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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A
AMENDMENT NO. 1 TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
Venture Lending & Leasing II, Inc.
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(Exact name of registrant as specified in charter)
Maryland 77-0456589
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2010 North First Street, Suite 310
San Jose, CA 95131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 436-8577
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Securities to be registered pursuant to 12(b) of the Act: None
Securities to be registered pursuant to 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
ITEM 1. BUSINESS
(a) General Development of Business
GENERAL. Venture Lending & Leasing II, Inc. ("Fund"), a Maryland
corporation, is a newly organized, non-diversified closed-end management
investment company electing status as a business development company ("BDC")
under the Investment Company Act of 1940 ("1940 Act"). The Fund's investment
objective is to achieve a high total return. The Fund will provide asset-based
financing to carefully selected venture capital-backed companies, in the form
of secured loans, installment sales contracts or equipment leases. The Fund
generally will receive warrants to acquire equity securities of the companies
in which the Fund invests in connection with the Fund's loans or equipment
leases. Westech Advisors, Inc. ("Westech Advisors" or the "Manager") will serve
as the Fund's Investment Manager. Siguler Guff Advisers, LLC ("Adviser to the
Manager") will serve adviser to Westech Advisors with respect to Westech
Advisors' administrative duties to the Fund. See Items 5 and 7 for the
information about the Manager and the Adviser to the Manager. The Fund was
incorporated on May 19, 1997. Its principal office is located at 2010 North
First Street, Suite 310, San Jose, California 95131 and its telephone number is
(408) 436-8577.
The Fund has not yet commenced operations and is registering its shares
of Common Stock, $.001 par value ("Shares"), pursuant to Section 12(g) of the
Securities Exchange Act of 1934 ("Act"), in compliance with the requirement of
Section 54(a)(2) of the 1940 Act. The Fund will offer its Shares in an
offering exempt from the registration requirements of the Securities Act of
1933 ("1933 Act") pursuant to Regulation D thereunder ("Regulation D") and will
sell its Shares in that offering solely to "accredited investors", as that term
is defined under Regulation D.
USE OF PROCEEDS. The Fund intends to apply the net proceeds of this
offering to enter into venture lending transactions, to a greater extent, and
leasing transactions, to a lesser extent, with Eligible Portfolio Companies and
with other companies, and to make associated equity investments, in furtherance
of its investment objective and policies. The Fund will seek to require
payment by investors pursuant to each capital call of only that portion of the
total dollar amount subscribed for that the Fund expects will be needed to fund
commitments entered into within a reasonable time after such capital call. It
is currently anticipated that all capital subscribed for will be called, and
that substantially all the proceeds of this offering will be invested in
venture loans and leases, within 36 months after the Fund has first accepted
subscriptions from investors in this offering, although under the terms of the
subscription agreement the Fund will be permitted to make capital calls at any
time until the fourth anniversary after the first closing of the offering.
(b) Financial Information About Industry Segments.
Not applicable; the Fund has not commenced business and has no
reserves.
(c) Narrative Description of Business.
Investment Program.
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GENERAL. The Fund's investment objective is to achieve a high total
return. The Fund will provide asset-based financing to carefully selected
venture capital-backed companies, in the form of secured loans, or to a lesser
extent, installment sales contracts or equipment leases. The Fund generally
will receive warrants to acquire equity securities in connection with its
portfolio investments. The Fund will make available significant managerial
assistance through its officers to certain companies whose securities are held
in the Fund's portfolio, as described under "Regulation". There can be no
assurance that the Fund will attain its investment objective.
As a BDC, the Fund must invest at least 70% of its total assets in
qualifying assets ("Qualifying Assets") consisting of (a) "eligible portfolio
companies" as defined in the 1940 Act ("Eligible Portfolio Companies") and (b)
certain other assets including cash and cash equivalents. An eligible
portfolio company generally is a United States company that is not an
investment company and that (i) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list; (ii) is actively controlled by a BDC and has an affiliate of a BDC
on its board of directors; or (iii) meets such other criteria as may be
established by the SEC. The Fund may invest up to 30% of its total assets in
non-Qualifying Assets, including companies that are not Eligible Portfolio
Companies (for example, because the company's securities are quoted on the
National Association of Securities Dealers' Automated Quotation System
("NASDAQ")) and Eligible Portfolio Companies as to which the Fund does not
offer to make available significant managerial assistance. The foregoing
percentages will be determined, in the case of financings in which the Fund
commits to provide financing prior to funding the commitment, by the amount of
the Fund's total assets represented by the value of the maximum amount of
securities to be issued by the borrower or lessee to the Fund pursuant to such
commitment.
VENTURE LOANS AND LEASES. Venture loans generally will be made
pursuant to a negotiated written loan agreement, and be evidenced by promissory
notes secured by the equipment or other assets of the borrower financed with
the proceeds of such loans, and in some cases secured by a broader lien on
substantially all of the borrower's assets (especially where loan proceeds are
permitted to be used for purposes other than financing equipment). The Fund
will receive periodic payments (usually monthly) of interest and principal, and
will generally receive a final payment in the nature of additional interest in
an amount equal to a percentage of the original loan amount, payable at
maturity of the loan (whether as stated or accelerated). Venture leases will
consist of a lease from the Fund to the lessee of the assets to be financed,
with periodic payments of rent and, in most cases, with a put option to sell
the assets to the lessee at the end of the lease term for a predetermined or
formula price. The interest rate and amortization terms of venture loans, the
rental rate and put provisions of leases, and all other transaction terms will
be individually negotiated between the Fund and each borrower or lessee. If
the Fund qualifies as a regulated investment Company ("RIC"), provisions of the
Internal Revenue Code may restrict the terms to which the Fund may enter into
venture leases and the extent to which venture leases may be used.
The documentation for loans or leases will include negotiated
representations, warranties, covenants and events of default intended to
protect the Fund customary for commercial transactions of this type and size.
Typical material terms include covenants to maintain the equipment or other
assets underlying the loan or lease and keep it adequately insured,
prohibitions against sale or other disposition of the assets or assignment of
the loan or lease except under specified conditions, and acceleration
provisions making the remaining outstanding amounts under the loan or lease
immediately due and payable and giving rise to a right to take possession of
the underlying assets upon certain events of default, including failure to make
required payments and failure to comply with specified
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covenants. There can be no assurance that the value of the underlying assets at
the time of default will be at least equal to the outstanding amount due under
the loan or lease.
Typically, loans or leases will be structured as commitments by the
Fund to provide financing, in one or more advances during a specified period of
time, or credit availability. The commitment of the Fund to finance future
asset acquisitions or working capital needs is typically subject to the absence
of any default under the loan or lease and compliance by the borrower or lessee
with requirements relating to, among other things, the type of assets to be
acquired. Although the Fund's commitment generally will provide that the Fund
is not required to continue to fund additional asset purchases or working
capital needs if there is a material adverse change in the borrower's or
lessee's financial condition, it is possible that a borrower's or lessee's
financial condition will not be as strong at the time the Fund funds a
commitment.
WARRANTS AND EQUITY SECURITIES. The Fund generally will acquire
warrants to purchase equity securities of the borrower or lessee in connection
with asset financings. The terms of the warrants, including the expiration
date, exercise price and terms of the equity security for which the warrant may
be exercised, will be negotiated individually with each borrower or lessee, and
will likely be affected by the price and terms of securities issued by the
company to its venture capitalists and other holders. Based upon the Manager's
past experience, it is anticipated that most warrants will be for a term of
five to ten years, and will have an exercise price based upon the price at
which the borrower or lessee most recently issued equity securities or, if a
new equity offering is imminent, will next issue equity securities. The equity
securities for which the warrant will be exercised generally will be common
stock (of which there may be one or more classes) or convertible preferred
stock. Substantially all the warrants and underlying equity securities will be
restricted securities under the 1933 Act at the time of issuance; the Fund
generally negotiates registration rights with the borrower or lessee that may
provide (i) "piggyback" registration rights, which permit the Fund under
certain circumstances to include some or all of the securities owned by it in a
registration statement filed by the borrower or lessee, or (ii) in very rare
circumstances, "demand" registration rights permitting the Fund under certain
circumstances to require the borrower or lessee to register the securities
under the 1933 Act (in some cases at the Fund's expense). The Fund will
generally negotiate "net issuance" provisions in the warrants, which allow the
Fund to receive upon exercise of the warrant without payment of any cash a net
amount of shares determined by the increase in the value of the issuer's stock
above the exercise price stated in the warrant.
Investment Policies
For purposes of these investment policies and unless otherwise
specified, references to the percentage of the Fund's total assets "invested"
in securities of a company will be deemed to refer, in the case of financings
in which the Fund commits to provide financing prior to funding the commitment,
to the amount of the Fund's total assets represented by the value of the
maximum amount of securities to be issued by the borrower or lessee to the Fund
pursuant to such commitment; the Fund will not be required to divest securities
in its portfolio or decline to fund an existing commitment because of a
subsequent change in the value of securities the Fund has previously acquired
or committed to purchase.
DIVERSIFICATION STANDARDS. The Fund will be classified as a
"non-diversified" closed-end investment company under the 1940 Act. Until the
Fund qualifies as a RIC, it will not be subject to
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the diversification requirements applicable to RICs under the Internal Revenue
Code. Commencing with the first capital call, the Manager will seek to
increase the diversification of the Fund's portfolio so as to make it possible
to meet the RIC diversification requirements, as described below. There can be
no assurance, however, that the Fund will be able to meet those requirements.
To qualify as a RIC, the Fund must meet the issuer diversification
standards under the Internal Revenue Code that require that, at the close of
each quarter of the Fund's taxable year, (i) not more than 25% of the market
value of its total assets is invested in the securities of a single issuer, and
(ii) at least 50% of the market value of its total assets is represented by
cash, cash items, government securities, securities of other RICs and other
securities (with each investment in such other securities limited so that not
more than 5% of the market value of the Fund's total assets is invested in the
securities of a single issuer and the Fund does not own more than 10% of the
outstanding voting securities of a single issuer). For purposes of the
diversification requirements under the Internal Revenue Code, the percentage of
the Fund's total assets "invested" in securities of a company will be deemed to
refer, in the case of financings in which the Fund commits to provide financing
prior to funding the commitment, to the amount of the Fund's total assets
represented by the value of the securities issued by the borrower or lessee to
the Fund at the time each portion of the commitment is funded.
The Fund will invest no more than 25% of its total assets in securities
of companies in any single industry. The broad industry categories in which
the Fund anticipates that most of its investments will fall (and within each of
which there may be several "industries" for purposes of the industry
diversification policy) include computer and semiconductor-related,
medical/biotechnology and communications.
INVESTMENT GUIDELINES. In selecting investments for the Fund's
portfolio, the Manager will endeavor to meet the following investment
guidelines, as established by the Fund's board of directors. The Fund may,
however, make investments that do not conform to one or more of these
guidelines when deemed appropriate by the Manager. Such investments might be
made if the Manager believes that a failure to conform in one area is offset by
exceptional strength in another or is compensated for by a higher yield,
favorable warrant issuance or other attractive transaction terms or features.
STAGE OF DEVELOPMENT GUIDELINES. The Manager will seek to diversify
the Fund's portfolio based on the stage of development of borrowers or lessees
by limiting the Fund's aggregate investment in securities of companies that, in
the opinion of Westech Advisors, are in the start-up stage to 35% of the Fund's
total assets. The Manager will seek to invest the remainder of the Fund's
assets in securities of companies that, in the opinion of the Manager, are in
the emerging growth stage or mezzanine stage, except that the Manager may
invest up to 5% of the Fund's total assets in securities of companies that, in
the opinion of the Manager, are in the seed capital stage. The Fund would
invest in seed capital stage companies for strategic purposes, with the goal of
making additional, larger investments if the company succeeds. For purposes of
these investment guidelines, the stages of development are defined as follows:
- Seed capital companies represent the earliest stage of
development. These companies have raised relatively modest
equity capital to prove a concept and qualify for start-up
capital. Their activities generally are limited to product
development, scientific and market research, recruiting a
management team and developing a business plan. These
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companies likely do not have financial support from either
venture capitalists or larger companies making strategic
investments.
- Start-up stage companies are completing or have recently
completed product development and initial marketing, but have
not sold their products commercially. Generally such firms have
made market studies, assembled key management, developed a
business plan and are ready to commence operations.
- Emerging growth stage companies have initiated or are about to
initiate full-scale operations and sales, but may not be showing
a profit.
- Mezzanine stage companies are approaching or have attained break
even or profitability and are continuing to expand. An
acquisition or initial public offering may be imminent.
Classification of a company by stage of development necessarily
involves a subjective judgment by the Manager, and it is possible that other
investors or market analysts would classify a company differently than the
classification used by the Fund.
QUALITY GUIDELINES. The Manager will seek to invest at least 65% of
the Fund's aggregate investments (determined over the life of the Fund) in
venture loans or leases that meet the following criteria:
Borrower/Lessee Criteria
- The company has a minimum capitalization of at least $1 million.
- The company has at least nine months' available cash to fund its
operations (excluding the cost of the financing to be provided
by the Fund) and indications from its equity investors that they
will make investments necessary to provide such cash.
- At least two venture capital investors have indicated a current
intention to make additional equity financing available to the
company, or the company has a forecasted positive cash flow.
- The company's business plan contemplates sales of at least $25
million within five years.
- The company has or will consummate equity venture capital
financing prior to funding the assets to be acquired.
Transaction Criteria
- The term of the loan or lease does not exceed 60 months, and
does not extend beyond December 31, 2005.
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- At least 75% of the assets to be financed are, in the opinion of
the Manager, critical to the company's day-to-day operations.
- At least 75% of the assets to be financed are moveable and, in
the opinion of the Manager, readily remarketable.
Equity Venture Capital Support Criteria
- At least two of the company's equity venture capital investors
(including the lead investor) have (i) in the opinion of the
Manager, significant venture capital industry experience and
(ii) at least $50 million under management.
SPECIAL SITUATIONS. The Manager may invest up to 10% of the Fund's
aggregate investments determined over the life of the Fund in special situation
investments. Such special situations would include providing bridge financing
to a company which is in the process of raising additional private equity,
planning an initial public offering or is seeking to enter into a business
combination through which it would be acquired. In addition, special
situations would also include investments in a "troubled" company undergoing a
restructuring or recapitalization of its existing debt or equity, and making
investments in subordinated debt.
INTERNATIONAL INVESTMENTS. The Manager may invest up to 10% of its
aggregate investments determined over the life of the Fund in United States
based companies that have international operations with assets located in
foreign divisions, subsidiaries or affiliated entities. If reasonably
practicable, such investment would be secured by the assets located in such
foreign divisions in addition to being secured by any assets located in the
United States.
LEVERAGE. The Fund intends to borrow money from and issue debt
securities to banks, insurance companies and other lenders to obtain additional
funds to originate venture loans and leases. Under the 1940 Act, the Fund may
not incur borrowings unless, immediately after the borrowing is incurred, such
borrowings would have "Asset Coverage" of at least 200%. "Asset Coverage"
means the ratio which the value of the Fund's total assets, less all
liabilities not represented by (i) the borrowings and (ii) any other
liabilities constituting "senior securities" under the 1940 Act, bears to the
aggregate amount of such borrowings and senior securities. The practical
effect of this limitation is to limit the Fund's borrowings and other senior
securities to 50% of its total assets less its liabilities other than the
borrowings and other senior securities. The 1940 Act also requires that, if
the Fund borrows money, provision be made to prohibit the declaration of any
dividend or other distribution on the Shares (other than a dividend payable in
Shares), or the repurchase by the Fund of Shares, if, after payment of such
dividend or repurchase of Shares, the Asset Coverage of such borrowings would
be below 200%. If the Fund is unable to pay dividends or distributions in the
amounts required under the Internal Revenue Code, it might not be able to
qualify as a RIC or, if qualified, to continue to so qualify.
The use of leverage increases investment risk. Lenders are expected to
require that the Fund pledge portfolio assets as collateral for loans. If the
Fund is unable to service the borrowings, the Fund may risk the loss of such
pledged assets. Lenders are also expected to require that the Fund agree to
loan covenants limiting the Fund's ability to incur additional debt or
otherwise limiting the Fund's flexibility, and loan agreements may provide for
acceleration of the maturity of the
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indebtedness if certain financial tests are not met. To minimize risks
associated with lending money at fixed rates, the Fund may enter into interest
rate hedging transactions with respect to all or any portion of the Fund's
investments. There can be no assurance that such interest rate hedging
transactions will be available in forms acceptable to the Fund. In addition,
entering into interest rate hedging transactions raises costs to the Fund.
TEMPORARY INVESTMENTS. Pending investment in asset financing
transactions and pending distributions, the Fund will invest excess cash in (i)
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities; (ii) repurchase agreements fully collateralized by U.S.
government securities; (iii) short-term high-quality debt instruments of U.S.
corporations; and (iv) pooled investment funds whose investments are restricted
to those described above. All such investments will mature in one year or
less. The U.S. government securities in which the Fund may invest include U.S.
government securities backed by the full faith and credit of the U.S.
government (such as Treasury bills, notes and bonds) as well as securities
backed only by the credit of the issuing agency. Corporate securities in which
the Fund may invest include commercial paper, bankers' acceptances and
certificates of deposit of domestic or foreign issuers.
The Fund also may enter into repurchase agreements that are fully
collateralized by U.S. government securities with banks or recognized
securities dealers in which the Fund purchases a U.S. government security from
the institution and simultaneously agrees to resell it to the seller at an
agreed-upon date and price. The repurchase price is related to an agreed-upon
market rate of interest rather than the coupon of the debt security and, in
that sense, these agreements are analogous to secured loans from the Fund to
the seller. Repurchase agreements carry certain risks not associated with
direct investments in securities, including possible declines in the market
value of the underlying securities and delays and costs to the Fund if the
other party to the transaction defaults.
OTHER INVESTMENT POLICIES. The Fund will not sell securities short,
purchase securities on margin (except to the extent the Fund's permitted
borrowings are deemed to constitute margin purchases), write puts or calls,
purchase or sell commodities or commodity contracts or purchase or sell real
estate. The Fund will not underwrite the securities of other companies, except
to the extent the Fund may be deemed an underwriter upon the disposition of
restricted securities acquired in the ordinary course of the Fund's business.
The Fund's investment objective, investment policies and investment
guidelines (other than its status as a BDC) are not fundamental policies and
may be changed by the Fund's board of directors at any time without shareholder
approval.
Regulation
The Small Business Incentive Act of 1980 ("1980 Provisions") modified
the provisions of the 1940 Act that are applicable to a closed-end investment
company. After filing its election to be treated as a BDC, a company may not
withdraw its election without first obtaining the approval of holders of a
majority of its outstanding voting securities (as defined under the 1940 Act).
The following is a brief description of the 1940 Act, as modified by the 1980
Provisions, and is qualified in its entirety by reference to the full text of
the 1940 Act and the rules thereunder.
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Generally, to be eligible to elect BDC status, a company must engage in
the business of furnishing capital and offering significant managerial
assistance to Eligible Portfolio Companies. More specifically, in order to
qualify as a BDC, a company must (i) be a domestic company; (ii) have
registered as a class of its securities or have filed a registration statement
with the SEC pursuant to Section 12 of the 1934 Act; (iii) operate for the
purpose of investing in the securities of certain types of Eligible Portfolio
Companies; (iv) offer to extend significant managerial assistance to such
Eligible Portfolio Companies; (v) have a majority of disinterested directors;
and (vi) file (or under certain circumstances, intend to file) a proper notice
of election with the SEC. The National Securities Markets Improvement Act of
1996 relaxed the requirement set forth in clause (iv), above, in certain
respects; in this regard, a BDC is not required to offer significant managerial
assistance to an issuer (x) which has total assets of not more than $4,000,000
and capital and surplus of not less than $2,000,000 or (y) with respect to any
other issuer that meets such criteria as the SEC otherwise may provide.
"Making available significant managerial assistance" is defined under
the 1940 Act, in relevant part, as (i) an arrangement whereby the BDC, through
its officers, directors, employees or general partners, offers to provide and,
if accepted, does provide, significant guidance and counsel concerning the
management, operations or business objectives of a portfolio company; or (ii)
the exercise by a BDC of a controlling influence over the management or polices
of the portfolio company by the BDC acting individually or as part of a group
acting together which controls the portfolio company. The officers of the Fund
intend to offer to provide managerial assistance, including advice on equipment
acquisition and financing, cash flow and expense management, general financing
opportunities, acquisition opportunities and opportunities to access the public
securities markets, to the great majority of companies to whom the Fund
provides venture loans or leases. In some instances, officers of the Fund
might serve on the board of directors of borrowers or lessees.
An "eligible portfolio company" generally is a United States company
that is not an investment company and that (i) does not have a class of
securities registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a BDC and has an
affiliate of a BDC on its board of directors; or (iii) meets such other
criteria as may be established by the SEC. Control under the 1940 Act is
presumed to exist where a BDC owns more than 25% of the outstanding voting
securities of the eligible portfolio company.
The 1940 Act prohibits or restricts BDCs from investing in certain
types of companies, such as brokerage firms, insurance companies, investment
banking firms, and investment companies. Moreover, the 1940 Act limits the
type of assets that BDCs may acquire to certain prescribed Qualifying Assets
and certain assets necessary for its operations (such as office furniture,
equipment, and facilities) if, at the time of acquisition, less than 70% of the
value of BDC's assets consist of Qualifying Assets. Qualifying Assets include:
(i) privately acquired securities of companies that were Eligible Portfolio
Companies at the time such BDC acquired their securities; (ii) securities of
bankrupt or insolvent companies; (iii) securities of Eligible Portfolio
Companies controlled by a BDC; (iv) securities received in exchange for or
distributed with respect to any of the foregoing; and (v) cash items,
government securities and high-quality short-term debt. The 1940 Act also
places restrictions on the nature of transactions in which, and the persons
from whom, securities can be purchased in order for the securities to be
considered Qualifying Assets. Such restrictions include limiting purchases to
transactions not involving a public offering and the requirement that
securities be acquired directly from either the portfolio company or its
officers, directors or affiliates.
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The Fund, as a BDC, may sell its securities at a price that is below
its net asset value per share provided a majority of the Fund's disinterested
directors has determined that such sale would be in the best interests of the
Fund and its shareholders and upon the approval by the holders of a majority of
its outstanding voting securities, including a majority of the voting
securities held by non-affiliated persons, of such policy or practice within
one year of such sale. A majority of the disinterested directors also must
determine in good faith, in consultation with the underwriters of the offering
if the offering is underwritten, that the price of the securities being sold is
not less than a price which closely approximates market value of the
securities, less any distribution discounts or commissions. As defined in the
1940 Act, the term "majority of the outstanding voting securities" of the Fund
means the vote of (i) 67% or more of the Fund's Shares present at a meeting, if
the holders of more than 50% of the outstanding Shares are present or
represented by proxy, or (ii) more than 50% of the Fund's outstanding Shares,
whichever is less.
Many of the transactions involving a company and its affiliates (as
well as affiliates of those affiliates) which were prohibited without the prior
approval of the Securities and Exchange Commission ("SEC") under the 1940 Act
prior to its amendment by the 1980 Provisions are permissible for BDCs,
including the Fund, upon the prior approval of a majority of the Fund's
disinterested directors and a majority of the directors having no financial
interest in the transactions. However, certain transactions involving certain
persons related to the Fund, including its directors, officers, Westech
Advisors and the Adviser to the Manager, may still require the prior approval
of the SEC. In general, (i) any person who owns, controls, or holds power to
vote, more than 5% of the Fund's 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 Fund's
disinterested directors, and, in some situations, the prior approval of the
SEC, before engaging in certain transactions with the Fund or any company
controlled by the Fund. The 1940 Act generally does not restrict transactions
between the Fund and its Eligible Portfolio Companies. While a BDC may change
the nature of its business so as to cease being a BDC (and in connection
therewith withdraw its election to be treated as a BDC) only if authorized to
do so by a majority vote (as defined by the 1940 Act) of its outstanding voting
securities, shareholder approval of changes in other fundamental investment
policies of a BDC is not required (in contrast to the general 1940 Act
requirement, which requires shareholder approval for a change in any
fundamental investment policy).
Taxation
The following is a general summary of certain of the United States
federal income tax laws relating to the Fund and investors in its Shares. This
discussion is based on the Internal Revenue Code, regulations, published
rulings and procedures and court decisions as of the date hereof. The tax law,
as well as the implementation thereof, is subject to change, and any such
change might interfere with the Fund's ability to qualify as a RIC or, if the
Fund so qualifies, to maintain such qualification. This discussion does not
purport to deal with all of the United States federal income tax consequences
applicable to the Fund or to all categories of investors, some of whom may be
subject to special rules. In addition, it does not address state, local,
foreign or other taxes to which the Fund or its investors may be subject, or
any proposed changes in applicable tax laws. Investors should consult their
tax advisers with respect to an investment in Fund Shares.
TAXATION OF THE FUND AS AN ORDINARY CORPORATION.
It is anticipated that, commencing with the second year of its
investment operations, the Fund will seek to meet the requirements, including
diversification requirements, to qualify for the special pass-through status
available to RICs under the Internal Revenue Code, and thus to be relieved of
federal income tax on that part of its net investment income and realized
capital gains that it distributes to shareholders. Unless and until the Fund
meets these requirements, it will be taxed as an ordinary corporation on its
taxable income for that year (even if that income is distributed to
shareholders) and all distributions out of its earnings and profits will be
taxable to shareholders as dividends; thus, such income will be subject to a
double layer of tax (although corporate shareholders may be entitled to a
dividends-received deduction). There is no assurance that the Fund will meet
the requirements to qualify as a RIC.
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TAXATION OF THE FUND AS A RIC
Consequences of Converting From an Ordinary Corporation to a RIC. In
order to qualify as a RIC, the Fund must, at the end of the first year in which
it so qualifies, have no accumulated earnings and profits from years in which
it was not taxed as a RIC. To meet this requirement, the Fund must, before the
end of the first year in which it qualifies as a RIC, distribute as dividends
all of its accumulated earnings and profits. In addition to the foregoing,
pursuant to a published notice of the Internal Revenue Service, the Fund must
either (i) elect to recognize gain on the disposition of any asset during the
ten year period (the "Recognition Period") beginning on the first day of the
first taxable year for which the Fund qualifies as a RIC that is held by the
Fund as of the beginning of such Recognition Period, to the extent of the
excess of (a) the fair market value of such asset as of the beginning of such
Recognition Period over (b) the Fund's adjusted basis in such asset as of the
beginning of such Recognition Period (such excess, hereinafter, "built-in
gain"), taxable at the highest regular corporate rates or (ii) immediately
recognize and pay tax on any such built-in gain with respect to any of its
portfolio holdings and, as described above, distribute the earnings and profits
from such deemed sales. As a RIC, the Fund would not be able to use any net
operating loss carryforwards relating to periods prior to the first year in
which the Fund qualifies as a RIC. The Administration, in effect, has proposed
that clause (ii) automatically apply to an ordinary corporation that converts
to a RIC after January 1, 1998 if the value of the assets of such corporation
exceeds $5,000,000. Even if enacted in its present form, it is unlikely that
this proposed legislation would apply since the Manager intends to cause the
Company to elect RIC status prior to January 2, 1998. In any event, the amount
of any such "built-in gain" is likely to be fairly nominal as of the date of
conversion.
RIC Qualification Requirements. To qualify as a RIC, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income and net short-term capital gain) ("Distribution Requirement") and must
meet several additional requirements. Among the requirements are the
following: (a) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to loans of
securities and gains from the sale or other disposition of securities or other
income derived with respect to its business of investing in securities ("Income
Requirement"); (b) the Fund must derive less than 30% of its gross income each
taxable year from gains from the sale or other disposition of securities held
for less than three months; (c) the Fund must diversify its assets so that, at
the close of each quarter of the Fund's taxable year, (i) not more than 25% of
the market value of its total assets is invested in the securities of a single
issuer or in the securities of two or more issuers that the Fund controls and
that are engaged in the same or similar trades or businesses or related trades
or businesses and (ii) at least 50% of the market value of its total assets is
represented by cash, cash items, government securities, securities of other
RICs and other securities (with each investment in such other securities
limited so that not more than 5% of the market value of the Fund's total assets
is invested in the securities of a single issuer and the Fund does not own more
than 10% of the outstanding voting securities of a single issuer)
("Diversification Requirement"); and (d) the Fund must file an election to be
treated as a RIC. If, after initially qualifying as a RIC, the Fund fails to
qualify for treatment as a RIC for a taxable year, it would be taxed as an
ordinary corporation on its taxable income for that year and all distributions
out of its earnings and profits would be taxable to shareholders as dividends
(that is, ordinary income). In such a case, there may be substantial tax and
other costs associated with re-qualifying as a RIC. Although there is
substantial uncertainty on several relevant issues, if the Administration's
proposal were enacted and in effect as of the date the Fund were to attempt to
requalify as a RIC, the Fund could be subject to the tax consequences described
in
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<PAGE> 12
the immediately preceding paragraph if such legislation were to apply to a
re-election of a previously disqualified RIC.
