Enterprise Associates, L.P. ...... 10/89 Ven 455,000
Spectrum Equity Investors, L.P. ........ 5/94 Ven 388,025
Trinity Ventures IV .................... 3/93 Ven 243,768
Utah Ventures Limited Partnership....... 3/89 Ven 250,000
-----------
Total............................... $ 7,452,902
===========
<CAPTION>
CASH ANNUALIZED
TOTAL CASH UNREALIZED RECEIVED PLUS INTERNAL
RECEIVED TO VALUE OF UNREALIZED RATE OF
DATE (3) HOLDINGS (4) VALUE (5) RETURN (6)
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
MEDICAL & HEALTH CARE TECHNOLOGY
Acusphere, Inc. ........................ $ 0 $ 1,202,499 $ 1,202,499 9.1%
ADESSO Specialty Services Org., Inc. ... 3,023 6,226,497 6,229,520 74.2%
Affymetrix.............................. 577,481 0 577,481 558.7%
Angenics, Inc. ......................... 17,153 0 17,153 -45.8%
Aprex Corporation ...................... 0 0 0 -100.0%
Arcturus Pharmaceutical Corporation..... 546,868 0 546,868 15.5%
* Arris Pharmaceutical Corporation........ 0 492,115 492,115 -0.5%
Biex, Inc. ............................. 0 6,027,122 6,027,122 59.8%
Cardiometrics, Inc...................... 1,628,146 0 1,628,146 -7.0%
CareCentric Solutions, Inc. ............ 0 757,832 757,832 4.4%
Circadian, Inc. ........................ 0 0 0 -100.0%
* CV Therapeutics, Inc. .................. 0 1,333,012 1,333,012 -18.1%
* ENDOcare, INC. ......................... 1,150 1,354,114 1,355,264 50.7%
GenMark, Inc. .......................... 0 0 0 -100.0%
Gilead.................................. 622,500 0 622,500 220.9%
Graham-Field Health Products, Inc. ..... 537,468 0 537,486 -24.9%
ICU Medical, Inc. ...................... 6,853,200 0 6,853,200 10.5%
Integra LifeSciences Corp. ............. 2,626,707 0 2,626,707 18.9%
Intella Interventional Systems, Inc. ... 0 41,834 41,834 54.9%
* LifeCell Corporation.................... 45,237 2,764,598 2,809,834 11.4%
* Matrix Pharmaceutical, Inc. ............ 0 2,244,978 2,244,978 4.5%
Megabios Corp. ......................... 0 5,046,340 5,045,340 61.1%
Molecular Geriatrics Corporation........ 0 188,680 188,680 -20.5%
Neurocrine Biosciences.................. 383,750 0 383,750 533.6%
OrthoLogic Corp. ....................... 277,329 0 277,329 13.0%
Oxford GlycoSciences Ltd. .............. 0 696,697 696,697 -16.5%
Periodontix, Inc. ...................... 0 501,000 501,000 13.0%
Pharmadigm Biosciences.................. 0 $ 2,547,111 2,547,111 14.1%
* Pharmos Corp. .......................... 0 503,342 503,342 -18.2%
Pherin Corporation ..................... 0 800,000 800,000 11.7%
* Physiometrix, Inc. ..................... 323,541 1,471,077 1,794,616 6.9%
* PolyMedica Industries, Inc. ............ 5,859,835 920,416 6,780,251 21.6%
Prolinx, Inc. .......................... 0 2,213,461 2,213,461 32.0%
Pyxis Corporation....................... 44,322,221 0 44,322,221 114.9%
R2 Technology, Inc. .................... 0 873,080 873,080 16.7%
RedCell, Inc. .......................... 0 310,489 310,489 -40.7%
* Shaman Pharmaceuticals, Inc. ........... 9,510,780 0 9,510,780 17.2%
Sleep Physiology Services, Inc. ........ 754,003 0 754,003 -18.0%
Spectrascan Health Services, Inc. ...... 6,455,740 1,420,950 7,876,690 7.5%
SyStemix, Inc. ......................... 20,147,091 0 20,147,091 168.2%
TheraTx, Inc. .......................... 9,482,044 0 9,482,044 76.2%
* ThermoElectron Corporation.............. 2,042,558 1,009,800 3,052,358 24.6%
UroMed Corp. ........................... 2,346,542 0 2,346,542 75.9%
------------- ------------ ------------- ------
Total............................... $ 115,364,385 $ 40,947,044 $ 156,311,428 38.0%
============= ============ ============= ======
VENTURE CAPITAL
Alta IV, Limited Partnership............ $ 2,779,747 $ 512,100 $ 3,291,347 24.7%
Batterson, Johnson, & Wang, L.P. ....... 194,121 330,668 524,789 1.0%
Columbine Venture Fund II, L.P. ........ 0 831,990 831,990 1.8%
CVM Equity Fund IV, Ltd. ............... 0 193,686 193,686 8.1%
Delphi Ventures, L.P. .................. 1,174,129 566,333 1,740,463 11.4%
El Dorado Ventures III, L.P. ........... 106,273 652,295 758,588 14.4%
Medical Science Partners, L.P. ......... 13,500 1,228,649 1,242,149 3.5%
Newtek Ventures II, L.P. ............... 265,766 668,862 934,628 3.4%
OW & W Pacrim Investments, Limited...... 149,385 262,955 412,340 0.0%
Onset Enterprise Associates, L.P. ...... 263,544 1,032,399 1,295,943 23.1%
Spectrum Equity Investors, L.P. ........ 23,133 503,743 526,876 16.4%
Trinity Ventures IV .................... 164,763 285,873 450,436 24.5%
Utah Ventures Limited Partnership....... 336,764 97,539 434,303 11.0%
------------- ------------ ------------- ------
Total............................... $ 5,471,125 $ 7,168,892 $ 12,638,018 11.8%
============= ============ ============= ======
</TABLE>
28
<PAGE> 33
<TABLE>
<CAPTION>
DATE OF TOTAL
INITIAL LIQUIDATION CASH
INVESTMENT DATE STATUS(2) INVESTED
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
OTHER
Carillon Technology, Inc. .............. 5/88 (7) Liq $2,000,333
Erox Corp. ............................. 8/91 3/94 Liq 400,000
In-Store Advertising, Inc. ............. 5/88 (7) Liq 1,528,380
Lynk Systems, Inc. ..................... 7/93 Act 350,000
Technologies for Info Processing ....... 3/97 Act 150,500
* Yes! Entertainment Corporation.......... 1/93 Pub 1,400,000
----------
Total............................... $5,829,213
==========
<CAPTION>
CASH ANNUALIZED
TOTAL CASH UNREALIZED RECEIVED PLUS INTERNAL
RECEIVED TO VALUE OF UNREALIZED RATE OF
DATE (3) HOLDINGS (4) VALUE (5) RETURN (6)
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
OTHER
Carillon Technology, Inc. .............. $ 0 $ 0 $ 0 -100.0%
Erox Corp. ............................. 679,500 0 679,500 24.8%
In-Store Advertising, Inc. ............. 0 0 0 -100.0%
Lynk Systems, Inc. ..................... 413,983 369,600 783,583 41.8%
Technologies for Info Processing ....... 0 159,876 159,876 8.4%
* Yes! Entertainment Corporation.......... 0 874,991 874,991 -9.4%
------------- ---------- ----------- ------
Total............................... $ 1,093,483 $1,404,467 $ 2,497,950 -13.9%
============= ========== =========== ======
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Public company as of 9/30/97. Publicly traded stocks are valued at 9/30/97 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) Act=A Technology Funding sponsored fund still holds an investment in the company.
Liq=The investment company was sold or no longer held as company ceased operations.
Pub=The company is now publicly traded and is still held in a Technology Funding sponsored fund.
Ven=Active investment in a Venture Capital L.P. by a Technology Funding sponsored fund.
(3) Represents the total cash received through 9/30/97 by the partnerships either upon the sale or partial sale of
their investment, acquisition of the portfolio company, or note repayments.
(4) 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.
(5) Represents the sum of "Total Cash Received to Date" and "Unrealized Value of Holdings."
(6) Represents the cumulative compounded rate of cash received on cash invested over the time period from the
first investment, as indicated, to 9/30/97, assuming that the "Unrealized Value of Holdings" was received in
cash on 9/30/97. 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.
(7) 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 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 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 or a
subsidiary of 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
will be managed on a "best-efforts" basis through TFI's wholly-owned subsidiary,
TFSC.
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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.
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 non-affiliated 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.
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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 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. In addition, the provisions of Section 17(i)
under the 1940 Act will apply to the Investment Managers in the case of willful
misfeasance, bad faith, or gross negligence, in the performance of their duties,
or by reason of their reckless disregard of their obligations and duties under
such contract or agreement.
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
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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; 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. The Fund has been advised by Morgan, Lewis &
Bockius LLP, counsel to the Fund, that under Treasury Regulations, the Fund will
be treated as a partnership, as opposed to a corporation, for federal tax
purposes unless the Fund affirmatively elects to be treated as a corporation for
federal tax purposes. The Investment Managers have no intention of making such
an election and do not anticipate any circumstances under which such an election
would be made. If the Fund were treated as a corporation for federal income tax
purposes, all of its income would be subject to tax at corporate rates,
distributions to investors generally would be taxable as dividends, and
investors would not be entitled to report any portion of the income or loss of
the Fund on their returns.
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.
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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.
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
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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.
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.
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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 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 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. 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.
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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 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
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(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, 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.
ERISA CONSIDERATIONS
The provisions of the Employee Retirement Income Security Act of 1974, as
amended, are extremely complex. Consequently, investors that are subject to
ERISA should consult with their own advisors prior to investing in the Fund.
A fiduciary of a pension, profit-sharing or other employee benefit plan (an
"Employee Plan") subject to the Employee Retirement Income Security Act of 1974
(ERISA) should consider fiduciary standards under ERISA in the context of the
Employee Plan's particular circumstances before authorizing an investment of all
or any portion of such Employee Plan's assets in shares of the Fund. Among other
factors, such fiduciary should consider (i) whether the investment satisfies the
prudence requirements of Section 404(a)(1)(B) of ERISA, (ii) whether the
investment satisfies the diversification requirements of Section 404(a)(1)(C) of
ERISA, (iii) whether the investment is in accordance with the documents and
instruments governing the Employee Plan as required by Section 404(a)(1)(D) of
ERISA, (iv) whether a prohibited transaction is violation of Section 406 of
ERISA or Section 408(e)(2) or 4975 of the IRC will occur and (v) how the
definition of the term "plan assets" under ERISA and the Department of Labor
regulations regarding the definition of "plan assets" affect the proposed
investments. In addition, persons who control the investments of individual
retirement accounts ("IRAs") should consider the applicable items listed above.
Neither ERISA nor the IRC defines "plan assets." However, under regulations
promulgated by the Department of Labor, the assets of certain pooled investment
vehicles, including certain partnerships, may be treated as "plan assets." If
the assets of the Fund were deemed to be "plan assets" of Employee Plans or IRAs
that owned shares, (i) the prudence standards and other provisions of ERISA will
extend to investments made by the Fund; (ii) the person or persons who have
investment discretion over the assets of Employee Plans that invest in the Fund
will be liable under ERISA for investments made by the Fund that do not conform
to such ERISA standards; and (iii) certain transactions that the Fund might
enter into in the future in the ordinary course of its business and operation
might constitute prohibited transactions of an Employee Plan or IRA under ERISA
and the IRC. A prohibited transaction, in addition to imposing potential
personal liability upon fiduciaries of Employee Plans or IRA's, may also result
in the imposition of an excise tax under the IRC upon the disqualified person
participating in the prohibited transaction, or result in disqualification of
the IRA.
The Fund's assets would not be considered to be "plan assets" under ERISA
and the Department of Labor regulations so long as, inter alia, the Shares are
"publicly-offered securities" or the Fund qualifies as a "venture capital
operating company" within the meaning of such regulations. Under the
regulations, an Interest, such as a Fund Share, will be considered a
"publicly-offered security" if such security is widely held, freely
transferable, and either (i) part of a class of securities registered under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934 or (ii) sold to a
plan pursuant to an effective registration statement under the
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Securities Act of 1933, as amended (the "Act"), provided that such securities
sold are thereafter registered under the Securities Exchange Act of 1934 within
a specified time period.
The Investment Managers believe that, under the regulations, Fund Shares
will be deemed "publicly-offered securities." Moreover, the Investment Managers
also expect the Fund to qualify as a "venture capital operating company."
Therefore, the Fund's underlying assets should not be deemed to be "plan
assets."
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 March 25, 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 of the voting securities held by nonaffiliated persons, at its last
annual meeting. In addition, the Fund
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<PAGE> 43
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 on a best
efforts basis through TFSC, a wholly-owned subsidiary of TFI, a registered
member of the NASD, to prospective investors who represent that they meet the
suitability standards set forth under "Suitability Considerations." The purchase
price of Shares is payable upon subscription in cash, by ACH transfer or check.
The Fund intends to allow Investors to purchase Shares by credit card in the
future. TFSC will promptly transmit all funds received from customers to the
Fund's bank accounts directly. TFSC will be the only entity distributing the
Shares and will not enlist the assistance of any other broker-dealer or
wholesaler.
There will be no minimum offering. If the Fund is unable to sell 1,000,000
Shares, the Fund will have fewer investments and greater risk than the
Investment Managers anticipate.
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.
This offering is being conducted in compliance with Rule 2810 of the NASD
Conduct Rules for direct participation programs and the total amount of all
items of compensation from whatever source payable to underwriters,
broker/dealers, or affiliates thereof, which are deemed to be in conjunction
with or related to the distribution of the public offering will not exceed 10.5%
of the proceeds received in compliance with the rule. Additionally, TFSC has
performed the necessary due diligence of the Investment Managers as described in
Rule 2810(b)(3) of the NASD Conduct Rules.
Personnel performing TFSC functions will receive salaries in connection
with their distribution activities. TFI will receive an investment management
fee in connection with its management of the assets of the Fund's portfolio and
the other assets of the Fund. Certain TFSC personnel will overlap with TFI
personnel in their performance of ongoing management services to the Fund. TFSC
personnel will receive a salary paid by TFI and TFCC in connection with their
distribution activities. TFSC personnel may also receive compensation in
connection with their responsibilities as employees of TFI and other affiliates
of TFSC.
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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).
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
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<PAGE> 45
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 may designate a
new Investment Manager, who would serve until the successor has been approved
and elected.
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
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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 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
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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 Shares 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 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 under guidelines established by the Directors.
The fair market value for equity venture capital investments for which no market
exists cannot be precisely determined. In the early stages of development,
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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 all reports as required by
applicable laws. The Fund will file all such reports with all governmental
authorities as required.
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 or TFSC 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.
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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. The
Fund will also file reports, proxy statements and other information with the SEC
under the Securities Exchange Act of 1934, as amended. Such reports, proxy
statements and other information, as well as the Registration Statement and the
exhibits and schedules thereto, can be inspected at the Public Reference section
of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such
material may be obtained at prescribed rates. The SEC also maintains a web site
that contains information filed electronically with the SEC. The address of the
SEC's web site is http://www.sec.gov.
Exhibit A is herein incorporated by reference to Exhibit a(2) of the Part C
as filed herewith.
45
<PAGE> 50
TECHNOLOGY FUNDING VENTURE CAPITAL FUND VI, LLC
PART C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
1. Financial Statements:
Not Applicable.
All other financial statements, schedules and historical financial
information have been omitted as the subject matter is not required, not
present, or not present in amounts sufficient to require submission.
2. Exhibits
a. (1) Certificate of Formation dated February 21, 1997
as filed with the State of Delaware on
February 27, 1997 is incorporated by reference
to Exhibit a(1) of the Initial Registration
Statement, as filed on March 25, 1997.
(2) Form of Operating Agreement with the Affiliated
Directors, the Independent Directors and the
Investors is filed herewith.
b. Not Applicable.
c. Not Applicable.
d. Not Applicable.
e. Not Applicable.
f. Not Applicable.
g. Investment Advisory Agreement with Technology
Funding Inc. and Technology Funding Ltd., is
filed herewith.
h. Distribution Agreement with Technology
Funding Securities Corporation, is filed herewith.
i. Not Applicable.
j. Not Applicable.
k. Not Applicable
l. Not Applicable.
m. Not Applicable.
n. Not Applicable.
o. Not Applicable.
p. Not Applicable.
q. Not Applicable.
r. Not Applicable.
Item 25. Marketing Arrangements.
Not Applicable.
Item 26. Other Expenses of Issuance and Distribution.
1
<PAGE> 51
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement:
Registration fees $40,000
Fees and expenses of qualification under state
securities laws (including fees of counsel) $50,000
Accounting fees and expenses $10,000
Legal fees and expenses $150,000
Printing expenses $75,000
Transfer Agent expenses $10,000
Retail Activities (reimbursements) $1,595,000
Total $1,930,000
Item 27. Persons controlled by or under Common Control with Registrant.
Each of the following entities might be deemed to be under common
control with the Registrant:
<TABLE>
<CAPTION>
Entity Basis of Common Control Place of Organization
- ------ ----------------------- ---------------------
<S> <C> <C>
- -Technology Funding Medical Investment Managers are Delaware
Partners I, L.P. Technology Funding Inc. and
Technology Funding Ltd.