The Fund would be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year at
least 98% of its ordinary income for such calendar year and 98% of its capital
gain net income for the one-year period ending on October 31 of such calendar
year, plus certain other amounts. For these purposes, any taxable income
retained by the Fund, and on which it pays federal income tax, would be treated
as having been distributed.
The Fund currently intends to distribute in each year for which it
qualifies as a RIC substantially all of its net investment income and capital
gain net income so as to not be subject to federal income or excise taxes.
Effect of Certain Investments and Investment Practices. The Fund's
venture lending and leasing activities will generally be unlike the typical
activities engaged in by most investment companies that seek to qualify as RICs
for federal income tax purposes. Certain aspects of these activities may at
times make it more difficult for the Fund to satisfy the requirements for
qualifying as a RIC than is true for other investment companies.
For example, because the timing of borrowings under the Fund's loan or
lease commitments will be primarily controlled by the borrower or lessee, it is
possible that, due to borrowings being made under some commitments at a faster
pace than others, the Fund might experience difficulty in meeting the
Diversification Requirement as of the close of a fiscal quarter. This
difficulty might be exacerbated during the early period of the Fund's
existence, when the Fund will own venture loans or leases to, and have
outstanding financing commitments with respect to, fewer borrowers or lessees
than will be the case for later periods. If the Fund does not meet the
Diversification Requirement as of the close of any fiscal quarter by reason of
a discrepancy existing immediately after the acquisition of any security or
other property which is wholly or partly the result of such acquisition during
such quarter, it generally will not lose its status as a RIC for such quarter
if such discrepancy is eliminated within 30 days after the close of such
quarter and in such cases it shall be considered to have met such requirements
at the close of such quarter. There can be no assurance, however, that the
Fund will be able to eliminate a discrepancy within the 30 day period.
The Fund's ability to enter into venture leasing transactions will be
limited by the Fund's intention to qualify as a RIC because, depending on the
terms of the leases, they may fail to qualify as assets either satisfying the
Diversification Requirement or producing income that would satisfy the Income
Requirement. Given the complexity of this area and the factual nature of the
determination, the Fund can offer no assurance or guarantee as to how each
venture lease will be characterized.
To the extent that the terms of venture loans provide for the receipt
by the Fund of additional interest at the end of the loan term or the terms of
venture leases provide for the receipt by the Fund of a purchase price for the
asset at the end of the lease term ("residual income"), the Fund would be
required to accrue such residual income over the life of the loan or lease, and
to include such accrued income in its gross income for each taxable year even
if it receives no portion of such residual income in that year. Thus, in order
to meet the Distribution Requirement and avoid payment of income taxes or the
Excise Tax on undistributed income, the Fund may be required in a particular
year to distribute as a dividend an amount in excess of the total amount of
income it actually receives. Those
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<PAGE> 13
distributions will be made from the Fund's cash assets, from amounts received
through amortization of loans or leases or from borrowed funds.
TAXATION OF THE FUND'S SHAREHOLDERS IF THE FUND QUALIFIES AS A RIC
General. Dividends paid to shareholders that are attributable to the
Fund's net investment income will be taxable to shareholders as ordinary
income. Capital gain distributions are taxable as long-term capital gains
regardless of how long the shareholder has held the Shares. It is not
anticipated that a significant portion of the Fund's dividends will qualify for
the dividends-received deduction for corporations.
Distributions are generally taxable to shareholders at the time the
distribution is received. However, any distribution declared by the Fund in
October, November or December, made payable to shareholders of record in such a
month and paid the following January, is deemed to have been paid by the Fund
and received by shareholders on December 31 of the year declared. This will
prevent the application of the Excise Tax, discussed above, to the Fund as a
result of the delay in the payment of the dividends.
If, for any calendar year, the Fund's total distributions exceed its
net investment income and net capital gains, the excess will generally be
considered a tax-free return of capital to a shareholder to the extent of the
shareholder's adjusted basis in its shares and then as capital gain. The
amount treated as tax-free return of capital will reduce the adjusted basis of
a shareholder's Shares, thereby increasing the potential gain or reducing the
potential loss on the sale of the Shares.
In general, upon the sale or other disposition of Shares, the selling
shareholder will recognize a gain or loss equal to the difference between the
amount realized on the sale and the seller's adjusted basis in the Shares. Any
loss realized will be disallowed to the extent the seller has acquired (or
entered into a contract to acquire) substantially identical Shares within a
period beginning 30 days before the disposition of Shares and ending 30 days
after the disposition. In such case, the basis of the Shares acquired will be
adjusted to reflect the disallowed loss. Gain or loss realized upon a sale of
Shares generally will be treated as a capital gain or loss. The gain or loss
will be a long-term capital gain or loss if the Shares were held for more than
one year. In addition, if the Shares sold were not held for more than six
months, any loss on the sale will be treated as long-term capital loss to the
extent of any capital gain dividend received by the shareholder with respect to
such Shares.
The Fund is required to withhold 31% of reportable payments (which may
include dividends and capital gain distributions) to individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number or who otherwise are subject to backup
withholding. The certification of a shareholder's taxpayer identification
number will be included in the Subscription Agreement to be provided with the
Private Offering Memorandum.
Federal withholding taxes at a rate of 30% (or a lesser treaty rate)
may apply to distributions to shareholders who are nonresident aliens or
foreign partnerships, trust or corporations. The rules governing United States
federal income taxation of foreign shareholders are complex, and prospective
non-U.S. shareholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to an
investment in Shares, including any reporting requirements.
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<PAGE> 14
Individuals and certain other shareholders will be required to include
in their gross income an amount of certain Fund expenses relating to the
production of gross income that are allocable to the shareholder. These
shareholders, therefore, will therefore be deemed to receive gross income from
the Fund in excess of the distributions they actually receive. Such allocated
expenses may be deductible by an individual shareholder as a miscellaneous
itemized deduction, subject to the limitation on miscellaneous itemized
deductions not exceeding 2% of adjusted gross income.
The Fund will notify shareholders following the end of each calendar
year of the amounts of dividends and capital gain distributions paid or deemed
paid during the year.
Tax-Exempt Investors. Qualified plans, Individual Retirement Accounts
and investors exempt from taxation under the internal Revenue Code Section
501(c)(3) (collectively, "Tax-Exempt Entities") are generally exempt from
taxation except to the extent that they have unrelated business taxable income
("UBTI") (determined in accordance with Internal Revenue Code Sections
511-514). If the Fund qualifies as a RIC, it is likely that distributions to a
Tax-Exempt Entity shareholder that are treated as dividends will not be
considered UBTI and will therefore be exempt from federal income tax even if
the Fund borrows to acquire its investment assets. Under Section 512(b) of the
Internal Revenue Code, UBTI does not include dividends received by a Tax-Exempt
Entity. As a general rule, the income tax provisions relating to corporation
apply to RICs, unless Subchapter M of the Internal Revenue Code provides
otherwise, and thus Section 512(b) should apply to exclude from UBTI dividends
paid by a RIC to a Tax-Exempt Entity. This conclusion is also supported by
Revenue Ruling 66-106, which applies Section 512(b) to exclude from UBTI
dividends paid to the tax-exempt shareholders of a real estate investment trust
("REIT"), a conduit entity that invests in real estate and is substantially
similar to a RIC for tax purposes, on the same theory. However, if a
Tax-Exempt Entity borrows money to purchase its Shares, a portion of its income
from the Fund will constitute UBTI pursuant to the "debt-financed property:
rules.
Social clubs, voluntary employee benefit associates, supplemental
unemployment benefit trusts, and qualified group legal service organizations
that are exempt from taxation under Internal Revenue Code Sections 501(c)(7),
(9), (17) and (20), respectively, are subject to different UBTI rules, which
generally will require them to characterize distributions from the Fund as
UBTI. Dividends distributions by the Fund to a charitable organization that is
a private foundation should constitute investment income for purposes of the
excise tax on net investment income of private foundations imposed by Section
4940 of the Internal Revenue Code.
Risk Factors
GENERAL
No Operating History; Reliance on Management. The Fund is newly
organized and has not yet entered into any financing transactions or identified
any specific transactions it will finance. The Fund could require substantial
time to become fully invested. Pending investment, all cash that the Fund has
received pursuant to capital calls will be committed to short-term, high grade
investments that present relatively low investment risk but provide a
correspondingly lower return.
The Fund will be wholly dependent for the selection, structuring,
closing and monitoring of its investments on the diligence and skill of its
Manager, acting under the supervision of the Fund's board
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<PAGE> 15
of directors. Although the principals of Westech Advisors have over 25 years'
of combined experience in investing in venture lending and leasing
transactions, there can be no assurance that the Fund will attain its
investment objective. Ronald W. Swenson and Salvador O. Gutierrez, the senior
officers of Westech Advisors, will have primary responsibility for the
selection of the companies in which the Fund will invest, the negotiation of
the terms of such investments and the monitoring of such investments after they
are made. Although Messrs. Swenson and Gutierrez intend to devote such time as
is necessary to the affairs of the Fund, they are not required to devote full
time to the management of the Fund. Furthermore, there can be no assurance
that either officer will remain associated with Westech Advisors or that, if
either officer ceased to be associated with Westech Advisors, Westech Advisors
would be able to find a qualified person or persons to fill their positions.
Illiquid Investment. The Shares will not be registered under the
Securities Laws and are subject to substantial restrictions on transfer. There
will be no trading market for the Shares, and shareholders are likely to be
required to hold their Shares until the final liquidation of the Fund. An
investment in the Fund is therefore illiquid and should be considered only by
investors financially able to maintain their investment for the long term.
Subscription Terms; Risk of Forced Sale of Shares. Under the terms of
the Subscription Agreements and to the extent permitted by law, the Fund will
have the following remedies if a subscriber defaults in its payment obligations
under the Subscription Agreement: (i) cancellation of the balance of the
subscriber's Share subscription, (ii) assignment of the balance of the
subscriber's Share subscription and/or (iii) repurchase of the Shares by the
Fund at a price equal to the lesser of (a) the price paid for the Shares by the
subscriber or (b) 60% of the Shares' then current net asset value (the
"Discounted Share Price"). Notably, the Fund would have the right to
repurchase such Shares from a subsequent transferee of the Shares at the
Discounted Share Price. Consequently, subscribers may experience difficulty in
finding a purchaser for the Shares, and any purchase price paid therefor would
likely be at a substantial discount to the Shares' fair market value.
Therefore, a subscriber is subject to the risk that if it cannot fund its
subscription obligation, its Shares may be repurchased by the Fund at a
substantial discount to their value. In addition, even if a subscriber's
shares were not repurchased by the Fund, such subscriber would lose its
percentage of ownership and the rights related thereto if the subscriber is
unable to make subsequent purchases as required by subsequent capital calls of
the Fund.
Long-Term Investment. After the fourth anniversary following the first
closing of this offering, the Fund will cease to make new investments in
venture loans or leases (except pursuant to commitments made before such fourth
anniversary) and will distribute to investors the proceeds of repayment,
prepayment or sale of its investments, net of any principal repayments on
borrowings, expenses or other obligations of the Fund, amounts paid on exercise
of warrants and certain other amounts. The Fund's Articles of Incorporation
provide that, on December 31, 2005, the Fund automatically will be dissolved
without any action by shareholders. From and after such dissolution, the
Fund's activities will be limited to the winding-up of its affairs, the
liquidation of its remaining assets and the distribution of the net proceeds
thereof to shareholders. Although the Fund generally would not invest in any
loan or lease with a maturity date later than December 31, 2005, it is possible
that, due to a default by a borrower or lessee or a transaction restructuring
due to a borrower's or lessee's financial difficulties, the Fund will not fully
realize on a loan or lease by the original maturity date. Furthermore, the
Fund may not be able to sell warrants it receives from borrowers or lessees, or
the equity securities it receives upon exercise of such warrants, for a
significant period of time due to
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<PAGE> 16
legal or contractual restrictions on resale or the absence of a liquid
secondary market. As a result, the liquidation process might not be completed
for a significant period after the Fund's dissolution. In addition, it is
possible that, if certain of the Fund's assets are not liquidated within a
reasonable time after the Fund's dissolution, the Fund may elect to make a
distribution in kind of all or part of such assets to shareholders. In such
case, shareholders would bear any expenses attendant to the liquidation of such
assets.
Competition. Other entities and individuals compete for investments
similar to those proposed to be made by the Fund, some of whom may have greater
resources than the Fund. Furthermore, the Fund's need to comply with
provisions of the 1940 Act pertaining to BDCs and, if the Fund qualifies as a
RIC, provisions of the Internal Revenue Code pertaining to RICs might restrict
the Fund's flexibility as compared with its competitors. The need to compete
for investment opportunities may make it necessary for the Fund to offer
borrowers or lessees more attractive transaction terms than otherwise might be
the case.
Leverage. The Fund's ability to borrow money to make additional loans
or leases creates leverage. While leverage can enhance the return on invested
capital, if the return on the investments purchased with borrowed funds fails
to cover the fixed cost of the borrowings, or if the return is negative, the
value of the Fund's net assets will decline more rapidly than would be the case
in the absence of leverage. For this reason, leverage is considered a
speculative investment technique. The Fund will pledge portfolio assets as
collateral for borrowings. If the Fund is unable to service its borrowings,
because of the failure of the obligors on the Fund's loans or leases to make
debt service or lease payments, or due to other factors, the Fund may risk the
loss of the pledged assets. In addition, if the interest rates on floating or
variable rate borrowings increase at a time that the Fund holds fixed rate
loans or leases, or holds variable rate loans or leases whose interest rates do
not increase as much as the rate on Fund's borrowings, the Fund's income and
yield will be adversely affected. If the income from assets purchased with
borrowed funds fails to cover the cost of the borrowing, the Fund would be in a
better position had it not borrowed at all. To minimize risks associated with
lending money at fixed rates, the Fund may enter into interest rate hedging
transactions with respect to all or any portion of the Fund's investments.
There can be no assurance that such interest rate hedging transactions will be
available on terms acceptable to the Fund. In addition, entering into interest
rate hedging transactions raises costs to the Fund.
Conversely, the ability of the Fund to attain its investment objective
depends in part on its ability to borrow money on favorable terms, and there
can be no assurance that the Fund will be able to do so. Lenders may require
that the Fund agree to loan covenants that could restrict its flexibility in
the future. In order to repay its indebtedness in a timely fashion, the Fund
may be required to dispose or seek prepayment of assets at a time it would
otherwise not do so. Under the 1940 Act, if the Fund borrows money, provision
must be made to prohibit the declaration of any dividend or other distribution
on the Shares (other than a dividend payable in Shares), or the repurchase by
the Fund of Shares, if after payment of such dividend or repurchase of Shares
the value of the Fund's total assets, less all liabilities not represented by
(i) the borrowings and (ii) any other liabilities constituting "senior
securities" under the 1940 Act, is less than 200% of the aggregate amount of
such borrowings and senior securities. If the Fund is unable to pay dividends
or distributions in the amounts required under the Internal Revenue Code, it
might not be able to qualify as a RIC or, if qualified, to continue to so
qualify.
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<PAGE> 17
Regulation. The Fund has elected to be treated as a BDC under the
Small Business Incentive Act of 1980, which modified the 1940 Act. Although
the 1980 Provisions exempt BDCs from registration under the 1940 Act and
relieve such companies from compliance with many provisions of the 1940 Act,
the 1980 Provisions impose on BDCs greater restrictions in some respects on
permitted types of investments. Moreover, the applicable provisions of the
1940 Act continue to impose numerous restrictions on the activities of the
Fund, including restrictions on leverage and on the nature of its investments.
While the Fund is not aware of any judicial rulings under, and is aware of only
a few administrative interpretations of, the 1980 Provisions, there can be no
assurance that the 1980 Provisions will be interpreted or administratively
implemented in a manner consistent with the Fund's objectives or manner of
operation.
Litigation. The Fund could be subject to litigation by borrowers or
lessees, based on theories of "lender liability" or otherwise, in connection
with the exercise of its rights as secured lender or lessor. The defense of
such a lawsuit, even if ultimately determined to be without merit, could be
costly and time-consuming.
Tax Status. The Fund must meet a number of requirements, described
under "Federal Income Taxation", to qualify as a RIC and, if qualified, to
continue to so qualify. For example, the Fund must meet specified asset
diversification standards under the Internal Revenue Code which might be
difficult to meet if the borrowers or lessees under some loans or leases drew
down their committed financing at a faster rate than other borrowers or
lessees, particularly during the early periods of the Fund's operations. If the
Fund experiences difficulty in meeting the diversification requirement for any
fiscal quarter, it might accelerate capital calls or borrowings in order to
increase the portion of the Fund's total assets represented by cash, cash items
and U.S. government securities as of the close of the following fiscal quarter
and thus attempt to meet the diversification requirement. However, the Fund
would incur additional interest and other expenses in connection with any such
accelerated borrowings, and increased investments by the Fund in cash, cash
items and U.S. government securities (whether the funds to make such
investments are derived from called equity capital or from accelerated
borrowings) are likely to reduce the Fund's return to investors. Furthermore,
there can be no assurance that the Fund would be able to meet the
diversification requirements through such actions. Failure to qualify as a RIC
would deny the Fund pass-through status and, in a year in which the Fund has
taxable income, would have a significant adverse effect on the return to
investors.
When the Fund elects to convert its status from that of an ordinary, or
C, corporation to that of a RIC, it must choose to either (i) pay tax whenever
an asset is sold during the ten years following the conversion on, at most, the
amount of gain which would have been realized had the property been sold on the
conversion date, or (ii) treat the entire amount of "built-in gain" as income
at the time of conversion. Part of the Clinton Administration's current budget
would eliminate the choice in (i) above and, therefore, force recognition of
any "built-in gain" at the time of conversion to RIC status. As noted in the
discussion under "Federal Income Taxation", it is unlikely the amount of any
such gain will be realized at the time the Fund intends to elect RIC status.
There is substantial uncertainty, however, as to how this proposal might
affect, if at all, a corporation which had previously been qualified as a RIC,
lost such qualification and then sought to re-qualify. It is possible that
such a corporation would have to recognize the entire amount of "built-in gain"
when it re-elects RIC status, even gain which accrued during prior periods of
RIC status.
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<PAGE> 18
Allocation of Expenses. If the Fund qualifies as a RIC, individuals
and certain other shareholders will be required to include in their gross
income an amount of certain Fund expenses relating to the production of gross
income that are allocable to the shareholder. These shareholders will
therefore be deemed to receive gross income from the Fund in excess of the
distributions they actually receive. Such allocated expenses may be deductible
by an individual shareholder as a miscellaneous itemized deduction, subject to
the limitation on miscellaneous itemized deductions not exceeding 2% of
adjusted gross income.
INVESTMENT RISKS
Credit Risks. The companies with which the Fund will enter into
financing transactions in most cases will not at that time have achieved
profitability, may experience substantial fluctuations in their operating
results or, in some cases, will not have significant operating revenues. The
ability of these companies to meet their obligations to the Fund will therefore
depend to a significant extent on the willingness of a borrower's or lessee's
equity venture capital investors to provide additional equity financing, which
in turn will depend on the borrower's or lessee's success in meeting its
business plan, the market climate for venture capital investments generally and
many other factors. The companies for which the Fund will provide financing
will frequently be engaged in the development of new products or technologies,
and the success of these efforts, or the ability of the companies to
successfully manufacture or market products or technologies developed, cannot
be assured. These companies frequently face intense competition, including
competition from companies with greater resources, and may face risks of
product or technological obsolescence or rapidly changing regulatory
environments which could adversely affect their prospects. The success of such
companies often depend on the management talents and efforts of one person or
small group of persons whose death, disability or resignation would adversely
affect their businesses.
Remedies Upon Default. In the event of a default on a loan or lease,
the Fund's available remedies would include legal action against the borrower
or lessee and foreclosure or repossession of collateral given by the borrower
or lessee, including the equipment or other assets being financed. The Fund
could experience significant delays in exercising its rights as a secured
lender or lessor and might incur substantial costs in taking possession of the
underlying assets and taking other steps to protect its investment.
Furthermore, the requirements under the laws of the various states for creating
and perfecting a security interest in the assets underlying a loan or lease are
technical and complex, and even minor deviations from the required procedures
could impair the Fund's security interest in the underlying assets. Venture
Lending & Leasing, Inc. ("VLLI") is a BDC organized by Westech Advisors and
Sigular Guff Advisers, LLC, and engaged in the same business as the Fund. The
Fund and VLLI will enter into intercreditor agreements which could limit the
Fund's flexibility in pursuing its remedies as a secured creditor, and reduce
the proceeds realized from foreclosing or taking possession of the collateral.
Under the intercreditor agreements, the Fund would agree that its security
interest would be treated in parity with the security interest of VLLI,
regardless of which security interest would have priority under applicable law.
The Fund will utilize certain of its funds in investments that involve
the financing of equipment assets. Equipment assets are often subject to rapid
depreciation or obsolescence such that there can be no assurance that the value
of the assets underlying a loan or lease to finance such assets will not
depreciate during the term of the transaction below the amount of the
borrower's or lessee's obligations. In addition, although borrowers or lessees
will be required under the transaction documents to provide customary insurance
for the assets underlying a loan or lease, and will be prohibited from
disposing of the assets without the Fund's consent, compliance with these
covenants
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<PAGE> 19
cannot be assured and, in the event of non-compliance, the assets could become
unavailable to the Fund due to destruction, theft, sale or other circumstances.
The Fund's ability to obtain payment beyond the assets underlying the loan or
lease from the borrower or lessee might be limited by bankruptcy or similar
laws affecting creditors' rights. Therefore, there can be no assurance that the
Fund would ultimately collect the full amount owed on a defaulted loan or
lease.
Speculative Nature of Warrants. The value of the warrants that the
Fund generally will receive in connection with its portfolio investments is
dependent on the value of the equity securities for which the warrants can be
exercised. The value of such securities is dependent primarily on the success
of the company's business strategy and the growth of its earnings, but also
depends on general economic and equity market conditions. The prospects for
achieving consistent profitability in the case of many companies in which the
Fund will invest are speculative. The warrants and equity securities for which
the warrants can be exercised generally will be restricted securities that
cannot readily be sold for some period of time. If the value of the equity
securities underlying a warrant does not increase above the exercise price
during the life of the warrant, the Fund would permit the warrant to expire
unexercised and the warrant would then have no value.
Illiquidity of Investments. The Fund anticipates that substantially
all of its portfolio investments (other than short-term investments) will
consist of securities that at the time of acquisition are subject to
restrictions on sale and for which no ready market will exist. Restricted
securities cannot be sold publicly without prior agreement with the issuer to
register the securities under the 1933 Act, or by selling such securities under
Rule 144 or other provisions of the 1933 Act which permit only limited sales
under specified conditions. Venture loans and leases are privately negotiated
transactions, and there is no established trading market in which such loans or
leases can be sold. In the case of warrants or equity securities, the Fund
generally will realize the value of such securities only if the issuer is able
to make an initial public offering of its shares, or enters into a business
combination with another company which purchases the Fund's warrants or equity
securities or exchanges them for publicly-traded securities of the acquiror.
The feasibility of such transactions depends upon the borrower's or lessee's
financial results as well as general economic and equity market conditions.
Furthermore, even if the restricted warrants or equity securities owned become
publicly-traded, the Fund's ability to sell such securities may be limited by
the lack of or limited nature of a trading market for such securities. When
restricted securities are sold to the public, the Fund, under certain
circumstances, may be deemed an "underwriter" or a controlling person with
respect thereto for the purposes of the 1933 Act, and be subject to liabilities
as such under that Act.
Because of the illiquidity of the Fund's investments, a substantial
portion of the Fund's assets will be carried at fair value as determined by the
board of directors. This value will not necessarily reflect the value of the
assets which may be realized upon a sale.
Non-Diversified Status. The Fund will be classified as a
"non-diversified" investment company under the 1940 Act. At such time as the
Fund meets certain asset diversification requirements, the Fund intends to
qualify as a RIC under the Internal Revenue Code and will thereafter seek to
meet the diversification standards thereunder. Nevertheless, the Fund's assets
may be subject to a greater risk of loss than if its investments were more
widely diversified.
18
<PAGE> 20
CONFLICTS OF INTEREST
Transactions by Other Clients. The Fund's board of directors has
determined that so long as VLLI has capital available to invest in loan or
lease transactions with final maturities earlier than December 31, 2002 (the
date on which VLLI will be dissolved), the Fund will invest in each portfolio
company that VLLI invests in ("Investments"). The amount of each Investment
will be allocated between the Fund and VLLI in accordance with the "Committed
Equity Capital" of the Fund and VLLI so long as VLLI has capital available to
invest. The Committed Equity Capital of VLLI is $46,700,000. If this
offering is fully subscribed, the Committed Equity Capital of the Fund will be
$100,000,000. If the minimum amount is raised, the Committed Equity Capital
of the Fund will be $50,00,000. Therefore, if the offering is fully
subscribed, each Investment will be allocated approximately two-thirds to the
Fund and one-third to VLLI. If the minimum amount is raised, Investments will
be allocated approximately one-half to the Fund and one-half to VLLI. In any
case, VLLI can only invest to the extent that it has capital available for
investment; after VLLI no longer has capital available for investment, VLLI
will no longer invest in transactions in which the Fund invests. As of May 19,
1997, VLLI has approximately $9,340,000 of capital committed to VLLI which has
not yet been called from its shareholders but must be called if at all, by July
5, 1998. This means that the funds with which VLLI has available to invest
with the Fund consist of (a) $9,340,000 plus (b) amounts which VLLI borrows by
leveraging its available capital funds plus (c) any proceeds from principal
payments received on loans and leases, plus the proceeds from the sale of
securities in an amount equal to the cost basis of securities sold. After
June 30, 1998, VLLI will no longer be permitted to enter into new commitments
to borrowers or lessees; however, VLLI will be permitted to fund existing
commitments from the sources described above. While investing the Fund's
capital in the same companies in which VLLI is also investing could provide the
Fund with greater diversification and access to larger transactions, it could
also result in a slower pace of investment than would be the case if the Fund
were investing in companies by itself.
Although VLLI and the Fund intend to invest in the same Companies in
the respective propor tions described above, the Fund may, at any time, with
the approval of its board of directors, (i) discontinue investing with VLLI
with respect to any or all future investments or (ii) choose to invest in
different proportions with VLLI than described above. In addition, the Fund
has no control over VLLI, and VLLI, which is not required to invest with the
Fund in any particular proportion or at all, may choose to discontinue
investing with the Fund or to invest in different proportions than described in
this paragraph. In the event that VLLI and the Fund invest in other than the
pro rata manner described above (which can occur only with board approval of
each), the Manager may have a conflict of interest in determining which of VLLI
and the Fund will invest in a particular company and, if both, in what
proportions. The Fund may also engage in loan or lease transactions with
companies that are preexisting borrowers or lessees from VLLI.
To the extent that portfolios of clients, other than VLLI, that are
advised by the Manager (but in which the Manager has no proprietary interest)
invest in opportunities available to the Fund, the Manager will allocate such
opportunities among the Fund and such other clients in a manner deemed fair and
equitable considering all of the circumstances in accordance with procedures
approved by the Fund's board of directors (including a majority of the
disinterested directors).
Intercreditor Agreements. In transactions in which both the Fund and
VLLI invest pro rata, it is expected that the Fund and VLLI will enter into an
intercreditor agreements pursuant to which the Fund and VLLI will cooperate in
pursuing their remedies following a default by one of the borrowers or lessees.