- -Technology Funding Venture Investment Managers are Delaware
Partners V, An Aggressive Growth Technology Funding Inc. and
Fund, L.P. Technology Funding Ltd.
- -Technology Funding Venture Investment Managers are Delaware
Partners IV, An Aggressive Growth Technology Funding Inc. and
Fund, L.P. Technology Funding Ltd.
- -Technology Funding Partners III, Investment Managers are Delaware
L.P. Technology Funding Inc.
and Technology Funding Ltd.
</TABLE>
2
<PAGE> 52
<TABLE>
<S> <C> <C>
- -Technology Funding Private Investment Managers are California
Reserve Fund, A California Technology Funding Inc. and
Limited Partnership Technology Funding Ltd.
- -Technology Funding Secured Investment Managers are California
Investors I Technology Funding Inc. and
Technology Funding Ltd.
- -Technology Funding Secured Investment Managers are California
Investors II Technology Funding Inc. and
Technology Funding Ltd.
- -Technology Funding Secured Investment Managers are California
Investors III, An Income and Technology Funding Inc. and
Growth Partnership, L.P. Technology Funding Ltd.
- -Technology Funding Wholly-owned subsidiary of California
Securities Corporation Technology Funding Ltd.
</TABLE>
Item 28. Number of Holders of Securities.
Not Applicable.
Item 29. Indemnification.
Under Article 10 of the Registrant's Operating Agreement neither the
Directors nor any of their Affiliates shall 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 Directors
or such Affiliates in good faith in the furtherance of the interests of the
Fund and in a manner reasonably believed by them to be within the scope of the
authority granted to the Directors by this Agreement or by the Investors,
provided that the Directors or such Affiliates were not guilty of negligence,
misconduct, or any other breach of fiduciary duty with respect to such acts or
omissions. The Fund, out of its assets and, subject to Section l0.02 of the
Operating Agreement, not out of the assets of the Directors, shall, to the full
extent permitted by law, indemnify and hold harmless any Director and any
Director Affiliate who was or is a party or is threatened to be made a party to
any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (including any action by or
in the right of the Fund), by reason of any acts or omissions or alleged acts
or omissions arising out
3
<PAGE> 53
of such Person's activities as a Director or as an Affiliate of a Director,
if such activities were performed in good faith in furtherance of the interests
of the Fund and in a manner reasonably believed by such Person to be within the
scope of the authority conferred to the Directors by this Agreement or by the
Investors against losses, damages, or expenses for which such Person has not
otherwise been reimbursed (including attorneys' fees, judgments, fines, and
amounts paid in settlements) actually and reasonably incurred by such Person in
connection with such action, suit, or proceeding, so long as such Person was
not guilty of negligence, misconduct, or any other breach of fiduciary duty
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, and provided that the satisfaction of any indemnification and any
holding harmless shall be from and limited to Fund assets and no Investor shall
have any personal liability on account thereof.
Notwithstanding the foregoing, none of the indemnified parties shall be
indemnified for any loss or damage incurred by them in connection with any
judgment entered in or settlement of any lawsuit for violations of federal or
state securities laws by the indemnified parties in connection with the offer
or sale of Fund Interests unless: (i) there has been a successful adjudication
on the merits as a result of a trial; or (ii) such claim has been dismissed
with prejudice on the merits by a court of competent jurisdiction that has been
apprised of the Securities and Exchange Commission's position on
indemnification. In addition, any such indemnification for securities law
violations must be approved by a court of competent jurisdiction. The Fund may
purchase liability insurance that insures the indemnified parties against any
liabilities as to which such parties are permitted to be indemnified pursuant
to the provisions of this Section 10.01. However, the Fund may not incur the
cost of that portion of liability insurance which insures the indemnified
parties for any liability as to which the indemnified parties are prohibited
from being indemnified under this Section 10.01.
Item 30. Business and Other Connections of Investment Advisers.
Technology Funding Inc. ("TFI") was organized in 1979 to act as Managing
General Partner or Managing Director of investment funds providing capital to
high technology companies. Technology Funding Ltd. ("TFL") was organized in
1980 to serve as co-General Partner or Managing Director with TFI in the
various funds sponsored by Technology Funding. Reference is made to "Key
Personnel" in the Prospectus and to Schedule D of Part II of Forms ADV for
Uniform Applications for Investment Adviser Registration, as amended from time
to time, (File Nos. 801-29727 and 801-29765) filed with the Commission for
information concerning the business and other connections of Charles R. Kokesh,
President of TFI and General Partner of TFL.
Item 31. Location of Accounts and Records.
Records are located at:
Technology Funding Inc.
4
<PAGE> 54
2000 Alameda de las Pulgas
San Mateo, CA 94403
Item 32. Management Service.
Not Applicable.
Item 33. Undertakings.
1. Registrant hereby undertakes to suspend offering of the shares covered
hereby until it amends its prospectus contained herein if (1) subsequent to the
effective date of this Registration Statement, its net asset value per share
declines more than 10 percent from its net asset value per share of the
effective date of this Registration Statement, or (2) its net asset value
increases to an amount greater than its net proceeds as stated in such
prospectus.
2. Not Applicable.
3. Not Applicable.
4. Registrant hereby undertakes: (a) to file, during any period in which
offers of shares or sales are being made, a post-effective amendment
to the registration statement: (i) to include any prospectus required
by Section 10(a)(3) of the 1933 Act, and (ii) to reflect in the
prospectus any facts or events after the effective date of the
registration statement (or the most recent post-effective amendement
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; (b) that, for the purpose of determining any liability
under the 1933 Act, each such post-effective amendment shall be deemed
a new registation statement relating to the securities offered
therein, and the offering of those securities at that time shall be
deemed to be the initial bona fide offering thereof; and (c) to remove
from any registration statement by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
5. Not Applicable.
5
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the Investment
Company Act of 1940, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Santa Fe, and the State of New Mexico, on the 1st day of December, 1997.
By:/s/ CHARLES R. KOKESH
---------------------
Name: Charles R. Kokesh
Title: Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
By:/s/ CHARLES R. KOKESH Date: December 1, 1997
---------------------
Name: Charles R. Kokesh
Title: Director
<PAGE> 56
EXHIBIT INDEX
Exhibit
EX-99.2A-1 Certificate of Formation dated February 21, 1997 as filed with
the State of Delaware on February 27, 1997 is incorporated by
reference to Exhibit a(1) of the Initial Registration Statement,
as filed on March 25, 1997.
EX-99.2A-2 Form of Operating Agreement with the Investment Managers,
Affiliated Directors, the Independent Directors, and the
Investors is filed herewith.
EX-99.2B Not Applicable.
EX-99.2C Not Applicable.
EX-99.2D Not Applicable.
EX-99.2E Not Applicable.
EX-99.2F Not Applicable.
EX-99.2G Investment Advisory Agreement with Technology Funding
Inc. and Technology Funding Ltd., is filed herewith.
EX-99.2H Distribution Agreement with Technology Funding Securities
Corporation, is filed herewith.
EX-99.2I Not Applicable.
EX-99.2J Not Applicable.
EX-99.2K Not Applicable.
EX-99.2L Not Applicable.
EX-99.2M Not Applicable.
EX-99.2N Not Applicable.
EX-99.2O Not Applicable.
EX-99.2P Not Applicable.
EX-99.2Q Not Applicable.
EX-99.2R Not Applicable.
<PAGE> 1
EXHIBIT 99.2A-2
TECHNOLOGY FUNDING VENTURE CAPITAL FUND VI, LLC
FORM OF OPERATING AGREEMENT
This OPERATING AGREEMENT ("Agreement") is entered into by Technology Funding
Inc. and Technology Funding Ltd. (the "Investment Managers"), and Charles R.
Kokesh and Gregory T. George (the "Affiliated Directors"), and Robert E.
Jackson, Jr., Ph.D., Selena A. Lantry, M.D., and Deborah J. Freehling, M.D.
(the "Independent Directors"), and each of those Persons who shall hereafter be
admitted as Investors. The Investment Managers, Affiliated Directors, and
Independent Directors are collectively the "Managing Members" of this limited
liability company.
The Parties to this Agreement hereby agree as follows:
ARTICLE 1
INTRODUCTION
1.01 FORMATION. Technology Funding Venture Capital Fund VI, LLC (the
"Fund") has been formed as a limited liability company under the laws of the
State of Delaware by the filing of the Certificate of Formation pursuant to the
Act (as defined herein), on behalf of the parties and any and all Substituted
Investors (as defined herein). Except as expressly provided herein to the
contrary, the rights and obligations of the Investors and the administration
and termination of the Fund shall be governed by the Act.
1.02 NAME. The name of the Fund is "Technology Funding Venture Capital
Fund VI, LLC." If considered necessary in the opinion of counsel to the Fund
to preserve the limited liability of the Investors, Directors, and Investment
Managers, property acquired and business conducted by the Fund shall be in such
other name as is necessary to preserve such limited liability.
1.03 PURPOSE. The Fund is authorized and empowered to elect to operate,
and to operate, as a business development company under Section 55, et. al. of
the Investment Company Act of 1940, as amended. The Fund's principal
investment objective is to generate long-term capital appreciation of its
assets through investment in venture capital opportunities. The Fund will seek
to accomplish this objective by making venture capital investments in new and
developing companies that the Investment Managers believe offer significant
long-term growth possibilities and by providing those companies with active
Page 1
<PAGE> 2
management assistance where warranted. The Fund will also seek to achieve this
objective by investing in established companies that the Investment Managers
believe offer special opportunities for growth. The Fund will seek to
preserve the Investors' capital through risk management and active
participation with Portfolio Companies. Generation of current income or tax
benefits will not be primary factors in the selection of investments.
1.04 PLACE OF BUSINESS AND OFFICE; REGISTERED AGENT. The Fund shall
maintain its principal office at: c/o Technology Funding Inc., 2000 Alameda de
las Pulgas, Suite 250, San Mateo, California 94403. The Management Committee
(as defined herein), may at any time change the location of the Fund's offices
and may establish additional offices if it deems it advisable. Notification of
any such change shall be given to the Investors on or before the date of any
such change. The name and address of the Fund's registered agent for service
of process is The Corporate Trust Company, Corporation Trust Center, 1209
Orange Street, Wilmington, New Castle County, Delaware 19801.
1.05 TERM. The operation of the Fund shall commence on the Commencement
Date (as hereinafter defined), and shall continue in full force and effect until
December 31, 2007, unless further extended for up to two additional two-year
periods from such date if the Management Committee determines that such an
extension is in the best interest of the Fund or until dissolution prior
thereto pursuant to the provisions hereof.
1.06 THE INVESTORS. The names, addresses, and Capital Contributions (as
defined herein), of the Investors are set forth in the books and records
of the Fund, as amended from time to time.
1.07 TITLE TO FUND PROPERTY. All property owned by the Fund, whether
real or personal, tangible or intangible, shall be owned by the Fund as an
entity, and no Investor, individually, shall have title to or any interest in
such property.
ARTICLE 2
DEFINITIONS
Unless otherwise provided herein or unless the context otherwise requires, the
terms with initial capital letters in this Agreement are defined as follows:
(a) "ACT" means the Delaware Limited Liability Company Act, as
at any time now existing or in the future.
Page 2
<PAGE> 3
(b) "ADJUSTED CAPITAL CONTRIBUTIONS" means 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.
(c) "AFFILIATE" means, when used with reference to a
specific Person, an "affiliated person" of such specified Person as
defined in Section 2(a)(3) of the 1940 Act.
(d) "AFFILIATED DIRECTORS" shall mean Charles R. Kokesh and
Gregory T. George and/or any other successor or additional director
that is an affiliate of the Fund within the meaning of Section
2(a)(3) of the 1940 Act.
(e) "AGREEMENT" means this Operating Agreement as originally
executed and as amended, modified, supplemented, or restated from
time to time.
(f) "CAPITAL ACCOUNT" means a capital account for an Investor
calculated as set forth in Section 11.03.
(g) "CAPITAL CONTRIBUTION" means the total amount of cash
that each Investor has contributed to the capital of the Fund in
consideration for such Investor's Shares, without reduction for
selling, organizational, or other expenses, less any amounts returned
pursuant to Section 7.05.
(h) "CASH AND SECURITIES AVAILABLE FOR DISTRIBUTION" means
all Fund cash from whatever sources derived, less such reserves as the
Management Committee shall deem reasonable for the Fund's business,
plus any securities held by the Fund that the Management Committee
deems available for distribution.
Page 3
<PAGE> 4
(i) "CLOSING DATE" means the fifth business day after the Fund
has terminated the offering of Shares.
(j) "COMMENCEMENT DATE" means the commencement of Fund
operations as evident by the acceptance by the initial subscriptions.
(k) "CONSENT" means either (i) the approval given by vote at a
meeting called and held pursuant to this Agreement or (ii) the
written approval required or permitted to be given pursuant to this
Agreement, or (iii) the act of granting such an approval, as the
context requires.
(l) "CONVERSION" means that point in time when the amount of
cash plus the value of all securities distributed valued at the time
of distribution to the Investors equals the aggregate Capital
Contributions of all Investors reduced by any returns of Capital
Contributions pursuant to Section 7.05.
(m) "DIRECTOR" or "DIRECTORS" shall mean each Affiliated
Director or Independent Director in his or her capacity as a
Director of the Fund collectively, the governing body of the Fund.
(n) "DISTRIBUTION EXPENSES" means those distribution expenses
incurred in connection with the distribution of the Fund by TFSC, the
Investment Managers, and their affiliates under applicable federal and
state laws, and any other expenses actually incurred, including but
not limited to: (i) accounting and legal fees incurred in
connection therewith; (ii) Blue Sky filing fees; (iii) the cost of
preparing sales materials used in connection with the distribution of
shares; (iv) salaries earned and reasonable and necessary expenses
incurred by the partners, officers, directors, and employees of or
contractors of the Investment Managers or their Affiliates for
distribution activities.
(o) "FUND" is defined in Section 1.01.
(p) "FUND INTEREST" means all of the interests of an Investor
in the Fund, including, without limitation, the Investor's: (i)
right to a distributive share of profits and losses; (ii) right to a
distributive share of the assets of the Fund; and (iii) right, if a
Director or Investment Manager, to participate in the management of
the Fund.
(q) "INCAPACITY" shall mean, as to any Person, the entry of an
order for relief in a bankruptcy proceeding ("bankruptcy"), entry of
an order of incompetence or insanity, or the death, dissolution, or
termination (other than by merger or consolidation), as the case may
be, of such Person.
Page 4
<PAGE> 5
(r) "INDEPENDENT DIRECTORS" shall mean those that are not
"Interested Persons" of the Fund, as defined in the 1940 Act.
(s) "INVESTMENT MANAGERS" means Technology Funding Inc.
("TFI") and Technology Funding Ltd. ("TFL") and/or any other Person
who becomes an Investment Manager of the Fund as provided herein, in
such Person's capacity as Investment Manager of the Fund.
(t) "INVESTMENT MANAGER OVERHEAD" means those customary and
routine expenses incurred by the Investment Managers solely for their
own accounts and that are not attributable in any way to performing
their investment management activities for the Fund. Investment
Manager Overhead does not include direct or indirect expenses incurred
by the Investment Managers for their Fund management activities
including but not limited to appropriate allocations of: (i) rent,
depreciation, utilities, property taxes, and the cost of capital
equipment unless acquired primarily for the benefit of the Fund; (ii)
salaries and other compensation of officers, directors, and employees
of or contractors to the Investment Managers or their Affiliates; and
(iii) expenses of a general and administrative nature that are
incurred by the Investment Managers on behalf of the Fund.
(u) "INVESTOR" means any Person, including a Substituted
Investor or an Investment Manager, who is an Investor shown on the
books and records of the Fund at the time of reference thereto, in
such Person's capacity as an Investor in the Fund.
(v) "IRC" means the Internal Revenue Code of 1986, as amended.
(w) "MAJORITY IN INTEREST OF THE INVESTORS" means Investors
who in the aggregate own, at the time of the determination, more than
50% of the Shares owned by all such Investors.
Page 5
<PAGE> 6
(x) "MANAGEMENT COMMITTEE" means the governing body of the
Company as set forth in Article 3.
(y) "NET LOSS" means for any Taxable Period the aggregate sum,
if negative, of all items of Fund income, gain, deduction, and loss,
including tax-exempt income and nondeductible expenses.
(z) "NET PROFIT" means for any Taxable Period the aggregate
sum, if positive, of all items of Fund income, gain, deduction, and
loss, including tax-exempt income and nondeductible expenses.
(aa) "OFFERING PERIOD" means that period commencing with the
effective date of the Prospectus when the Fund began offering Shares
and ending when such offering is terminated.