Under the intercreditor agreements, each party would agree that its security
interest would be treated in parity with the security interest of the other
party, regardless of which security interest would have priority under
applicable law. The proceeds realized from the sale of any collateral or the
exercise of any other creditor's rights will be allocated between the Fund and
VLLI pro rata in accordance with their respective investments. As a result of
such intercreditor agreements, the Fund would have less flexibility in pursuing
its remedies following a default than it would have had there been no
intercreditor agreement, and the Fund may realize fewer proceeds. In addition,
because the Fund and VLLI invest at the same time in the same borrower or
lessee, such borrower or lessee would be required to service two loans rather
than one. Any additional administrative costs or burdens resulting therefrom
may make the Fund a less attractive lender, and may make it more difficult for
the Fund to acquire such loans or leases.
19
<PAGE> 21
Incentive Compensation. The compensation payable to Westech Advisors
and the Adviser to the Manager will be based in part upon a percentage of the
Fund's distributions to shareholders after shareholders have received aggregate
distributions in a specified amount. Westech Advisors and the Adviser to the
Manager believe this compensation structure might benefit the Fund by creating
a greater identity of economic interest between the Fund and the Manager and
the Adviser to the Manager. However, the incentive compensation structure might
also create an incentive for the Westech Advisors and the Adviser to the
Manager to make investments that are riskier or more speculative than would be
the case in the absence of incentive compensation.
Effect of Borrowings. After the first two years of the Fund's
investment operations, the Management Fee will be based on the value of the
Fund's total assets, including assets purchased with borrowed funds.
Therefore, decisions by the Manager to cause the Fund to borrow additional
funds will increase the quarterly fees payable to the Manager and the Adviser
to the Manager. The Fund's overall borrowing limits, however, are set by the
Fund's board of directors in light of its fiduciary duty to the shareholders.
Indemnification and Exculpation. The Fund's Articles of Incorporation
provide for indemnifica tion of directors, officers, employees and agents
(including Westech Advisors and the Adviser to the Manager) of the Fund to the
full extent permitted by Maryland law and the 1940 Act, including the advance
of expenses and reasonable counsel fees. The Articles of Incorporation also
contain a provision eliminating personal liability of a Fund director or
officer to the Fund or its shareholders for monetary damages for certain
breaches of their duty of care.
Selection of Disinterested Directors. Westech Advisors intends that,
prior to the closing of this offering, a majority of the Fund's directors will
be disinterested directors. Although the continued tenure of all directors
will be subject to annual election by shareholders, the initial selection of
directors, including the disinterested directors, is made by the Manager.
Employees.
The fund expects to have no employees and will rely on the Manager and
its officers (all of whom are employed and paid by the Manager) to administer
its affairs, subject to the supervision of the Fund's Board of Directors.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
The Fund has not commenced business and has no revenues or assets.
ITEM 2. FINANCIAL INFORMATION
The Fund has not commenced business and has no revenues or assets.
ITEM 3. PROPERTIES
The Fund has not commenced business and has no assets. It is
anticipated that the Fund's principal assets following commencement of
operations will be securities.
20
<PAGE> 22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The Fund has no Shares outstanding as of the date of this Private
Offering Memorandum. It is anticipated that, prior to the first closing of
this offering, Westech Advisors will purchase one Share at a price of $1,000 as
the Fund's initial capital. Therefore, until immediately subsequent to the
first capital call to purchase the Shares offered pursuant to this offering,
Westech Advisors will be deemed to "control" the Fund.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Fund are:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Ronald W. Swenson* 52 Chairman, Chief Executive Officer and Director
2010 North First Street, Suite 310
San Jose, CA 95131
Salvador O. Gutierrez* 53 Chief Operating Officer, Chief Financial
2010 North First Street, Suite 310 Officer and Director
San Jose, CA 95151
George W. Siguler 50 Advisory Director
630 Fifth Avenue, 16th Floor
New York, NY 10111
Michael G. McCaffery 43 Advisory Director
555 California Street, Suite 2600
San Francisco, CA 94104
Patricia A. Breshears 62 Vice President and Secretary
2010 North First Street, Suite 310
San Jose, CA 95131
</TABLE>
- --------------------------------------
* Interested person of the Fund within the meaning of the 1940 Act.
The board of directors of the Fund anticipates electing three
additional disinterested directors. The Fund's disinterested directors will
each receive an annual fee from the Fund of $5,000. Such directors also will
be reimbursed by the Fund for their expenses in attending meetings of the board
of directors or any committee thereof and will receive a fee for attendance in
person at any meeting at a per diem rate of $500. The Fund's interested
directors and officers are employees of the Manager and receive no compensation
from the Fund for their services as directors or officers, other than reimburse
ment of their expenses in attending meetings. The Fund's advisory directors
are employees of the Adviser to the Manager or the Placement Agent and receive
no compensation from the Fund for their services as directors or officers,
other than reimbursement of their expenses in attending meetings. The Fund's
Placement Agent is Robertson, Stephens & Company LLC, a broker-dealer
Registered under the Federal Securities laws ("Placement Agent").
21
<PAGE> 23
The business backgrounds of the Fund's directors and officers are as
follows:
RONALD W. SWENSON is Chairman, Chief Executive Officer, and Director of
the Manager and his business background is set forth under "Management -- The
Manager".
SALVADOR O. GUTIERREZ is the Chief Operating Officer and Chief
Financial Officer of the Manager and his business background is set forth under
"Management -- The Manager".
GEORGE W. SIGULER is Managing Director of the Adviser to the Manager
and his business background is set forth under "Management -- Adviser to the
Manager".
MICHAEL G. MCCAFFERY is President and Chief Executive Officer of the
Placement Agent, Robertson, Stephens & Company LLC. Mr. McCaffery previously
served as Director of Investment Banking at Robertson, Stephens & Company LLC,
where he had responsibility for Corporate Finance, Mergers & Acquisitions and
Private Placements. Mr. McCaffery graduated from the Stanford Graduate School
of Business with an M.B.A., concentrating on accounting and finance. He
received an M.A. from Merton College, Oxford University, Oxford, England, where
he attended as a Rhodes Scholar. He also received a B.A. from Princeton
University, where he attended the Woodrow Wilson School of Public and
International Affairs.
PATRICIA A. BRESHEARS is Vice President of the Manager and
administrator and corporate secretary of Western Technology. Before joining
Western Technology in 1984, she was office manager for F.A. Hoyt, Ltd., a
transportation equipment lessor, and from 1976-1980, she was a senior
documentation specialist for Crocker Equipment Leasing, Inc.
THE MANAGER
Westech Advisors, the Investment Manager, is a corporation organized by
the principals of Western Technology for the purpose of serving as Investment
Manager to VLLI and the Fund. Western Technology, an independent asset-based
financing organization headquartered in San Jose, California, was founded in
1980 and has originated more than $200 million in asset-based financing for
venture capital-backed companies. Messrs. Swenson and Gutierrez, the sole
executive officers of Westech Advisors, each own 50% of its voting securities.
Westech Advisors' principal business address is 2010 North First Street, Suite
310, San Jose, California 95131.
Messrs. Swenson and Gutierrez will have primary responsibility for the
Fund's investment program. The business backgrounds of Messrs. Swenson and
Gutierrez are as follows:
RONALD W. SWENSON is the Chief Executive Officer of Westech Advisors
and President and a Director of Western Technology. Mr. Swenson was the
founder of Western Technology in 1980. From 1978-1980, Mr. Swenson was Director
of Marketing for Magnuson Computer Systems, with responsibility for product
planning, sales support and developing financial leasing and service functions.
Before that, he was a Business Manager for Control Data Corp., responsible for
P&L, engineering and marketing for several major computer and peripheral
product lines and, earlier, a Program Manager at Control Data for disk storage
licensing with foreign companies.
22
<PAGE> 24
SALVADOR O. GUTIERREZ is the President and Chief Financial Officer of
Westech Advisors and Senior Vice President-Chief Financial Officer and a
Director of Western Technology. Before joining Western Technology in 1987, Mr.
Gutierrez was head of corporate lending for Home Federal Bank of San Diego and,
from 1982-1984, was a senior credit officer for Imperial Bank in Palo Alto. In
both positions, Mr. Gutierrez dealt extensively with loans to young
high-technology companies. Prior to joining Imperial Bank, Mr. Gutierrez was a
corporate lending officer for Wells Fargo Bank, holding various senior lending
positions over his ten-year tenure. At Wells Fargo, Mr. Gutierrez handled
major leasing companies and many high-technology companies in the San Francisco
Bay Area. Mr. Gutierrez also had marketing responsibility for Latin America
for Wells Fargo Leasing.
ADVISER TO THE MANAGER
Siguler Guff Advisers, LLC, the adviser to Westech Advisors, is an
independent investment advisory firm that, together with its affiliates,
manages or co-manages individual private equity accounts and three private
equity funds, in addition to the Fund and VLLI, with total committed capital in
excess of $400 million. Siguler Guff Advisers, LLC is a Delaware limited
liability company whose voting securities are beneficially owned as follows:
45% by George W. Siguler, 45% by Drew J. Guff and 10% by Donald P. Spencer.
The principal business address of Siguler Guff Advisers, LLC is 630 Fifth
Avenue, 16th Floor, Rockefeller Center, New York, New York 10111.
Messrs. Siguler and Spencer will have primary responsibility for
advising the Manager. The business backgrounds of Messrs. Siguler and Spencer
are as follows:
GEORGE W. SIGULER, a founder and Managing Director of Siguler Guff
Advisers, LLC and its affiliates, was a Managing Director of Mitchell Hutchins
Institutional Investors, Inc. ("Mitchell Hutchins") and head of its Private
Equity Group from 1991 until late 1995. Mr. Siguler was Director and President
of Associated Capital Advisers, Inc. (investment management firm) from 1990
through 1991 and was Vice Chairman and a director of Monarch Capital
Corporation (financial services holding company) from 1984 through 1991. Mr.
Siguler was head of Monarch's investment management subsidiary and oversaw the
company's common stock and bond portfolios and established Monarch's private
equity investment group. From 1983-1984, Mr. Siguler served in the Reagan
Administration as Chief of Staff of the U.S. Department of Health and Human
Services, with oversight responsibility for a $300 billion budget and 150,000
employees. He was a founding partner of the Harvard Management Company in the
early 1970s and initiated and managed its private equity activity. Mr. Siguler
is a director or senior officer of Business Mortgage Investors, Inc. (private
real estate investment trust), Venture Lending & Leasing, Inc. (business
development company), Endowment Advisers (private equity investment affiliate
of The Common Fund) and Novacare, Inc.
DONALD P. SPENCER, 42, a founder and Managing Director of Siguler Guff
Advisers, LLC and its affiliates, was with Mitchell Hutchins and its parent
corporation from 1989 until late 1995, ultimately serving as a Senior Vice
President and portfolio manager in its Private Equity Group. He also serves as
an officer of Business Mortgage Investors, Inc. and Venture Lending & Leasing,
Inc. He previously was a First Vice President and Associate General Counsel
for Mitchell Hutchins's parent corporation. From 1986-1989, Mr. Spencer was
senior vice president and general counsel of Atalanta/Sosnoff Capital
Corporation, an institutional money manager and, from 1980-1986, was an
23
<PAGE> 25
associate attorney at two major New York law firms specializing in
representation of financial services companies.
ITEM 6. EXECUTIVE COMPENSATION.
The Fund will pay no compensation to its officers who are "interested
persons" (as defined in the 1940 Act) of the Manager or the Advisor to the
Manager or to its directors other than its disinterested directors. The Fund's
disinterested directors will each receive an annual fee from the Fund of
$5,000. Such directors also will be reimbursed by the Fund for their expenses
in attending meetings of the Board of Directors or any committee thereof and
will receive a fee for attendance in person at any meeting at a per diem rate
of $500.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions With Management and Others
The Manager of the Fund and the Adviser to the Manager also serve as
Investment Manager and Fund Manager, respectively, to VLLI. The Fund will make
investments through venture loans and leases in companies in which VLLI will
also invest. Under the policies adopted by the Fund's board of directors, the
Fund's investment and VLLI's investment in the same transaction will be made,
pro rata in accordance with the Committed Equity Capital of the Fund and VLLI
until such time as VLLI is no longer able to make such investments by reason of
its term or available capital committed to VLLI. While investing the Fund's
capital in the same companies in which VLLI is also investing could provide the
Fund with greater diversification and access to larger transactions, it could
also result in a slower pace of investment than would be the case if the Fund
were investing in companies by itself.
Although VLLI and the Fund intend to invest in the same companies in
the respective proportions described above, the Fund may, at any time, with the
approval of its board of directors, (i) discontinue investing with VLLI with
respect to any or all future investments or (ii) choose to invest in different
proportions with VLLI than described above. In addition, the Fund has no
control over VLLI, and VLLI, which is not required to invest with the Fund in
any particular proportion or at all, may choose to discontinue investing with
the Fund or to invest in different proportions than described in this
paragraph. In the event that VLLI and the Fund invest in other than the pro
rata manner described above (which can occur only with board approval of each),
the Manager may have a conflict of interest in determining which of VLLI and
the Fund will invest in a particular company and, if both, in what proportions.
The Fund also may engage in loan and lease transactions with companies that are
pre-existing borrowers or lessees from VLLI.
To the extent that portfolios of clients other than VLLI which are
advised by the Manager (but in which the Manager has no proprietary interest)
invest in opportunities available to the Fund, the Manager will allocate such
opportunities among the Fund and such other clients in a manner deemed fair and
equitable considering all of the circumstances in accordance with procedures
approved by the Fund's board of directors (including a majority of the
disinterested directors).
Until the Fund has called and invested at least 75% of the total
amounts subscribed for by investors, except as provided below, neither the
Manager nor the Adviser to the Manager nor any
24
<PAGE> 26
"Controlled Person" of either will, without the consent of the Fund, sponsor,
distribute or act as investment adviser or manager to any pooled investment
vehicle other than the Fund or VLLI or act as investment adviser or manager to
any client if the investment program of such pooled investment vehicle or
client includes the provision of asset-backed financing to venture
capital-backed companies as a primary or major component. In the event that
the Fund elects to irrevocably release investors from any uncalled portion of
their subscription obligations as to new investments, the "total amount
subscribed for by investors" shall be deemed reduced to reflect such release.
The foregoing restriction shall not be deemed to prohibit the Manager, the
Adviser to the Manager, or any Controlled Person of either from acting as
investment adviser or manager with respect to any existing client of such party
as of May 19, 1997; provided, however, that until the 75% investment threshold
described above has occurred, such party shall not, without the consent of the
Fund, accept from such existing clients any additional investment funds (other
than amounts required for follow-on investments to existing investments) beyond
the funds invested or committed by such existing clients as of May 19, 1997. A
"Controlled Person" of the Manager or the Adviser to the Manager as used in
this paragraph means any entity (i) 50% or more of whose voting securities are
beneficially owned by the Manager or (ii) 50% or more of whose voting
securities are controlled by any of the "Key Executives" of the Manager or the
Adviser to the Manager. For purposes of this paragraph, the "Key Executives"
of the Manager are Ronald W. Swenson and Salvador O. Gutierrez; the "Key
Executive" of the Adviser to the Manager is George W. Siguler.
The Fund is offering the Shares directly to institutional investors and
the following individual investors (the "Direct Individual Investors"): (i)
shareholders of VLLI and its affiliates, (ii) affiliates of the Manager and
Adviser to the Manager, and (iii) such other individuals to which the Fund and
the Placement Agent shall agree. The Fund's Placement Agent is offering the
Shares to (i) individuals other than the Direct Institutional Investors and
(ii) such institutional investors to which the Fund and the Placement Agent
agree. The Placement Agent is a broker-dealer registered under the 1934 Act
and a member of the National Association of Securities Dealers, Inc. Each
investor purchasing Shares through the Fund's Placement Agent shall pay to
the Placement Agent, at the first capital call to each such investors, in
addition to the purchase price, a brokerage fee equal to 2% of such investor's
total capital commitment to the Fund (regardless of when or if such capital is
called).
The Placement Agent has entered into an Engagement Letter with the Fund
pursuant to which it will act as placement agent. As compensation for its
services to the Fund, the Placement Agent will receive from the Manager an
amount calculated based on the Incentive Fee (defined under Item 7(d)).
Specifically, the Placement Agent will be paid quarterly an amount equal to
10% of the Incentive Fee portion of the Management Fee which is attributable
to subscriptions made by investors purchasing through the Placement Agent.
For example, if 20% of the subscriptions are made by investors purchasing
through the Placement Agent, the Placement Agent would receive 10% of
one-fifth of any Incentive Fee. In addition, the Placement Agent will be
reimbursed by the Fund for its reasonable expenses incurred in placing the
Shares.
(b) Certain Business Transactions
Certain of the current directors and officers of the Fund are officers
of the Managers. Certain of the current directors are officers of the Adviser
to the Manager. See "Transactions with Promoters" below for a description of
the Fund's Management Agreement with the Managers ("Management Agreement").
(c) Indebtedness of Management
None.
(d) Transactions With Promoters.
Westech Advisors and Siguler Guff Advisers may be deemed promoters of
the Fund. The Fund will enter into a Management Agreement with the Manager and
the Adviser to the Manager, pursuant to which Westech Advisors will, with the
advice of the Adviser to the Manager and subject to the investment policies and
guidelines established by the board of directors, identify, evaluate, structure
and close the investments to be made by the Fund, arrange debt financing for
the Fund, provide portfolio management and servicing of loans or leases held in
the Fund's portfolio, and administer the Fund's day-to-day affairs. Westech
Advisors will have primary responsibility for origination and servicing of
venture loans and leases; the Adviser to the Manager will advise Westech
Advisors with respect to administrative matters for the Fund.
The Fund will be required to pay all organizational and offering
expenses (including accounting, legal, printing, clerical, filing and other
expenses) incurred by the Fund; the Placement Agent; or either of Westech
Advisors or the Adviser to the Manager or their affiliates on behalf of the
Fund in connection with the organization of the Fund and this offering,
estimated at $300,000. The
25
<PAGE> 27
Fund will also pay all operating expenses except those specifically required to
be borne by Westech Advisors or the Adviser to the Manager, including (i)
brokerage and commission expense and other transaction costs incident to the
acquisition and dispositions of investments and the creation and perfection of
security interests with respect thereto, (ii) federal, state and local taxes
and fees, including transfer taxes and filing fees, incurred by or levied upon
the Fund, (iii) interest charges and other fees in connection with borrowings,
(iv) SEC fees and expenses and any fees and expenses of state securities
regulatory authorities, (v) expenses of printing and distributing reports and
notices to shareholders, (vi) costs of proxy solicitation, (vii) costs of
meetings of shareholders and the board of directors, (viii) charges and
expenses of the Fund's custodian, transfer and dividend disbursing agent, (ix)
compensation and expenses of the Fund's disinterested directors, and expenses
of all directors in attending board or shareholder meetings, (x) legal and
auditing expense, including expenses incident to the documentation for, and
consummation of, venture lending and leasing transactions and legal actions to
enforce the Fund's rights under such loans and leases; (xi) costs of any
certificates representing the Shares, (xii) costs of stationery and supplies,
(xiii) the costs of membership by the Fund in any trade organizations and (xiv)
expenses associated with litigation and other extraordinary or non-recurring
expenses.
The operating expenses required to be borne by the Manager and the
Adviser to the Manager are: (i) all costs and fees incident to the selection
and investigation of prospective Fund investments, such as travel expenses and
professional fees (but excluding legal and accounting fees and other costs
incident to the documentation, closing or consummation of such transactions),
(ii) the cost of adequate office space for the Fund and all necessary office
equipment and services, including telephone service, heat, utilities and
similar items and (iii) the cost of providing the Fund with such corporate,
administrative and clerical personnel (including officers and directors of the
Fund who are interested persons of the Manager and the Adviser to the Manager
and are acting in their respective capacities as officers and directors) as the
Fund's board of directors reasonably deems necessary or advisable to perform
the services required to be performed by the Manager and the Adviser to the
Manager under the Management Agreement.
As compensation for their services to the Fund, the Manager and the
Adviser to the Manager, together, will receive a management fee ("Management
Fee"), whether before or after dissolution of the Fund, computed and paid
quarterly for the first two years following the first closing of this offering,
at an annual rate of 2.5% of the amount of the Fund's Committed Equity Capital
(regardless of when or if such committed capital is called) as of the last day
of each such fiscal quarter; and computed and paid quarterly for each quarter
thereafter, at an annual rate of 2.5% of the Fund's total assets (including
amounts derived from borrowed funds) as of the last day of each such fiscal
quarter. For purposes of calculating the Management Fee, any capital committed
to the Fund at a closing subsequent to the first closing (regardless of when or
if such committed capital is called) shall be deemed to have been committed as
of the first closing. To illustrate, assuming the Fund has a first closing for
$75 million on July 15, 1997, and a second closing for $25 million on November
15, 1997, then the $25 million committed on November 15, 1997 will be treated
as if it had been committed on July 15, 1997 for purposes of calculating the
Management Fee. Therefore, on November 15, 1997, for the $25 million committed
at the second closing, the Fund would pay to the Manger $156,250 (i.e., 1/4 of
2.5% of $25 million) for the Management Fee attributable to the quarter ending
October 15, 1997. On January 15, 1998, the Fund would pay to the Manager
$625,000 (i.e., 1/4 of 2.5% of $100 million) for the Management Fee
attributable to the quarter ending on such date.
26
<PAGE> 28
The Management Fee will be divided between Westech Advisors and the
Adviser to the Manager in accordance with their agreement. Committed Equity
Capital is the aggregate amount of subscription obligations for the purchase of
the Fund's shares (including any amounts of such obligations that have been
satisfied). These fees are higher than those of most investment companies,
although they are comparable to those of many privately-offered funds investing
in venture capital investments.
In addition to the Management Fee, Westech Advisors and the Adviser to
the Manager will together receive a monthly incentive fee (the "Incentive Fee")
after shareholders have received a return of funds ("Payout") equal to the
following: (a) cumulative dividends and distributions equal to 100% of all
amounts paid, as of the date of calculation, by shareholders to the Fund (and
not including any of the 2% placement fees paid to the Placement Agent by
certain of the shareholders) for the purchase of Shares plus (b) a preferred
return on all amounts paid, as of the date of calculation, equal to an 8%
cumulative, non-compounded annual return on such amounts. After Payout has
been achieved, all amounts available to be paid as dividends and distributions
to shareholders in accordance with the Fund's distribution policies will be
distributed as follows (whether before or after dissolution of the Fund): 80%
as dividends to the Fund's shareholders, and 20% to the Manager and the
Adviser to the Manager, together, as the Incentive Fee. Notwithstanding the
foregoing, the Incentive Fee shall not accrue or be paid until the Fund is no
longer permitted to make capital calls under the Subscription Agreements or
irrevocably waives any right to do so. The Incentive Fee will be payable to
the Manager and the Adviser to the Manager as promptly as practicable
following the end of each month for which it is earned, and will be divided
between Westech Advisors and the Adviser to the Manager in accordance with
their agreement; provided, however, that 10% of that portion of the Incentive
Fee that is attributable to subscriptions made by investors purchasing through
the Placement Agent will be paid quarterly to the Placement Agent.
Notwithstanding the foregoing, the Incentive Fee shall not accrue or be paid
until the Fund is no longer permitted to make capital calls under the
Subscription Agreements or irrevocably waives any right to do so.
In addition, if the Management Agreement is terminated by the Fund for
any reason prior to the dissolution of the Fund and the final distribution in
liquidation of all the Fund's assets to shareholders, the Fund will pay Westech
Advisors and the Adviser to the Manager, together, an annual fee ("Post-
Termination Fee"), in addition to any Management Fee and Incentive Fee
previously paid to or earned by the Manager and the Adviser to the Manager,
calculated and paid with respect to the Attributable Assets of the Fund (as
defined below in this paragraph), in a similar manner as the Incentive Fee is
calculated and paid, as though the entire Fund consisted of the Attributable
Assets as of the date of termination and disregarding any Capital Contributions
subsequent to the date of termination. "Attributable Assets" are all
securities or other assets held in the Fund's portfolio, including securities
receivable, as of the time of termination of the Management Agreement, and any
assets to which the Fund is or may become entitled under the terms of any
securities or other assets held in the Fund's portfolio, including but not
limited to warrants issuable under the terms of venture loans or leases, and
securities issuable upon exercise of any warrants, but excluding cash and cash
equivalents. The Post-Termination Fee will be paid only if, prior to the
payment of any such Post-Termination Fee, the Fund receives an opinion of its
counsel to the effect that payment of the Post-Termination Fee is permissible
under the applicable provisions of the 1940 Act and the Investment Advisers Act
of 1940, and applicable rules, regulations and interpretations of the SEC
thereunder. If the Fund's counsel concludes that an exemptive order or
no-action letter of the SEC is required to permit the Fund to pay the
Post-Termination Fee or to provide such counsel with adequate assurances
27
<PAGE> 29
upon which the aforementioned opinion can be based, the Fund, upon the request
of the Manager, will seek, together with the Manager, to obtain such an
exemptive order or no-action letter. The Fund currently anticipates that a
no-action letter or exemptive order will be required to enable the Fund's
counsel to render the aforementioned opinion. The Post-Termination Fee will be
payable as promptly as practicable following the end of any fiscal year for
which it is earned.
If the Manager or the Adviser to the Manager or certain of their
affiliates receives any compensation from a company whose securities are held
in the Fund's portfolio in connection with the provision to that company of
significant managerial assistance, the compensation due to the Manager or the
Adviser to the Manager hereunder shall be reduced by the amount of such fee.
Such compensation could include directors' fees paid to officers of the Manager
or the Adviser to the Manager for serving on the boards of directors of
borrowers or lessees, or finder's or consulting fees paid to Westech Advisors
or the Adviser to the Manager for the services such as locating acquisition
candidates or additional or alternative sources of financing.
Under the Management Agreement, the Manager and the Adviser to the
Manager will not be liable for any error in judgment or mistake of law or for
any loss suffered by the Fund in connection with the Management Agreement,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Managers in the performance of their duties or from reckless
disregard of their duties and obligations under the Management Agreement. The
Management Agreement will continue in effect for a period longer than two years
from its date of execution only if such continuation is approved at least
annually by the board of directors or a majority of the outstanding voting
securities of the Fund, and by a majority of the directors who are not parties
to the Management Agreement or interested persons of such parties. The
Management Agreement is terminable by vote of the Fund's board of directors or
by the holders of a majority of the outstanding voting securities of the Fund,
at any time without penalty, on 60 days' written notice to the Manager. The
Management Agreement may also be terminated by the Manager on 60 days' written
notice to the Fund and will terminate automatically upon its assignment.
ITEM 8. LEGAL PROCEEDINGS
None.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
(a) Market Information
The offer and sale of the Shares will not be registered under the 1933
Act on the ground that their issuance and sale is exempt from such registration
requirements as not involving a public offering pursuant to Section 4(2) of the
1933 Act.
Because the Shares will be acquired by investors in transactions "not
involving a public offering", they will be "restricted securities" and may be
required to be held indefinitely. Shares may not be sold, transferred,
assigned, pledged or otherwise disposed of without registration under
applicable securities laws or pursuant to an exemption from registration (in
which case the shareholder
28
<PAGE> 30
will at the option of the Fund be required to provide the Fund with a legal
opinion, in form and substance satisfactory to the Fund, that registration is
not required). Accordingly, an investor must be willing to bear the economic
risk of investment in the Shares until the Fund is liquidated. No sale,
transfer, assignment, pledge or other disposition, whether voluntary or
involuntary, of the Shares may be made except by registration of the transfer
on the Fund's books. Each transferee will be required to execute an instrument
agreeing to be bound by these restrictions and the other restrictions imposed
on the Shares by the Subscription Agreement and to execute such other
instruments or certifications as are reasonably required by the Fund or the
Manager. A transfer of all or some of the Shares owned by a shareholder will
not relieve the shareholder of any unfulfilled subscription obligation, unless
the Fund expressly consents in writing to the assumption of the transferor's
Subscription Agreement by the transferee or another party. The Fund may
withhold consent to such an assumption at its absolute discretion.
(b) Holders
The Fund has no Shares outstanding as of the date of this Private
Offering Memorandum. It is anticipated that, prior to the first closing of
this offering, Westech Advisors will purchase one Share at a price of $1,000 as
the Fund's initial capital. Therefore, until immediately subsequent to the
first capital call to purchase the Shares offered pursuant to this offering,
Westech Advisors will be deemed to "control" the Fund.