(bb) "OPERATIONAL COSTS" means all expenses of the Fund except
Organizational Expenses, Distribution Expenses and Investment
Managers' Overhead including but not limited to: (i) the costs of
operations (e.g., documentation, securities filings, other direct and
indirect costs of selecting, negotiating, monitoring, and
liquidating Portfolio Company investments including consultants,
attorneys, accountants, appraisers, due diligence expenses, industry
trade shows and conferences, travel, investment banking fees and
commissions, or preparation of status reports); (ii) the Fund's
accounting costs (e.g., maintenance of Fund books and records, audit
fees, preparation of regulatory and tax reports, costs of computer
equipment or services used by or charged to the Fund); (iii) the
costs of investor communications (e.g., design, production, and
mailing of all reports and communications to Investors, including
those required by regulatory agencies); (iv) the costs of investor
documentation and services; (v) legal, tax, and other professional
services; (vi) salaries, benefits, and other compensation plus an
appropriate allocation of overhead burden (including but not limited
to an allocation of direct and indirect costs such as benefits;
recruitment and training; rent and related facilities expenses;
costs of acquiring, financing, and maintaining capital assets;
financing charges and cost of capital; insurance; security; storage;
utilities, etc.) for partners, officers, directors, employees of and
contractors to the Investment Managers or their Affiliates
attributable to performing any of the foregoing activities; (vii)
electronic payment charges (including credit card merchant fees and
ACH processing fees); and (viii) any other related operational or
administrative expenses necessary for the operation of the Fund.
Page 6
<PAGE> 7
(cc) "ORGANIZATIONAL EXPENSES" means those organizational
expenses incurred in connection with the formation of the Fund and in
qualifying or maintaining the qualification of Shares under applicable
federal and state laws, and any other expenses actually incurred and
related to organizational activities of the Fund, including but not
limited to: (i) accounting and legal fees incurred in connection
therewith; (ii) registration fees; (iii) the cost of preparing,
printing, amending, and supplementing the Prospectus, registration
statement, and related filings; and (iv) salaries earned and
reasonable and necessary expenses incurred by the partners, officers,
directors, and employees of or contractors to the Investment Managers
or their Affiliates for performing any such organizational
activities.
(dd) "PERSON" shall mean any individual, company, corporation,
unincorporated organization or association, trust, or other entity.
(ee) "PORTFOLIO COMPANY" means any Person in which the Fund
makes an investment, other than a Short-Term Investment.
(ff) "PROSPECTUS" means that prospectus dated December 5,
1997, offering Shares in the Fund, as supplemented and amended.
(gg) "SHARE" means a unit of interest in the Fund held by any
Investor, including the Investment Managers to the extent of their
capital contributions, representing a Capital Contribution equal to
$100 for each Share.
(hh) "SHORT-TERM INVESTMENT" means commercial paper, government
obligations, money market instruments, certificates of deposit, or
other similar obligations and securities, or the liquid securities of
issuers, such as Investment Companies, which exclusively invest in
such securities, in each case where the maturity or average
maturity, as the case may be, is one year or less at the time of
purchase by the Fund.
(ii) "SUBSTITUTED INVESTOR" means a Person admitted as an
Investor to the Fund other than a Director pursuant to Section 13.03
in place of and with all of the rights of the Investor who has
transferred or assigned such Investor's Fund Interest to such Person,
and who is shown as an Investor on the books and records of the Fund.
(jj) "SUBSCRIPTION AGREEMENT" means the contract for the
purchase of Fund shares.
Page 7
<PAGE> 8
kk) "TAXABLE PERIOD" means each calendar year.
ll) "TFI" means Technology Funding Inc., a California
corporation.
mm) "TFL" means Technology Funding Ltd., a California limited
partnership.
nn) "TFSC" means Technology Funding Securities Corporation, a
California corporation.
oo) "1940 ACT" means the Investment Company Act of 1940 and
all rules and regulations promulgated thereunder, as amended by the
Small Business Incentive Act of 1980, and as further amended from
time to time.
ARTICLE 3
MANAGEMENT
3.01 BOARD OF DIRECTORS. The governing body of the Fund shall be the
Directors, which shall consist of such number of Independent Directors
as is fixed pursuant to Section 3.02 and two Affiliated Directors, who shall
initially be Charles R. Kokesh and Gregory T. George.
3.02 INDEPENDENT DIRECTORS. The number of Independent Directors shall
initially be three and shall be fixed from time to time thereafter by the
Directors as then constituted; provided, however, that the number of
Independent Directors shall in no event be less than three or more than five.
A majority of the members of the Board of Directors shall at all times be
Independent Directors. If at any time the number of Independent Directors is
less than a majority, action shall be taken within 90 days thereafter, pursuant
to Section 3.04 to restore the number of Independent Directors to a majority.
3.03 MANAGEMENT COMMITTEE. The Directors shall delegate to the
Management Committee the powers specified in Section 3.05. The Management
Committee is comprised of the Affiliated Directors.
Page 8
<PAGE> 9
3.04 APPROVAL AND ELECTION OF DIRECTORS. The Directors shall hold office
for a term of two years from their election or until their successors are
elected, unless they are sooner removed pursuant to Section 12.03 or sooner
withdrawn pursuant to Section 12.01 or 12.02, as the case may be. Directors
may succeed themselves in office. The Management Committee may designate
successor Management Committee members to fill vacancies created by the
retirement or withdrawal of a Management Committee member pursuant to Section
12.01 or 12.02 or by the removal of a member of the Management Committee
pursuant to Section 12.03. The Management Committee may designate Independent
Directors to fill any vacancies created by an increase in the number of
Independent Directors pursuant to Section 3.02 or by the withdrawal or
removal of an Independent Director. In the event that no Independent Directors
remain, the Management Committee shall continue the business of the Fund and
shall perform all duties of the Directors under this Agreement and shall,
within 90 days, call a special meeting of Investors for the purpose of
approving and electing Independent Directors. Each Investor other than a
Director hereby consents to the admission of any successor Independent
Directors pursuant to this Section 3.04, and no further consent shall be
required. Any successor Independent Director designated by the Management
Committee shall hold office until the next bi-annual meeting of Investors or
until his or her successor has been approved and elected, unless he or she is
sooner removed pursuant to Section 12.03 or withdraws pursuant to Section
12.01.
3.05 MANAGEMENT COMMITTEE POWERS. Subject to the terms hereof, including
but not limited to Section 3.06, the Management Committee shall have full,
exclusive, and complete discretion in the management and control of the affairs
of the Fund, shall make all decisions affecting Fund affairs and shall have all
of the rights, powers, and obligations of a managing member of a limited
liability company under the Act and otherwise as provided by law. The members
of the Management Committee shall provide overall guidance and supervision with
respect to the operation of the Fund, shall perform all duties imposed on the
directors of business development companies by the 1940 Act, and shall monitor
the activities of Portfolio Companies in which the Fund has invested. Except
as otherwise expressly provided in this Agreement, the Management Committee is
hereby granted the right, power, and authority to do on behalf of the Fund all
things which, in its sole judgment, are necessary or appropriate to manage the
Fund's affairs and fulfill the purposes of the Fund, including, by way of
illustration and not by way of limitation, the power and authority from time to
time to do the following:
(a) subject to Section 3.14, invest the assets of the Fund in
such investments as are consistent with the Fund's purpose, provided
that such investments do not cause the Fund to fail to comply with
Section 55 of the 1940 Act;
Page 9
<PAGE> 10
(b) incur all expenses permitted by this Agreement;
(c) to the extent that funds are available, cause to be paid
all expenses, debts, and obligations of the Fund;
(d) employ and dismiss from employment such agents,
employees, managers, accountants, attorneys, consultants, and other
Persons necessary or appropriate to carry out the business and
affairs of the Fund, whether or not any such Persons so employed are
Affiliates of any Directors or the Investment Managers, and to pay
such compensation to such Persons as is competitive with the
compensation paid to unaffiliated Persons in the area for similar
services, subject to the restrictions set forth in Section 3.11;
(e) subject to the indemnification provisions in this
Agreement, pay, extend, renew, modify, adjust, submit to arbitration,
prosecute, defend, or settle, upon such terms it deems sufficient,
any obligation, suit, liability, cause of action, or claim, including
tax audits, either in favor of or against the Fund;
(f) enter into any sales, agency, or dealer agreements, and
escrow agreements, with respect to the sale of Shares to Investors
and provide for the distribution of such Shares by the Fund through
one or more broker-dealers (which may be Affiliates of the
Directors), or otherwise;
(g) borrow money and issue multiple classes of senior
indebtedness or a single class of interests senior to the Shares to
the extent permitted by the 1940 Act and repay, in whole or in part,
any such borrowings or indebtedness and repurchase or retire, in
whole or in part, any such interests senior to the Shares; and in
connection with such loans or senior instruments to mortgage, pledge,
assign, or otherwise encumber any or all properties or assets owned
by the Fund, including any income therefrom, to secure such
borrowings or provide repayment thereof;
(h) establish and maintain accounts with financial
institutions, including federal or state banks, brokerage firms,
trust companies, savings and loan institutions, or money market
funds;
(i) make temporary investments of Fund capital in Short-Term
Investments;
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(j) to the extent permitted by the 1940 Act, form or cause to
be formed one or more small business investment companies under the
Small Business Investment Fund Act of 1958, as amended;
(k) establish valuation principles and periodically apply such
principles to the Fund's venture capital investment portfolio;
(l) to the extent permitted by the 1940 Act, designate and
appoint one or more agents for the Fund who shall have such authority
as may be conferred upon them by the Management Committee and who may
perform any of the duties of, and exercise any of the powers and
authority conferred upon, the Management Committee hereunder
including, but not limited to, designation of one or more agents as
authorized signatories on any bank accounts maintained by the Fund;
(m) prosecute, protect, defend, or cause to be protected and
defended, or abandon, any patent, patent right, copyright, trade
name, trademark, and service mark, and any application with respect
thereto, that may be held by the Fund;
(n) take all reasonable and necessary actions to protect the
secrecy of and the proprietary rights with respect to any know-how,
trade secret, secret process, or other information and to prosecute
and defend all rights of the Fund in connection therewith;
(o) subject to the other provisions of this Agreement, to
enter into, make, and perform such contracts, agreements, and other
undertakings, and to do such other acts, as it may deem necessary or
advisable for, or as may be incidental to, the conduct of the
business contemplated by this Section 3.05, including, without in any
manner limiting the generality of the foregoing, contracts,
agreements, undertakings, and transactions with any Investor or with
any other person, firm, or corporation having any business,
financial, or other relationship with any Investor, provided,
however, such transactions with such Persons and entities (i) shall
only be entered into to the extent permitted under the 1940 Act and
(ii) shall be on terms no less favorable to the Fund than are
generally afforded to unrelated third parties in comparable
transactions;
(p) purchase, rent, or lease equipment for Fund purposes;
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(q) purchase and maintain, at the Fund's expenses, liability
and other insurance to protect the Fund's assets from third party
claims; provided that, in its judgment, such insurance is available
and reasonably priced; and cause the Fund to purchase or bear the
costs of any insurance covering the potential liabilities of the
Investors, or employees or partners of the Fund or Investment
Managers as well as the potential liabilities of any Person serving
at the request of the Investment Managers as a director of or advisor
to a Portfolio Company; provided, however, that the Directors or
Investment Managers, as the case may be, shall be required to bear,
out of their separate assets, the portion of the premiums for any
such insurance coverages beyond those for matters against which the
Fund is permitted to indemnify the Directors under Article 10;
(r) cause to be paid any and all taxes, charges, and
assessments that may be levied, assessed or imposed upon any of the
assets of the Fund;
(s) make any election on behalf of the Fund that is or may be
permitted under the IRC and supervise the preparation and filing of
all tax and information returns that the Fund may be required to
file;
(t) take any action that may be necessary or appropriate for
the continuation of the Fund's valid existence as a limited liability
company under the laws of the State of Delaware and of each other
jurisdiction in which such existence is necessary to protect the
limited liability of the Investors or to enable the Fund to conduct
the business in which it is engaged;
(u) admit additional Investors to the Fund in accordance with
Section 7.02; admit an assignee of an Investor's Fund Interest to be
a Substituted Investor in the Fund, pursuant to and subject to the
terms of Section 13.03, without the consent of any other Investor; and
(v) perform all normal business functions, and otherwise
operate and manage the business and affairs of the Fund, in
accordance with and as limited by this Agreement.
3.06 INVESTMENT MANAGERS. The Investment Managers are hereby granted the
exclusive power and authority from time to time to do the following:
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(a) subject to the supervision of the Management Committee,
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, among
other things, to find, evaluate, structure, monitor, sell, and
liquidate, upon dissolution or otherwise, such investments, to
provide, or arrange for the provision of, managerial assistance to
Portfolio Companies and in connection therewith to enter into,
execute, amend, supplement, acknowledge, and deliver any and all
contracts, agreements, or other instruments for the performance of
such functions, including the investment and reinvestment of all or
part of the Fund's assets, execution of portfolio transactions, and
any or all administrative functions; and
(b) on behalf of the Fund, grant Fund guarantees of
Portfolio Company borrowings so long as the aggregate guarantees
outstanding at any time do not, when combined with Fund borrowings,
exceed 50% of the Fund's aggregate Capital Contributions.
The grant of exclusive power and authority to the Investment Managers under
this Section 3.06 in no way limits the rights, powers, or authority of the
Management Committee under this Agreement, the Act, or as otherwise provided by
law.
3.07 TAX MATTERS PARTNER; TAX ELECTIONS. TFI, as one of the managing
members of the Fund, shall perform all duties imposed by Sections 6221 through
6233 of the IRC as "Tax Matters Partner" of the Fund, including, but not
limited to, the following: (i) the power to conduct all audits and other
administrative proceedings with respect to Fund tax items; (ii) the power to
extend the statute of limitations for all Investors with respect to Fund tax
items; (iii) the power to file a petition with an appropriate federal court for
review of a final Fund administrative adjustment; and (iv) the power to enter
into a settlement with the Internal Revenue Service on behalf of, and binding
upon, those Investors having less than a 1% interest in the profits of the Fund
unless an Investor notifies the Internal Revenue Service and TFI that TFI may
not act on such Investor's behalf.
The Management Committee may cause the Fund to make all elections required or
permitted to be made by the Fund under the IRC and not otherwise expressly
provided for in this Agreement, in the manner that the Management Committee
believes will be most advantageous to individual taxpayers who: (i) are married
and filing joint federal income tax returns; (ii) are not "dealers" for federal
income tax purposes; (iii) are not subject to alternative minimum tax; and (iv)
have income at least part of which, without
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giving effect to any additional tax on preference items, is subject to the
maximum federal income tax rate in effect at the time of the election.
3.08 APPOINTMENT OF AUDITORS. Subject to the approval of (i) a Majority
in Interest of the Investors (which approval is subject to Section 14.02) and
(ii) a majority of the Independent Directors, the Management Committee, in the
name and on behalf of the Fund, is authorized to appoint independent certified
public accountants for the Fund.
3.09 GOOD FAITH. The Management Committee shall not cause the Fund to
consent to or join in any waiver, amendment, or modification of the terms of
any company agreement, limited liability company agreement, management
agreement, or investment contract to which it is a party unless, in the good
faith judgment of the Management Committee, such waiver, amendment, or
modification would be in the best interests of the Fund.
3.10 RESTRICTIONS ON THE DIRECTORS' AUTHORITY. The Directors shall not
have authority to do any of the following:
(a) act in contravention of this Agreement or of the 1940 Act;
(b) possess Fund property or assign the rights of the Fund in
specific property for other than a Fund purpose;
(c) admit any other Person as a Director of the Fund without
the approval of the Investors except as otherwise provided herein;
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(d) commingle or permit the commingling of the assets of the
Fund with the assets of any other Person except as otherwise provided
herein;
(e) permit any Person who makes a nonrecourse loan to the Fund
to acquire, at the time and as a result of making the loan, any
direct or indirect interest in the profits, capital or property of
the Fund other than as a secured creditor;
(f) without the consent of a Majority in Interest of the
Investors, subject to paragraph 14.02; to
(i) elect to dissolve the Fund; or
(ii) sell or otherwise dispose of at any one time all
or substantially all of the assets of the Fund;
or
(g) invest in a company in which any Director has an equity
interest other than through another company that it manages.
3.11 CONTRACTS WITH AFFILIATES OF THE DIRECTORS. The Management Committee
may, on behalf of the Fund, enter into contracts for goods or services with any
Affiliate of a Director provided that the charges for such goods or services
are the lower of (i) cost, including a reasonable allocation of cost of
capital, or (ii) those charged by unaffiliated Persons in the area for
similar goods and services. Any such contract shall be subject to termination
by a majority of the Independent Directors following 60 days' prior notice
thereof.
3.12 OBLIGATIONS OF THE DIRECTORS. The Directors shall devote such time
and effort to the Fund business as, in their judgment, may be necessary or
appropriate to manage the affairs of the Fund. The Directors are under a duty
and obligation to conduct the affairs of the Fund in the best interests of the
Fund, including the safekeeping and the use of all Fund funds and assets
(whether or not in the immediate possession or control of the Directors) and
the use thereof for the benefit of the Fund. Neither the Directors nor any of
their Affiliates shall enter into any transaction with the Fund that will
significantly benefit the Directors or such Affiliates in their independent
capacities unless the transaction is expressly permitted hereunder and under
the 1940 Act or any exemptive order issued by the Securities
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and Exchange Commission thereunder, or is entered into principally for the
benefit of the Fund in the ordinary course of Fund business.