(c) Dividends
The Fund intends to distribute to shareholders substantially all of its
net investment income and net realized capital gains, if any, as determined for
income tax purposes. Applicable law, including provisions of the 1940 Act, may
limit the amount of dividends and other distributions payable by the Fund.
Income dividends will generally be paid quarterly to shareholders of record on
the last day of each preceding calendar quarter end. Substantially all of the
Fund's net capital gain (the excess of net long-term capital gain over net
short-term capital loss) and net short-term capital gain, if any, will be
distributed at least annually with the Fund's final quarterly dividend
distribution for the year.
Until the fourth anniversary following the first closing of this
offering, the Manager will seek to reinvest the proceeds of matured, repaid or
resold investments, net of required distributions to shareholders, principal
payments on borrowings and expenses or other obligations of the Fund, in new
loans or leases. Beginning on the fourth anniversary of the Fund's first
closing, the Fund will also distribute to investors all proceeds received from
principal payments and sales of investments, net of reserves and expenses,
principal repayments on the Fund's borrowings, amounts required to fund
financing commitments entered into before such fourth anniversary, and any
amounts paid on exercise of warrants. Distributions of such amounts are likely
to cause annual distributions to exceed the earnings and profits of the Fund
available for distribution, in which case such excess will be considered a tax
free return of capital to a shareholder to the extent of the shareholder's
adjusted basis in his shares and then as capital gain.
ITEM 10. RECENT SALES OF UNREGULATED SECURITIES
See Item 9(b)
29
<PAGE> 31
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
GENERAL. The holders of the Fund's outstanding shares will elect all
the directors and are entitled to one vote per Share on all matters submitted
to shareholder vote. All Shares will participate equally in dividends and
distributions and in the proceeds of any liquidation. Shares have no
preference, conversion, exchange or cumulative voting rights. The Fund has
200,000 Shares authorized.
Annual meetings of shareholders will be held beginning in 1998 and
special meetings may be called by the Chairman of the board of directors or
President, a majority of the board of directors or shareholders holding at
least 25% of the outstanding Shares entitled to be voted at a meeting. The
Fund anticipates soliciting proxies from shareholders for each annual meeting.
The Fund's Articles of Incorporation can be amended by the affirmative vote of
at least a majority of the Fund's Shares outstanding and entitled to vote.
The Fund does not currently intend to issue share certificates. The
Fund, pursuant to its Bylaws, is authorized to issue share certificates upon
the approval of the Fund's board of directors and may in the future decide to
issue stock certificates to certain or all of the Fund's shareholders. The
ownership of uncertificated Shares will be recorded on a stock ledger
maintained by the Fund's transfer agent. Share ownership may only be
transferred in compliance with the provisions set forth herein under
"Transferability of Shares". The transfer agent for the Shares shall notify
the proposed purchaser of the Shares that the Shares are subject to certain
rights and restrictions including, without limitation, the Fund's right, to the
extent permitted by law, to repurchase the Shares at a price equal to the
lesser of: (i) 60% of the Shares' then current net asset value or (ii) the
price at which the original subscriber purchased the Shares if the original
owner of such Shares should default upon its obligation to make future required
capital contributions. At the time of issue or registration of transfer of any
uncertificated Shares, the Fund or its transfer agent will deliver to the
person designated by the registered holder of such Shares an account statement
specifying the number and class of Shares being issued or transferred and
certain other information. Share certificates, if any, will bear legends
reflecting restrictions on their transferability, the existence of issuer's
repurchase rights, and certain other matters.
The Fund's Articles of Incorporation provide that each holder of Shares
will be required, upon demand, to disclose to the Fund such information with
respect to direct or indirect holdings of Shares as is deemed necessary to
comply with provisions of the Internal Revenue Code applicable to the Fund, to
comply with requirements of any other appropriate taxing authority, or to
comply with the provisions of the 1940 Act or ERISA.
CLOSING AND CAPITAL CALLS. The Fund will accept subscription
agreements, and such agreements shall become binding, at one or more closings
during the Offering Period. The first closing will take place on or before
July 15, 1997, but only if the Fund has received subscriptions for an aggregate
amount of $50 million. The Manager, however, may extend the date through
December 31, 1997. Subsequent closings shall occur if at all no later than
nine months following the first closing of this Offering. The Fund will issue
Shares from time to time at capital calls which will be made at such times as
it needs capital to fund investment commitments. In the event that the Fund
30
<PAGE> 32
does not receive subscriptions for $50 million, no subscriptions will be
accepted. At the first capital call, Shares will be issued at a price of
$1,000 per Share.
If the Fund accepts subscriptions from new investors at a closing
subsequent to the first closing, it will issue a capital call for those new
subscribers to purchase Shares with a subscription price equal to the same
percentage of their total subscription obligations as has previously been
satisfied by subscribers who participated in previous closings. As a result,
subsequent Subscribers will have invested the same percentage of their total
capital commitment as previous Subscribers. Shares will be issued at
subsequent capital calls at the greater of the Fund's then current net asset
value per Share and $1,000 per Share. Management anticipates that the Fund's
net asset value per Share at subsequent closings will be less than $1,000 per
Share. During the Offering Period, the Fund will be charged a Management Fee
immediately following each closing at which subscriptions from new investors
are accepted such that the Management Fee will equal the fee which would have
been payable if the additional capital commitments had been subscribed for at
the first closing.
The Fund will give investors whose subscriptions have been received and
accepted at least 15 days' written notice of each capital call. Shares
purchased pursuant to subsequent capital calls will be issued at the greater of
(i) $1,000 or (ii) the Fund's then current net asset value per Share, which may
be more or less than the purchase price of Shares purchased pursuant to
previous capital calls. The Fund will seek to require payment by investors
pursuant to each capital call of only that portion of the dollar amount
subscribed for that the Fund expects will be needed for commitments or
investments in venture loans and leases within a reasonable time after such
capital call. The amount and timing of capital calls may be affected by the
diversification requirements under the Internal Revenue Code for qualification
as a RIC. To the extent that all capital has not been called by the fourth
anniversary following the first closing of this offering, the Fund will not be
entitled to make further capital calls, and any remaining subscriptions will
lapse as to the uncalled portion of capital.
Following the first closing at which a subscriber purchases Shares, the
Fund or its transfer agent will provide the Subscriber a countersigned copy of
the subscriber's Subscription Agreement and an account statement indicating
that Shares have been credited to the subscriber's account. Similar account
statements will be issued after each capital call. shareholders will have
dividend and voting rights only with respect to Shares that have been purchased
at any given time.
To purchase Shares, a prospective qualified investor must deliver to
the Fund two completed, executed copies of the Subscription Agreement, such
agreement and the signature page to be in the form provided with the Private
Offering Memorandum. Upon receipt of a capital call notice, the prospective
investor must also pay by check or wire transfer to an account designated by
the Fund, before the due date specified by the Fund, the payment for the
initial number of Shares required to be purchased under the Subscription
Agreement. The Fund may in its discretion require any prospective investor to
complete an investor questionnaire in form acceptable to the Fund before
accepting such prospective investor's subscription.
Subscriptions may be made only by executing and delivering a
Subscription Agreement in the form specified by the Fund. The rights and
obligations under the Subscription Agreements may not be transferred or
assigned by a subscriber without the consent of the Fund.
31
<PAGE> 33
Interest will be charged on amounts due under the Subscription
Agreement and received by the Fund later than fourteen business days after the
date the payment is due, calculated at a daily rate equal on an annualized
basis to four percentage points over the highest rate of interest reported from
time to time as a "prime rate" by The Wall Street Journal (but not in excess of
the maximum rate of interest permitted by law). If a default in a payment
under the Subscription Agreement (including interest charges) remains uncured
for 30 days following a payment date, to the extent permitted by law, the Fund,
at its option, may pursue any or all of the following remedies: (i) cancel the
balance of the subscriber's Share subscription (including the installment as to
which the subscriber had defaulted), (ii) assign the remaining balance of the
subscriber's Share subscription (including the installment as to which the
Subscriber has defaulted) to another investor selected by the Fund and/or (iii)
repurchase the Shares previously purchased by the defaulting subscriber at a
purchase price per Share equal to the lesser of (a) 60% of the Shares' then
current net asset value or (b) the price at which the Subscriber purchased the
Shares. The election by the Fund to pursue one or more of these remedies will
not preclude the Fund from pursuing any rights it may have to seek judicial
enforcement of the Subscriber's subscription obligation.
DISSOLUTION OF THE FUND. Until the fourth anniversary following the
first closing of this offering, the Fund will, subject to market conditions,
invest the proceeds of repayment, prepayment or sale of its investments, net of
any principal repayments on borrowings and expenses or other obligations of the
Fund, in additional venture loans and leases. Thereafter, the Fund will cease
to make new investments in venture loans or leases (other than amounts required
to fund financing commitments entered into before such fourth anniversary) and
will distribute to investors the proceeds of repayment, prepayment or sale of
its investments, net of (i) any principal repayments on borrowings, (ii)
expenses or other obligations of the Fund, (iii) amounts paid on exercise of
warrants or other convertible securities and (iv) any follow-on investment to
an existing venture loan or lease made to increase the likelihood of ultimate
realization of the investment and determined by the board of directors to be in
the best interests of the Fund.
The Fund's Articles of Incorporation provide that, on December 31,
2005, the Fund automatically will be dissolved without any action by
shareholders. From and after such dissolution, the Fund's activities will be
limited to the winding-up of its affairs, the liquidation of its remaining
assets and the distribution of the net proceeds thereof to shareholders.
Although the Fund generally will not invest in any loan or lease with a
maturity date later than December 31, 2005, it is possible that, due to a
default by a borrower or lessee or a transaction restructuring due to a
borrower's or lessee's financial difficulties, the Fund will not fully realize
on a loan or lease by the original maturity date. Furthermore, the Fund may
not be able to sell warrants it receives from borrowers or lessees, or the
equity securities it receives upon exercise of such warrants, for a significant
period of time due to legal or contractual restrictions on resale or the
absence of a liquid secondary market. As a result, the liquidation process
might not be completed for a significant period after the Fund's dissolution.
In addition, it is possible that, if certain of the Fund's assets are not
liquidated within a reasonable time after the Fund's dissolution, the Fund may
elect to make a distribution in kind of all or part of such assets to
shareholders. In such case, shareholders would bear any expenses attendant to
the liquidation of such assets.
TRANSFERABILITY OF SHARES. The offer and sale of the Shares will not
be registered under the 1933 Act on the ground that their issuance and sale is
exempt from such registration requirements as not involving a public offering
pursuant to Section 4(2) of the 1933 Act.
32
<PAGE> 34
Because the Shares will be acquired by investors in transactions "not
involving a public offering", they will be "restricted securities" and may be
required to be held indefinitely. Shares may not be sold, transferred,
assigned, pledged or otherwise disposed of without registration under
applicable securities laws or pursuant to an exemption from registration (in
which case the shareholder will at the option of the Fund be required to
provide the Fund with a legal opinion, in form and substance satisfactory to
the Fund, that registration is not required). Accordingly, an investor must be
willing to bear the economic risk of investment in the Shares until the Fund is
liquidated. No sale, transfer, assignment, pledge or other disposition,
whether voluntary or involuntary, of the Shares may be made except by
registration of the transfer on the Fund's books. Each transferee will be
required to execute an instrument agreeing to be bound by these restrictions
and the other restrictions imposed on the Shares by the Subscription Agreement
and to execute such other instruments or certifications as are reasonably
required by the Fund or the Manager. A transfer of all or some of the Shares
owned by a shareholder will not relieve the shareholder of any unfulfilled
subscription obligation, unless the Fund expressly consents in writing to the
assumption of the transferor's Subscription Agreement by the transferee or
another party. The Fund may withhold consent to such an assumption at its
absolute discretion.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation law of the State of Maryland, under which the Fund is
incorporated, permits the articles of incorporation of a Maryland corporation
to include a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages, subject to specified
restrictions. The law does not, however, allow the liability of directors and
officers to the corporation or its stockholders to be limited to the extent
that (1) it is proved that the person actually received an improper benefit or
profit or (2) a judgment or other final adjudication is entered in a proceeding
based on a finding that the person's action, or failure to act, was the result
of active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding. The Articles of Incorporation of the Fund
contain a provision limiting the liability of its directors and officers to the
Fund and its shareholders to the fullest extent permitted from time to time by
the laws of Maryland (but not in violation of the 1940 Act). The Maryland
corporation law also permits a corporation to indemnify its directors, officers
and agents, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that the act or omissions of the party
seeking to be indemnified was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, or the party actually received an improper personal
benefit, or, in the case of any criminal proceeding, the party had reasonable
cause to believe that the act or omission was unlawful. The Fund's Articles of
Incorporation and Bylaws require the Fund to indemnify its directors, officers
and agents (including the Manager and Adviser to the Manager) to the fullest
extent permitted from time to time by the laws of Maryland, subject to the
limitations on indemnification under the 1940 Act.
The Fund's Bylaws provide that the Fund may purchase and maintain
insurance on behalf of any person who is or was a director, officer or agent of
the Fund against any liability asserted against that person and incurred by
that person in or arising out of his or her position, whether or not the Fund
would have the power to indemnify him or her against such liability provided no
such insurance
33
<PAGE> 35
so purchased will protect or purport to protect any officer or director against
liabilities for willful misfeasance, bad faith, gross negligence or reckless
disregard of duty.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Fund has not commenced business and has prepared no financial
statements.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Fund has not commenced business and has prepared no financial
statements.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements - None
(b) Exhibits - See Exhibit Index following signature page in this
Registration Statement, which Exhibit Index is incorporated herein by
reference.
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
VENTURE LENDING & LEASING II, INC.
Date: July 2, 1997 By: /s/ RONALD W. SWENSON
------------------- --------------------------------
Ronald W. Swenson,
Chief Executive Officer
34
<PAGE> 36
VENTURE LENDING & LEASING II, INC.
(the "Company")
EXHIBIT INDEX
FORM 10/A
AMENDMENT NO. 1 TO
FORM 10 REGISTRATION STATEMENT
EXHIBIT DESCRIPTION
3(i) Articles of Incorporation of the Company filed with the Maryland
Secretary of State on May 19, 1997, previously filed.
3(ii) Bylaws of the Company, previously filed.
4.1 Form of Subscription Agreement between the Company and Individual
Investors, previously filed.
4.2 Form of Subscription Agreement between the Company and Institutional
Investors, previously filed.
4.3 Form of Subscriptions Agreement between the Company and Individual
Investors Purchasing Through the Placement Agent (including Investor
Questionaire), previously filed.
4.4 Form of Subscription Agreement between the Company and Institutional
Investors Purchasing Through the Placement Agent (including Investor
Questionaire), previously filed.
10.1 Form of Custodian Agreement between the Company and BankBoston, N.A.
10.2 Form of Stock Transfer Agent Fee Services Agreement between the Company
and BankBoston, N.A.
10.3 Form of Intercreditor Agreement between the Company and Venture
Lending & Leasing, Inc.--previously filed.
10.4 Form of Management Agreement between the Company, Westech Investment
Advisors, Inc. and Siguler Guff Advisers, LLC.
10.5 Form of Engagement Letter between Robertson, Stephens & Company LLC and
Westech Investment Advisors, Inc.
35
<PAGE> 1
VENTURE LENDING & LEASING II, INC.
A Maryland Corporation
BYLAWS
April 31, 1997
7038720.02
<PAGE> 2
BYLAWS
OF
VENTURE LENDING & LEASING II, INC.
(A MARYLAND CORPORATION)
ARTICLE I
NAME OF CORPORATION, LOCATION OF
OFFICES AND SEAL
Section 1. Name. The name of the corporation is Venture Lending & Leasing II,
Inc.
Section 2. Principal Offices. The principal office of the Corporation in the
City of Baltimore. The Corporation may, in addition, establish and maintain
such other offices and places of business as the Board of Directors may, from
time to time, determine.
Section 3. Seal. The corporate seal of the Corporation shall be circular in
form and shall bear the name of the Corporation, the year of its incorporation,
and the word "Maryland". The form of the seal shall be subject to alteration by
the Board of Directors and the seal may be used by causing it or a facsimile to
be impressed or affixed or printed or otherwise reproduced. Any officer or
director of the Corporation shall have authority to affix the corporate seal of
the Corporation to any document requiring the same.
ARTICLE II
SHAREHOLDERS
Section 1. Annual Meetings. An annual meeting of shareholders to elect
directors and transact any other business within the Corporation's powers will
be held at such time as is set by the Board of Directors during the month of
May of each calendar year.
Section 2. Special Meetings. Special meetings of shareholders may be called at
any time by the Chairman of the Board, or President, or by a majority of the
Board of Directors, and shall
7038720.02
<PAGE> 3
be held at such time and place as may be stated in the notice of the meeting.
Special meetings of the shareholders may be called by the Secretary upon the
written request of the holders of shares entitled to vote not less than
twenty-five percent of all the votes entitled to be cast at such meeting,
provided that (1) such request shall state the purposes of such meeting and the
matters proposed to be acted on, and (2) the shareholders requesting such
meeting shall have paid to the Corporation the reasonably estimated cost of
preparing and mailing the notice thereof, which the Secretary shall determine
and specify to such shareholders. No special meeting shall be called upon the
request of shareholders to consider any matter which is substantially the same
as a matter voted upon at any special meeting of the shareholders held during
the preceding twelve months, unless requested by the holders of a majority of
all shares entitled to be voted at such meeting.
Section 3. Notice of Meetings. The Secretary shall cause notice of the place,
date, and hour, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, to be mailed, postage prepaid, not less than
ten nor more than ninety days before the date of the meeting, to each
shareholder entitled to vote at such meeting at his or her address as it
appears on the records of the Corporation at the time of such mailing. Notice
shall be deemed to be given when deposited in the United States mail addressed
to the shareholders as aforesaid. Notice of any shareholders' meeting need not
be given to any shareholder who shall sign a written waiver of such notice
whether before or after the time of such meeting, or to any shareholder who is
present at such meeting in person or by proxy. Notice of adjournment of a
shareholders' meeting to another time or place need not be given if such time
and place are announced at the meeting. Irregularities in the notice of any
meeting to, or the nonreceipt of any such notice by, any of the shareholders
shall not invalidate any action otherwise properly taken by or at any such
meeting.
Section 4. Quorum and Adjournment of Meetings. The presence at any
shareholders' meeting, in person, by telephone conference, or by proxy, of
shareholders entitled to cast a majority of the votes shall be necessary and
sufficient to constitute a quorum
-2-
7038720.02
<PAGE> 4
for the transaction of business. In the absence of a quorum, the holders of a
majority of shares entitled to vote at the meeting and present in person or by
proxy, or, if no shareholder entitled to vote is present in person or by proxy,
any officer present entitled to preside or act as secretary of such meeting may
adjourn the meeting without determining the date of the new meeting or from
time to time without further notice to a date not more than 120 days after the
original record date. Any business that might have been transacted at the
meeting originally called may be transacted at any such adjourned meeting at
which a quorum is present.
Section 5. Chief Executive Officer. Except as otherwise provided in the
Articles of Incorporation or by applicable law, at each shareholders' meeting
each shareholder shall be entitled to one vote for each share of stock of the
Corporation validly issued and outstanding and registered in his or her name on
the books of the Corporation on the record date fixed in accordance with
Section 5 of Article VI hereof, either in person or by proxy appointed by
instrument in writing subscribed by such shareholder or his or her duly
authorized attorney, except that no shares held by the Corporation shall be
entitled to a vote.
Except as otherwise provided in the Articles of Incorporation, these Bylaws, as
required by provisions of the Investment Company Act of 1940, as amended ("1940
Act") or as required under Maryland law, all matters shall be decided by a vote
of the majority of the votes validly cast. The vote upon any question shall be
by ballot whenever requested by any person entitled to vote, but, unless such a
request is made, voting may be conducted in any way approved at the meeting.
At any meeting at which there is an election of Directors, the chairman of the
meeting may, and upon the request of the holders of ten percent of the stock
entitled to vote at such election shall, appoint two inspectors of election who
shall first subscribe an oath or affirmation to execute faithfully the duties
of inspectors at such election with strict impartiality and according to the
best of their ability, and shall, after the election, make a certificate of the
result of the vote taken. No candidate for the office of Director shall be
appointed as an inspector.
-3-
7038720.02
<PAGE> 5
Section 6. Validity of Proxies. The right to vote by proxy shall exist only if
the instrument authorizing such proxy to act shall have been signed by the
shareholder or by his or her duly authorized attorney. Unless a proxy provides
otherwise, it shall not be valid more than eleven months after its date. All
proxies shall be delivered to the Secretary of the Corporation or to the person
acting as Secretary of the meeting before being voted, who shall decide all
questions concerning qualification of voters, the validity of proxies, and the
acceptance or rejection of votes. If inspectors of election have been appointed
by the chairman of the meeting, such inspectors shall decide all such
questions. A proxy with respect of stock held in the name of two or more
persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Corporation receives a specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a shareholder shall be deemed valid unless challenged at or prior to
its exercise.
Section 7. Stock Ledger and List of Shareholders. It shall be the duty of the
Secretary or Assistant Secretary of the Corporation to cause an original or
duplicate stock ledger to be maintained at the office of the Corporation's
transfer agent. Such stock ledger may be in written form or any other form
capable of being converted into written form within a reasonable time for
visual inspection.
Any one or more persons, each of whom has been a shareholder of record of the
Corporation for more than six months next preceding such request, who owns in
the aggregate five percent or more of the outstanding capital stock of the
Corporation, may submit (unless the Corporation at the time of the request
maintains a duplicate stock ledger at its principal office in Maryland) a
written request to any officer of the Corporation or its resident agent in
Maryland for a list of the shareholders of the Corporation. Within twenty days
after such a request, there shall be prepared and filed at the Corporation's
principal office in Maryland a list containing the names and addresses of all
shareholders of the Corporation and the number of shares of each class held by
each shareholder, certified as correct by an officer of the Corporation, by its
stock transfer agent, or by its registrar.
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Section 8. Action Without Meeting. Any action required or permitted to be taken
by shareholders at a meeting of shareholders may be taken without a meeting if
(1) all shareholders entitled to vote on the matter sign a written consent to
the action, (2) all shareholders entitled to notice of the meeting but not
entitled to vote at it sign a written waiver of any right to dissent, and (3)
the consents and waivers are filed with the records of the meetings of
shareholders. Such consent shall be treated for all purposes as a vote at the
meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. Except as otherwise provided by operation of law, by the
Articles of Incorporation, or by these Bylaws, the business and affairs of the
Corporation shall be managed under the direction of and all the powers of the
Corporation shall be exercised by or under authority of its Board of Directors.
Section 2. Number and Term of Directors. Except for the initial Board of
Directors, the Board of Directors shall consist of not fewer than three nor
more than five Directors, as specified by a resolution of a majority of the
entire Board of Directors. Directors need not be shareholders of the
Corporation. All acts done at any meeting of the Directors or by any person
acting as a Director, so long as his or her successor shall not have been duly
elected or appointed, shall, notwithstanding that it be afterwards discovered
that there was some defect in the election of the Directors or of such person
acting as a Director or that they or any of them were disqualified, be as valid
as if the Directors or such other person, as the case may be, had been duly
elected and were or was qualified to be Directors or a Director of the
Corporation. Each Director shall hold office until his or her successor is
elected and qualified or until his or her earlier death, resignation, or
removal.
Section 3. Election. Unless otherwise required by the 1940 Act, at each annual
meeting of shareholders, Directors shall be elected by vote of the holders of a
majority of the shares present in person or by proxy and entitled to vote
thereon. A
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plurality of all the votes cast at a meeting at which a quorum is present is
sufficient to elect a Director.
Section 4. Vacancies and Newly Created Directorships. If any vacancies shall
occur in the Board of Directors by reason of death, resignation, removal, or
otherwise, or if the authorized number of Directors shall be increased, the
Directors then in office shall continue to act, and such vacancies (if not
previously filled by the shareholders) may be filled by a majority of the
Directors then in office, although less than a quorum, except that a newly
created Directorship may be filled only by a majority vote of the entire Board
of Directors; provided, however, that if, at any time that there are
shareholders of the Corporation, immediately after filling such vacancy at
least two-thirds (2/3) of the Directors then holding office shall have been
elected to such office by the shareholders of the Corporation. In the event
that at any time, other than the time preceding the first annual shareholders'
meeting, less than a majority of the Directors of the Corporation holding
office at that time were elected by the shareholders, a meeting of the
shareholders shall be held promptly and in any event within sixty days for the
purpose of electing Directors to fill any existing vacancies in the Board of
Directors, unless the Securities and Exchange Commission shall by order extend
such period.
Section 5. Removal. At any shareholders' meeting duly called, provided a quorum
is present, the shareholders may remove any director from office (either with
or without cause) and may elect a successor or successors to fill any resulting
vacancies for the unexpired terms of the removed director or directors. A
majority of all the votes entitled to be cast for the election of directors is
sufficient to remove a Director.
Section 6. Annual and Regular Meetings. The annual meeting of the Board of
Directors for choosing officers and transacting other proper business shall be
held at such other time and place as the Board may determine. The Board of
Directors from time to time may provide by resolution for the holding of
regular meetings and fix their time and place within or outside the State of
Maryland. Except as otherwise provided in the 1940 Act, notice of such annual
and regular meetings need not be given, provided that notice of any change in
the time or place of such
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meetings shall be sent promptly to each Director not present at the meeting at
which such change was made, in the manner provided for notice of special
meetings. Except as otherwise provided under the 1940 Act, members of the Board
of Directors or any committee designated thereby may participate in a meeting
of such Board or committee by means of a conference telephone or similar
communications equipment that allows all persons participating in the meeting
to hear each other at the same time.
Section 7. Special Meetings. Special meetings of the Board of Directors shall
be held whenever called by the Chairman of the Board, the Vice Chairman, the
President (or, in the absence or disability of the President, by any Vice
President), the Treasurer, or by two or more Directors, at the time and place
(within or without the State of Maryland) specified in the respective notice or
waivers of notice of such meetings. Notice of special meetings, stating the
time and place, shall be (1) mailed to each Director at his or her residence or
regular place of business at least three days before the day on which a special
meeting is to be held or (2) delivered to him or her personally or transmitted
to him or her by telegraph, telecopy, telex, cable, or wireless at least one
day before the meeting.
Section 8. Waiver of Notice. No notice of any meeting need be given to any
Director who is present at the meeting or who waives notice of such meeting in
writing (which waiver shall be filed with the records of such meeting) either
before or after the time of the meeting.
Section 9. Quorum and Voting. At all meetings of the Board of Directors, the
presence of one half or more of the number of Directors then in office shall
constitute a quorum for the transaction of business, provided that, at any time
that there shall be more than one director, there shall be present at least two
directors. In the absence of a quorum, a majority of the Directors present may
adjourn the meeting, from time to time, until a quorum shall be present. The
action of a majority of the Directors present at a meeting at which a quorum is
present shall be the action of the Board of Directors, unless concurrence of a
greater proportion is required for such action by law, by the Articles of
Incorporation, or by these Bylaws.
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Section 10. Action Without a Meeting. Except as otherwise provided under the
1940 Act, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting
if a written consent to such action is signed by all members of the Board or of
such committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board or committee.
Section 11. Compensation of Directors. Directors shall be entitled to receive
such compensation from the Corporation for their services as may from time to
time be determined by resolution of the Board of Directors.
ARTICLE IIIA
ADVISORY DIRECTORS
Section 1. Advisory Directors. The Board of Directors may elect one or more
persons (who may or may not be officers of the Corporation) to serve as
Advisory Directors of the Corporation. Advisory Directors shall attend meetings
of the Board of Directors, and provide advice and assistance to the Board of
Directors as requested. Advisory Directors will not be deemed members of the
Board of Directors, and will not vote on any matter requiring a vote of the
Board of Directors.
Section 2. Election, Removal, etc. The election, tenure, qualifications,
removal and resignation of Advisory Directors shall be governed by the
provisions of Article V of these By-Laws dealing with the election, tenure,
qualifications, removal and resignation of officers.
Section 3. Indemnification and Insurance. An Advisory Director shall be
entitled to the same Indemnification and Insurance provided under Article IX of
these By-Laws as that which would apply to an officer or director of the
Corporation.