3.13 OTHER BUSINESS OF INVESTORS. Any Investor and any Affiliate of any
Investor may engage in or possess any interest in other business ventures of
any kind, nature or description, independently or with others, whether such
ventures are competitive with the Fund or otherwise. Neither the Fund nor any
Investor shall have any rights or obligations by virtue of this Agreement or
the company relationship created hereby in or to such independent ventures or
the income or profits or losses derived therefrom, and the pursuit of such
ventures, even if competitive with the business of the Fund, shall not be
deemed wrongful or improper. Neither the Directors nor any Affiliate of the
Directors shall be obligated to present any particular investment opportunity
to the Fund, except with respect to opportunities that are suitable for the
Fund, which must first be made available to the Fund before any of the
Directors may invest, and the Directors and their Affiliates shall each have
the right to take for their own account (individually or as a trustee, partner,
or fiduciary) or to recommend to others any such particular investment
opportunity. The Investment Managers and Affiliated Directors hereby consent
and agree promptly to furnish the Independent Directors, upon request, with
information on a confidential basis as to any venture capital investments made
by them, or any of their Affiliates, for their own account or for others.
3.14 PROHIBITED TRANSACTIONS. Except to the extent expressly permitted by
this Agreement and except as permitted by the 1940 Act or any exemptive order
issued by the Securities and Exchange Commission thereunder:
(a) the Fund shall not lend money or other property to an
Investment Manager or any Investment Manager Affiliate;
(b) the Fund shall not sell to or purchase any security or
any other property from a Director, Investment Manager, or any
Affiliate of either, or effect any transaction in which a Director,
Investment Manager, or any Affiliate of either is a joint or several
participant;
(c) the Fund shall not purchase or sell commodities or
commodity contracts, participate on a joint or a joint and several
basis in any trading account in securities, or purchase any
securities on margin, except such short-term credits as are necessary
for clearance of transactions;
(d) no reimbursement for expenses of the Fund shall be made to
the Directors or any Director Affiliate except as permitted under
Article 4;
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(e) the Fund shall not issue any of its Shares for
services or for property other than cash or securities;
(f) the Fund shall not sell any Shares at a price below the
current net asset value of such Shares; and
(g) except as provided in Section 7.06, the Fund shall not
purchase any Shares issued by it.
ARTICLE 4
COMPENSATION
4.01 INVESTMENT MANAGERS. Over and above their distributive share of Fund
profits, losses, and distributions, detailed in Articles 8 and 9, the
Investment Managers shall also receive the following amounts from the Fund:
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(a) MANAGEMENT FEE. The Fund shall pay the Investment
Managers a Management Fee for supervising the venture capital
operations of the Fund equal to;
(i) 2% of the total Capital Contributions for each
year of Fund operations during the Offering Period; and
(ii) 2% of Adjusted Capital Contributions for each year
of Fund operations after the Closing Date.
To the extent permitted by applicable law, a full 2% Management Fee
shall be payable by 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. All Management Fees shall be
due and payable monthly in arrears. Prior to the closing date and
as of the date each Investor's Subscription Agreement is accepted,
the Management Fee will be assessed for the period from the
Commencement Date to the date of acceptance. 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. In the event that such
fees are carried forward, the Fund will incur an interest expense.
(b) REIMBURSEMENT OF OPERATIONAL COSTS. The Fund shall
reimburse the Investment Managers or their Affiliates for Operational
Costs incurred by the Investment Managers or their Affiliates in
connection with the business of the Fund, including without
limitations expenses related to the selection of Portfolio Companies
or to proposed investments, even if the proposed investments
ultimately are not undertaken by the Fund. The Management Fee is in
addition to the reimbursement of actual Operational Costs.
4.02 INDEPENDENT DIRECTORS. As compensation for services rendered to the
Fund, the Fund will pay each Independent Director:
(a) the sum of $10,000 annually in quarterly installments
beginning on the Commencement Date;
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(b) the sum of $1,000 for each meeting of the Directors
attended by such Independent Director up to an annual limit of
$4,000;
(c) if appointed to a committee by the Directors, the
sum of $1,000 for each such committee meeting attended up to an
annual limit of $4,000; provided, however, that if such committee
meeting is held on the same day as a meeting of the Directors, no
additional fee will be paid; and
(d) all out-of-pocket expenses relating to attendance at the
meetings, committee or otherwise, of the Directors.
ARTICLE 5
INVESTORS
5.01 LIMITED LIABILITY. The Investors and Directors shall not be
personally liable for any of the debts or losses of the Fund beyond the amount
of total Investor Capital Contributions to the Fund and the share of assets and
undistributed profits of the Fund allocable to the Investors, except as
otherwise provided by the Act and Section 13.04.
5.02 NO MANAGEMENT RESPONSIBILITY. No Investor other than a Director or
Investment Manager shall participate in the management or control of the
business of or transact any business for the Fund but may exercise the rights
and powers of an Investor under this Agreement. All management responsibility
is vested in the Directors. The Investors other than the Directors hereby
consent to the taking of any action by the Directors, Management Committee, and
the Investment Managers contemplated under Article 3.
5.03 NO AUTHORITY TO ACT. No Investor other than a Director shall have
the power to represent, act for, sign for, or to bind the Fund. All authority
to act on behalf of the Fund is vested in the Directors and as expressly
delegated to the Management Committee, and the Investment Managers. The
Investors consent to the exercise by the Directors of the powers conferred on
them by law and this Agreement.
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5.04 RIGHTS OF INVESTORS. The Investors shall have the following rights:
(a) the right to elect and remove Directors;
(b) the right to 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 business development company under
the 1940 Act;
(c) the right to approve or disapprove any proposed investment
advisory contract or management agreement or to disapprove and
terminate any such existing contracts; provided, however, that such
contracts are also approved by a majority of the Independent
Directors;
(d) the right to approve or reject the appointment of the
independent accountants of the Fund; provided, however, that such
appointment is approved by the Management Committee, including a
majority of the Independent Directors;
(e) the right to propose and approve an amendment to this
Agreement; provided, however, that no such amendment shall conflict
with the 1940 Act; and
(f) the right to approve any other material matters related to
the business of the Fund that the 1940 Act requires to be approved by
the Investors so long as the Fund is a business development company
subject to the provisions of the 1940 Act; provided, however, that,
prior to the exercise of any such right of approval, the Management
Committee amends this Agreement to reflect such additional voting
right.
Each of the foregoing matters shall be approved or disapproved, as the case may
be, upon the vote or consent of a Majority in Interest of the Investors.
5.05 NO CONSENT REQUIRED. Notwithstanding the foregoing, no vote,
approvals, or other consent shall be required of the Investors to amend this
Agreement in any of the following respects: (i) to reflect any change in the
amount or character of the Capital Contribution of any Investor; (ii) to admit
an
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additional Investor or a Substituted Investor or remove an Investor in
accordance with the terms of this Agreement; or (iii) to correct any false or
erroneous statement, or to make a change in any statement in order that such
statement shall accurately represent the agreement among the Investors and
Directors in this Agreement; provided that no such correction or change shall
in any manner adversely affect the Fund Interests of any Investor.
ARTICLE 6
AMENDMENTS
6.01 PROPOSAL OF AMENDMENTS. Except as otherwise specified in this
Agreement, any amendment to this Agreement may be proposed by the Directors or
by Investors other than the Directors who, in aggregate, own not less than 10%
of the Shares owned by all such Investors. The Directors or Investors
proposing such amendment shall submit to the Management Committee: (i) the
text of such amendment; (ii) a statement of the purpose of such amendment; and
(iii) an opinion of counsel obtained by the Directors or Investors proposing
such amendment to the effect that such amendment is permitted by the Act and
the laws of any other jurisdiction where the Fund is qualified to do business,
will not impair the limited liability of the Directors or Investors, and will
not adversely affect the classification of the Fund as a partnership for
federal and state income tax purposes. The Management Committee shall, within
20 days after receipt of any proposal under this Section 6.01, give
notification to all Directors and Investors of such proposed amendment, of such
statement of purpose, and of such opinion of counsel, together, in the case of
an amendment proposed by Investors, with the views, if any, of the Management
Committee and the Investment Managers with respect to such proposed amendment.
All proposed amendments shall be submitted to the Investors for a vote no less
than 10 days nor more than 60 days after the date of mailing of such notice and
will be adopted if approved by a Majority in Interest of the Investors. For
purposes of obtaining a written vote, the Management Committee may require
receipt of written responses within a specified time.
6.02 AMENDMENTS TO BE ADOPTED SOLELY BY THE MANAGEMENT COMMITTEE. The
Management Committee may, without the consent of any Investor, amend any
provision of this Agreement, and execute whatever documents may be required in
connection therewith, to reflect:
(a) a change in the name or the location of the principal
place of business of the Fund;
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(b) the admission of Substituted Investors, additional
Investors, or successor Directors in accordance with this Agreement;
(c) a 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 a publicly traded
partnership taxable as a corporation for federal income tax purposes
or as a corporation for state income tax purposes; and
(d) any other amendments similar to the foregoing.
6.03 AMENDMENTS NOT ALLOWABLE. Unless approved by Investors holding a
majority of the Shares affected thereby, no amendment to this Agreement shall
be permitted if, in the opinion of counsel to the Fund (unless such counsel is
disapproved by such majority), the effect of such amendment would be to:
(a) increase the duties or liabilities of any Investor;
(b) change the interest of any Investor hereto in the assets,
profits, or losses of the Fund, except as otherwise provided herein;
or
(c) in any way adversely affect the federal income tax status
of the Fund.
ARTICLE 7
CAPITAL CONTRIBUTIONS
7.01 CAPITAL CONTRIBUTIONS OF INVESTORS. The Investors shall make the
following contributions to the capital of the Fund:
(a) INVESTMENT MANAGERS. The Investment Managers shall
contribute an aggregate amount equal to 0.1% payable on the
Commencement Date.
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(b) INVESTORS. The Investors and Investment Managers shall
make Capital Contributions, payable upon subscription, in the
amounts set forth opposite their respective names in the books and
records of the Fund, as amended from time to time.
No Investor other than Investment Managers shall be required to lend any funds
to the Fund or to make any Capital Contribution to the Fund except as set
forth in this Section 7.01.
7.02 ADMISSION OF ADDITIONAL INVESTORS. The Management Committee is
authorized to admit to the Fund, as additional Investors, such Persons as they
deem advisable. The manner of the offering of Shares, the terms and conditions
under which subscriptions for such Shares will be accepted, and the manner of
and conditions to the sale of Shares to subscribers therefor and the admission
of such subscribers as additional Investors will be as provided in the
Prospectus in all material respects and subject to any provisions hereof.
Before any Person is admitted to the Fund as an Investor, such Person or such
Person's attorney-in-fact shall execute a counterpart of this Agreement and
thereby agree in writing to be bound by all of the provisions hereof as an
Investor.
7.03 INTEREST ON CAPITAL CONTRIBUTIONS. No Investor shall have the right
to be paid interest on any Capital Contribution or on such Investor's Capital
Account, except as specifically provided in this Agreement.
7.04 WITHDRAWAL AND RETURN OF CAPITAL. No Investor shall have the right
to withdraw or to demand the return of any or all of that Investor's Capital
Contribution except as specifically provided in this Agreement.
7.05 EXCESS CAPITAL CONTRIBUTIONS. To the extent the Management Committee
determines, in its sole discretion, that the Fund has received Capital
Contributions in excess of the Fund's needs, the Management Committee may
return said excess Capital Contributions to the Investors, provided that at the
time of such partial returns (i) all liabilities of the Fund to Persons other
than Investors have been paid or, in the good faith determination of the
Management Committee, there remains property of the Fund sufficient to pay them
and (ii) the Management Committee causes this Agreement to be amended, if
necessary, to reflect a reduction in Capital Contributions. In the event that
the Management Committee elects to make a partial return of Capital
Contributions to Investors, such distribution shall be made pro rata to all of
the Investors based upon the number of Shares held by each Investor. Each
Investor, by becoming such, consents to such pro rata distribution theretofore
or thereafter duly authorized and made in accordance with this Section 7.05.
Without the consent of all Investors, no
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Investor shall have the right to receive property other than cash in return for
such Investor's Capital Contribution unless such property is in the form of
markable securities and made valid to all Investors.
7.06 REDEMPTION OF SHARES. The Fund may redeem or repurchase Shares to
the extent permitted by the 1940 Act.
ARTICLE 8
PROFIT AND LOSS
8.01 NET PROFIT. Except as provided in Section 8.03, Net Profit of the
Fund shall be allocated for Fund tax and accounting purposes, in the following
order and priority:
(a) first, to those Investors with deficit Capital Account
balances in proportion to such deficits until such deficits have been
eliminated;
(b) second, to those Investors as necessary to offset Net Loss
previously allocated to such Investors pursuant to Section 8.02(b)
until each Investor has been allocated cumulative Net Profit pursuant
to this Section 8.01(b) equal to the cumulative Net Loss previously
allocated to such Investor pursuant to Section 8.02(b) not already
offset pursuant to this Section 8.01(b) or Section 8.01(a); and
(c) third,
(i) 80% to the Investors to be allocated pursuant
to Section 8.04; and
(ii) 20% to the Investment Managers.
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In no event shall the Investment Managers be allocated less than 1% of the Net
Profit of the Fund plus their pro rata share based on capital contributed.
8.02 NET LOSS. Except as provided in Section 8.03, Net Loss of the Fund
shall be allocated for Fund tax and accounting purposes, in the following order
and priority:
(a) first, to the Investors and Investment Managers as
necessary to offset Net Profit previously allocated to such Investors
and Investment Managers pursuant to Section 8.01(c) until each
Investor and Investment Manager has been allocated cumulative Net
Loss pursuant to this Section 8.02(a), equal to the cumulative Net
Profit previously allocated to such Investor and Investment Manager
pursuant to Section 8.01(c) and not already offset by this Section
8.02(a); and
(b) second, 99% to the Investors and 1% to the Investment
Managers.
8.03 ALLOCATION OF LOSSES IN EXCESS OF CAPITAL ACCOUNT. The amount of any
Net Loss in excess of any then positive balance in the Capital Account of an
Investor, which would be allocable to an Investor but for this Section 8.03,
shall be allocated to the Investors that have positive balances in their
Capital Accounts in proportion to the respective amounts of such positive
balances until all such balances have been reduced to zero, and thereafter
solely to the Investment Managers.
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8.04 ALLOCATIONS AMONG INVESTORS. Any allocations to the Investors other
than the Investment Managers pursuant to Article 8 shall be made among such
Investors as follows:
(a) with respect to any Net Profit or Net Loss allocated to such
Investors as a group pursuant to Article 8, such allocation shall be
made to the extent possible under the IRC, first to equalize the
Capital Account balance per Share of each such Investor, and then in
the proportion that the number of Shares held by each such Investor
bears to the total number of Shares held by all such Investors.
8.05 ALLOCATIONS AMONG INVESTMENT MANAGERS. All allocations to the
Investment Managers pursuant to this Article 8, as well as allocations of
compensation, fees, or reimbursements paid to the Investment Managers, shall be
determined by the Investment Managers in their sole discretion.
8.06 QUALIFIED INCOME OFFSET. In the event any Investor unexpectedly
receives an adjustment, allocation, or distribution that results in a deficit
balance in such Investor's Capital Account, there shall be allocated to such
Investor items of Fund income and gain in an amount and manner sufficient to
eliminate such deficit balance as quickly as possible.
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ARTICLE 9
DISTRIBUTIONS
9.01 DISTRIBUTIONS GENERALLY. Except as provided in Section 9.02, Cash
and Securities Available for Distribution shall be distributed 99% to the
Investors, and 1% to the Investment Managers until Conversion. After
Conversion, Cash and Securities Available for Distribution shall be distributed
80% to the Investors in proportion to their respective Capital Account balances
and 20% to the Investment Managers. Securities distributed in kind to
Investors shall be treated as if sold at the value determined under Section
9.04, and the gain or loss shall be allocated in accordance with Article 8.
Distributions to Investors shall be made only to the extent they are not
prohibited by any applicable restrictions set forth in the 1940 Act. On
liquidation, distributions shall be made in accordance with the provisions of
Article 15.
9.02 MINIMUM DISTRIBUTION. Notwithstanding Section 9.01 and to the extent
there are funds available, if Net Profit is allocated to the Investors under
Article 8 for any Taxable Period, the Directors shall endeavor, within ninety
(90) days following the close of the Taxable Period for which the Net Profit is
allocated, to make a distribution out of Cash and Securities Available for
Distribution to all Investors and the Investment Manager that, when added to
all other distributions made to such Investors during such Taxable Period
(exclusive of distributions under this Section 9.02 for the previous Taxable
Periods), will be in an amount sufficient to meet the federal and state tax
liability of each Investor, calculated for purposes of this Section 9.02 as if
such Investor were taxable on the Net Profit allocated for the Taxable Period
at the highest combined federal and California income tax rates applicable to
individuals, assuming that California income taxes are deductible for federal
income tax purposes, and taking into account any special rates that apply to
ordinary income and capital gains included in Fund taxable income for the
Taxable Period. To the extent that the Investment Managers or their
principals may be expected to make estimated tax payment for any period other
than a Taxable Period, the capital Net Profit fee for such period shall be
estimated as required by the IRC, and the Minimum Distribution, calculated in
the same manner as above, shall be paid to the Investment Manager sufficiently
in advance that Investment Managers could make such estimated tax payments.
9.03 MANDATORY REINVESTMENT. For a period of four years after the Closing
Date, any cash received from liquidation of Portfolio Company investments
(except those utilized as provided in Section 7.04) shall be retained by the
Fund and reinvested at the discretion of the Investment Managers.
9.04 DISTRIBUTIONS AMONG INVESTORS. Distributions made to the
Investors other than the Investment Managers as a group pursuant to Sections
9.01 and 9.02 shall be made in proportion to their respective Capital Account
balances. Distributions to the Investment Managers shall be allocated
amongst the two entities solely at the Investment Managers' discretion.
9.05 VALUATION. The value of securities distributed in kind to the
Investors that cannot be valued on the basis of either (i) available market
quotations or (ii) third party transactions involving actual transactions or
actual firm offers by investors who are not Affiliates of the Fund shall be
valued by an appraisal made in accordance with the appraisal procedure
described in Section 12.03(b) provided,
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however, that such appraisal need be made in connection with securities
distributed in kind to the Investors upon the dissolution of the Fund only if
the value of the securities distributed in kind to the Investors upon such
dissolution exceeds 10% of the Capital Contributions of all Investors.
ARTICLE 10
RESPONSIBILITIES OF THE INVESTORS AMONG THEMSELVES
10.01 INDEMNIFICATION OF THE DIRECTORS BY THE FUND. Neither the Directors
nor any of their Affiliates shall 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 Directors or such
Affiliates in good faith in the furtherance of the interests of the Fund and in
a manner reasonably believed by them to be within the scope of the authority
granted to the Directors by this Agreement or by the Investors, provided that
the Directors or such Affiliates were not guilty of negligence, misconduct, or
any other breach of fiduciary duty with respect to such acts or omissions. The
Fund, out of its assets and, subject to Section l0.02, not out of the assets
of the Directors, shall, to the full extent permitted by law, indemnify and
hold harmless any Director and any Director Affiliate who was or is a party or
is threatened to be made a party to any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative (including any action by or in the right of the Fund), by reason
of any acts or omissions or alleged acts or omissions arising out of such
Person's activities as a Director or as an Affiliate of a Director, if such
activities were performed in good faith in furtherance of the interests of the
Fund and in a manner reasonably believed by such Person to be within the scope
of the authority conferred to the Directors by this Agreement or by the
Investors against losses, damages, or expenses for which such Person has not
otherwise been reimbursed (including attorneys' fees, judgments, fines, and
amounts paid in settlements) actually and reasonably incurred by such Person in
connection with such action, suit, or proceeding, so long as such Person was
not guilty of negligence, misconduct, or any other breach of fiduciary duty
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, and provided that the satisfaction of any indemnification and any
holding harmless shall be from and limited to Fund assets and no Investor shall
have any personal liability on account thereof.
Notwithstanding the foregoing, none of the indemnified parties shall be
indemnified for any loss or damage incurred by them in connection with any
judgment entered in or settlement of any lawsuit for
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violations of federal or state securities laws by the indemnified parties in
connection with the offer or sale of Fund Interests unless: (i) there has been
a successful adjudication on the merits as a result of a trial; or (ii) such
claim has been dismissed with prejudice on the merits by a court of competent
jurisdiction that has been apprised of the Securities and Exchange Commission's
position on indemnification. In addition, any such indemnification for
securities law violations must be approved by a court of competent
jurisdiction.
The Fund may purchase liability insurance that insures the indemnified parties
against any liabilities as to which such parties are permitted to be
indemnified pursuant to the provisions of this Section 10.01. However, the
Fund may not incur the cost of that portion of liability insurance which
insures the indemnified parties for any liability as to which the indemnified
parties are prohibited from being indemnified under this Section 10.01.
10.02 FUND LOANS. The Directors or any Affiliate of any Director may lend
funds to the Fund for such period of time as the Management Committee may
determine, and with interest payable in an amount equal to the lesser of (i)
the interest rate at which the Directors or such Director Affiliate could then
borrow such amount or (ii) the maximum amount of interest then permitted under
any applicable usury laws; provided, however, that if the Fund is able to
obtain comparable financing from an unrelated lending institution, the amount
of interest and similar charges or fees paid to the Directors or such Affiliate
would not exceed those charged by such unrelated lending institution on
comparable loans for the same purpose. Any such amounts shall be repaid to the
Directors or any Director Affiliate before any distributions may be made
pursuant to Article 9. In no event shall a loan made to the Fund by any Person
be deemed to be a part of any Fund Interest that such Person may hold, nor
shall the Directors or their Affiliates provide the Fund with permanent
financing.
10.03 INVESTORS LOOK SOLELY TO FUND ASSETS. Neither the Directors nor any
of their Affiliates shall have any personal liability to any Investor for the
repayment of any amounts outstanding in the Capital Account of an Investor
including, but not limited to, Capital Contributions. Any such payment shall
be solely from the assets of the Fund. The Directors shall not be liable to
any Investor by reason of any change in the federal income tax laws as they
apply to the Fund and the Investors, whether such change occurs through
legislative, judicial, or administrative action, so long as the Directors have
acted in good faith and in a manner reasonably believed to be in the best
interests of the Investors. Neither the Directors nor any of their Affiliates
shall have any personal liability to repay to the Fund any portion or all of
any negative amount of the Director's Capital Account except as otherwise
provided in Section 15.03.
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ARTICLE 11
ACCOUNTING, RECORDS, AND REPORTS
11.01 METHOD OF ACCOUNTING. The Fund's books and records shall be kept on
an accrual basis in accordance with generally accepted accounting principles;
however, for purposes of tax reporting, the Management Committee may choose
either the cash or accrual method with the filing of the Fund's first tax
return.
11.02 FISCAL YEAR. The fiscal year of the Fund shall be the calendar year.
The admission of additional Investors shall be deemed to have been on the first
day of the month if the Investor was admitted to the Fund during the first 15
days of a month and the 16th day of the month if Investor was admitted to the
Fund after the 15th day of a month.
11.03 CAPITAL ACCOUNTS. An individual Capital Account shall be maintained
for each Investor. The initial balance of each such Capital Account shall be
zero and shall be increased by: (i) the amount of any cash and the fair market
value of any property (net of liabilities) contributed to the Fund by such
Investor valued as of the time of such contribution and (ii) any Net Profit of
the Fund for a Taxable Period (or specially allocated items of income or gain)
allocated to the Investor pursuant to Article 8 (as of the end of such Taxable
Period) including gains deemed realized upon the distribution of securities
under Sections 9.01 and 9.02. An Investor's Capital Account shall be decreased
by: (i) the amount of any cash distributed to such Investor; (ii) the fair
market value of any securities or other property (net of liabilities)
distributed to such Investor (valued as of the time of distribution); and (iii)
the Net Loss of the Fund for a Taxable Period (or specially allocated items of
deduction or loss) allocated to the Investor pursuant to Article 8 (as of the
end of such Taxable Period) including losses deemed realized upon the
distribution of securities under Sections 9.01 and 9.02, such decrease occurring
as of the time of the distribution.
11.04 MAINTENANCE OF INFORMATION. The Fund will maintain, or cause to be
maintained, such books and records as are required under Section 31 of the 1940
Act and as shall enable it to be reasonably responsive to requests for
information pursuant to Section 11.05.
11.05 ACCESS TO INFORMATION. Each Investor may obtain from the Fund from
time to time upon written demand to the Directors, for a purpose clearly
related to such Investor's interest as an Investor, including any suit by such
Investor against the Fund, provided that such purpose is set forth in
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such written demand, the following: (i) true and full information regarding
the status of the business and financial condition of the Fund, which shall be
deemed satisfied if the Management Committee provide a copy of the most recent
audited financial statements of the Fund; (ii) promptly after becoming
available, a copy of that Investor's federal, state, and local income tax
information statement for each of the last two fiscal years; (iii) a current
list of the names and last known business, residence, or mailing address of
each Investor except for those Investors who have requested that their names
not be disclosed; (iv) a copy of this Agreement and all amendments and
restatements; and (v) such other information as is just and reasonable in the
discretion of the Management Committee. All such information may be obtained
by the Investor's compliance with such procedures as the Management Committee,
from time to time, shall reasonably establish, including without limitation
with respect to payment of copying, mailing, and other administrative costs
occasioned hereby. The Management Committee may condition the provision of
information on the execution of an acknowledgment by the requesting party that
the information provided will be held in confidence, will not be disclosed to
any other persons, will not be used for commercial purposes, will not be used
in such a fashion that the Fund's tax status may be jeopardized, and that the
requesting party will indemnify the Fund and the Management Committee for any
failure to honor such commitments.
11.06 BANKING. The Investment Managers shall open and thereafter maintain
separate accounts in the name of the Fund in which there shall be deposited all
of the funds of the Fund. No other funds shall be deposited in the accounts.
The funds in said accounts shall be used solely for the business of the Fund,
including, without limitation, such investments as authorized in Section
3.05(i).
11.07 AUDIT. At the expense of the Fund, an annual audit of the Fund's
books of account shall be made by a firm of independent certified public
accountants selected by the Directors and approved by a Majority in Interest of
the Investors. In the determination of the profits or losses of the Fund to be
reflected by its books and records, such certified public accountants shall be
governed by the provisions of this Agreement and the 1940 Act. In any
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circumstances where no provision under the IRC and regulations thereunder may
be applicable to the determination of any item, the accountants shall act in
their discretion in such manner as may, most consistently with prior practices,
properly reflect that item. If required by any governmental agency or by
principles of accounting, the accountants may cause adjustments to be made to
the statements of the Fund for reporting purposes. The annual certified
financial report of the Fund shall include a balance sheet, an income
statement, a statement of equity for Investors, and a statement of changes in
financial position. The report also shall include the amount of any
reimbursement made by the Fund to the Investment Managers, Directors or their
Affiliates. Copies of the annual certified financial report of the accountants
for each year shall be transmitted to all Investors within 120 days after the
end of that year. Such copies shall be accompanied by a statement of the risks
involved in investments in the Fund to the extent required under Section
64(b)(1) of the 1940 Act.
11.08 STATUS REPORTS. Within 75 days after the end of each of the first
three quarters of the Fund's fiscal year, the Directors shall have prepared and
transmitted to the Investors, at the expense of the Fund, a quarterly report
containing the same financial information contained in the Fund's Quarterly
Report on Form 10-Q filed by the Fund with the Securities and Exchange
Commission under the Securities Exchange Act of 1934. Within 120 days after
the end of each fiscal year, the Investment Managers shall have prepared and
transmitted to the Investors, at the expense of the Fund, an annual report
containing a summary of the year's activity and the financial information set
forth in Section 11.07.
11.09 TAX RETURNS. The Directors shall use their best efforts to cause the
Fund to file all tax and information returns required of the Fund in a timely
manner. The Directors will cause to be transmitted or delivered within 75 days
after the end of each year to each Person who was an Investor at any time
during such year a statement setting forth all information relating to the
Fund's operations for such fiscal year as is reasonably required to complete
federal and state income tax or information returns.
ARTICLE 12
REMOVAL OR RETIREMENT OF DIRECTOR'S AND INVESTMENT MANAGERS
12.01 RESIGNATION OF A DIRECTOR. Subject to Section 12.05, a
Director may voluntarily resign or withdraw from the Fund, but only upon
compliance with all of the following procedures:
(a) the Director shall give notification to the Board of
Directors that he or she proposes to withdraw;
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(b) subject to Section 3.02, the remaining members of the
Management Committee shall designate a successor Director who shall
hold such office until such Director's successor has been approved
and elected;
(c) the Management Committee shall designate only an
Independent Director to replace a withdrawing or retiring Independent
Director; and
(d) the withdrawing Director shall cooperate fully with the
successor Director so that the responsibilities of the withdrawing
Director may be transferred to the successor Director with as little
disruption of the Fund's business and affairs as practicable.
12.02 RESIGNATION OF THE INVESTMENT MANAGERS. Subject to Section 12.05,
each of the Investment Managers may voluntarily resign or withdraw from the
Fund, but only upon compliance with all of the following procedures:
(a) the Investment Managers shall, at least 60 days prior to
such withdrawal, give notification to all Investors that they propose
to withdraw and that there be substituted in their place a Person or
Persons designated and described in such notification;
(b) enclosed with the notification shall be a certificate,
duly executed by or on behalf of each such proposed successor
Investment Managers, to the effect that: (i) it is experienced in
performing (or employs sufficient personnel who are experienced in
performing) functions that an Investment Manager is required to
perform under this Agreement; (ii) it has a net worth that meets the
requirements of any statute or the courts applicable to a manager of a
limited liability company in order to ensure that the Fund will not
fail to be classified for state income tax purposes as a limited
liability company rather than as an association taxable as a
corporation; and (iii) it is willing to become an Investment Manager
under this Agreement and will assume all duties and responsibilities
thereunder, without receiving any compensation for services from the
Fund in excess of that payable under this Agreement to the withdrawing
Investment Managers and without receiving any participation in the
withdrawing Investment Manager's Fund Interest other than that agreed
upon by the withdrawing Investment Managers and the successor
Investment Manager;
(c) if the Investment Managers resign or withdraw, there shall
be on file at the principal office of the Fund, prior to such
withdrawal, audited financial statements of each proposed successor
Investment Manager,
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as of a date not earlier than twelve months prior to the date of the
notification required by this Section 12.02, certified by a
nationally or regionally recognized firm of independent certified
public accountants, together with a certificate, duly executed on
behalf of each proposed successor Investment Manager by its principal
financial officer, to the effect that no material adverse change in
its financial condition has occurred since the date of such audited
financial statements that has caused its net worth, excluding the
purchase price of its Fund Interest, to be reduced to less than the
amount under Subsection 12.02(b). Such audited financial statements
and certificates shall be available for examination by any Investor
during normal business hours;
(d) subject to Section 14.02, a Majority in Interest of the
Investors has consented to the appointment of any successor
Investment Manager; and
(e) the withdrawing Investment Manager shall cooperate fully
with each successor Investment Manager so that the responsibilities
of the withdrawing Investment Manager may be transferred to each
successor Investment Manager with as little disruption of the Fund's
business and affairs as practicable.
12.03 REMOVAL OF A DIRECTOR; DESIGNATION OF A SUCCESSOR DIRECTOR.
(a) Any of the Independent Directors may be removed either:
(i) for cause by the action of at least two-thirds of the remaining
Directors, including a majority of the remaining Independent
Directors; (ii) subject to Section 14.02, by failure to be approved
and re-elected by the Investors pursuant to Section 14.04; or (iii)
subject to Section 14.02, with the consent of a Majority in Interest
of the Investors. The Investment Managers may be removed either:
(i) by a majority of the Directors; (ii) subject to Section 14.02, by
failure to be approved and re-elected by the Investors pursuant to
Section 14.04; or (iii) subject to Section 14.02, with the consent of
a Majority in Interest of the Investors. The removal of a Director
shall in no way derogate from any rights or powers of such Director,
or the exercise thereof, or the validity of any actions taken
pursuant thereto, prior to the date of such removal.
(b) In the event of the removal of the Investment Managers and
continuation of the Fund, the venture capital investments held by the
Fund at the time of removal shall be appraised by two independent
appraisers, one jointly selected by the Investment Managers and one
by the Independent Directors. In the event that such two appraisers
are unable to agree on the value of the Fund's venture capital
investment portfolio, they shall jointly appoint a third independent
appraiser whose determination shall be final and binding. The cost
of the appraisal conducted by the appraiser selected by the
Investment Managers shall be borne jointly and severally by the
Investment Managers, and the cost of the appraisal conducted by the
appraiser selected by the
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Independent Directors shall be borne by the Fund. The cost of the
appraisal conducted by a third appraiser shall be borne equally by
the Fund and, jointly and severally, by the Investment Managers. All
unrealized capital gains and losses of the Fund shall be deemed
realized at that time solely for purposes of making a final
allocation to the Investment Managers. All unrealized capital gains
and losses of the Fund shall be deemed realized at that time solely
for purposes of making a final allocation to the Investment Managers.
With respect to their Fund Interests pursuant to Article 8, the
Investment Managers shall receive a final allocation of Net Profit or
Net Loss equal to the Net Profit or Net Loss that they would have
been allocated pursuant to Article 8, if all unrealized capital gains
and losses of the Fund were deemed realized, an allocation of Net
Profit or Net Loss was made at such time, and such time were deemed
to be the end of a Taxable Period. If the Capital Accounts of the
Investment Managers have a positive balance after such allocation,
the Fund shall deliver a promissory note of the Fund to the
Investment Managers, the principal amount of which shall be equal to
the amount, if any, by which the positive amount of the Investment
Managers' Capital Accounts exceeds the amount of their Capital
Contributions and which bears interest at a rate per annum equal to
100% of the prime rate in effect at Bank of America N.T. & S.A. at
the time of removal, with interest payable annually and principal
payable, if at all, only from 20% of any available cash before any
distributions thereof are made to the Investors pursuant to Article
9. If the Capital Accounts of the Investment Managers have a
negative balance after such allocation, the Investment Managers shall
contribute cash to the capital of the Fund in an amount equal to the
negative balance in their Capital Accounts. The Fund Interests of
the Investment Managers shall convert to those of Investors, and the
Investment Managers shall continue to receive, as Investors, only
those allocations of the Net Profits and Net Losses pursuant to
Article 8 and related distributions. In the event that any of the
foregoing requires an exemptive order from the SEC that is not
granted, the Investment Managers shall not receive a final allocation
of Net Profits and Net Losses and their interest shall convert to
that of Investors, and the Investment Managers shall continue to
receive, as Investors, only those allocations of Net Profits and Net
Losses pursuant to Sections 8.01(c)(i) and 8.02(a) and (b).