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ARTICLE IV
COMMITTEES
Section 1. Organization. By resolution adopted by the Board of Directors, the
Board may designate one or more committees of the Board of Directors, including
an Executive Committee. The Chairmen of such committees shall be elected by the
Board of Directors. Each committee must be comprised of one or more members,
each of whom must be a Director and shall hold committee membership at the
pleasure of the Board. The Board of Directors shall have the power at any time
to change the members of such committees and to fill vacancies in the
committees. The Board may delegate to these committees any of its powers,
except the power to authorize dividends on stock, authorize the issuance of
stock (except as permitted under Title 2 of the Annotated Corporations and
Associations Code of Maryland ("Code")), recommend to shareholders any action
requiring shareholders' approval, amend these Bylaws, approve any merger or
share exchange which does not require shareholder approval, approve or
terminate any contract with an "investment adviser" or "principal underwriter,"
as those terms are defined in the 1940 Act, or to take any other action
required by the 1940 Act to be taken by the Board of Directors.
Section 2. Executive Committee. Unless otherwise provided by resolution of the
Board of Directors, when the Board of Directors is not in session, the
Executive Committee, if one is designated by the Board, shall have and may
exercise all powers of the Board of Directors in the management of the business
and affairs of the Corporation that may lawfully be exercised by an Executive
Committee. The President and Chairman shall automatically be members of the
Executive Committee.
Section 3. Proceedings and Quorum. In the absence of an appropriate resolution
of the Board of Directors, each committee may adopt such rules and regulations
governing its proceedings, quorum, and manner of acting as it shall deem proper
and desirable. In the event any member of any committee is absent from any
meeting, the members thereof present at the meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member.
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Section 4. Other Committees. The Board of Directors may appoint other
committees, each consisting of one or more persons, who need not be Directors.
Each such committee shall have such powers and perform such duties as may be
assigned to it from time to time by the Board of Directors, but shall not
exercise any power which may lawfully be exercised only by the Board of
Directors or a committee thereof.
ARTICLE V
OFFICERS
Section 1. General. The officers of the Corporation shall be a Chairman; Chief
Executive Officer; Vice President; Treasurer; and Secretary and may include one
or more Vice Presidents, Assistant Secretaries, or Assistant Treasurers, and
such other officers as may be appointed in accordance with the provisions of
Section 11 of this Article.
Section 2. Election, Tenure and Qualifications. The officers of the
Corporation, except those appointed as provided in Section 11 of this Article
V, shall be elected by the Board of Directors at its first meeting or such
subsequent meetings as shall be held prior to its first annual meeting, and
thereafter annually at its annual meeting. If any officers are not elected at
any annual meeting, such officers may be elected at any subsequent regular or
special meeting of the Board. Except as otherwise provided in this Article V,
each officer elected by the Board of Directors shall hold office until the next
annual meeting of the Board of Directors and until his or her successor shall
have been elected and qualified. Any person may hold one or more offices of the
Corporation except that no one person may serve concurrently as both President
and Vice President. A person who holds more than one office in the Corporation
may not act in more than one capacity to execute, acknowledge, or verify an
instrument required by law to be executed, acknowledged, or verified by more
than one officer. No officer, other than the Chairman or [Vice Chairman], need
be a Director.
Section 3. Vacancies and Newly Created Officers. If any vacancy shall occur in
any office by reason of death, resignation, removal, disqualification, or other
cause, or if any new office shall be created, such vacancies or newly created
offices may be
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filled by the Board of Directors at any regular or special meeting or, in the
case of any office created pursuant to Section 11 hereof, by any officer upon
whom such power shall have been conferred by the Board of Directors.
Section 4. Removal and Resignation. Any officer may be removed from office by
the vote of a majority of the members of the Board of Directors given at a
regular meeting or any special meeting called for such purpose. Any officer may
resign from office at any time by delivering a written resignation to the Board
of Directors, the President, the Chairman, the Secretary, or any Assistant
Secretary. Unless otherwise specified therein, such resignation shall take
effect upon delivery.
Section 5. President. The President shall be the chief executive officer of the
Corporation and, in the absence of the Chairman, shall preside at all
shareholders' meetings and at all meetings of the Board of Directors. Subject
to the supervision of the Board of Directors, the President shall have general
charge of the business, affairs, and property of the Corporation and general
supervision over its officers, employees, and agents. Except as the Board of
Directors may otherwise order, the President may sign in the name and on behalf
of the Corporation all deeds, bonds, contracts, or agreements. The President
shall exercise such other powers and perform such other duties as from time to
time may be assigned by the Board of Directors.
Section 6. Chairman. The Chairman shall be an executive officer of the
Corporation and shall preside at all shareholders' meetings and at all meetings
of the Board of Directors, and may be ex officio a member of all committees of
the Board of Directors. Except as the Board of Directors may otherwise order,
the Chairman may sign in the name and on behalf of the Corporation all deeds,
bonds, contracts, or agreements. The Chairman shall exercise such other powers
and perform such other duties as from time to time may be assigned by the Board
of Directors.
Section 7. The Vice Chairman shall be the chief operating officer of the
Corporation and, in the absence of the Chairman, shall preside at the all
shareholders' meetings and at all meetings of the Board of Directors. Except as
the Board of Directors may otherwise order, the Vice Chairman may sign in the
name and on
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behalf of the Corporation all deeds, bonds, contracts, or agreements. The Vice
Chairman shall exercise such other powers and perform such other duties as from
time to time may be assigned by the Board of Directors.
Section 8. Vice President. The Board of Directors may from time to time elect
one or more Vice Presidents who shall have such powers and perform such duties
as from time to time may be assigned to them by the Board of Directors or the
President. The Board of Directors may establish titles among the Vice
Presidents denoting their relative seniority. At the request of, or in the
absence or in the event of the disability of, the President, the Vice President
(or, if there are two or more Vice Presidents, then the senior of the Vice
Presidents present and able to act) may perform all the duties of the President
and, when so acting, shall have all the powers of and be subject to all the
restrictions upon the President.
Section 9. Treasurer and Assistant Treasurers. The Treasurer shall be the
principal financial and accounting officer of the Corporation and shall have
general charge of the finances and books of account of the Corporation. Except
as otherwise provided by the Board of Directors, the Treasurer shall have
general supervision of the funds and property of the Corporation and of the
performance by the Custodian of its duties with respect thereto. The Treasurer
shall render to the Board of Directors, whenever directed by the Board, an
account of the financial condition of the Corporation and of all transactions
as Treasurer; and as soon as possible after the close of each financial year
the Treasurer shall make and submit to the Board of Directors a like report for
such financial year. The Treasurer shall perform all acts incidental to the
office of Treasurer, subject of the control of the Board of Directors.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, may perform all the duties of the Treasurer.
Section 10. Secretary and Assistant Secretaries. The Secretary shall attend to
the giving and serving of all notices of the Corporation and shall record all
proceedings of the meetings of the shareholders and Directors in books to be
kept for that
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purpose. The Secretary shall keep in safe custody the seal of the Corporation,
and shall have responsibility for the records of the Corporation, including the
stock books and such other books and papers as the Board of Directors may
direct and such books, reports, certificates, and other documents required by
law to be kept, all of which shall at all reasonable times be open to
inspection by any Director. The Secretary shall perform such other duties which
appertain to this office or as may be required by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, may perform all the duties of the Secretary.
Section 11. Subordinate Officers. The Board of Directors from time to time may
appoint such other officers and agents as it may deem advisable, each of whom
shall have such title, hold office, for such period, have such authority, and
perform such duties as the Board of Directors may determine. The Board of
Directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities, and duties. Any officer or
agent appointed in accordance with the provisions of this Section 11 may be
removed, either with or without cause, by any officer upon whom such power of
removal shall have been conferred by the Board of Directors.
Section 12. Remuneration. The salaries or other compensation, if any, of the
officers of the Corporation shall be fixed from time to time by resolution of
the Board of Directors in the manner provided by Section 9 of Article III,
except that the Board of Directors may by resolution delegate to any person or
group of persons the power to fix the salaries or other compensation of any
subordinate officers or agents appointed in accordance with the provisions of
Section 11 of this Article V.
Section 13. Surety Bond. The Board of Directors may require any officer or
agent of the Corporation to execute a bond (including, without limitation, any
bond required by the 1940 Act and the rules and regulations of the Securities
and Exchange Commission promulgated thereunder) to the Corporation in such sum
and with such surety or sureties as the Board of Directors may determine,
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conditioned upon the faithful performance of his or her duties to the
Corporation, including responsibility for negligence and for the accounting of
any of the Corporation's property, funds or securities that may come into his
or her hands.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates of Stock. The interest of each shareholder of the
Corporation may be evidenced by certificates for shares of stock in such form
as the Board of Directors may from time to time authorize; provided, however,
the Board of Directors may, in its discretion, authorize the issuance of
noncertificated shares. No certificate shall be valid unless it is signed by
the Chairman, President, or a Vice President and countersigned by the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation and sealed with the seal of the Corporation, or bears the facsimile
signatures of such officers and a facsimile of such seal. In case any officer
who shall have signed any such certificate, or whose facsimile signature has
been placed thereon, shall cease to be such an officer (because of death,
resignation, or otherwise) before such certificate is issued, such certificate
may be issued and delivered by the Corporation with the same effect as if he or
she were such officer at the date of issue.
In the event that the Board of Directors authorizes the issuance of
non-certificated shares of stock, the Board of Directors may, in its discretion
and at any time, discontinue the issuance of share certificates and may, by
written notice to the registered owners of each certificated share, require the
surrender of share certificates to the Corporation for cancellation. Such
surrender and cancellation shall not affect the ownership of shares of the
Corporation.
Section 2. Transfer of Shares. Subject to the provisions of the next sentence
of this Section 2 of Article VI, Shares of the Corporation shall be
transferable on the books of the Corporation by the holder of record thereof in
person or by his or her duly authorized attorney or legal representative (i)
upon surrender and cancellation of any certificate or certificates for the same
number of shares of the same class, duly endorsed or accompanied
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by proper instruments of assignment and transfer, with such proof of the
authenticity of the signature as the Corporation or its agents may reasonably
require, or (ii) as otherwise prescribed by the Board of Directors. the Board
of Directors may, from time to time, adopt limitations and rules and
regulations with reference to the transfer of the shares of stock of the
Corporation to comply with the requirements of the Securities Act of 1933, as
amended, or other applicable laws. The Corporation shall be entitled to treat
the holder of record of any share of stock as the absolute owner thereof for
all purposes, and accordingly shall not be bound to recognize any legal,
equitable, or other claim or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise expressly provided by law or the statutes of the State of Maryland.
Section 3. Stock Ledgers. The stock ledgers of the Corporation, containing the
names and addresses of the shareholders and the number of shares held by them
respectively, shall be kept at the principal offices of the Corporation or, if
the Corporation employs a transfer agent, at the offices of the transfer agent
of the Corporation.
Section 4. Transfer Agents and Registrars. The Board of Directors may from time
to time appoint or remove transfer agents and registrars of transfers for
shares of stock of the Corporation, and it may appoint the same person as both
transfer agent and registrar. Upon any such appointment being made, all
certificates representing shares of capital stock thereafter issued shall be
countersigned by one of such transfer agents or by one of such registrars or by
both and shall not be valid unless so countersigned. If the same person shall
be both transfer agent and registrar, only one countersignature by such person
shall be required.
Section 5. Fixing of Record Date. The Board of Directors may fix in advance a
date as a record date for the determination of the shareholders entitled to
notice of or to vote at any shareholders' meeting or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or to
receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion, or
exchange of stock, or for the purpose
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of any other lawful action, provided that (1) such record date shall be within
ninety days prior to the date on which the particular action requiring such
determination will be taken; (2) the transfer books shall not be closed for a
period longer than twenty days; and (3) in the case of a meeting of
shareholders, the record date shall be at least ten days before the date of the
meeting.
Section 6. Lost, Stolen or Destroyed Certificates. Before issuing a new
certificate for stock of the Corporation alleged to have been lost, stolen, or
destroyed, the Board of Directors or any officer authorized by the Board may,
in its discretion, require the owner of the lost, stolen, or destroyed
certificate (or his or her legal representative) to give the Corporation a bond
or other indemnity, in such form and in such amount as the Board or any such
officer may direct and with such surety or sureties as may be satisfactory to
the Board or any such officer, sufficient to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft, or
destruction of any such certificate or the issuance of such new certificate.
ARTICLE VII
FISCAL YEAR AND ACCOUNTANT
Section 1. Fiscal Year. The fiscal year of the Corporation shall, unless
otherwise ordered by the Board of Directors, be twelve calendar months ending
on the 31st day of December.
Section 2. Accountant.
A. The Corporation shall employ an independent public accountant or a firm of
independent public accountants as its Accountant to examine the accounts of the
Corporation and to sign and certify financial statements filed by the
Corporation. The Accountant's certificates and reports shall be addressed both
to the Board of Directors and to the shareholders. The employment of the
Accountant shall be conditioned upon the right of the Corporation to terminate
the employment forthwith without any penalty by vote of a majority of the
outstanding voting securities at any shareholders' meeting called for that
purpose.
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B. A majority of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Corporation shall
select the Accountant at any meeting held within thirty days before or after
the beginning of the fiscal year of the Corporation or before the annual
shareholders' meeting in that year. The selection shall be submitted for
ratification or rejection at the next succeeding annual shareholders' meeting.
If the selection is rejected at that meeting, the Accountant shall be selected
by majority vote of the Corporation's outstanding voting securities, either at
the meeting at which the rejection occurred or at a subsequent meeting of
shareholders called for the purpose of selecting an Accountant.
C. Any vacancy occurring between annual meetings due to the resignation of
the Accountant may be filled by the vote of a majority of the members of the
Board of Directors who are not interested persons.
ARTICLE VIII
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Corporation shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments owned by the
Corporation. The Custodian (and any sub-custodian) shall be a bank or trust
company of good standing having an aggregate capital, surplus, and undivided
profits not less than fifty million dollars ($50,000,000) or such other
financial institution or other entity as shall be permitted by rule or order of
the Securities and Exchange Commission. The Custodian shall be appointed from
time to time by the Board of Directors, which shall fix its remuneration.
Section 2. Termination of Custodian Agreement. Upon termination of the
agreement for services with the Custodian or inability of the Custodian to
continue to serve, the Board of Directors shall promptly appoint a successor
Custodian, but in the event that no successor Custodian can be found who has
the required qualifications and is willing to serve, the Board of Directors
shall call as promptly as possible a special meeting of the
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shareholders to determine whether the Corporation shall function without a
Custodian or shall be liquidated. If so directed by resolution of the Board of
Directors or by vote of the holders of a majority of the outstanding shares of
stock of the Corporation, the Custodian shall deliver and pay over all property
of the Corporation held by it as specified in such vote.
Section 3. Other Arrangements. The Corporation may make such other arrangements
for the custody of its assets (including deposit arrangements) as may be
required by any applicable law, rule, or regulation.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
Section 1. Indemnification of Officers, Directors, Employees and Agents. The
Corporation shall indemnify its present and past directors, officers,
employees, and agents (including any "investment adviser" or "principal
underwriter," as those terms are defined in the 1940 Act), and any persons who
are serving or have served at the request of the Corporation as a director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or enterprise, to the full extent provided and allowed by Section 2-418
of the Code concerning corporations, as amended from time to time or any other
applicable provisions of law. Notwithstanding anything herein to the contrary,
no director, officer, investment adviser, or principal underwriter of the
Corporation shall be indemnified in violation of Sections 17(h) and (i) of the
1940 Act. Expenses incurred by any such person in defending any proceeding to
which he or she is a party by reason of service in the above-referenced
capacities shall be paid in advance or reimbursed by the Corporation to the
full extent permitted by law, including Sections 17(h) and (i) of the 1940 Act.
Section 2. Insurance of Officers, Directors, Employees and Agents. The
Corporation may purchase and maintain insurance on behalf of any person who is
or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
or other enterprise, against any liability asserted against that person and
incurred by that person in or arising out of his or her
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position, whether or not the Corporation would have the power to indemnify him
or her against such liability. Notwithstanding the foregoing, any insurance so
purchased will not protect or purport to protect any officer or director
against liabilities for willful misfeasance, bad faith, gross negligence, or
reckless disregard of duty.
Section 3. Amendment. No amendment, alternation, or repeal of this Article or
the adoption, alteration, or amendment of any other provision of the Articles
of Incorporation or Bylaws inconsistent with this Article shall adversely
affect any right or protection of any person under this Article with respect to
any act or failure to act which occurred prior to such amendment, alteration,
repeal, or adoption.
ARTICLE X
AMENDMENTS
Section 1. General. Except as provided in Section 2 of this Article X, all
Bylaws of the Corporation, whether adopted by the Board of Directors or the
shareholders, shall be subject to amendment, alteration, or repeal, and new
Bylaws may be made by the affirmative vote of a majority of either: (1) the
holders of record of the outstanding shares of stock of the Corporation
entitled to vote, at any annual or special meeting, the notice or waiver of
notice of which shall have specified or summarized the proposed amendment,
alteration, repeal, or new Bylaw; or (2) the Directors, at any regular or
special meeting the notice or waiver of notice of which shall have specified or
summarized the proposed amendment, alteration, repeal, or new Bylaw.
Section 2. By Shareholders Only. No amendment of any section of these Bylaws
shall be made except by the shareholders of the Corporation if the Bylaws
provide that such section may not be amended, altered, or repealed except by
the shareholders. From and after the issue of any shares of the capital stock
of the Corporation, no amendment, alteration, or repeal of this Article X shall
be made except by the affirmative vote of the holders of either: (a) more than
two-thirds of the Corporation's outstanding shares present at a meeting at
which the holders of more than fifty percent of the outstanding shares are
present in person or
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by proxy, or (b) more than fifty percent of the Corporation's outstanding
shares.
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CUSTODIAN AGREEMENT
THIS AGREEMENT made as of this day of , 1997,
between Venture Lending & Leasing II, Inc., a corporation organized under the
laws of Maryland with its principal place of business at 2010 North First
Street, Suite 310, San Jose, California 95131 (hereinafter called the "Fund"),
and BankBoston, N.A., a national banking association with its principal place
of business at 100 Federal Street, Boston, Massachusetts (hereinafter called
the "Custodian").
WHEREAS, the Fund desires that certain securities, cash and other
property shall be hereafter held and administered by the Custodian as the
Fund's agent pursuant to the terms of this Agreement; and
WHEREAS, the Custodian, directly and through its sub-custodian network,
provides services in the ordinary course of its business which will meet the
Fund's needs as provided for hereinafter;
NOW, THEREFORE, in consideration of the mutual promises herein made,
the Fund and the Custodian agree as follows:
Section 1. Definitions.
"Account" shall mean one or more separate accounts maintained by the
Custodian and/or its sub-custodians and other agents in the name of the Fund
and in which the Custodian holds the Assets pursuant to this Agreement.
"Assets" shall mean any security (as defined in Section 2(1) of the
Securities Act of 1933, as amended, and also shall include any "foreign
security" as that term is defined in Rule 17f-5 under the Investment Company
Act of 1940, as amended), any "contract of sale" of a "commodity" for "future
delivery" (as such terms are defined in the Commodity Exchange Act), any United
States or foreign currency and any other property.
"Officers' Certificate" shall mean a request of directions in writing
or confirmation of an oral request or directions in writing signed in the name
of the Fund by, unless otherwise specifically indicated in any certified list
provided to the Custodian under Section 3, any two officers of the Fund, other
two persons, or combination thereof, in each case specifically authorized to
sign on behalf of the Fund by the Board of Directors of the Fund (each such
officer or other person, hereinafter referred to as an "Authorized Person").
<PAGE> 2
Section 2. Custodian as Agent.
-------------------
The Custodian is authorized to act under the terms of this Agreement as
the Fund's agent and shall be representing the Fund whenever acting within the
scope of the Agreement. Subject to the provisions of Section 6, the Custodian
is authorized further to appoint sub-custodians and other agents from time to
time to carry out some or all of the duties which the Custodian is authorized
to perform hereunder.
Section 3. Names, Titles and Signature of Fund's Officers.
-----------------------------------------------
The President or Vice President of the Fund will certify to the
Custodian a list containing the names, titles, and signatures of those persons
authorized to sign Officers' Certificates ("Authorized Persons"). Said
President or Vice President, or his or her successor, will provide the
Custodian promptly with any changes which may occur from time to time.
The Custodian is authorized to rely and act upon Officers' Certificates
of any persons (if less than two, so indicated) who are Authorized Persons.
Different persons may be "Authorized Persons" for different purposes. The Fund
will provide the Custodian with a list of authenticated specimen signatures of
Authorized Persons, will indicate on such list for what purposes each
Authorized Person is authorized, and will promptly incorporate any changes to
such list for what purposes each Authorized Person is authorized, and will
promptly incorporate any change to such list as may occur from time to time.
Should the Fund fail to inform the Custodian that an Authorized Person has
ceased to be an Authorized Person, the Custodian shall be entitled to rely upon
the signature of that person (or, where expressly permitted by the terms
hereof, the oral instructions of that person) as if such person were still an
Authorized Person, until notified to the contrary by the Fund.
The Custodian is further authorized to rely upon any instructions
received by any other means and identified as having been authorized or given
by any of such persons; provided, that, (a) the Custodian and the Fund shall
have previously agreed in writing upon the means of transmission and the method
of identification for such instructions; (b) the Custodian has not been
notified by the Fund to cease to recognize such means and methods, and (c) such
means and methods have in fact been used.
If the Fund should choose to have dial-up or other means of direct
access to the Custodian's accounting system for assets in the Account, the
Custodian is also authorized to rely and act upon any instructions received by
the Custodian through any computer terminal device, regardless of whether such
instructions shall in fact have been given or authorized by the
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<PAGE> 3
Fund, provided that such instructions are accompanied by passwords which have
been mutually agreed to in writing by the Custodian and the Fund and the
Custodian has not been notified by the Fund to cease recognizing such
passwords.
Where dial-up or other direct means of access to the Custodian's
accounting system for Assets is utilized, the Fund agrees to indemnify the
Custodian and hold it harmless from and against any and all liabilities,
losses, damages, costs, reasonable counsel fees, and other reasonable expenses
of every nature suffered or incurred by the Custodian by reason of or in
connection with the willful misfeasance of the Fund in connection with the use
by the Fund or its employees of any terminal device with access to the
Custodian's accounting system for custodial accounts.
Section 4. Receipt and Disbursement of Money.
A. The Custodian shall open and maintain the Account, subject to
debit only by a draft or order by the Custodian acting pursuant to the terms of
this Agreement. The Custodian shall hold in the Account, subject to the
provisions hereof, all cash received by it from or for the account of the Fund.
1. The Custodian shall make payment of cash to the Account or
shall debit the Account only (a) for the purchase of Assets for the Fund upon
the delivery of such Assets to the Custodian, registered in the name of the
Fund or of the nominee of the Custodian referred to in Section 8 below; (b) for
payments in connection with the conversion, exchange or surrender of Assets
owned or subscribed to by the Fund held by or to be delivered to the Custodian;
(c) for payments in connection with the return of the cash collateral received
in connection with Assets loaned by the Fund; (d) for payments of interest,
dividends, taxes and in connection with rights offerings; or (e) for other
proper Fund purposes. All securities and other Assets accepted in connection
with the purchase of such Assets, if (a) usual in the course of local market
practice or (b) specifically required in instructions from the Fund, shall be
accompanied by payment of, or a "due bill" for, any dividends, interest or
other distributions of the issue due the purchaser.
2. Except as hereinafter provided, the Custodian shall make
any payment for which it receives direction from an Authorized Person so long as
such direction (i) is (x) in writing (or is a facsimile transmission of a
written direction), (y) electronically transmitted to the Custodian as provided
in Section 3 or (z) when written or electronic directions cannot reasonably be
given within the relevant time period, orally when the person giving such
direction assures the Custodian that the directions will be confirmed in writing
by an Authorized Persons
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<PAGE> 4
within twenty-four (24) hours and (ii) states that such payment is for a
purpose permitted under the terms of this subsection A. Contemporaneously with
the execution of this Agreement, the Fund is furnishing to the Custodian a list
of approved bank accounts to which funds may be wired pursuant to this
subsection A if the Officers' Certificates do not contain such information. The
Custodian shall not make any disbursements nor wire any funds to any account
not shown on such list unless the Custodian shall first have received an
Officers' Certificate specifically amending such list to include such account.
The Custodian shall not make any payment pursuant to paragraph 1(e) of this
subsection A unless the Custodian shall first have received an Officers'
Certificate specifying the amount of such payment, setting forth the purpose
for which such payment is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom such payment is to
be made. Receipt of an Officer's Certificate or written notice from an
Authorized Person shall be deemed to establish that payment of cash pursuant to
such direction is for a valid corporate purpose.
3. All funds received by the Custodian in connection with the
sale, transfer, exchange or loan of Assets will be credited to the Account in
immediately available funds as soon as reasonably possible on the date such
received funds are immediately available. Payments for purchase of Assets for
the Account made in immediately available funds will be charged against the
Account on the day of delivery of such Assets and all other payments will be
charged on the business day after the day of delivery.
B. The Custodian is hereby authorized and required to (a) collect on a
timely basis all income and other payments with respect to Assets held
hereunder to which the Fund shall be entitled either by law or pursuant to
custom in the securities business, and to credit such income to the Account,
(b) detach and present for payment all coupons and other income items requiring
presentation as and when they become due, (c) collect interest when due on
Assets held hereunder, and (d) endorse and collect all checks, drafts or other
orders for the payment of money received by the Custodian for the account of
the Fund.
C. If the Custodian agrees to advance cash or securities of the
Custodian for delivery on behalf of the Fund to a third party, any property
received by the Custodian on behalf of the Fund in respect of such delivery
shall serve as security for the Fund's obligation to repay such advance until
such time as such advance is repaid, and, in the case where such advance is
extended for the purchase of Assets which constitute "margin stock" under
Regulation U of the Board of Governors of the Federal Reserve System, such
additional Assets of the Fund, as shall be necessary for the Custodian, in the
Custodian's
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<PAGE> 5
reasonable determination, to be in compliance with such Regulation U also shall
constitute security for the Fund's obligation to repay such advance. The Fund
hereby grants the Custodian a security interest in such property of the Fund to
secure such advance and agrees to repay such advance promptly without demand
from the Custodian (and in any event, as soon as reasonably practicable
following any demand by the Custodian), unless otherwise agreed by both
parties. Should the Fund fail to repay such advance as required, the Custodian
shall be entitled immediately to apply such security to the extent necessary to
obtain repayment of the advance, subject, in the case of Fund failure to make
prompt repayment without demand, to prior notice to the Fund.
Section 5. Receipt of Other Assets.
The Custodian shall hold in the Account, segregated at all times from
those of any other persons, firms or corporations, pursuant to the provisions
hereof, all Assets received by it from or for the account of the Fund. All such
Assets are to be held or disposed of by the Custodian for, and subject at all
times to the instructions of, the Fund pursuant to the terms of this Agreement.
The Custodian shall have no power or authority to assign, hypothecate, pledge
or otherwise dispose of any of the Assets, except pursuant to the directive of
the Fund and only for the account of the Fund as set forth in Section 7 of this
Agreement.
The Custodian and its agents (including foreign sub-custodians) may
make arrangements with Depository Trust Fund ("DTC") and other foreign or
domestic depositories or clearing agencies, including the Federal Reserve Bank
and any foreign depository or clearing agency, whereby certain Assets may be
deposited for the purpose of allowing transactions to be made by bookkeeping
entry without physical delivery of such Assets, subject to such restrictions as
may be agreed upon by the Custodian and the Fund. No foreign depository or
clearing agency may be used by the Custodian for such purposes without the
approval of the Fund evidenced by an Officers' Certificate unless such foreign
depository or clearing agency is an "eligible foreign custodian" (within the
meaning of Rule 17f-5 under the Investment Company Act of 1940) or by
appropriate regulatory proceedings has received permission from the Securities
and Exchange Commission to be treated as an "eligible foreign custodian" for
purposes of such Rule. The Custodian shall immediately commence procedures to
replace Assets lost due to robbery, burglary or theft while such securities are
within its control or that of its agents or employees upon discovery of such
loss.
Section 6. Foreign Sub-custodians and Other Agents.