(c) Subject to Section 3.02, the remaining members of the
Management Committee may designate one or more Persons to fill any
vacancy existing in the number of Independent Directors fixed
pursuant to Section 3.02 resulting from removal of an Independent
Director by the Directors pursuant to Section 12.03(a). Remaining
members of the Management Committee may designate one or more Persons
to be successors to the Investment Managers removed by the
Independent Directors pursuant to Section 12.03(a), and each Investor
other than a Director hereby consents to the admission of such
successor or successors, no further consent being required. Any such
successor Director or Investment Manager shall hold office until the
next annual meeting of Investors or until his or her successor has
been approved and elected. With the consent of such number of
Investors other than a Director (but not in any event less than a
Majority in Interest of the Investors) as are then required under the
Act, and under the laws of the other jurisdictions in which the Fund
is then formed or qualified, to consent to the admission of a
Director, such Investors may, subject to the provisions of Sections
3.02, 12.05, 13.01 and 14.02, at any time admit a Person to be
successor to a Director concurrently therewith being removed by the
Investors pursuant to Section 12.03(a).
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(d) Any removal of a Director shall not affect any rights or
liabilities of the removed Director that matured prior to such
removal.
12.04 INCAPACITY OF A DIRECTOR.
(a) In the event of the incapacity of a Director, the business
of the Fund shall be continued with the Fund property by the
remaining Directors. Subject to Section 3.04, the remaining
Directors shall give notification to the Investors of such event and
shall, within 90 days, call a meeting of the Management Committee for
the purpose of designating a successor Director. Any such successor
Director shall hold such office until the next bi-annual meeting of
Investors or until his or her successor has been approved and
elected. The Directors shall make such amendments to the certificate
of formation and execute and file for recordation such amendments or
other documents or instruments as are necessary and required by the
Act or this Agreement to reflect the termination of the Fund Interest
of the Incapacitated Director, the fact that such Incapacitated
Director has ceased to be a Director, and the appointment of such
successor Director.
(b) In the event of the Incapacity of all Directors, the Fund
shall be dissolved. Upon the Incapacity of all Directors, a
Director shall immediately cease to be a Director and its Fund
Interest, as such, shall continue only for the purpose of determining
the amount, if any, that it is entitled to receive upon any
dissolution pursuant to Section 15.01.
(c) Any such termination of a Director shall not affect any
rights or liabilities of the Incapacitated Director that matured
prior to such Incapacity.
12.05 ADMISSION OF A SUCCESSOR DIRECTOR.
(a) The admission of any successor Director pursuant to
Sections 12.01, 12.02, or 12.03, as the case may be, shall be
effective only if and after the following conditions are satisfied:
(i) the designation of such Person as successor
Director shall occur, and for all purposes, shall be deemed to have
occurred, prior to the withdrawal or removal of the withdrawing or
removed
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Director, or transfer of the withdrawing or removed Director's Fund
Interest pursuant to Sections 12.01, 12.02, or 12.03, as the case may
be; and
(ii) the Fund Interests of the Investors shall
not be affected by the admission of such successor Director or the
transfer of the Director's Fund Interest.
(b) A Director shall not have the right to transfer or assign
its Fund Interest, except that a Director may: (i) transfer its Fund
Interest to a successor Director pursuant to Section 12.01 or 12.02;
(ii) substitute instead as a successor Director any Person that has,
by merger, consolidation, or otherwise, acquired substantially all of
its assets and continued its business; and (iii) pledge or grant an
interest in its right to receive payments and distributions under
this Agreement. Each Investor other than a Director hereby consents
to the admission of any additional or successor Director pursuant to
this Section 12.05(b), and no further consent or approval shall be
required; and
(c) Notwithstanding anything to the contrary in this Article
12, a Director's Fund Interest shall at all times be subject to the
restrictions on transfer set forth in Section 13.01.
12.06 LIABILITY OF A WITHDRAWN OR REMOVED DIRECTOR. Any Director who shall
withdraw or be removed from the Fund, or who shall sell, transfer, or assign
its Fund Interest shall remain liable for obligations and liabilities incurred
by it as Director prior to the time such withdrawal, removal, sale, transfer,
or assignment shall have become effective, but it shall be free of any
obligation or liability incurred on account of the activities of the Fund from
and after the time such withdrawal, removal, sale, transfer, or assignment
shall have become effective.
12.07 CONSENT OF INVESTORS TO ADMISSION OF SUCCESSOR DIRECTORS. Subject to
Section 14.02, each Investor other than a Director hereby consents pursuant to
Section 12.02 to the admission of any Person as a successor Director meeting
the requirements of Section 12.02 to whose admission as such a Majority in
Interest of the Investors have expressly consented, and no further express
consent or approval shall be required.
12.08 CONTINUATION. In the event of the withdrawal, removal, or retirement
of a Director, or the transfer or assignment by a Director of its Fund
Interest, the Fund shall not be dissolved and the business of the Fund shall be
continued by the remaining Directors.
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ARTICLE 13
TRANSFERABILITY OF AN INVESTOR'S FUND INTEREST
13.01 RESTRICTIONS ON TRANSFERS.
(a) OPINION OF COUNSEL. Notwithstanding any other provisions
of this Section 13.01, no sale, exchange, transfer, or assignment of
a Fund Interest may be made by an Investor unless in the opinion of
counsel for the Fund, satisfactory in form and substance to the
Management Committee, (which opinion may be waived, in whole or in
part, at the discretion of the Management Committee), that:
(i) such sale, exchange, transfer, or assignment, when
added to the total of all other sales, exchanges, transfers, or
assignments of Fund Interests within the preceding twelve months,
would not result in the Fund's being considered to have terminated
within the meaning of Section 708 of the IRC;
(ii) such sale, exchange, transfer or assignment would
not violate any federal securities laws or any state securities or
"Blue Sky" laws (including any investor suitability standards)
applicable to the Fund or the Fund Interest to be sold, exchanged,
transferred, or assigned; and
(iii) such sale, exchange, transfer, or assignment could
not cause the Fund to be treated as a publicly traded partnership
taxable as a corporation for federal income tax purposes or to lose
its status as a partnership for state income tax purposes.
Any such opinion of counsel shall be delivered in writing to the Fund
prior to the date of the sale, exchange, transfer, or assignment.
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(b) MINORS. In no event shall all or any part of a Fund
Interest be assigned or transferred by an Investor to a minor or an
incompetent except in trust, pursuant to the Uniform Gifts to Minors
Act or the Uniform Transfers to Minors Act, or by will or intestate
succession.
(c) FRACTIONAL INTERESTS. No purported sale, exchange,
assignment, or transfer by an Investor of, or after which the
transferor and each transferee would hold, a Fund Interest
representing less than ten Shares or including a fractional Share
will be permitted or recognized for any purpose without the consent
of the Management Committee, which consent shall be granted only for
good cause shown.
(d) DOCUMENTATION. Each Investor other than a Director
agrees, upon request of the Directors, to execute such certificates
or other documents and perform such acts as the Management Committee
deem appropriate after an assignment of a Fund Interest by that
Investor to preserve the limited liability of the Investors under the
laws of the jurisdiction in which the Fund is doing business. For
purpose of this Section 13.01(d), any transfer of a Fund Interest,
whether voluntary or by operation of law, shall be considered an
assignment.
(e) VOID AB INITIO. Any purported assignment of a Fund
Interest that is not made in compliance with this Agreement is hereby
declared to be null and void and of no force or effect whatsoever.
(f) EXPENSE. Each Investor other than a Director agrees,
prior to the time the Directors consent to an assignment of Fund
Interest by that Investor, to pay all reasonable expenses, including
attorneys' fees, incurred by the Fund in connection with such
assignment.
13.02 ASSIGNEES.
(a) NOTIFICATION REQUIRED AND EFFECTIVE DATE. The Fund shall
not recognize for any purpose any purported sale, assignment, or
transfer of all or any fraction of the Fund Interest of an Investor
other than a Director unless the provisions of Section 13.01 shall
have been complied with and there shall have been filed with the Fund
a dated notification of such sale, assignment, or transfer, in form
satisfactory to the Directors, executed and acknowledged by both the
seller, assignor,
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or transferor and the purchaser, assignee, or transferee and such
notification (i) contains the acceptance by the purchaser, assignee,
or transferee of all of the terms and provisions of this Agreement
and (ii) represents that such sale, assignment, or transfer was made
in accordance with all applicable laws and regulations. Any sale,
assignment, or transfer shall be recognized by the Fund as effective
on the first day of the fiscal quarter following the fiscal quarter
in which such notification is filed with the Fund. If a Fund
Interest is sold, assigned, or transferred more than once during a
fiscal quarter, the last purchaser, assignee, or transferee with
respect to whom notification is received shall be recognized by the
Fund.
(b) VOTING. Unless and until an assignee of a Fund Interest
becomes a Substituted Investor, such assignee shall not be entitled
to vote or to give consents with respect to such Fund Interest.
(c) ASSIGNOR RIGHTS. Any Investor other than a Director who
shall assign all of such Investor's Fund Interest shall cease to be
an Investor and shall not retain any statutory rights as an Investor.
(d) WRITTEN ASSIGNMENTS. Anything herein to the contrary
notwithstanding, both the Fund and the Directors shall be entitled to
treat the assignor of a Fund Interest as the absolute owner thereof
in all respects, and shall incur no liability for distributions made
in good faith to such assignor until such time as a written
assignment that conforms to the requirements of this Section 13.02
has been received by the Fund and accepted by the Management
Committee.
(e) ASSIGNEE NOT SUBSTITUTED INVESTOR. A person who is the
assignee of all or any fraction of the Fund Interest of an Investor
other than a Director, but does not become a Substituted Investor and
desires to make a further assignment of such Fund Interest, shall be
subject to all the provisions of this Article 13 to the same extent
and in the same manner as any Investor desiring to make an assignment
of such Investor's Fund Interest.
13.03 SUBSTITUTED INVESTORS.
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(a) APPROVAL. No Investor other than a Director shall have
the right to substitute a purchaser, assignee, transferee, donee,
heir, legatee, distributee, or other recipient of all or any fraction
of such Investor's Interest as an Investor in the transferring
Investor's place. Any such purchaser, assignee, transferee, donee,
heir, or other recipient of a Fund Interest (whether pursuant to a
voluntary or involuntary transfer) shall be admitted to the Fund as a
substituted Investor only (i) with the consent of the Directors,
which consent shall be granted or withheld in the absolute discretion
of the Directors; (ii) by satisfying the requirements of Sections
13.01 or 13.02; and (iii) if necessary, upon an amendment to this
Agreement executed by all necessary parties and filed or recorded in
the proper records of each jurisdiction in which such recordation is
necessary to qualify the Fund to conduct business or to preserve the
limited liability of the Investors and Directors. Any such consent by
the Directors may be evidenced, if necessary, by the execution by the
Directors of an amendment to this Agreement evidencing the admission
of such Person as an Investor. The admission of a Substituted
Investor shall be recorded on the books and records of the Fund. The
Investors hereby consent and agree to such admission of a Substituted
Investor by the Management Committee. The Directors agree to process
such amendments not less frequently than quarterly.
(b) ADMISSION. Each Substituted Investor, as a condition to
admission as an Investor, shall execute and acknowledge such
instruments, in form and substance satisfactory to the Directors, as
the Directors deem necessary or desirable to effectuate such
admission and to confirm the agreement of the Substituted Investor
to be bound by all the terms and provisions of this Agreement with
respect to the Fund Interest acquired. All reasonable expenses,
including attorneys' fees, incurred by the Fund in this connection
shall be borne by such Substituted Investor.
(c) RIGHTS OF ASSIGNEE. Until an assignee shall have been
admitted to the Fund as a Substituted Investor pursuant to this
Section 13.03, such assignee shall be entitled to all of the rights
of an assignee of a limited liability company interest under the Act.
13.04 INDEMNIFICATION. Each Investor shall indemnify and hold harmless the
Fund, the Directors, and every Investor who was or is a party to any pending or
completed action, suit, or proceeding whether civil, criminal, administrative,
or investigative, by reason of or arising from any actual misrepresentation or
misstatement of facts or omission to state facts made (or omitted to be made)
by such Investor in connection with any assignment, transfer, encumbrance, or
other disposition of all or and part of a Fund Interest, or the admission of a
Substituted Investor to the Fund, against expenses for which the Fund or such
other Person has not otherwise been reimbursed (including attorneys fees,
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judgments, fines, and amounts paid in settlement) actually and reasonably
incurred by the Fund or such other Person in connection with such action, suit,
or proceeding.
13.05 INCAPACITY OF AN INVESTOR. If an Investor other than a Director
dies, such Investor's executor, administrator, or trustee, or, if such Investor
is adjudicated incompetent, such Investor's committee, guardian or conservator,
or, if such Investor becomes bankrupt, the trustee or receiver of such
Investor's estate, shall have all the rights of an Investor for the purpose of
settling or managing the estate of such Investor, and such power as the
Incapacitated Investor possessed to assign all or any part of the Incapacitated
Investor's Fund Interest and to join with such assignee in satisfying
conditions precedent to such assignee's becoming a Substituted Investor. The
Incapacity of an Investor shall not dissolve the Fund.
13.06 WITHHOLDING OF DISTRIBUTIONS. From the date of the receipt of any
instrument relating to the transfer of a Share or at any time the Investment
Managers are in doubt regarding the person entitled to receive distributions in
respect of a Share, the Directors may withhold any such distributions until the
transfer is completed or abandoned or the dispute is resolved.
13.07 TRANSFEROR-TRANSFEREE ALLOCATIONS. If a Share is transferred in
compliance with the provisions of this Article 13, the income, gains, losses,
deductions, and credits allocable in respect of that Share shall be allocated
to the days of the Taxable Period to which they are economically attributable,
and then prorated between the transferor and the transferee on the basis of the
number of days in the Taxable Period that each was the holder of that interest.
ARTICLE 14
CONSENTS, VOTING, AND MEETINGS
14.01 METHOD OF GIVING CONSENT. Any consent required by this Agreement may
be given as follows:
(a) by a written consent pursuant to Section 14.05 given by
the consenting Investor at or prior to the doing of the act or thing
for which the consent is solicited, provided that such consent shall
not have been nullified by either (i) notification to the Directors
by the consenting Investor at or prior to the time of, or the
negative vote by such consenting Investor at, any meeting held to
consider the doing of such act or thing or (ii) notification to the
Director prior to the doing of any act or thing the doing of which is
not subject to approval at such meeting; or
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(b) by the affirmative vote by the consenting Investor to the
doing of the act or thing for which the consent is solicited at any
meeting called and held pursuant to Sections 14.04 or 14.05 to
consider the doing of such act or thing.
14.02 LIMITATIONS ON REQUIREMENTS FOR CONSENTS. Notwithstanding any other
provisions of this Agreement unless, prior to the exercise by the Investors
other than the Directors of the rights of such Investors: (i) to approve
actions of the Directors pursuant to Section 3.09; (ii) to vote to remove a
Director or Investment Manager pursuant to Section 12.03 or to approve the
appointment of a successor Director pursuant to Section 12.05; (iii) to approve
and elect or remove Directors and to approve certain Fund matters pursuant to
Section 5.04; (iv) to approve and elect to dissolve the Fund pursuant to
Section 15.01(c); or (v) to amend this Agreement pursuant to Section 6.03, as
the case may be, counsel for the Fund or counsel designated by not less than
10% of the Shares owned by all Investors shall have delivered to the Fund an
opinion to the effect that neither the existence of such right or rights nor
the exercise thereof will violate the provisions of the Act or the laws of the
other jurisdictions in which the Fund is then formed or qualified, will
adversely affect the limited liability of the Investors and Directors, or will
adversely affect the classification of the Fund as a partnership for federal or
state income tax purposes, then:
(a) notwithstanding the provisions of Section 3.09, the
Directors shall be prohibited from taking an action, performing an
act, or entering into a transaction, as the case may be;
(b) notwithstanding the provisions of Sections 12.03 and
12.05, the Investors other than the Directors shall be prohibited
from removing a Director or from approving the appointment of a
successor Director;
(c) notwithstanding the provisions of Section 5.04, the
Investors other than the Directors shall be prohibited from approving
and electing or removing Directors and approving certain Fund
matters, as the case may be;
(d) notwithstanding the provisions of Section 15.01(c), the
Investors other than the Directors shall be prohibited from electing
to dissolve the Fund; and
(e) notwithstanding the provisions of Section 6.03, the
Investors other than the Directors shall be prohibited from amending
this Agreement.