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<PAGE> 6
(a) It is understood and agreed that the Custodian will hold the
Fund's Assets through sub-custodians located in the foreign jurisdictions
described in Exhibit A and such additional foreign jurisdictions as may be
agreed to in writing by the Custodian and the Fund. The foreign sub-custodians
set forth in Exhibit A shall be the initial sub-custodians for the
corresponding foreign jurisdictions. The Custodian may replace the foreign
sub-custodian for any foreign jurisdiction, shall select the new
sub-custodian(s) for each new foreign jurisdiction added to Exhibit A and may
appoint (and at any time remove) any other entity as its agent to carry out the
provision of this Agreement; provided, however, that any such sub-custodian or
other agent shall be approved by an Officer's Certificate, such approval not to
be unreasonably withheld; and provided further that in no event shall the
Custodian appoint any such sub-custodian unless such sub-custodian is an
"eligible foreign custodian" (within the meaning of Rule 17f-5 under the
Investment Company Act of 1940) or by appropriate regulatory proceedings has
received permission from the Securities and Exchange Commission to be treated
as an "eligible foreign custodian" for purposes of such Rule or the Fund
otherwise agrees in writing. No approval by the Fund of any sub-custodian or
other agent of the Custodian shall exempt the Custodian from using reasonable
care and diligence in selecting such sub-custodian or other agent or relieve
the Custodian of its responsibilities or liabilities hereunder.
The Custodian agrees further that in placing Assets with any such
foreign sub-custodian, it will enter into a written sub-custodian agreement
which shall provide that: (i) the Custodian will be adequately indemnified and
the Assets so placed adequately insured in the event of loss, as provided in
part (b) of this section; (ii) the Assets will not be subject to any right,
charge, security interest, lien or claim of any kind in favor of the foreign
sub-custodian or its creditors (except any claim for payment for the services
provided by such sub-custodian and any related expenses; provided, however that
the Custodian shall use its best efforts promptly to release any such right,
charge, security interest, lien or claim on the assets, except to the extent
such right, charge, security interest, lien or claim arises with respect to a
special request or requirement by the Fund for services the cost of which and
the expenses incurred in connection with which the Fund has not paid or has
declined to pay, it being agreed and understood that, in the ordinary course,
all payments for usual and routine services rendered and expenses incurred by a
sub-custodian shall be the obligation of the Custodian); (iii) beneficial
ownership of the Assets will be freely transferable without payment of money or
value other than for safe custody or administration; (iv) adequate records will
be maintained identifying the Assets as belonging to the Fund; (v) the
Custodian's independent public accountants will be given
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<PAGE> 7
access to those records or the confirmation of the contents of those records;
and (vi) the Custodian will receive periodic reports with respect to the
safekeeping of the Assets, including, but not necessarily limited to,
notification of any transfer to or from the Account.
(b) In addition to the indemnities included in Section 13 hereof, the
Custodian agrees to indemnify and hold harmless the Fund from any and all loss
or damage incurred or suffered by the Fund as a result of placement by the
Custodian of Assets with a foreign sub-custodian hereunder, to the extent the
Custodian receives indemnification from such foreign sub-custodian pursuant to
part (a)(i) of this section.
(c) With respect to any Assets to be placed with foreign sub-custodians
pursuant to this section, the Custodian represents and warrants that during the
term of this Agreement it will carry Bankers Blanket Bond or similar insurance
for losses incurred as a result of such sub-custodial arrangements.
(d) The Fund authorizes the Custodian to release any and all
information regarding Assets placed with foreign sub-custodians hereunder as
may be required by court order of a court of competent jurisdiction.
Section 7. Transfer, Exchange and Redelivery of Assets.
The Custodian (or a sub-custodian or any other agent of the Custodian)
shall have sole power to release or deliver any Assets of the Fund held by the
Custodian (or such sub-custodian or agent) pursuant to this Agreement. The
Custodian agrees (and will obtain an undertaking from each sub-custodian or
other agent) that Assets held by the Custodian (or by a sub-custodian or other
agent of the Custodian) will be transferred, exchanged or delivered only (a)
for sales of securities for the account of the Fund in accordance with (i) "New
York Street Practice", (ii) predominant established practice in the relevant
local market, or (iii) specific instructions from the Fund; or (b) when Assets
are called, redeemed or retired or otherwise become payable; (c) for
examination by any broker selling any such securities in accordance with
"street delivery" custom or other relevant local market practice; (d) in
exchange for or upon conversion into other Assets whether pursuant to any plan
of merger, consolidation, reorganization, recapitalization or readjustment, or
otherwise; (e) upon conversion of such Assets pursuant to their terms into
other Assets; (f) upon exercise of subscription, purchase or other similar
rights represented by such Assets pursuant to their terms; (g) for the purpose
of exchanging interim receipts or temporary securities for definitive
securities; (h) for the purpose of tendering Assets; (i) for the purpose of
delivering Assets lent by the Fund; (j) for purposes
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<PAGE> 8
of delivering collateral upon redelivery of Assets lent or for purposes of
delivering excess collateral; or (k) for other proper Fund purposes. As to any
deliveries made by Custodian pursuant to items (b), (d), (e), (f), (g), (i),
(j) and (k), Assets in exchange therefor shall be deliverable to the Custodian
(or a sub-custodian or other agent of the Custodian). The Custodian may rely
upon any written, electronic or oral instructions or an Officers' Certificate
relating thereto or oral instructions or an Officers' Certificate relating
thereto as provided for in Sections 3 and 4 above.
Section 8. The Custodian's Acts Without Instructions.
Unless and until the Custodian receives instructions to the contrary,
the Custodian (or a sub-custodian or other agent of the Custodian) shall:
(a) present for payment all coupons and other income items held by it
for the account of the Fund which call for payment upon presentation and hold
the cash received by it upon such payment in the Account; (b) collect interest
and cash dividends and other distributions, provide notice to the Fund of
receipts, and deposit to the Account; (c) hold for the account of the Fund all
stock dividends, rights and similar securities issued with respect to any
Assets held by the Custodian under the terms of this Agreement; (d) execute as
agent on behalf of the Fund all necessary ownership certificates required by
the Internal Revenue Code or the Income Tax Regulations of the United States
Treasury Department, the laws of any State or territory of the United States,
or, in the case of Assets held through foreign sub-custodians, the laws of the
jurisdiction in which such Assets are held, now or hereafter in effect,
inserting the Fund's name on such certificates as the owner of the Assets
covered thereby, to the extent it may lawfully do so; (e) use its best efforts,
in cooperation with the Fund, to file such forms, certificates and other
documents as may be required to comply with all applicable laws and regulations
relating to withholding taxation applicable to the Assets' and (f) use its best
efforts to assist the Fund may have a reasonable claim. The Fund agrees to
furnish to the Custodian such information and to execute such forms and other
documents as the Custodian may reasonably request or as otherwise may be
reasonably necessary in connection with the Custodian's performance of its
obligations under clauses (e) and (f).
Section 9. Registration of Securities and Other Assets.
Except as otherwise directed by an Officers' Certificate, the
Custodian shall register all securities and other Assets, except such as are in
bearer form, in the name of the Fund or a registered nominee of the Fund or a
registered nominee of the Custodian or a sub-custodian. Securities and
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<PAGE> 9
other Assets deposited with DTC or a foreign securities depository permitted
under Section 5 may be registered in the nominee name of DTC or such foreign
securities depository. The Custodian shall execute and deliver all such
certificates in connection therewith as may be required by the applicable
provisions of the Internal Revenue Code, the laws of any State or territory of
the United States, or, in the case of Assets placed with foreign
sub-custodians, the laws of the jurisdiction in which such Assets are held. The
Custodian shall maintain such books and records as may be necessary to identify
the specific Assets held by it hereunder at all times.
The Fund shall from time to time furnish the Custodian appropriate
instruments to enable the Custodian to hold or deliver in proper form for
transfer, or to register in the name of its registered nominee, any Assets which
it may hold for the account of the Fund and which may from time to time be
registered in the name of the Fund.
Section 10. Voting and Other Action.
Neither the Custodian nor any nominee, sub-custodian or other agent of
the Custodian or of DTC or any foreign securities depository shall exercise any
voting rights attributable to the Assets held hereunder by or for the Fund
except in accordance with the instructions contained in an Officers'
Certificate.
The Custodian shall use its best efforts, in cooperation with the Fund
to obtain and deliver (or have obtained and delivered) to the Fund all notices,
proxies and proxy soliciting materials with relation to such Assets, such
proxies to be executed by the registered holder of such Assets (if registered
otherwise than in the name of the Fund), but without indicating the manner in
which such proxies are to be voted.
Section 11. Transfer Tax and Other Disbursements.
The Fund shall pay or reimburse the Custodian from time to time for any
transfer taxes payable upon transfer of Assets made hereunder and for all other
necessary and proper disbursements and expenses made or incurred by the
Custodian in the performance of this Agreement, as required by U.S. law or the
laws of the jurisdiction in which the Assets are held, as the case may be.
The Custodian shall use its best efforts, in cooperation with the Fund,
to execute and deliver such forms, certificates and other documents in
connection with Assets delivered to it by or under this Agreement as may be
required under the laws of any jurisdiction to exempt from taxation any
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<PAGE> 10
exemptible transfers and/or deliveries of any such Assets and shall use its
best efforts to assist the Fund in any other manner which the Fund may
reasonably request in order to establish any such exemption or to obtain a
refund of any such tax.
Section 12. Compensation and the Custodian's Expenses.
The Custodian shall be compensated for its services hereunder as shall
be agreed upon in writing by the parties from time to time and for all other
expenses incurred by the Custodian in the exercise of its duties hereunder.
Such compensation shall be payable by the Fund to the Custodian promptly
following receipt by the Fund of an invoice and any other appropriate
documentation.
If the Custodian submits an invoice and the Fund has requested further
information or documentation with respect to one or more items in the invoice,
the Fund shall nonetheless promptly make payment with respect to those items
for which the Fund has made no such request.
Section 13. Liability of Custodian: Indemnification.
The Custodian shall be liable for and shall indemnify the Fund for, and
hold the Fund harmless from and defend the Fund against, any loss, damage,
cost, judgment, expense or any other liability (including, but not limited to,
the Fund's reasonable legal fees and expenses and any other reasonable legal
fees and expenses which the Fund incurs or for which the Fund is otherwise
liable) incurred by the Fund directly related to or arising from (a) the
failure of the Custodian to act as provided in specific, unambiguous and
complete instructions, relating to the movement of cash or securities of the
Fund (including for these purposes all instructions in "SWIFT") or in
connection with a so called "corporate rights" matter, timely received by the
Custodian in the manner required hereunder, from an Authorized Person or such
person as otherwise provided herein or (b) any negligent act or negligent
failure to act of the Custodian under this Agreement. The Custodian shall not be
liable to the Fund for acting in accordance with the Fund's directions and
instructions or for the acts, omissions, lack of financial responsibility, or
failure to perform its obligations of (i) any person or organization designated
by the Fund to be the authorized agent of the Fund as a party to any transaction
or (ii) DTC, any Federal Reserve Bank, any foreign securities depository or any
other United States or foreign depository in connection with any book entry
system that the Custodian is required to use in accordance with local market
practice. The Fund agrees to indemnify the Custodian for, and hold the Custodian
harmless from and defend the Custodian against, any loss, damage, cost,
judgment, expense, or any other liability (including, but not limited to, the
Custodian's
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reasonable legal fees and expenses or any other reasonable fees and expenses
which the Custodian incurs or for which the Custodian is otherwise liable)
incurred by the Custodian directly relating to or arising from actions taken
pursuant to instructions from an Authorized Person or such person as otherwise
provided herein; provided, however, that the Custodian shall not be indemnified
if it fails to act in accordance with specific, unambiguous, and complete
instructions of the Fund or is negligent with respect to the manner in which it
carries out its obligations hereunder. As to legal matters which may arise in
connection with its following instructions or otherwise carrying out its
obligations hereunder, the Custodian shall, in exercising its reasonable
judgment in the performance of its duties hereunder, be entitled to receive and
act upon the prior advice of counsel and shall be without liability to the Fund
for any action taken or not taken or other thing done or not done in good faith
in reliance upon such advice, including its determination to decline to follow
the Fund's directions and instructions.
Within a reasonable time after receipt by a party of notice of the
commencement of any action for which such party (the "Indemnified Party") may
seek indemnity, the Indemnified Party will notify the other party (the
"Indemnifying Party") in writing of the commencement thereof; and the omission
so to notify the Indemnifying Party will not relieve the Indemnifying Party from
any liability hereunder as to the particular item for which indemnification is
then being sought, except to the extent that the omission results in a failure
of actual notice to the Indemnifying Party and the Indemnifying Party is damaged
solely as a result of such failure to give notice. In case any such action is
brought against an Indemnified Party, and it notifies the Indemnifying Party of
the commencement thereof, the Indemnifying Party will be entitled to participate
therein, and to assume the defense thereof, with counsel who shall be to the
reasonable satisfaction of the Indemnified Party, and after notice from the
Indemnifying Party of such party's election so to assume the defense thereof,
the Indemnifying Party will not be liable to the Indemnified Party for any legal
or other expenses subsequently incurred by the Indemnified Party in connection
with the defense thereof other than reasonable costs of investigation. The
Indemnifying Party shall not be liable to the Indemnified Party on account of
any settlement of any claim or action effected without the consent of the
Indemnifying Party.
Section 14. Reports by the Custodian.
-------------------------
The Custodian shall furnish the Fund with such reports concerning
transactions in the Account and/or the Assets as may be agreed upon from time to
time. The books and records of the Custodian pertaining to its actions under
this Agreement shall be
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open to inspection and audit at reasonable times and upon reasonable notice to
the Custodian, by officers of and auditors employed by the Fund (and such other
persons as the Fund may designate from time to time). All such books and
records shall be the property of the Fund and the Custodian shall forthwith
upon the Fund's request, turn over to the Fund and cease to retain in its
files, records and documents created and maintained by the Custodian pursuant
to this Agreement, which are no longer needed by the Custodian in performance
of its services or for its protection.
Section 15. Termination and Assignment.
This Agreement may be terminated by the Fund or the Custodian,
immediately upon written notice from the Fund or the Custodian, as applicable,
to the other party, if the other party fails materially to perform its
obligations hereunder, and may otherwise be terminated by the Fund or by the
Custodian on one hundred eighty (180) days' notice, given in writing and sent by
registered mail to the Custodian or the Fund as the case may be. Upon
termination of this Agreement, the Custodian shall deliver the Assets of the
Fund to such entity as is designated in writing by the Fund and in the absence
of such a designation may, but shall not be obligated to, deliver them to a
bank or trust company of the Custodian's own selection having an aggregate
capital, surplus and undivided profits as shown by its last published report of
not less than 50 million dollars ($50,000,000), the Assets to be held by such
bank or trust company for the benefit of the Fund under terms similar to those
of this Agreement and the Fund to be obligated to pay to such transferee the
then current rates of such transferee for services rendered by it; provided,
however, that the Custodian may decline to transfer such amount of such Assets
equivalent to all fees and other sums owing by the Fund to the Custodian
(except for such out-of-pocket expenses as are described in Section 12 hereto),
and the Custodian shall have a charge against and security interest in such
amount until all monies owing to it have been paid, or escrowed to its
satisfaction.
This Agreement may not be assigned by the Custodian without the consent
of the Fund, authorized or approved by a resolution of the Fund's Board of
Directors.
Section 16. Force Majeure.
The Custodian shall not be liable or accountable for any loss or damage
resulting from any condition or event beyond its reasonable control; provided,
however, that the Custodian shall promptly use its best efforts to mitigate any
such loss or damage to the Fund as a result of any such condition or event. For
the purposes of the foregoing, the actions or inactions of
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<PAGE> 13
the Custodian's sub-custodians and other agents shall not be deemed to be
beyond the reasonable control of the Custodian. In connection with the
foregoing, the Custodian agrees (and agrees that it will use its best efforts
to obtain the undertaking of its sub-custodians and other agents to the effect)
that the Custodian (and/or such sub-custodian or agent) shall maintain such
alternate power sources for computer and related systems and alternate channels
for electronic communication with such computers and related systems that the
failure of the primary power source and/or communications channel of the
Custodian (and/or its sub-custodians or other agents) will not foreseeably
result in any loss or damage to the Fund.
Section 17. Third Parties.
This Agreement shall be binding upon and the benefits hereof shall
inure to the parties hereto and their respective successors and assigns.
However, nothing in this Agreement shall give or be construed to give or confer
upon any third party any rights hereunder.
Section 18. Amendments.
The terms of this Agreement shall not be waived, altered, modified,
amended, supplemented or terminated in any manner whatsoever, except by written
instrument signed by both of the parties hereto.
Section 19. Sweep Authorization.
The Bank will automatically invest cash in money market funds or
repurchase agreements made available by the Bank and authorized by Customer.
Section 20. Governing Law.
This Agreement shall be governed and construed in accordance with the
laws of The Commonwealth of Massachusetts.
Section 21. Counterparts.
This agreement may be executed in several counterparts, each of which
is an original.
Section 22. Notices.
All notices provided for herein shall be in writing and shall become
effective when deposited in the United States mail, postage prepaid and
certified, addressed (a) if to the Custodian, at BankBoston, N.A., 150 Royall
Street - Mail Stop: 45-02-22, Canton, MA 02021, Attention: Manager, Worldwide
Custody, and, (b)
13
<PAGE> 14
if to the Fund, at 2010 North First Street, Suite 310, San Jose, CA 95131,
Attention: Ronald W. Swenson, or to such other address as either party may
notify the other in writing.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
VENTURE LENDING & LEASING II, INC.
By:________________________________
Name:______________________________
Title:_____________________________
BANKBOSTON, N.A.
By:________________________________
Name:______________________________
Title:_____________________________
14
<PAGE> 15
EXHIBIT A
BANKBOSTON, N.A.
WORLDWIDE CUSTODY
Agent Bank List
NONE
<PAGE> 16
ADDENDUM NO. 1 TO
CUSTODIAN AGREEMENT
DOCUMENT CUSTODY SERVICE
FOR
VENTURE LENDING & LEASING II, INC. (VLLI II)
This Addendum supplements and constitutes a part of the Custodian Agreement
made by and between VLLI II (the "Customer") and The BankBoston, N.A. (the
"Bank") dated _____________, 1997.
WHEREAS, the Customer has need for certain document custody services which the
Bank is willing and able to provide;
NOW, THEREFORE, in consideration of mutual promises herein made, the Customer
and the Bank agree as follows:
A. The Bank will provide physical safekeeping of documents executed in
connection with loans, leases, and installment sales contracts held
within custodial accounts and subaccounts;
B. The Bank shall review each document received from or on behalf of
the Customer in accordance with instructions provided by the
Customer from time to time for that purpose;
C. The Bank shall notify the Customer of any missing, incomplete, or
inconsistent documents by means agreeable to Customer and the Bank.
The Customer may deposit such missing documents or complete or
correct the documents as may be specified in instructions of record.
D. The Bank will release and deliver said documents pursuant to
Customer's direction and instruction as required.
In carrying out the foregoing services, the Bank will use reasonable care in
accordance with standard customs adhered to by banks that act as document
custodians under similar circumstances and conditions.
<PAGE> 17
INSTITUTIONAL CUSTODY FEE SCHEDULE
FOR
VENTURE LENDING & LEASING II, INC.
PREPARED JUNE 18, 1997
<TABLE>
<S> <C>
CUSTODIAN FEES:
ANNUAL ADMINISTRATIVE FEE (BILLED MONTHLY) $3,600.00
PORTFOLIO TRANSACTIONS
DTC $ 12.00
FBE $ 12.00
Physicals $ 20.00
Options $ 40.00
Principal & Interest Payments $ 5.00
Wires In and Out $ 3.50
Out-of-Pocket Expenses as incurred
passed through at costs.
DOCUMENT CUSTODY FEES
Annual Maintenance Fee (Billed Monthly) $ 3.00 per Folder
Receipt In (Initial Set-Up) $ 2.00 per Folder
Reinstatement $ 2.00 per Folder
Release Out $ 2.00 per Folder
Out-of-Pocket Expenses Expedited (Overnight) Mail
PORTFOLIO ACCOUNTING FEE
Annual Accounting Fee Per Account N/A
(Billed Monthly), Quarterly Valuations,
Monthly Reports
Interim Valuations (per Valuation) N/A
Any pricing service costs passed through
as Out-of-Pocket Expense.
</TABLE>
BANKBOSTON, N.A. VENTURE LENDING & LEASING, INC.
By: By:
--------------------------------- -------------------------------
Title: Title:
------------------------------ ----------------------------
Date: Date:
------------------------------- -----------------------------
<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Section 1. Appointment of Agent.................................... 1
Section 2. Standard Services....................................... 2
Section 3. Fees and Expenses....................................... 3
Section 4. Representations and Warranties of the Bank.............. 4
Section 5. Representations and Warranties of the Company........... 5
Section 6. Indemnification......................................... 5
Section 7. Standard of Care........................................ 7
Section 8. Responsibilities of the Bank............................ 7
Section 9. Covenants of the Company and the Bank................... 8
Section 10. Data Access and Proprietary Information................. 9
Section 11. Termination of Agreement................................ 10
Section 12. Assignment.............................................. 11
Section 13. Subcontractors.......................................... 11
Section 14. Notices................................................. 12
Section 15. Successors.............................................. 12
Section 16. Amendment............................................... 12
Section 17. Severability............................................ 13
Section 18. Governing Law........................................... 13
Section 19. Force Majeure........................................... 13
Section 20. Consequential Damages................................... 13
Section 21. Descriptive Headings.................................... 13
Section 22. Third Party Beneficiaries............................... 13
Section 23. Survival................................................ 14
Section 24. Merger of Agreement..................................... 14
Section 25. Counterparts............................................ 14
</TABLE>
i
<PAGE> 2
TRANSFER AGENCY AND STOCK TRANSFER SERVICES AGREEMENT
This Transfer Agency and Stock Transfer Services Agreement (the
"Agreement"), dated as of July 1, 1997 is between Venture Lending & Leasing,
Inc.; a Maryland corporation (the "Company") and BankBoston, N.A., a national
banking association (the "Bank").
WHEREAS, the Board of Directors of the Company has approved and
authorized the appointment of the Bank as transfer agent and registrar and
exchange agent.
WHEREAS, the Bank desires to accept such appointment and perform the
services related to such appointment;
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereby agree as follows:
SECTION 1. APPOINTMENT OF AGENT
1.01 The Company hereby appoints the Bank to act as sole transfer agent
and registrar for the common stock of the Company (the "Shares") in accordance
with the terms and conditions hereof, and the Bank hereby accepts such
appointment.
1.02 In connection with the appointment of the Bank as transfer agent
and registrar for the Company, the Company will file the following documents
with the Bank:
(a) Copies of Registration Statements and amendments thereto, filed
with the Securities and Exchange Commission;
(b) Specimens of all forms of outstanding stock certificates, in the
forms approved by the Board of Directors of the Company, with a certificate of
the Secretary of the Company as to such approval;
(c) Specimens of the signatures of the officers of the Company
authorized to sign stock certificates and individuals authorized to sign
written instructions and requests; and
(d) An opinion of counsel for the Company with respect to:
(i) The Company's organization and existence under the laws of
its state of organization;
<PAGE> 3
(ii) The status of all shares of stock of the Company covered
by the appointment under the Securities Act of 1933, as
amended, and any other applicable federal or state
statute; and
(iii) That all issued shares are, and all unissued shares will
be, when issued, validly issued, fully paid and
nonassessable.
SECTION 2. STANDARD SERVICES
2.01 The Bank will perform the following services:
In accordance with the procedures established from time to time by
agreement between the Company and the Bank, the Bank shall:
(a) issue and record the appropriate number of Shares as
authorized and hold such shares in the appropriate shareholder
("Shareholder") account;
(b) effect transfers of Shares by the registered owners thereof
upon receipt of appropriate documentation;
(c) prepare and transmit payments for dividends and
distributions declared by the Company, provided good funds for said
dividends or distributions are received by the Bank prior to the
scheduled mailing date for said dividends or distributions;
(d) act as agent for Shareholders pursuant to the dividend
reinvestment plan, cash purchase plan, and other investment programs as
amended from time to time in accordance with the terms of the agreements
relating thereto to which the Bank is or will be a party; and
(e) issue replacement certificates for those certificates
alleged to have been lost, stolen or destroyed upon receipt by the Bank
of an open penalty surety bond satisfactory to it and holding it and the
Company harmless, absent notice to the Company and the Bank that such
certificates have been acquired by a bona fide purchaser. The Bank, at
its option, may issue replacement certificates in place of mutilated
stock certificates upon presentation thereof without such indemnity.
2
<PAGE> 4
2.02 The Bank shall perform all the customary services of a transfer
agent, dividend disbursing agent, agent of dividend reinvestment plan, cash
purchase plan and other investment programs as described in Section 2.01
consistent with those requirements in effect as of the date of this Agreement.
The detailed services and definition, frequency, limitations and associated
costs (if any) are set out in the attached fee and service schedule ("Fee and
Service Schedule").
2.03 The Bank may provide such additional services to or on behalf of
the Company (e.g., escheatment services) as may be agreed upon in writing
between the Company and the Bank.
SECTION 3. FEES AND EXPENSES
3.01 Fees.
The Company agrees to pay the Bank fees for the services performed
pursuant to this Agreement as set forth in the Fee and Service Schedule
attached hereto. Such fees, and the out-of-pocket expenses and advances
identified under Section 3.02 below, may be changed from time to time by
written agreement between the Bank and the Company.
3.02 Out of Pocket Expenses.
(a) In addition to the fees paid under Section 3.01 above, the Company
agrees to reimburse the Bank for out-of-pocket expenses, including, but not
limited to, check stock, stationery, envelopes, confirmation production,
postage, forms, insurance, telephone usage, facsimile charges, microfilm,
microfiche, printing of proxies, expenses incurred attending annual meeting,
records storage or advances incurred by the Bank for the items set out in the
Fee and Service Schedule attached hereto. In addition, any other expenses
incurred by the Bank at the request or with the consent of the Company will be
reimbursed by the Company.
(b) All out-of-pocket expenses described in Section 3.02(a) above, will
be billed as incurred subject to Section 3.03(b), provided, however, that
payment for postage expenses in excess of $5,000 must be received by the Bank in
collected funds by 12:00 p.m. Eastern time on the scheduled mailing date.
(c) The Bank reserves the right to receive compensation from vendors
for services rendered to vendors which relate to services to be provided under
this Agreement, to the extent such services rendered reduce the overall costs
of the services.
3
<PAGE> 5
3.03 Payment of Fees and Expenses.
(a) The Company agrees to pay all fees and reimbursable expenses
within thirty (30) days following the receipt of the respective billing notice.
Interest charges will accrue on unpaid balances outstanding for more than
forty-five (45) days.
(b) The Bank hereby reserves the right, in its sole discretion, to
require payment of its fees and expenses in advance.
3.04 Services Required by Legislation.
Services required by legislation or regulatory mandate that become
effective after the effective date of this Agreement shall not be part of the
standard services, and shall be billed by appraisal.
3.05 Overtime Charges.
Overtime charges will be assessed in the event of a late delivery to
the Bank of Company material for mailings to shareholders unless the mail date
is rescheduled. Such material includes, but is not limited to, proxy
statements, quarterly and annual reports, dividend enclosures and news releases.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Company that:
4.01 It is a national banking association duly organized and existing
and in good standing under the laws of the United States of America;
4.02 It is duly qualified to carry on its business in The Commonwealth
of Massachusetts;
4.03 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement;
4.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement; and
4
<PAGE> 6
4.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Bank that:
5.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland;
5.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement;
5.03 All corporate proceedings required by said Articles of
Incorporation, By-Laws and applicable law have been taken to authorize it to
enter into and perform this Agreement; and
SECTION 6. INDEMNIFICATION
6.01 The Bank shall not be responsible for, and the Company shall
indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees and expenses, payments, expenses and
liability arising out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement, provided such actions
are taken in good faith and without negligence or willful misconduct;
(b) The Company's lack of good faith, negligence or willful
misconduct or the breach of any representation or warranty of the
Company hereunder;
(c) The reliance or use by the Bank or its agents or
subcontractors of information, records and documents which (i) are
received by the Bank or its agents or subcontractors and furnished
to it by or on behalf of the Company, and (ii) have been prepared
and/or maintained by the Company or any other person or firm on behalf
of the Company. Such other person or firm shall include any former
transfer agent or former registrar, or co-transfer agent or
co-registrar or any current registrar where the Bank is not the
current registrar;
5
<PAGE> 7
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests of the
Company's representatives; and
(e) The offer or sale of Shares in violation of any federal
or state securities laws or in violation of any stop order or other
determination or ruling by any federal or state agency with respect
to the offer or sale of such Shares in such state
(f) The negotiations and processing of checks made payable to
prospective or existing Shareholders which are tendered to the Bank for
the purchase of Shares (commonly known as "third party checks").
6.02 At any time the Bank may apply to any officer of the Company for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents and subcontractors shall not be liable
and shall be indemnified by the Company for any action taken or omitted by it
in reliance upon such instructions or upon the advice or opinion of such
counsel. The Bank, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document reasonably believed to be
genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided the Bank or its
agents or subcontractors by telephone, in person, machine readable input,
telex, CRT data entry or similar means authorized by the Company, and shall not
be held to have notice of any change of authority of any person, until receipt
of written notice thereof from the Company. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of officers of the Company, and the proper countersignature
of any former transfer agent or former registrar, or of a co-transfer agent or
co-registrar.
6.03 In order that the indemnification provisions contained in this
Section 6 shall apply, upon the assertion of a claim for which the Company may
be required to indemnify the Bank, the Bank shall promptly notify the Company
of such assertion, and shall keep the Company advised with respect to all
developments concerning such claim. The Company shall have the option to
participate with the Bank in the defense of such claim or to defend against
said claim in its own name or the name of the Bank. The Bank shall in no case
confess any claim or make any compromise in any case in which the Company may
be required to indemnify it except with the Company's prior written consent.
SECTION 7. STANDARD OF CARE
6
<PAGE> 8
The Bank shall at all times act in good faith and agrees to use its
best efforts within reasonable time limits to insure the accuracy of all
services performed under this Agreement, but assumes no responsibility and
shall not be liable for loss or damage due to errors unless said errors are
caused by its negligence, bad faith or willful misconduct or that of its
employees.
SECTION 8. RESPONSIBILITIES OF THE BANK
----------------------------
The Bank undertakes the duties and obligations imposed by this Agreement
upon the following terms and conditions, by all of which the Company, by its
acceptance hereof, shall be bound:
8.01 Whenever in the performance of its duties hereunder the Bank
shall deem it necessary or desirable that any fact or matter be proved or
established by the Company prior to taking or suffering any action hereunder,
such fact or matter may be deemed to be conclusively proved and established by
a certificate signed by the Chairman of the Board, the President, any Vice
President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of the Company and delivered to the Bank. Such certificate
shall be full authorization to the Bank for any action taken or suffered in
good faith by it under the provisions of this Agreement in reliance upon such
certificate.
8.02 The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be
required by the Bank for the carrying out or performing by the Bank of the
provisions of this Agreement.
8.03 The Bank, any of its affiliates or subsidiaries, and any
stockholder, director, officer or employee of the Bank may buy, sell or deal in
the securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
appointed as agent under this Agreement. Nothing herein shall preclude the Bank
from acting in any other capacity for the Company or for any other legal entity.
8.04 No provision of this Agreement shall require the Bank to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder or in the exercise of its rights it shall believe
in good faith that repayment of such funds or adequate indemnification against
such risk or liability is not reasonably assured to it.
SECTION 9. COVENANTS OF THE COMPANY AND THE BANK
-------------------------------------
7
<PAGE> 9
9.01 The Company shall furnish to the Bank the following:
(a) A copy of the Articles of Incorporation and By-Laws of the
Company;
(b) Copies of all material amendments to its Articles of
Incorporation or Bylaws made after the date of this Agreement, promptly
after such amendments are made; and
(c) A certificate of the Company as to the Shares authorized,
issued and outstanding, as well as a description of all reserves of
unissued Shares relating to the exercise of options, warrants or a
conversion of debentures or otherwise.
9.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Company for the safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any,
and for the preparation, use, and recordkeeping of such certificates, forms and
devices.
9.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. The Bank
agrees that all such records prepared or maintained by it relating to the
services performed hereunder are the property of the Company and will be
preserved, maintained and made available in accordance with the requirements of
law, and will be surrendered promptly to the Company on and in accordance with
its request.
9.04 The Bank and the Company agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
9.05 In the event that any requests or demands are made for the
inspection of the Shareholder records of the Company, the Bank will endeavor to
notify the Company and to secure instructions from an authorized officer of the
Company as to such inspection. The Bank expressly reserves the right, however,
to exhibit the Shareholder records to any person whenever it is advised by
counsel that it may be held liable for the failure to exhibit the Shareholder
records to such person.
SECTION 10. DATA ACCESS AND PROPRIETARY INFORMATION
---------------------------------------
8
<PAGE> 10
10.01 The Company acknowledges that the data bases, computer programs,
screen formats, report formats, interactive design techniques, and
documentation manuals furnished to the Company by the Bank as part of the
Company's ability to access certain Company related data ("Customer Data")
maintained by the Bank on data bases under the control and ownership of the
Bank or other third party ("Data Access Services") constitute copyrighted,
trade secret, or other proprietary information (collectively, "Proprietary
Information") of substantial value to the Bank or other third party. In no
event shall Proprietary Information be deemed Customer Data. The Company agrees
to treat all Proprietary Information as proprietary to the Bank and further
agrees that it shall not divulge any Proprietary Information to any person or
organization except as may be provided hereunder. Without limiting the
foregoing, the Company agrees for itself and its employees and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in accordance with the Bank's
applicable user documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any
portion of the Proprietary Information, and if such access is inadvertently
obtained, to inform the Bank in a timely manner of such fact and dispose of
such information in accordance with the Bank's instructions;
(d) to refrain from causing or allowing the data acquired
hereunder from being retransmitted to any other computer facility or other
location, except with the prior written consent of the Bank;
(e) that the Company shall have access only to those authorized
transactions agreed upon by the parties; and
(f) to honor all reasonable written requests made by the Bank
to protect at the Bank's expense the rights of the Bank in Proprietary
Information at common law, under federal copyright law and under other federal
or state law.
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 10.
10.02 If the Company notifies the Bank that any of the Data Access
Services do not operate in material compliance with the most recently issued
user documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure. Organizations from which the Bank may obtain
certain
9
<PAGE> 11
data included in the Data Access Services are solely responsible for the
contents of such data and the Company agrees to make no claim against the Bank
arising out of the contents of such third party data, including, but not
limited to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER
PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED
ON AN AS IS, AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES
EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
10.03 If the transactions available to the Company include the ability
to originate electronic instructions to the Bank in order to (i) effect the
transfer or movement of cash or Shares or (ii) transmit Shareholder information
or other information, then in such event the Bank shall be entitled to rely on
the validity and authenticity of such instructions without undertaking any
further inquiry as long as such instructions are undertaken in conformity with
security procedures established by the Bank from time to time.
SECTION 11. TERMINATION OF AGREEMENT
11.01 Either party may terminate this Agreement after written notice to
the other if one party has materially breached its obligation under this
Agreement, and the breaching party has failed to cure such material breach
within thirty (30) calendar days of receipt of such notice.
11.02 Should the Company exercise its right to terminate this Agreement
for reasons other than a material breach by the Bank as provided in Section
11.01 above, the Company shall pay the Bank for all out-of-pocket expenses
associated with the movement of records and material. In addition, the Bank
will charge the Company a termination fee of 25% of the fees billed during the
preceding twelve (12) months (with a minimum charge of $2,500.00). The charge
will cover the coordination of the Bank's termination process and the cost of
transferring the Company's records to a successor Transfer Agent or to the
Company, as directed by the Company, and the Bank will perform its services in
assisting with the transfer of records in a diligent and professional manner.
11.03 This Agreement may be terminated by either party upon ninety (90)
days written notice to the other.
SECTION 12. ASSIGNMENT
10
<PAGE> 12
12.01 Except as provided in Section 12.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
12.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
12.03 The Bank may, without further consent on the part of the
Company, (i) subcontract for the performance hereof with Boston EquiServe
Limited Partnership, a Delaware limited partnership which is duly registered as
a transfer agent pursuant to Section 17A(c)(2) of the Securities Exchange Act
of 1934, as amended, or (ii) subcontract with other subcontractors for
telephone and mailing services as may be required from time to time; provided,
however, that the Bank shall be as fully responsible to the Company for the
acts and omissions of any subcontractor as it is for its own acts and omissions.
SECTION 13. SUBCONTRACTORS
Nothing herein shall impose any duty upon the Bank in connection with
or make the Bank liable for the actions or omissions to act of unaffiliated
third parties such as, by way of example and not limitation, Airborne Services,
the U.S. mails and telecommunications companies, provided, if the Bank selected
such company, the Bank shall have exercised due care in selecting the same.
11
<PAGE> 13
SECTION 14. NOTICES
Any notice or communication by the Bank or the Company to the other is
duly given if in writing and delivered in person or mailed by first class mail,
postage prepaid, telex, telecopier or overnight air courier guaranteeing next
day delivery, to the other's address:
If to the Company:
Venture Lending & Leasing, Inc.
c/o Westech Investment Advisors
2010 North First Street, Suite 310
San Jose, CA 95131
Attn: Salvator O. Gutierrez
If to the Bank:
BankBoston, N.A.
c/o Boston EquiServe Limited Partnership
150 Royall Street
Canton, MA 02021
Telecopy No.: (617) 575-2549
Attn: Michael Lapolla
The Bank and the Company may, by notice to the other, designate
additional or different addresses for subsequent notices or communications.
SECTION 15. SUCCESSORS
All of the covenants and provisions of this Agreement by or for the
benefit of the Company or the Bank shall bind and inure to the benefit of their
respective successors and assigns hereunder.
SECTION 16. AMENDMENT
This Agreement may be amended or modified by a written amendment
executed by both parties hereto and authorized or approved by a resolution of
the Board of Directors of the Company.
12
<PAGE> 14
SECTION 17. SEVERABILITY
If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction or other authority to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
SECTION 18. GOVERNING LAW
This Agreement shall be governed by the laws of The Commonwealth of
Massachusetts.
SECTION 19. FORCE MAJEURE
In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to
the other party resulting from such failure to perform or otherwise from such
causes.
SECTION 20. CONSEQUENTIAL DAMAGES
Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or any
consequential damages arising out of any act or failure to act hereunder.
SECTION 21. DESCRIPTIVE HEADINGS
Descriptive headings of the several sections of this Agreement are
inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.
SECTION 22. THIRD PARTY BENEFICIARIES
The provisions of this Agreement are intended to benefit only the Bank
and the Company and their respective permitted successors and assigns. No
rights shall be granted to any other person by virtue of this Agreement, and
there are no third party beneficiaries hereof.
13
<PAGE> 15
SECTION 23. SURVIVAL
All provisions regarding indemnification, warranty, liability and
limits thereon, and confidentiality and protection of proprietary rights and
trade secrets shall survive the termination of this Agreement.
SECTION 24. MERGER OF AGREEMENT
This agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof, whether oral or written.
SECTION 25. COUNTERPARTS
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
all such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by one of its officers thereunto duly authorized, all
as of the date first written above.
VENTURE LENDING & LEASING INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
BANKBOSTON, N.A.
By:
----------------------------
Name: Dennis V. Moccia
--------------------------
Title: Director
-------------------------
14
<PAGE> 16
SCHEDULE A
BANKBOSTON, N.A.
- --------------------------------------------------------------------------------
STOCK TRANSFER AGENT SERVICES
FEE AND SERVICE SCHEDULE
FOR
VENTURE LENDING & LEASING, INC.
A. TERM:
The term of this Agreement shall be for a period of THREE (3) YEARS,
commencing from the effective date of this Agreement, JULY 1, 1997
This Agreement shall be self renewing, and providing that service mix
and volumes remain constant, the final year's fees listed under the Fees
for Standard Services section shall be increased by the accumulated
change in the National Employment Cost Index for Service Producing
Industries (Finance, Insurance, Real Estate) for the preceding years of
the contract, as published by the Bureau of Labor Statistics of the
United States Department of Labor. Fees will be increased on this basis
on each successive contract anniversary thereafter.
B. FEES:
========================================================
$ 7,000.00 ANNUAL ADMINISTRATIVE FEE 7/1/97-6/30/98
$ 9,000.00 ANNUAL ADMINISTRATIVE FEE 7/1/98-6/30/99
$10,000.00 ANNUAL ADMINISTRATIVE FEE 7/1/99-6/30/00
========================================================
Base Fee includes all services below. Limitations and additional
services are indicated with additional charges as noted.
C. STANDARD SERVICES:
BankBoston, N.A. agrees to provide the following services to Venture
Lending & Leasing, Inc. in accordance with the standard fees set forth
in Section B herein above.
ACCOUNT MAINTENANCE
- Annual administrative services as Transfer Agent
- Annual administrative services as Registrar
- Maintaining up to 1000 shareholder accounts per year, additional
accounts to be billed at $5.00 each per year, to include the following
services:
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VENTURE LENDING & LEASING, INC.
PAGE 2
- Processing of new stockholder accounts
- Posting and acknowledging address changes
- Processing other routine file maintenance
- Posting all transactions, including debit and credit certificates
to the stockholder file
- Researching and responding to all stockholder inquiries
- Remove inquiry access to Venture Lending & Leasing, Inc.'s
stockholder records via PC terminal with telecommunications
software
ROUTINE CERTIFICATE ISSUANCE
- - Issuance, cancellation and registration of up to 1000 certificates per year
(excess to be billed at $1.50 each) to include the following services:
- Production and mailing of Daily Transfer Reports
- Processing of all legal transfers including window and mail items
- Combining certificates into large denominations
- Processing Indemnity Bonds
- Replacing lost certificates
- Placing, maintaining and removing stop-transfer notations
SPECIAL CERTIFICATE ISSUANCE
- - The processing of up to 50 stock option issuances, to include DWAC
processing where required, per year, additional to be billed at $7.50 per
stock option issuance
- - The processing of up to 50 Restricted Transfers per year, additional to be
billed at $7.50 per Restricted Transfer
MAILING AND REPORTING SERVICES
- - Addressing and enclosing Quarterly Reports, three (3) per annum for
registered shareholders
- - Preparing a full Statistical Report to reflect shareholder base by
geographic residence code, class code, and share group, two (2) per annum
- - Preparing a full stockholder list, four (4) per annum
- - Coding "multiple" accounts at a single household to suppress mailing of
reports to same
- - Prepare a set of labels (4) per annum
<PAGE> 18
VENTURE LENDING & LEASING, INC.
PAGE 3
ANNUAL MEETING SERVICES
- - Preparing a full stockholder list as of the Annual Meeting Record Date
- - Addressing and enclosing proxy card along with notice and statement return
envelope and Annual Report envelope
- - Receiving, opening and examining returned proxies
- - Writing in connection with unsigned or improperly executed proxies
- - Providing summary reports on status of tabulation on a daily basis
- - Responding to inquiries as to whether specific accounts have yet voted
- - Tabulating returned proxies to include up to four (4) proposals, excess to be
billed at $0.03 per account, per proposal
- - Attending Annual Meeting as Inspector of Election (travel expenses billed as
incurred)
- - Preparing a final Annual Meeting List reflecting how each account has voted on
each proposal
DIVIDEND SERVICES
As Dividend Disbursing Agent and Paying Agent, Bank of Boston will perform
the dividend related services indicated below, pursuant to the following terms
and conditions:
- - Checks to be drawn on The First National Bank of Boston and funds immediately
available in-house on mailing date
- - All funds must be received by 12:00 P.M., EASTERN TIME via Federal Funds Wire
or Bank of Boston Demand Deposit Account debit
Dividend checks will be released upon receipt of funding
- - Preparing and mailing quarterly dividends (check includes address change
feature) with an additional enclosure with each dividend check
- - Preparing a hard copy dividend list as of each dividend record date
- - Preparing and filing Federal Information Returns (Form 1099) of dividends paid
in a year and mailing a statement to each stockholder
- - Preparing and filing State Information Returns of dividends paid in a year to
stockholders resident within such state
- - Preparing and filing annual withholding return (Form 1042) and payments to the
government of income taxes withheld from Non-Resident Aliens
- - Replacing lost dividend checks
- - Providing photocopies of canceled checks when requested
- - Reconciling paid and outstanding checks
- - Coding "undeliverable" accounts to suppress mailing dividend checks to same
- - Processing and recordkeeping of accumulated uncashed dividends
- - Furnishing requested dividend information to stockholders
<PAGE> 19
VENTURE LENDING & LEASING, INC.
PAGE 4
- - Performing the following duties as required by the Interest and Dividend Tax
Compliance Act of 1983:
- Withholding tax from shareholder accounts not in compliance with the
provisions of the Act
- Reconciling and reporting taxes withheld, including additional 1099
reporting requirements, to the Internal Revenue Service
- Responding to shareholder inquiries regarding the Regulations
- Mailing to new accounts who have had taxes withheld, to inform them of
procedures to be followed to curtail subsequent back-up withholding
- Performing shareholder file adjustments to reflect certification of accounts
D. BILLING DEFINITION OF NUMBER OF ACCOUNTS
For billing purposes, the number of accounts will be based on open
accounts on file at the beginning of each billing period, plus any new
accounts added during that period.
E. ACCEPTANCE
In witness whereof, the parties hereto have caused this Fee and Service
Schedule to be executed by their respective officers as of the effective
date of this Fee and Service Schedule.
BANKBOSTON, N.A. VENTURE LENDING & LEASING, INC.
By: By:
-------------------------------------- -----------------------------
Title: Dennis V. Moccia Title:
----------------------------------- --------------------------
Date: Director Date:
------------------------------------ ---------------------------
<PAGE> 1
EXHIBIT 10.4
MANAGEMENT AGREEMENT
THIS AGREEMENT (together with all Exhibits attached hereto, this
"Agreement") is made as of May __, 1997, between VENTURE LENDING & LEASING II,
INC., a Maryland corporation ("Fund"), on the one hand, and WESTECH INVESTMENT
ADVISORS, INC., a California corporation ("Westech Advisors"), and SIGULER GUFF
ADVISERS, LLC, a Delaware limited liability company ("Siguler Guff Advisers"),
on the other hand. Westech Advisors is sometimes referred to herein as the
"Manager"; Siguler Guff Advisers is sometimes referred to herein as the "Adviser
to the Manager".
WHEREAS, the Fund is a newly organized, non-diversified closed-end
management investment company that has elected status as a business development
company ("BDC") under the Investment Company Act of 1940 ("1940 Act");
WHEREAS, the Manager and the Adviser to the Manager are each investment
advisers registered as such under the Investment Advisers Act of 1940 ("Advisers
Act"); and
WHEREAS, the Fund desires to retain the Manager and the Adviser to the
Manager to furnish certain investment advisory, portfolio management and
administrative services to the Fund, and the Manager and Siguler Guff Advisers
are willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties as follows:
1. Appointment. The Fund hereby appoints Westech Advisors as Investment
Manager and Siguler Guff Advisers as Adviser to the Manager for the period and
on the terms set forth in this Agreement. Westech Advisors and Siguler Guff
Advisers each accepts such appointment and agrees to render the services herein
set forth, for the compensation herein provided.
2. Investment Duties. Subject to the supervision of the Fund's Board of
Directors ("Board"), the Manager will provide a continuous investment program
for the Fund and will determine from time to time what securities and other
investments will be purchased, retained or sold by the Fund. Subject to
investment policies and guidelines established by the Board, the Manager will
identify, evaluate, structure and close the investments to be made by the Fund,
arrange debt financing for the Fund, provide portfolio management and servicing
of loans or leases held in the Fund's portfolio, and administer the Fund's
day-to-day affairs. The Adviser to the Manager will advise the Manager
concerning the organization of the Fund, oversight of Fund administration, and
shareholder relations.
<PAGE> 2
3. Administrative Duties. The Manager will administer the affairs of
the Fund under the supervision of the Board and subject to the following:
(a) The Manager will supervise all aspects of the operations
of the Fund, including oversight of transfer agency, custodial and accounting
services; provided, however, that nothing contained herein shall be deemed to
relieve or deprive the Board of its responsibility for and control of the
conduct of the affairs of the Fund.
(b) The Manager will arrange, but not pay, for the periodic
preparation, updating, filing and dissemination (as required) of the Fund's
registration statement under the Securities Exchange Act of 1934, proxy
material, tax returns and required reports to the Fund's shareholders and the
Securities and Exchange Commission ("SEC") and other appropriate federal or
state regulatory authorities.
(c) The Manager will oversee the computation of the net asset
value and the net income of the Fund in accordance with procedures adopted by
the Board.
(d) The Manager will maintain or oversee the maintenance of
all books and records with respect to the Fund, and will furnish the Board with
such periodic and special reports as the Board reasonably may request. In
compliance with the requirements of Rule 31a-3 under the 1940 Act, the Manager
hereby agrees that all records, which it maintains for the Fund, are the
property of the Fund, agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act any records, which it maintains for the Fund and which
are required to be maintained by Rule 31a-1 under the 1940 Act, and further
agrees, upon request by the Fund, to surrender promptly to the Fund any records
that it maintains for the Fund.
(e) All cash, securities and other assets of the Fund will be
maintained in the custody of one or more banks in accordance with the provisions
of Section 17(f) of the 1940 Act and the rules thereunder; the authority of the
Manager to instruct the Fund's custodian(s) to deliver and receive such cash,
securities and other assets on behalf of the Fund will be governed by a
custodian agreement between the Fund and each such custodian, and by resolution
of the Board.
4. Further Duties. In all matters relating to the performance of this
Agreement, the Manager and Siguler Guff Advisers will act in conformity with the
Articles of Incorporation and Bylaws of the Fund and with the instructions and
directions of the Board and will comply with the requirements of the 1940 Act,
the rules thereunder, and all other applicable federal and state laws and
regulations.
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<PAGE> 3
5. ERISA Requirements. If any assets of the Fund are ever determined by
the Manager to constitute assets of any employee benefit plan investor governed
by the Employee Retirement Investment Security Act of 1974, as amended
("ERISA"), then the Manager shall also act in accordance with the requirements
of ERISA and hereby acknowledges that in such a situation it would be a
fiduciary of any such employee benefit plan investors and will be deemed to have
been appointed by such employee benefit plan investors as investment manager
with respect to the assets of such employee benefit plan investors invested in
the Fund.
6. Services Not Exclusive.
(a) The services furnished by the Manager and the Adviser to
the Manager hereunder are not to be deemed exclusive and the Manager and the
Adviser to the Manager, except as otherwise expressly provided in this Section
6, shall be free to furnish similar services to others so long as its services
under this Agreement are not impaired thereby. Except as otherwise expressly
provided in this Section 6, nothing in this Agreement shall limit or restrict
the right of any director, officer or employee of the Manager or of the Adviser
to the Manager, who may also be a director, officer or employee of the Fund, to
engage in any other business or to devote his or her time and attention in part
to the management or other aspects of any other business, whether of a similar
nature or a dissimilar nature.
(b) Until the Fund has called and invested at least 75% of the
total amounts subscribed for by investors, except as provided below, neither the
Manager nor the Adviser to the Manager nor any "Controlled Person" of either
will, without the consent of the Fund, sponsor, distribute or act as investment
adviser or manager to any pooled investment vehicle other than the Fund or
Venture Lending & Leasing, Inc., a Maryland corporation ("VLLI") or act as
investment adviser or manager to any client if the investment program of such
pooled investment vehicle or client includes, as a primary or major component,
the provision of asset-backed financing to venture capital-backed companies. In
the event that the Fund elects irrevocably to release investors from any
uncalled portion of their subscription obligations, the "total amount subscribed
for by investors" shall be deemed reduced to reflect such release. The foregoing
restriction shall not be deemed to prohibit the Manager, the Adviser to the
Manager, or any Controlled Person of either from acting as investment adviser or
manager with respect to any existing client of such party as of May 19, 1997;
provided, however, that, until the 75% investment threshold described above has
occurred, such party shall not, without the consent of the Fund, accept from
such existing clients any additional investment funds (other than amounts
required for follow-on investments to existing investments) beyond the funds
invested or committed by such existing clients as of May 19, 1997. A "Controlled
Person" of the Manager or the Adviser to the Manager as used in this paragraph
means any entity (i) 50% or more of whose
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<PAGE> 4
voting securities are beneficially owned by the Manager or (ii) 50% or more of
whose voting securities are controlled by any of the "Key Executives" of the
Manager or the Adviser to the Manager. For purposes of this paragraph, the "Key
Executives" of the Manager are Ronald W. Swenson and Salvador O. Gutierrez; the
"Key Executive" of the Adviser to the Manager is George W. Siguler.
7. Expenses.
(a) The Fund will pay all expenses (including, without
limitation, accounting, legal, printing, clerical, filing and other expenses)
incurred by the Fund, Robertson, Stephens & Company LLC ("the Placement Agent")
or either of the Manager or the Adviser to the Manager, or their affiliates on
behalf of the Fund in connection with the organization of the Fund and the
initial offering of its shares. Except as otherwise expressly provided for in
Section 7(b), during the term of this Agreement, the Fund will bear all of its
expenses incurred in its operations including, but not be limited to, the
following: (i) brokerage and commission expense and other transaction costs
incident to the acquisition and dispositions of investments and the creation and
perfection of security interests with respect thereto, (ii) federal, state and
local taxes and fees, including transfer taxes and filing fees, incurred by or
levied upon the Fund, (iii) interest charges and other fees in connection with
borrowings, (iv) SEC fees and expenses and any fees and expenses of state
securities regulatory authorities, (v) expenses of printing and distributing
reports and notices to shareholders, (vi) costs of proxy solicitation, (vii)
costs of meetings of shareholders and the Board, (viii) charges and expenses of
the Fund's custodian, transfer and dividend disbursing agents, (ix) compensation
and expenses of the Fund's directors who are not interested persons of the Fund,
the Manager, the Adviser to the Manager or the Placement Agent, and of any of
the Fund's officers who are not interested persons of the Manager or the Adviser
to the Manager, and expenses of all directors in attending Board or shareholder
meetings, (x) legal and auditing expense, including expenses incident to the
documentation for, and consummation of, venture lending and leasing transactions
and legal actions to enforce the Fund's rights under such loans and leases, (xi)
costs of any certificates representing the Shares, (xii) costs of stationery and
supplies, (xiii) the costs of membership by the Fund in any trade organizations
and (xiv) expenses associated with litigation and other extraordinary or
non-recurring expenses.
(b) The expenses to be borne by the Manager and the Adviser to
the Manager in connection with their duties to the Fund hereunder are limited to
the following: (i) all costs and fees incident to the selection and
investigation of prospective Fund investments, such as travel expenses and
professional fees (but excluding legal and accounting fees and other costs
incident to the closing, documentation or consummation of such transactions),
(ii) the cost of adequate office space for the Fund and all necessary office
equipment and services, including telephone service, heat,
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<PAGE> 5
utilities and similar items and (iii) the cost of providing the Fund with such
corporate, administrative and clerical personnel (including officers and
directors of the Fund who are interested persons of the Manager or the Adviser
to the Manager and are acting in their respective capacities as officers and
directors) as the Board reasonably deems necessary or advisable to perform the
services required to be performed by the Manager and the Adviser to the Manager
under this Agreement.
(c) The Fund may pay directly any expenses incurred by it in
its normal operations and, if any such payment is consented to by the Manager
and acknowledged as otherwise payable by the Manager or the Adviser to the
Manager pursuant to this Agreement, the Fund may reduce the fee payable to the
Manager and the Adviser to the Manager pursuant to Section 8 hereof by such
amount. To the extent that such deductions exceed the fee payable to the Manager
and the Adviser to the Manager on any quarterly payment date, such excess shall
be carried forward and deducted in the same manner from the fee payable on
succeeding quarterly payment dates.
(d) The payment or assumption by the Manager or the Adviser to
the Manager of any expense of the Fund that the Manager or the Adviser to the
Manager is not required by this Agreement to pay or assume shall not obligate
the Manager or the Adviser to the Manager to pay or assume the same or any
similar expense of the Fund on any subsequent occasion.