Such counsel may rely as to the law of any jurisdiction, other than a
jurisdiction in which such counsel's principal office is located, on an opinion
of counsel in such other jurisdiction in form and substance satisfactory to
such counsel.
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14.03 ACTION BY THE DIRECTORS. The Directors shall act by majority vote
at a meeting duly called, or by unanimous written consent without a meeting,
unless the 1940 Act requires that a particular action be taken only at a
meeting. Meetings of the Directors may be called by any two Directors.
Subject to the requirements of the 1940 Act, the Directors by majority vote
may delegate to any one of its number, or a committee thereof, its authority to
approve particular matters or take particular actions on behalf of the Fund. A
quorum for all meetings of the Directors shall be a majority of the Directors.
14.04 SPECIAL MEETINGS. The dissolution of the Fund, the removal of
Directors, and any other matter requiring the consent of all or any of the
Investors other than the Investment Managers pursuant to this Agreement may be
considered at a meeting of the Investors held not less than 20 nor more than 60
days after notification thereof shall be given to all Investors. Such
notification (i) may be given by the Directors, in its discretion, at any time
and (ii) shall be given by the Directors within 30 days after receipt by the
Directors of a request for such a meeting made by Investors who own, in
aggregate, not less than 10% of the Shares owned by all Investors. Any such
notification shall state briefly the purpose, time, and place of the meeting.
All such meetings shall be held within or outside the State of Delaware at such
reasonable place as the Directors shall designate and during normal business
hours. Investors may vote in Person or by proxy at any such meeting. If
Proxies are solicited for a specific meeting and an Investor other than a
Director does not return a proxy, that Investor shall be deemed to have granted
to the Management Committee a proxy solely for those matters noticed for and
acted upon at that meeting. Such proxy shall be voted by a majority of the
members of the Management Committee.
14.05 ACTION WITHOUT A MEETING. Any action that may be taken at a Fund
meeting may be taken without a meeting if consent in writing setting forth the
action to be taken is signed by the Investors holding not less than the minimum
percentage of Shares that would be necessary to authorize or take such action
at a meeting at which all the Investors were present and voted. Each Investor
shall be given notice of the matters to be voted upon in the same manner as
described in Sections 14.04 and 14.05. The date on which votes will be counted
shall be not less than 10 or more than 60 days following mailing of the notice.
14.06 APPROVAL AND ELECTION OF DIRECTORS. In the approval and election of
Independent Directors, those candidates receiving the highest number of votes
cast, at a meeting at which a Majority in Interest of the Investors is present
in person or by proxy, up to the number of Independent Directors proposed to be
approved and elected, shall be approved and elected to serve until the next
Investor
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meeting or until their successors are duly approved, elected and qualified; and
each Investor shall have one vote for each Share owned by such Investor. In
the approval and election of the Investment Managers, the two candidates
receiving the highest numbers of votes cast shall be approved and elected
pursuant to the foregoing provision. Any vote for the approval and election of
Directors shall be subject to the limitations of Section 14.02.
14.07 RECORD DATES. The Directors may set in advance a date for
determining the Investors other than the Directors entitled to notification of
and to vote at any meeting. All record dates shall not be more than 60 days
prior to the date of the meeting to which such record date relates.
14.08 SUBMISSIONS TO INVESTORS. The Directors shall give all Investors
notification of any proposal or other matter required by any provision of this
Agreement or by law to be submitted for the consideration and approval of the
Investors. Such notification shall include any information required by the
relevant provision of this Agreement or by law.
14.09 INVESTOR MEETINGS. The Directors shall call an Investor Meeting
no less often than every two years with the first such meeting to be held
within two years from the Closing Date.
ARTICLE 15
DISSOLUTION AND TERMINATION
15.01 DISSOLUTION. The Fund shall be dissolved upon the occurrence of any
of the following:
(a) the expiration of its term, except to the extent extended
pursuant to Section 1.05;
(b) the Incapacity of all Directors;
(c) the election to dissolve the Fund by a Majority in Interest
of the Investors;
(d) the withdrawal, retirement or removal of a Director, or the
transfer or assignment by a Director of its Fund Interest without the
designation of a successor Director under Section 12.05;
(e) the sale or other disposition at any one time of all or
substantially all of the assets of the Fund; and
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(f) dissolution required by operation of law.
Dissolution of the Fund shall be effective on the day on which the event occurs
giving rise to the dissolution, but the Fund shall not terminate until the
assets of the Fund have been distributed as provided in Section 15.02 and the
certificate of formation of the Fund has been canceled.
15.02 LIQUIDATION. On dissolution of the Fund, a "Liquidating Trustee" (who
shall be the Management Committee, if still constituted, and otherwise shall be
a Person proposed and approved by a Majority in Interest of the Investors)
shall cause to be prepared a statement setting forth the assets and liabilities
of the Fund as of the date of dissolution, and such statement shall be
furnished to all of the Investors. Then, those Fund assets that the
Liquidating Trustee determines should be liquidated shall be liquidated as
promptly as possible, but in an orderly and business-like manner to minimize
loss. If the Liquidating Trustee determines that an immediate sale at the time
of liquidation of all or part of the Fund assets would cause undue loss to the
Investors, the Liquidating Trustee may, in order to avoid such loss, either
defer liquidation and retain the assets for a reasonable time by placing Fund
assets in a liquidating trust, or distribute the assets to the Investors in
kind. If Fund assets are placed in a liquidating trust, the following
liquidation order or priority including Section 15.03 shall be adhered to when
terminating the trust. If no liquidating trust is set up, the Liquidating
Trustee shall then wind up the affairs of the Fund and distribute the
proceeds of the Fund by the end of the Taxable Period of the liquidation (or,
if later, within 90 days after the date of such liquidation) in the following
order or priority:
(a) to the payment of the expenses of liquidation and to
creditors (including Investors who are creditors, to the extent
permitted by law) in satisfaction of liabilities of the Fund other
than liabilities for distributions to Investors, in the order of
priority as provided by law;
(b) to the setting up of any reserves that the liquidating
trustee may deem necessary or appropriate for any anticipated
obligations or contingencies of the Fund or of the Liquidating
Trustee arising out of or in connection with the operation or
business of the Fund. Such reserves may be paid over by the
Liquidating Trustee to an escrow agent or trustee proposed and
approved by the Liquidating Trustee to be disbursed by such escrow
agent or trustee in payment of any of the aforementioned obligations
or contingencies and, if any balance remains at the expiration of
such period as the liquidating trustee shall deem advisable, to be
distributed by such escrow agent or trustee in the manner hereinafter
provided;
(c) to the payment of liabilities for distributions to
Investors other than the Investment Managers in order of
priority as provided by law;
(d) to the payment of liabilities for distributions to
Independent Directors in order of priority as provided by law;
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(e) to the payment of liabilities for distributions to the
Investment Managers in order of priority as provided by law; then
(f) to those Investors with positive Capital Account balances
in proportion to the respective amounts of such positive balances.
For purposes of determining the amounts and allocation of such distribution,
all Fund assets shall be valued by the Liquidating Trustee at their then fair
market value, and any gains or losses that would arise from their sale at such
valuation or, in the event of distributions to be made in kind, that would
arise assuming such a sale were made, shall be allocated as specified in
Article 8. For the purposes of calculating if and when Conversion occurs in
liquidation, amounts credited to the Investors' Capital Accounts, pursuant to
this Section 15.02 shall be deemed to have been distributed.
15.03 NEGATIVE CAPITAL ACCOUNTS. At such time during liquidation as all
assets of the Fund have been sold, all liabilities and expenses have been paid,
all income, gains, losses and deductions have been allocated in accordance with
Article 8, all distributions have been deemed distributed, and all adjustments
to the Capital Accounts have been made, if an Investment Manager then has a
negative balance in that Investment Manager's Capital Account, such Investment
Manager shall by the end of the Taxable Period of the liquidation (or, if
later, within 90 days after the date of such liquidation) contribute to the
capital of the Fund an amount equal to the deficit amount of its Capital
Account. Any amount so contributed shall be distributed as provided for in
Section 15.02 to the other Investors. The Investors shall not be required to
make any further contribution to the company on dissolution except as required
by this Section 15.03.
15.04 TERMINATION. The Liquidating Trustee shall comply with any
requirements of the Act or other applicable law pertaining to the winding up of
a limited liability company, at which time the Fund shall stand terminated.
ARTICLE 16
COVENANTS OF INVESTORS
Each Investor covenants, warrants, and agrees with the Fund and each of the
Investors that:
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(a) such Investor shall not transfer, sell, or offer to sell
such Investor's Shares without compliance with the conditions and
provisions of this Agreement;
(b) if such Investor assigns all or any part of such
Investor's Shares, then until such time as one or more assignees
thereof are admitted to the Fund as a Substituted Investor with
respect to the entire Fund Interest so assigned, the matters to which
any holder thereof would covenant and agree if such holder were to
execute this Agreement as an Investor shall be and remain true; and
(c) such Investor shall notify the Directors immediately if any
representations or warranties made herein or in any subscription
agreement should be or become untrue.
ARTICLE 17
REPRESENTATIONS AND WARRANTIES OF INVESTMENT MANAGERS
THE INVESTMENT MANAGERS REPRESENT AND WARRANT TO THE FUND AND EACH OF THE
INVESTORS THAT:
(a) the Investment Managers shall not assign all or any part
of their interest in the Fund if, such assignment would cause a
termination of the Fund within the meaning of IRC Section 708(b).
ARTICLE 18
ARBITRATION
IN THE EVENT A DISPUTE BETWEEN THE PARTIES HERETO ARISES OUT OF, IN CONNECTION
WITH, OR WITH RESPECT TO THIS AGREEMENT, OR ANY BREACH THEREOF (OTHER THAN
CLAIMS ARISING UNDER FEDERAL AND STATE SECURITIES LAWS), SUCH DISPUTE SHALL, ON
THE WRITTEN REQUEST OF ONE PARTY DELIVERED TO THE OTHER PARTY, BE SUBMITTED TO
AND SETTLED BY ARBITRATION IN THE COUNTY OF SAN MATEO IN ACCORDANCE WITH THE
RULES OF THE AMERICAN ARBITRATION ASSOCIATION THEN IN EFFECT AND WITH THE
CALIFORNIA ARBITRATION ACT (SECTIONS 1280 THROUGH 1294.2 OF THE CALIFORNIA CODE
OF CIVIL PROCEDURE), EXCEPT AS HEREIN SPECIFICALLY PROVIDED. JUDGMENT UPON
THE AWARD RENDERED BY THE
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ARBITRATORS MAY BE ENTERED IN ANY COURT HAVING JURISDICTION THEREOF. THE
PARTIES HEREBY SUBMIT TO THE IN PERSONAM JURISDICTION OF THE SUPERIOR COURT OF
THE STATE OF CALIFORNIA FOR THE PURPOSE OF CONFIRMING ANY SUCH AWARD AND
ENTERING JUDGMENT THEREON. NOTWITHSTANDING ANYTHING TO THE CONTRARY THAT MAY
NOW OR HEREAFTER BE CONTAINED IN THE RULES OF THE AMERICAN ARBITRATION
ASSOCIATION, THE PARTIES AGREE AS FOLLOWS:
(a) Within 10 days after receipt of notice of arbitration from
the noticing party, each party shall propose and approve one person
approved by the American Arbitration Association to hear and
determine the dispute. If more than two parties are involved, they
shall together propose and approve two persons. The two persons so
chosen shall propose and approve a third impartial arbitrator. The
majority decision of the arbitrators shall be final and conclusive
upon both parties hereto. If either party fails to approve its
arbitrator within 10 days after delivery of the notice provided for
herein, then the arbitrator approved by the one party shall act as
the sole arbitrator and shall be deemed to be the single, mutually
approved arbitrator to resolve the controversy. In the event the
parties are unable to agree upon a rate of compensation for the
arbitrators, they shall be compensated for their services at a rate
to be determined by the American Arbitration Association;
(b) the parties shall enjoy, but are not to be limited to, the
same rights to discovery as they would in the federal District Court
for the Northern District of California;
(c) the costs of the arbitration including attorneys' fees
shall be paid by the losing party or will be allocated between the
parties in such proportions as the arbitrators decide;
(d) the arbitrators shall, upon the request of either party,
issue a written opinion of their findings of fact and conclusions of
law; and
(e) upon receipt by the requesting party of said written
opinion, said party shall have the right within 10 days thereof to
file with the arbitrators a motion to reconsider, and the arbitrators
thereupon shall reconsider the issues raised by said motion and
either confirm or change their majority decision, which shall then be
final and conclusive upon both parties hereto. The costs of such a
motion for reconsideration and written opinion of the arbitrators
including attorneys' fees shall be paid by the moving party.
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ARTICLE 19
POWER OF ATTORNEY
19.01 POWER OF ATTORNEY. Each Investor other than a Director hereby
irrevocably constitutes and appoints the Management Committee, or either of
them, as such Investor's true and lawful agents and attorneys-in-fact, with
full power and authority in such Investor's name, place, and stead, to make,
execute, acknowledge, deliver, file, and record the following documents and
instruments in accordance with the other provisions of this Agreement;
(a) this Agreement and a certificate of formation, a
certificate of doing business under fictitious name, and any other
instrument that may be required to be filed in connection with the
formation and operation of the Fund under the laws of Delaware or
other laws of any other state;
(b) any and all amendments, restatements, cancellations, or
modifications of the instruments described in Section 19.01(a);
(c) any and all instruments related to the admission of any
successor Director or any Investor; and
(d) all documents and instruments that may be necessary
or appropriate to effect the dissolution and termination of the Fund,
pursuant to the terms hereof.
19.02 IRREVOCABILITY. The foregoing power of attorney is coupled with an
interest and such grant shall be irrevocable. Such power of attorney shall
survive the subsequent Incapacity of any such Investor or the transfer of any
or all of such Investor's Shares.
19.03 PRIORITY OF AGREEMENT. In the event of any conflict between
provisions of this Agreement or any amendment hereto and any documents
executed, acknowledged, sworn to, or filed by the Management Committee under
this power of attorney, this Agreement and its amendments shall govern.
19.04 EXERCISE OF POWER. This power of attorney may be exercised by a
Management Committee either by signing separately as attorney-in-fact for each
such Investor or by a single signature of a Management Committee acting as
attorney-in-fact for all of them.
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ARTICLE 20
MISCELLANEOUS
20.01 CERTIFICATE OF FORMATION. On each subsequent change in the Fund
specified in the Act, the Directors shall cause to be executed and acknowledged
an amended certificate of formation pursuant to the provisions of the Act,
which will be duly filed as prescribed by Delaware law.
20.02 DELAWARE LAW. This Agreement and the rights and obligations of the
parties hereunder shall be governed by, and construed and interpreted according
to, the laws of Delaware.
20.03 COUNTERPARTS. This Agreement may be executed in counterparts, and
all counterparts so executed shall constitute one agreement that shall be
binding on all the parties hereto. Any counterpart of either this Agreement
that has attached to it separate signature pages which altogether contain the
signatures of all Directors or Investors or their attorneys-in-fact shall for
all purposes be deemed a fully executed instrument.
20.04 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to and unless otherwise
provided in this Agreement, each and all of the covenants, terms, provisions,
and agreements herein contained shall be binding upon and inure to the benefit
of the successors, successors-in-title, heirs, and assigns of the respective
parties hereto.
20.05 NOTICES. Any notice, offer, consent, or demand permitted or required
to be made under this Agreement to any party hereto shall be given in writing
signed by the Investor giving such notice either by (i) personal delivery or
(ii) by registered or certified mail, postage prepaid, addressed to that party
at the respective address shown on the Fund's books and records, or to such
other address as that party shall indicate by proper notice to the Management
Committee, in the same manner as provided above. All notices shall be deemed
effective upon receipt or five days after the date of mailing in accordance
with the above provisions.
20.06 SEVERABILITY. If any provision of this Agreement, or the application
thereof, shall for any reason and to any extent be invalid or unenforceable,
the remainder of this Agreement and the application of such provision to other
Persons or circumstances shall not be effected thereby, but shall be enforced
to the maximum extent possible under applicable law.
20.07 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
hereof and supersedes all prior agreements or understandings, written or oral,
between the parties with respect thereto.
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20.08 HEADINGS, ETC. The headings in this Agreement are inserted for
convenience of reference only and shall not affect interpretation of this
Agreement. Wherever from the context it appears appropriate, each term stated
in either the singular or the plural shall include the singular and the plural,
and pronouns stated either the masculine or the neuter genders shall include
the masculine, the feminine and the neuter.
20.09 LEGENDS. If certificates are issued evidencing an Investor's Shares,
each such certificate shall bear such legends as may be required by applicable
federal and state laws, or as may be deemed necessary or appropriate by the
Management Committee to reflect restrictions upon transfer contemplated herein.
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EXECUTED ______________ at _________ THE INVESTMENT MANAGERS
TECHNOLOGY FUNDING INC.
Investment Manager
By:
Charles R. Kokesh, President
TECHNOLOGY FUNDING LTD.
Investment Manager
By:
Charles R. Kokesh,
General Partner
THE AFFILIATED DIRECTORS
[Charles R. Kokesh]
[Gregory T. George]
THE INDEPENDENT DIRECTORS
Robert E. Jackson, Jr., Ph.D.
Selena A. Lantry, M.D.
Deborah J. Freehling, M.D.
THE INVESTORS
(All Investors now and hereafter
admitted as Investors of the Fund
pursuant to powers of attorney now
and hereafter executed in favor of,
and delivered to, the Investment
Managers or either with them)
By: The Management Committee,
Attorney-in-Fact
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EXHIBIT 99.2G
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made this 2nd day of December, 1997, by and
between Technology Funding Venture Capital Fund VI, LLC, a Delaware limited
liability company (the "Fund"), and Technology Funding Inc., a California
corporation ("TFI") and Technology Funding Ltd., a California limited
partnership ("TFL") (collectively the "Investment Managers").
WHEREAS, the Fund is a closed-end management investment
company that has elected to be regulated as a business development company
pursuant to Section 54 under the Investment Company Act of 1940, as amended
(the "1940 Act"), consisting of one portfolio of shares.
WHEREAS, the Fund desires to retain the Investment Managers to
render investment management services to the Fund and the Investment Managers
are willing to render such services:
NOW, THEREFORE, in consideration of mutual covenants herein
contained, the parties hereto agree as follows:
1. DUTIES OF THE INVESTMENT MANAGERS. The Fund hereby appoints
the Investment Managers to act as investment advisers for the period and on
such terms set forth in this Agreement. The Fund employs the Investment
Managers to manage the investment and reinvestment of the Fund's assets, to
continuously review, supervise and administer the investment program of the
Fund to determine in its discretion the securities to be purchased or sold and
the portion of the Fund's assets to be held uninvested, to provide the Fund
with records concerning the Investment Managers' activities which the Fund is
required to maintain, and to render regular reports to the Fund's Managing
Members (hereinafter referred to as the Fund's "Directors") concerning the
Investment Managers' discharge of the foregoing responsibilities.
The Investment Managers accept such employment and shall discharge the
foregoing responsibilities subject to the control of the Directors of the Fund,
and in compliance with the objectives, policies and limitations set forth in
the Fund's prospectus as amended or supplemented from time to time (the
"Prospectus"), and applicable laws and regulations.
2. PORTFOLIO TRANSACTIONS. The Investment Managers are
authorized to select the brokers or dealers that will execute purchases and
sales of portfolio securities for the Fund, to the extent that brokers or
dealers will be used to execute any such transactions, and are directed to use
their best efforts to obtain the best net results as described in the Fund's
Prospectus from time to time. The Investment Managers agree to promptly
communicate to the Directors of the Fund such information relating to
transactions as they may reasonably request. The Investment Managers shall
further be authorized to incur investment banking fees, finders fees and other
<PAGE> 2
expenses relating to the acquisition of securities of portfolio companies and
to be reimbursed for such expenses and fees from assets of the Fund.
3. COMPENSATION OF THE INVESTMENT MANAGERS. For the services to
be rendered by the Investment Managers as provided in Sections 1 and 2 of this
Agreement, the Fund shall pay to the Investment Managers a Management Fee and
Profit Allocation as described in the Fund's current Prospectus. TFI will
receive 100% of the Management Fee due to the Investment Managers to the extent
of its costs. TFL will receive the remainder of the Management Fee to cover
its costs. TFL will receive 99% of the profit allocation due to the Investment
Managers with TFI receiving the additional 1%.
In the event of termination of this Agreement, the fee provided under this
Section shall be computed on the basis of the period ending on the last
business day on which this Agreement is in effect subject to a pro rata
adjustment based on the number of days elapsed in the current month as a
percentage of the total number of days in such month.
4. REPORTS. The Fund and the Investment Managers agree to
furnish to each other current Prospectuses, proxy statements, reports to
Members (hereinafter referred to as "Shareholders"), certified copies of their
financial statements, and such other information with regard to their affairs
as each may reasonably request.
5. STATUS OF INVESTMENT MANAGERS. The services of the Investment
Managers to the Fund are not to be deemed exclusive, and the Investment
Managers shall be free to render similar services to others so long as their
services to the Fund are not impaired thereby.
6. LIABILITY OF INVESTMENT MANAGERS. Except as may otherwise
be provided by law, and in the absence of: (i) willful misfeasance, bad faith
or gross negligence on the part of the Investment Managers in performance of
their obligations and duties hereunder; (ii) reckless disregard by the
Investment Managers of their obligations and duties hereunder; or (iii) a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act, as
amended), the Investment Managers shall not be subject to any liability
whatsoever to the Fund, or to any Shareholder of the Fund, for any error of
judgment, mistake of law or any other act or omission in the course of, or
connected with, rendering services hereunder including, without limitation, for
any losses that may be sustained in connection with the purchase, holding,
redemption or sale of any security on behalf of the Fund.
7. PERMISSIBLE INTERESTS. Subject to and in accordance with the
Operating Agreement of the Fund and the Articles of Incorporation and Limited
Partnership Agreement of the Investment Managers, respectively, Directors,
agents and Shareholders of the Fund are or may be interested in the Investment
Managers (or any successor thereof) as officers, directors or otherwise;
officers, agents and directors of the Investment Managers are or may be
interested in
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the Fund as Directors, officers, Shareholders or otherwise; and the Investment
Managers (or any successor) are or may be interested in the Fund as a
Shareholder or otherwise. The effect of any such interrelationships shall be
governed by said Operating Agreement, Articles of Incorporation or Limited
Partnership Agreement and the relevant provisions of the l940 Act. All such
interests shall be fully disclosed between the parties on an ongoing basis and
in the Fund's Prospectus as required by law.
8. OPERATING AGREEMENT. The Investment Managers are hereby
expressly put on notice of the limitation of shareholder and Director liability
as set forth in Article 13 of the Operating Agreement of the Fund and pursuant
to the Delaware Limited Liability Company Act (the "Act") and agree that the
obligations assumed by the Fund pursuant to this Agreement shall be limited in
all cases to the Fund and its assets, and the Investment Managers shall not
seek satisfaction of any such obligation from the Shareholders or any
Shareholder of the Fund. Nor shall the Investment Managers seek satisfaction
of any such obligations from the Directors or any individual Director.
9. DURATION AND TERMINATION. This Agreement shall continue for
two years from the date of its execution and thereafter for additional periods
of one year from such date if the Directors of the Fund determine that such an
extension is in the best interest of the Fund, or until dissolution prior
thereto pursuant to the provisions hereto. This Agreement may be terminated by
the Fund at any time, without the payment of any penalty, by vote of a majority
of the Directors of the Fund or by vote of a majority of the outstanding voting
securities of the Fund on 60 days' written notice to the Investment Managers.
This Agreement may be terminated by the Investment Managers at any time,
without the payment of any penalty, upon 60 days' written notice to the Fund.
This Agreement will automatically and immediately terminate in the event of its
assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered or mailed postpaid, to the other parties at any office
of such party.
As used in this Section, the term "assignment" shall have the meaning set forth
in the 1940 Act.
10. AMENDMENT OF AGREEMENT. This Agreement may be amended by
mutual consent, but the consent of the Fund must be obtained (a) by a vote of a
majority of those Directors of the Fund who are not parties to this Agreement
or interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such amendment, and (b) to the extent required by the
1940 Act, by vote of a majority of the outstanding voting securities of the
Fund.
11. GOVERNING LAW. All questions concerning the validity, meaning
and effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
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12. SEVERABILITY. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed as of this 2nd day of December, 1997.
TECHNOLOGY FUNDING VENTURE CAPITAL TECHNOLOGY FUNDING, INC.
FUND VI, LLC
By /s/ GREGORY T. GEORGE By /s/ CHARLES R. KOKESH
-------------------- ---------------------------
Name: Gregory T. George Name: Charles R. Kokesh
Title: Member Title: CEO and President
TECHNOLOGY FUNDING, LTD.
By /s/ CHARLES R. KOKESH
---------------------------
Name: Charles R. Kokesh
Title: General Partner
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<PAGE> 1
EXHIBIT 2H
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 2nd day of December, 1997
between Technology Funding Venture Capital Fund VI, LLC ("the Fund"), a
Delaware limited liability company and Technology Funding Securities
Corporation ("TFSC" or the "Distributor"), a California corporation.
WHEREAS, the Fund has elected to be regulated as a business
development company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and its shares are registered with the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act") and the Securities Exchange Act of 1934, as amended ("1934 Act"); and
WHEREAS, the Distributor is registered as a broker with the SEC under
the 1934 Act.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the Fund and Distributor hereby agree as follows:
ARTICLE 1. Sale of Shares. The Fund grants to the Distributor the
exclusive right to sell units (the "Shares") of the Fund at the price set forth
in the Prospectus (which shall not be less than the Fund's net asset value per
Share) as agent and on behalf of the Fund, during the term of this Agreement
and subject to the registration requirements of the 1933 Act and the 1934 Act,
the rules and regulations of the SEC and the laws governing the sale of
securities in the various states ("Blue Sky Laws").
ARTICLE 2. Solicitation of Sales. When soliciting sales of Shares,
the Distributor will be acting as a broker, as that term is defined in the 1934
Act. In no case will the Distributor act as a dealer, as that term is defined
in the 1934 Act, or otherwise as a principal in the solicitation or sale of
Shares. The distribution of Shares will be conducted in compliance with Rule
2810 of the Conduct Rules of the National Association of Securities Dealers,
Inc. ("NASD"). Distributor agrees to perform the necessary due diligence to
ensure that all material facts are adequately and accurately disclosed as
prescribed in Rule 2810(b)(3) of the Conduct Rules of the NASD.
In consideration of these rights granted to the Distributor, the
Distributor agrees to use its best efforts, consistent with its other business,
in connection with the distribution of Shares of the Fund; provided, however,
that the Distributor shall not be prevented from entering into like
arrangements with other issuers. The Distributor will not be obligated to
purchase any Shares of the Fund and may not, in fact, purchase Shares as
principal or otherwise take Shares into its inventory. The provisions of this
paragraph do not obligate the Distributor to register as a broker under the
Blue Sky Laws of any jurisdiction if it determines it would be uneconomical for
it to do so or to maintain its registration in any jurisdiction in which it is
now registered nor obligate the Distributor to sell any particular number of
Shares.
<PAGE> 2
During the distribution of Shares, TFSC will comply with the requirements of
Rule 2810(b)(2)(B) of the NASD Conduct Rules.
ARTICLE 3. Authorized Representations. The Distributor is not
authorized by the Fund to give any information or to make any representations
other than those contained in the current registration statement and prospectus
of the Fund filed with the SEC or contained in shareholder reports or other
material that may be prepared by or on behalf of the Fund for the Distributor's
use.
ARTICLE 4. Registration of Shares. The Fund agrees that it will take
all action necessary to register Shares under the federal and state securities
laws so that there will be available for sale the number of Shares the
Distributor may reasonably be expected to sell and to pay all fees associated
with said registration. The Fund shall make available its currently effective
prospectus for the entire offering period as described therein. The Fund shall
furnish to the Distributor copies of all information, financial statements and
other papers which the Distributor may reasonably request for use in connection
with the distribution of Shares of the Fund.
ARTICLE 5. Compensation. As compensation for providing the services
under this Agreement the Distributor shall be reimbursed for its actual costs
of distribution as described in the Fund's current prospectus, as amended from
time to time.
ARTICLE 6. Indemnification of Distributor. The Fund agrees to
indemnify and hold harmless the Distributor and each of its directors and
officers and each person, if any, who controls the Distributor within the
meaning of Section 15 of the 1933 Act against any loss, liability, claim,
damages or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damages, or expense and reasonable counsel
fees and disbursements incurred in connection therewith), arising by reason of
any person acquiring any Shares, based on the ground that the registration
statement, prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended) included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements made not misleading. However, the
Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statements or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor.
In no case (i) is the indemnity of the Fund to be deemed to protect
the Distributor against any liability to the Fund or its shareholders to which
the Distributor or such person otherwise would be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable to the Distributor under the
indemnity agreement contained in this paragraph with respect to any claim made
against the Distributor or any person indemnified unless the Distributor or
other person shall have notified the Fund in writing of the claim within a
reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the
Distributor or such other person (or after the Distributor or the person shall
have
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<PAGE> 3
received notice of service on any designated agent). However, failure to
notify the Fund of any claim shall not relieve the Fund from any liability
which it may have to the Distributor or any person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph.
The Fund shall be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any claims subject to this indemnity provision. If the Fund elects to
assume the defense of any such claim, the defense shall be conducted by counsel
chosen by the Fund and satisfactory to the indemnified defendants in the suit
whose approval shall not be unreasonably withheld. In the event that the Fund
elects to assume the defense of any suit and retain counsel, the indemnified
defendants shall bear the fees and expenses of any additional counsel retained
by them. If the Fund does not elect to assume the defense of a suit, it will
reimburse the indemnified defendants for the reasonable fees and expenses of
any counsel retained by the indemnified defendants.
The Fund agrees to notify the Distributor promptly of the commencement
of any litigation or proceedings against it or any of its officers or directors
in connection with the issuance or sale of any of its Shares.
ARTICLE 7. Indemnification of Fund. The Distributor covenants and
agrees that it will indemnify and hold harmless the Fund and each of its
directors and officers and each person, if any, who controls the Fund within
the meaning of Section 15 of the Act, against any loss, liability, damages,
claim or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, damages, claim or expense and reasonable counsel
fees incurred in connection therewith) based upon the 1933 Act, 1934 Act, 1940
Act or any other statute or common law and arising by reason of any person
acquiring any Shares, and alleging a wrongful act of the Distributor or any of
its employees or alleging that the registration statement, prospectus,
Shareholder reports or other information filed or made public by the Fund (as
from time to time amended) included an untrue statement of a material fact or
omitted to state a material fact required to be stated or necessary in order to
make the statements not misleading, insofar as the statement or omission was
made in reliance upon and in conformity with information furnished to the Fund
by or on behalf of the Distributor.
In no case (i) is the indemnity of the Distributor in favor of the
Fund or any other person indemnified to be deemed to protect the Fund or any
other person against any liability to which the Fund or such other person would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement, or (ii) is the
Distributor to be liable under the indemnity agreement contained in this
paragraph with respect to any claim made against the Fund or any person
indemnified unless the Fund or person, as the case may be, shall have notified
the Distributor in writing of the claim within a reasonable time after the
summons or other first written notification giving information of the nature of
the claim shall have been served upon the Fund or upon any person (or after the
Fund or such person shall have received notice of service on any designated
agent). However, failure to notify the Distributor of any claim shall not
relieve the Distributor from any liability which it may have to the
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<PAGE> 4
Fund or any person against whom the action is brought otherwise than on account
of its indemnity agreement contained in this paragraph.
The Distributor shall be entitled to participate, at its own expense,
in the defense or, if it so elects, to assume the defense of any suit brought
to enforce the claim, but if the Distributor elects to assume the defense, the
defense shall be conducted by counsel chosen by the Distributor and
satisfactory to the indemnified defendants whose approval shall not be
unreasonably withheld. In the event that the Distributor elects to assume the
defense of any suit and retain counsel, the defendants in the suit shall bear
the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the indemnified defendants in the suit for the reasonable fees and expenses of
any counsel retained by them.
The Distributor agrees to notify the Fund promptly of the commencement
of any litigation or proceedings against it in connection with the issue and
sale of any of the Fund's Shares.
ARTICLE 8. Effective Date. This Agreement shall be effective upon
its execution, and unless terminated as provided, shall continue in force for
two year(s) from the effective date. This Agreement shall automatically
terminate in the event of its assignment. As used in this paragraph the term
"assignment" shall have the meaning specified in the 1940 Act. In addition,
this Agreement may at any time be terminated without penalty by TFSC, by a vote
of a majority of Independent Directors of the Fund or by vote of a majority of
the outstanding voting securities of the Fund upon not less than sixty days
prior written notice to the other party.
ARTICLE 9. Notices. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice to the
other party at the last address furnished by the other party to the party
giving notice: if to the Fund or the Distributor notices shall be sent to 2000
Alameda de las Pulgas, San Mateo, California 94403.
ARTICLE 10. Limitation of Liability. A copy of the Operating
Agreement of the Fund has been provided to the Distributor and notice is hereby
given that this Agreement is executed on behalf of the directors of the Fund as
directors and not individually and that the obligations of this instrument are
not binding upon any of the directors, officers or shareholders of the Fund
individually but binding only upon the assets and property of the Fund.
ARTICLE 11. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of Delaware and the applicable provisions
of the 1940 Act. To the extent that the applicable laws of the State of
Delaware, or any of the provisions herein, conflict with the applicable
provisions of the 1940 Act, the latter shall control.
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ARTICLE 12. Multiple Originals. This Agreement may be executed in
two or more counterparts, each of which when so executed shall be deemed to be
an original, but such counterparts shall together constitute but one and the
same instrument.
IN WITNESS, the Fund and Distributor have each duly executed this
Agreement, as of the day and year above written.
TECHNOLOGY FUNDING VENTURE
CAPITAL FUND VI, LLC
By: /s/ GREGORY T. GEORGE
Attest: /s/ GAIL MULCAHY
TECHNOLOGY FUNDING SECURITIES
CORPORATION
By: /s/ CHARLES R. KOKESH
Attest: /s/ GAIL MULCAHY
5