8. Compensation.
(a) For the services provided and the expenses assumed
pursuant to this Agreement, the Fund or its successor trustees will pay, whether
before or after dissolution of the Fund, to the Manager and the Adviser to the
Manager, together, a management fee ("Management Fee"), computed and paid
quarterly for the first two years following the first closing of the initial
offering of the Fund's shares, at an annual rate of 2.5% of the amount of the
Fund's Committed Equity Capital (as defined below) (regardless of when or if
such committed capital is called) as of the last day of each such fiscal
quarter; and computed and paid quarterly for each quarter thereafter, at an
annual rate of 2.5% of the Fund's total assets (including amounts derived from
borrowed funds) as of the last day of each such fiscal quarter. For purposes of
calculating the Management Fee, any capital committed to the Fund at a closing
subsequent to the first closing (regardless of when or if such committed capital
is called) shall be deemed to have been committed as of the first closing. To
illustrate, assuming the Fund has a first closing for $75 million on July 15,
1997, and a second closing for $25 million on November 15, 1997, then the $25
million committed on November 15, 1997 will be treated as if it had been
committed on July 15, 1997 for purposes of calculating the Management Fee.
Therefore, on November 15, 1997, for the $25 million committed at the second
closing, the Fund would pay to the Manger $156,250 (i.e., 1/4 of 2.5% of $25
million) for the
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<PAGE> 6
Management Fee attributable to the quarter ending October 15, 1997. On January
15, 1998, the Fund would pay to the Manager $625,000 (i.e., 1/4 of 2.5% of $100
million) for the Management Fee attributable to the quarter ending on such date.
The Fund's Committed Equity Capital, as of the end of any fiscal
quarter, shall be the aggregate amount of subscription obligations for the
purchase of the Fund's shares (including any amounts of such obligations that
have been satisfied) as of the end of such fiscal quarter.
(b) For the services provided and the expenses assumed
pursuant to this Agreement, in addition to the Management Fee, the Fund will pay
to the Manager and the Adviser to the Manager a monthly incentive fee
("Incentive Fee") after shareholders have received a return of funds ("Payout")
equal to the following: (a) cumulative dividends and distributions equal to 100%
of all amounts paid, as of the date of calculation, by shareholders to the Fund
(but excluding any of the 2% placement fees paid to the Placement Agent by
certain of the shareholders) for the purchase of shares plus (b) a preferred
return on all amounts paid, as of the date of calculation, equal to an 8%
cumulative, non-compounded annual return on such amounts.
The Incentive Fee shall be calculated as follows: All amounts available
to be paid as dividends and distributions to shareholders in accordance with the
Fund's distribution policies will be distributed as follows (whether before or
after dissolution of the Fund): 80% as dividends to the Fund's shareholders, and
20% to the Manager and the Adviser to the Manager, together, as the Incentive
Fee. Notwithstanding the foregoing, the Incentive Fee shall not accrue or be
paid until the Fund is no longer permitted to make capital calls under the
subscription agreement pursuant to which shareholders purchased their shares or
irrevocably waives any right to make capital calls.
In calculating such 8% preferred return, any capital contributed that
is Make-Up Capital (as defined below) shall be treated as if contributed on the
date that investors subscribing for shares of the Fund at an earlier closing
("Earlier Investor") were required to contribute capital corresponding to such
Make-Up Capital. As used herein, "Make-Up Capital" means the capital that each
investor who purchases shares in the Fund for the first time at a closing
subsequent to the first closing of the offering are required, pursuant to the
terms of such investor's subscription agreement with the Fund, to contribute an
amount equal to the product of: (i) such subscriber's capital commitment and
(ii) a fraction, the numerator of which is the aggregate of all Capital Calls
that have been made to Earlier Investors and the denominator of which is the
aggregate amount of all Capital commitments of Earlier Investors. To illustrate,
assume the Fund has (i) a closing for $75 million of committed capital on July
15, 1997, (ii) a first capital call on August 1, 1997, for 10% of all committed
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<PAGE> 7
capital, (iii) a second capital call for an additional 5% of committed capital
on October 1, 1997, and (iv) a second closing for $25 million of committed
capital on December 30, 1997. If an investor, subscribing for shares for the
first time, subscribes for a $1 million capital contribution at the second
closing on December 30, 1997, such investor, pursuant to the terms of his
Subscription Agreement, will contribute $150,000 as Make-Up Capital at the
second closing. For purposes of calculating the 8% preferred return, $100,000 of
such Make-Up Capital shall be treated as if the Fund received it on August 1,
1997, and $50,000 of such Make-Up Capital shall be treated as if it had been
contributed on October 1, 1997. Therefore, if there is more than one closing
such that Make-Up Capital must be contributed to the Fund, the actual return on
capital invested in the Fund will need to be higher than 8% to meet the 8%
preferred return threshold.
(c) If this Agreement is terminated by the Fund for any reason
prior to the final distribution in liquidation of all the Fund's assets to
shareholders, the Fund will pay, regardless of the dissolution of the Fund, to
the Manager and the Adviser to the Manager an annual post-termination fee
("Post-Termination Fee"), in addition to any Management Fee and Incentive Fee
previously paid to or earned by the Manager and the Adviser to the Manager,
calculated as provided in Annex A hereto; provided, however, that such Post-
Termination Fee will be paid only if, prior to the payment of any such
Post-Termination Fee, the Fund receives an opinion of its counsel to the effect
that payment of the Post-Termination Fee is permissible under the applicable
provisions of the 1940 Act and the Advisers Act, and applicable rules,
regulations and interpretations of the SEC thereunder. Within a reasonable time
after the Fund commences operations, the Fund will consult with its counsel as
to the permissibility of payment of the Post-Termination Fee under the 1940 Act
and the Advisers Act. If the Fund's counsel concludes that an exemptive order or
no-action relief of the SEC is required to permit the Fund to pay the
Post-Termination Fee or to provide such counsel with adequate assurances upon
which the aforementioned opinion can be based, the Fund agrees to seek, together
with the Manager and the Adviser to the Manager, such an exemptive order or
no-action relief within a reasonable time after the Fund commences operations.
The Post-Termination Fee will be payable as promptly as practicable following
the end of any fiscal year for which it is earned.
(d) If this Agreement becomes effective or terminates before
the end of any fiscal quarter, the Management Fee for the period from the
effective day to the end of the fiscal quarter or from the beginning of such
fiscal quarter to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full fiscal quarter
in which such effectiveness or termination occurs.
(e) If (i) the Manager or the Adviser to the Manager, (ii) an
officer, director or employee of the Manager or the Adviser
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<PAGE> 8
to the Manager, (iii) a company controlling, controlled by or under common
control with the Manager or the Adviser to the Manager, or (iv) an officer,
director or employee of any such company receives any compensation from a
company whose securities are held in the Fund's portfolio in connection with the
provision to that company of significant managerial assistance, the compensation
due to the Manager and the Adviser to the Manager hereunder shall be reduced by
the amount of such fee. If such amounts have not been fully offset at the time
of termination of this Agreement, the Manager and the Adviser to the Manager
shall pay such excess amounts to the Fund upon termination.
9. Limitation of Liability of Manager and the Adviser to the Manager.
Neither the Manager nor the Adviser to the Manager shall be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which this Agreement relates except a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement. Any person, even though also an officer, director,
employee or agent of the Manager or the Adviser to the Manager, who may be or
become an officer, director, employee or agent of the Fund shall be deemed, when
rendering services to the Fund or acting with respect to any business of the
Fund, to be rendering such service to, or acting solely on behalf of, the Fund
and not as an officer, director, employee, or agent or one under the control or
direction of the Manager or the Adviser to the Manager even though paid by it.
10. Duration and Termination.
(a) This Agreement shall become effective upon the date
hereabove written provided that this Agreement shall not take effect unless it
has first been approved (i) 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
approval, and (ii) by vote of a majority of the Fund's outstanding voting
securities.
(b) Unless sooner terminated as provided herein, this
Agreement shall continue in effect for two years from the above written date.
Thereafter, regardless of the dissolution of the Fund, if not terminated, this
Agreement shall continue automatically for successive periods of twelve months
each, provided that such continuance is specifically approved at least annually
(i) 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 approval, and (ii) by the Board
or by vote of a majority of the outstanding voting securities of the Fund.
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<PAGE> 9
(c) Notwithstanding the foregoing, this Agreement may be
terminated: (i) by vote of the Board or by a vote of a majority of the
outstanding voting securities of the Fund at any time, without the payment of
any penalty, on sixty days' written notice to the Manager and the Adviser to the
Manager or (ii) by the Manager and the Adviser to the Manager at any time,
without the payment of any penalty, on sixty days' written notice to the Fund.
This Agreement will automatically terminate in the event of its assignment.
11. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved by vote of a majority of the Fund's outstanding voting
securities.
12. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Maryland, without giving effect to the conflicts of
laws principles thereof, and in accordance with the 1940 Act. To the extent that
the applicable laws of the State of Maryland conflict with the applicable
provisions of the 1940 Act, the latter shall control.
13. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. 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. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of the outstanding voting securities",
"affiliated person", "interested person", "assignment", "broker", "investment
adviser", "national securities exchange", "net assets", "security" and
"significant managerial assistance" shall have the same meaning as such terms
have in the 1940 Act, subject to such exemption as may be granted by the
Securities and Exchange Commission by any rule, regulation or order. Where the
effect of a requirement of the 1940 Act reflected in any provision of this
Agreement is relaxed by a rule, regulation or order of the Securities and
Exchange Commission, whether of
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<PAGE> 10
special or general application, such provision shall be deemed to incorporate
the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated as of the day and year first above
written.
VENTURE LENDING & LEASING II, INC.
By: ______________________________
Salvador O. Gutierrez,
Chief Operating Officer
WESTECH INVESTMENT ADVISORS, INC.
By: ______________________________
Ronald W. Swenson,
President
SIGULER GUFF ADVISERS, LLC
By: ______________________________
George W. Siguler,
Managing Director
10
<PAGE> 11
ANNEX A
to
Management Agreement
of
Venture Lending & Leasing II, Inc.
Subject to the conditions set forth in the Management Agreement, if the
Management Agreement is terminated by the Fund for any reason prior to the final
distribution in liquidation of all the Fund's assets to shareholders, the Fund
will pay, regardless of the dissolution of the Fund, the Manager and the Adviser
to the Manager an annual fee ("Post-Termination Fee"), in addition to any
Management Fee and Incentive Fee previously paid to or earned by the Manager and
the Adviser to the Manager, payable as promptly as practicable after the end of
the Fund's fiscal year and calculated as follows:
1. The "Attributable Assets" of the Fund will be determined.
Attributable Assets shall be all securities or other assets held in the Fund's
portfolio, including securities receivable, as of the time of termination of the
Management Agreement, and any assets to which the Fund is or may become entitled
under the terms of any securities or other assets held in the Fund's portfolio,
including, but not limited to, warrants issuable under the terms of venture
loans or leases, and securities issuable upon exercise of any warrants, but
excluding cash and cash equivalents.
2. The Post-Termination Fee shall be calculated and paid with respect
to the Attributable Assets of the Fund, in the same manner as the Incentive Fee
is calculated and paid, as though the entire Fund consisted of the Attributable
Assets as of the date of termination.
3. Any Capital Contributions made by investors subsequent to the date
of termination shall be disregarded, and any amounts paid by the Fund to acquire
additional Attributable Assets, including, but not limited to, amounts paid to
fund venture loans or leases pursuant to commitments existing on the date of
termination and amounts paid on exercise of warrants, shall be treated as
additional Capital Contributions.
4. All Total Distributions on or prior to the date of termination shall
be taken into account in calculating the Post-Termination Fee, and Total
Distributions as of the date of termination shall be deemed to include all cash
and cash equivalents held by the Fund on the date of termination.
1
<PAGE> 12
5. After the date of termination, Total Distributions shall be deemed
to consist of (i) the proceeds of any sale or other disposition of Attributable
Assets during the fiscal year that is recognized by the Fund for federal income
tax purposes, plus (ii) all income received or recognized in a fiscal year with
respect to Attributable Assets, including, without limitation, interest,
dividends, amortization of discount and accrual of residual payments, minus
(iii) an amount of the Fund's Allocable Expenses (as defined below) for the
fiscal year determined by multiplying such Allocable Expenses by a fraction, the
numerator of which is the average of the beginning and end values of
Attributable Assets for that fiscal year and the denominator of which is the
average of the beginning and end values of the Fund's total assets for that
fiscal year. Allocable Expenses shall consist of all Fund expenses other than
accrual of the Post-Termination Fee, accrual of any incentive fee paid to a
successor manager or advisor and any management or advisory fee paid to a
successor manager or advisor to the extent any such management or advisory fee
exceeds 2.5% of the Fund's total assets less Attributable Assets.
2
<PAGE> 1
EXHIBIT 10.5
April 1, 1997
Ronald W. Swenson
Salvador O. Gutierrez
Westech Investment Advisors, Inc.
2010 North First Street, Suite 310
San Jose, CA 95131
George Siguler
Siguler Guff Advisers
630 Fifth Avenue
16th Floor
New York, NY 10111
Gentlemen::
We are pleased to confirm the arrangements under which Robertson, Stephens &
Sponsors LLC ("RS & Co.") is engaged by Westech Investment Advisors, Inc. and
Siguler Guff Advisers (the "Sponsors") as placement agent to the Sponsors.
1. ENGAGEMENT
A. SCOPE OF ENGAGEMENT. The Sponsors hereby engage RS & Co. as the
placement agent during the term of this agreement (the "Agreement") in
connection with the proposed private placement (the "Offering") of
shares [of common stock] in Venture Lending & Leasing II, Inc..] (the
"Fund"). The Offering will be structured as an offering of up to $100
million of shares in the Fund, of which up to $70 million will be
placed directly by the Fund and up to $30 million will be placed by RS
& Co. (the "Shares") However, the final terms of the Offering will be
negotiated between the Sponsors and the investors who purchase Shares
in the Offering. RS & Co. hereby accepts such engagement and agrees to
use its reasonable best efforts in connection with the engagement.
This Agreement shall not give rise to any commitment by RS & Co. to
purchase any of the Shares, and RS & Co. shall have no authority to
bind the Fund. All subscriptions to purchase Shares shall be subject to
acceptance by the Sponsors. RS & Co. may retain other brokers or
dealers to act as sub-agents on its behalf in connection with the
Offering.
B. OFFERING MEMORANDUM. The Offering will be made by means of, and in
accordance with, a private placement memorandum (the "Memorandum"), to
be prepared and approved by the Sponsors, in consultation with RS & Co.
The Sponsors will also be responsible for updating and supplementing
the Memorandum prior to closing to reflect developments affecting the
Sponsors and the Fund. All other documents and materials to be used for
circulation to investors (collectively, "Investor Materials") in
connection with the Offering will be provided by the Sponsors to RS &
Co. in advance. The Memorandum and all Investor Materials shall be the
responsibility of the Sponsors. The Memorandum will include all
information to be provided to accredited investors under Rule 506 of
Regulation D under the Securities Act of 1933, as amended (the
"Securities Act"). Neither the Memorandum nor any of the Investor
Materials shall contain an untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
C. COMPLIANCE WITH SECURITIES LAWS. Each of the Sponsors and RS & Co.
agrees to conduct the Offering in a manner intended to qualify for the
exemption from the registration requirements of the Securities Act
<PAGE> 2
April 1, 1997 Page 2
Engagement Letter
Westech Investment Advisors, Inc.
provided by Section 4(2) thereof and Rule 506 of Regulation D
thereunder. Each of the Sponsors and RS & Co. agrees to limit offers to
sell, and solicitations of offers to buy, securities of the Sponsors in
connection with the Offering to persons reasonably believed by it to be
"accredited investors" within the meaning of Rule 501(a) under the
Securities Act. Each of the Sponsors and RS & Co. agrees that it will
not engage in any form of general solicitation or general advertising
in connection with the Offering within the meaning of Rule 502 under
the Securities Act. Each of the Sponsors and RS & Co. agrees to conduct
the Offering in a manner intended to comply with the registration or
qualification requirements, or available exemptions therefrom, under
applicable state "blue sky" laws and applicable securities laws of
other jurisdictions; the Sponsors shall be responsible for compliance
with the filing requirements of the securities laws of states and other
jurisdictions and in that respect shall provide to RS & Co. a blue sky
memorandum and shall make all filings and take all other actions as are
required in connection with compliance with such laws. The Sponsors
will not, for a period of six months following the final closing date
of the Offering, offer for sale or sell any Shares in the Fund unless,
in the opinion of the Sponsor's legal counsel, concurred in by RS &
Co.'s legal counsel, such offer or sale does not jeopardize the
availability of exemptions from the registration and qualification
requirements under applicable federal securities laws, state "blue sky"
laws or the securities laws of any other jurisdiction with respect to
the Offering. The Sponsors has not engaged in any such offering during
the six months prior to the date of this Agreement.
2. COMPENSATION AND EXPENSES
A. FEES. The Sponsors agree to compensate RS & Co. through a ten
percent (10%) interest in the Sponsors' incentive fee paid to the
Sponsors by the Fund with respect to the Shares purchased by persons or
entities which are introduced to the Sponsors by RS & Co. and become
shareholders of the Fund (the "RS & Co. Investors"). RS & Co. shall
receive its portion of the incentive fee paid to the Sponsors by the
Fund pursuant to the terms of the investment management agreement
between the Fund and the Sponsors. RS & Co. will separately change
each RS & Co. Investor a fee equal to two percent (2%) of such RS & Co.
Investor's subscription to the Fund. For purposes of determining which
shareholders are RS & Co. Investors, RS & Co. shall from time to time
provide the Sponsors with a list of prospective investors RS & Co.
intends to contact. If the Sponsors do not remove a prospective
investor from the list and such investor becomes a shareholder of the
Fund, such investor shall be deemed to be an RS & Co. Investor upon
subscription to the Fund, and RS & Co. shall be entitled to a portion
of the incentive fee as herein described. Bayview Investors, Ltd., an
affiliate of RS & Co., shall be entitled to purchase Shares sold in the
Offering on terms and conditions equivalent to the most favorable terms
and conditions given to any other purchasers of Shares in the Offering.
B. EXPENSES. Whether or not there is a closing of the Offering, the
Sponsors will pay their own and their agents' expenses in connection
with the Offering and will reimburse RS & Co. for its reasonable
out-of-pocket expenses incurred in connection with the Offering,
including without limitation the fees and expenses of legal counsel,
travel expenses and printing expenses, provided that such expenses will
not exceed $_75,000 without prior written approval of the Sponsors. If
RS & Co. or any other Indemnified Person (as defined in Exhibit A
hereto) becomes involved in any action, suit, hearing, investigation or
similar proceeding in connection with the Offering or the engagement
hereunder, the Sponsors will reimburse such Indemnified Person for
reasonable out-of-pocket expenses incurred in connection therewith,
notwithstanding the absence of a judicial determination as to the
propriety or enforceability of the Sponsors's obligation to reimburse
such Indemnified Person and the possibility that such payments might
later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement is so
held to have been improper, each Indemnified Person shall promptly
return it to the Sponsors, together with interest, compounded annually,
determined on the basis of the prime rate announced from time to time
by Bank of America, NT&SA, San Francisco, California. All of the
foregoing expenses will be reimbursed within ten (10) days after
receipt by the Sponsors of an invoice setting forth the items requiring
reimbursement.
C. RELATED TRANSACTIONS. In the event that the Sponsors shall enter
into any agreement, arrangement or relationship with any RS & Co.
Investor in the Offering or otherwise in connection with the Offering
other than as described in the Memorandum within one year following the
closing, RS & Co. shall be paid the fees and any related expenses
described in this Section 2 based upon the value to the Sponsors of
such agreement, arrangement
<PAGE> 3
April 1, 1997 Page 3
Engagement Letter
Westech Investment Advisors, Inc.
or relationship. In addition, to the extent that any RS & Co. Investor
in the Offering purchases any other Interest in the Fund within two (2)
years following the later of the date of such purchaser's subscription
agreement and the termination of our engagement hereunder, then RS &
Co. shall be entitled to receive with respect to such subsequent
purchase, fees calculated as set forth in Section 2(A) hereof.
3. DUE DILIGENCE; SPONSORS MATERIAL
A. DUE DILIGENCE AND SPONSORS MATERIAL. The Sponsors shall make members
of management and other employees available to RS & Co. for purposes of
satisfying RS & Co.'s due diligence requirements and consummating the
Offering, and shall commit such time and other resources as are
necessary or appropriate to secure reasonable and timely success of the
Offering. The Sponsors shall cooperate with RS & Co. in connection
with, and shall make available to RS & Co., such documents and other
information as RS & Co. shall reasonably request, to satisfy its due
diligence requirements. None of the documents or other information
provided to RS & Co. shall contain an untrue statement of a material
fact or omit to state a material fact necessary to make any such
statements, in light of the circumstances under which they were made,
not misleading. Following the closing of any Offering the Sponsors
shall provide to RS & Co. quarterly updates on the Fund's business as
well as quarterly balance sheets, income statements and statements of
cash flows as soon as they are available, and shall in addition provide
to RS & Co. all information made available to the Fund's equity
holders.
B. CONFIDENTIALITY. RS & Co. will keep confidential and not disclose to
any third party any confidential information provided by the Sponsors
(including, without limitation, confidential information of the
Sponsors's affiliates or of entities in which the Sponsors invest) made
available to RS & Co. pursuant to Section 3(A) hereof by the Sponsors,
and will use the confidential information only in connection with the
engagement hereunder; provided, however, such confidential information
shall not include any information already available to or in the
possession of RS & Co. prior to the date of its disclosure to RS & Co.
by the Sponsors, any information in the Memorandum or the Investor
Materials or generally available to the public, or any information
which becomes available to RS & Co. on a non-confidential basis from a
third party who is not bound by a confidentiality obligation to the
Sponsors; and provided further, that such confidential information may
be disclosed (i) to RS & Co.'s members, employees, agents, advisors and
representatives in connection with its engagement hereunder, who shall
be informed of the confidential nature of the information and that such
information is subject to a confidentiality agreement; (ii) to any
person with the written consent of the Sponsors, including to any
prospective investors; or (iii) if, upon the advice of counsel, RS &
Co. is required by law to disclose such information, provided that to
the extend possible, RS & Co. shall provide reasonable notice to the
Sponsors of such disclosure.
4. OTHER DOCUMENTS. The Sponsors will, at each closing of the Offering,
furnish RS & Co. with an opinion of its counsel relating to the
Sponsors and the Offering in form and substance satisfactory to RS &
Co. and its counsel. In addition, at each closing the Sponsors will
provide RS & Co. with the same documents and certificates as are
furnished to the purchasers in the Offering and such other
certification and documents as RS & Co. or its counsel may reasonably
request, in form and substance satisfactory to RS & Co. and its
counsel.
5. TERMINATION. The engagement hereunder will terminate upon the earliest
to occur of: (i) the final closing of the Fund; (ii) the mutual written
agreement of the Sponsors and RS & Co.; (iii) ten (10) days following
the delivery of a written termination notice, with or without cause,
from RS & Co. or the Sponsors to the other. Notwithstanding any
termination of RS & Co.'s engagement hereunder, if at any time during
the two (2) year period following such termination the Sponsors
complete an offering with similar objectives and on terms similar to
the terms of the Offering, RS & Co. shall be entitled to the incentive
fee set forth in Section 2(A) above, but only with respect to purchases
in such offering made by an RS & Co. Investor. For purposes of the
foregoing calculation, within ninety (90) days following any
termination of its engagement, RS & Co. will deliver to the Sponsors a
final list of all purchasers with whom RS & Co. has had discussions in
connection with its engagement
<PAGE> 4
April 1, 1997 Page 4
Engagement Letter
Westech Investment Advisors, Inc.
and, subject to removal of any such purchasers as set forth in Section
2(A), this list shall be conclusive for purposes of establishing when
RS & Co. is entitled to receive compensation pursuant to this Section
5.
6. INDEMNIFICATION. RS & Co. and the Sponsors hereby agree to the terms
set forth in Exhibit A hereto.
7. MISCELLANEOUS
A. NOTICES. All notices or communications hereunder will be in writing
and will be mailed or delivered as follows: If to the Sponsors, at the
name and address set forth on the first page of this Agreement,
facsimile number (408) 436-8625; and if to RS & Co., at Robertson,
Stephens & Sponsors LLC, 555 California Street, Suite 2600, San
Francisco, California 94104, Attention: Dana K. Welch, facsimile number
(415) 676-2675.
B. SURVIVAL; GOVERNING LAW; ENTIRE AGREEMENT. The representations,
warranties and covenants of the Sponsors set forth herein will remain
in full force and effect regardless of any investigation made by or on
behalf of RS & Co., any investor or any other entity or persons and
will survive delivery of the Shares. The provisions of this Section 7
and Sections 1(C), 2, 3(A), 5, 6 and Exhibit A hereof shall survive any
termination of this Agreement. The provisions of Section 3(B) hereof
shall survive delivery of the Shares and any termination of this
Agreement for a period of two (2) years following the final delivery of
the Shares or the termination of this Agreement, as applicable. This
Agreement, including the Exhibits hereto, shall be governed by and
construed in accordance with the internal laws of the State of
California without giving effect to any principles of conflicts of law.
This Agreement, together with the Exhibits hereto, contains the entire
agreement between the Sponsors and RS & Co. concerning the Offering and
supersedes any prior understanding or agreement whether written or
oral. Any amendment hereto or waiver of any right or obligation
hereunder must be in writing signed by the party to be charged.
This Agreement is effective as of the date first set forth above.
Please confirm that the foregoing correctly and completely sets forth
our understanding, by signing and returning to us the enclosed
duplicate of this Agreement.
Sincerely,
ROBERTSON, STEPHENS & SPONSORS LLC
By: Robertson, Stephens & Sponsors Group, L.L.C..
__________________________________________________
Authorized Signatory
Accepted and agreed:
WESTECH INVESTMENT ADVISORS, INC.
By: _____________________________
Its:
<PAGE> 5
April 1, 1997 Page 5
Engagement Letter
Westech Investment Advisors, Inc.
EXHIBIT A
INDEMNIFICATION AND CONTRIBUTION
In consideration of the agreement of RS & Co. to act on behalf of the
Sponsors pursuant to the attached agreement dated April 1, 1997 (the "Engagement
Letter"), the Sponsors agrees to indemnify and hold harmless RS & Co., its
affiliates, and each of their respective affiliates, directors, officers,
agents, advisors, consultants, employees and controlling persons (as defined in
the Securities Act) (RS & Co. and each such other person or entity are
hereinafter referred to as an "Indemnified Person"), from and against any
losses, claims, damages, expenses and liabilities or actions in respect thereof
(collectively, "Losses"), as they may be incurred, including all legal fees and
other expenses incurred in connection with investigating, preparing, defending,
paying, settling or compromising any Losses, whether or not in connection with
any pending or threatened litigation in which any Indemnified Person is a named
party) to which any of them may become subject (including in any settlement
effected with the Sponsors consent, which shall not be unreasonably withheld) to
the extent related to or arise out of any act, omission, transaction or event
contemplated by the Agreement. The Sponsors will not, however, be responsible
under the foregoing provisions with respect to any Losses (i) incurred as a
result of RS & Co.'s investment in the Fund, or (ii) to the extent that a court
of competent jurisdiction shall have determined by a final judgment that such
Losses resulted from an Indemnified Person's gross negligence, bad faith or
breach of the Engagement Letter.
If the indemnity referred to in this Exhibit A should be, for any
reason whatsoever, unenforceable, unavailable or otherwise insufficient to hold
each Indemnified Person harmless for all Losses incurred by it, the Sponsors
shall pay to or on behalf of each Indemnified Person contributions for Losses so
that each Indemnified Person ultimately bears only a portion of such Losses as
is appropriate (i) to reflect the relative benefits received by each such
Indemnified Person, respectively, on the one hand and the Sponsors on the other
hand in connection with the transaction or (ii) if the allocation on that basis
is not permitted by applicable law, to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each such
Indemnified Person, respectively, and the Sponsors as well as any other relevant
equitable considerations; provided, however, that in no event shall the
aggregate contribution of all Indemnified Persons to all Losses exceed the
amount of the fees actually received by RS & Co. pursuant to the Agreement. The
relative fault of each Indemnified Person and the Sponsors shall be determined
by reference to, among other things, whether the actions or omissions to act
were by such Indemnified Person or the Sponsors, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action or omission to act.
The Sponsors also agrees that no Indemnified Person shall have any
liability to the Sponsors or its affiliates, directors, officers, employees,
agents, advisors or shareholders, directly or indirectly, related to or arising
out of the Agreement, except Losses incurred by the Sponsors that a court of
competent jurisdiction shall have determined by a final judgment to have
resulted from such Indemnified Person's gross negligence, bad faith or material
breach of the Engagement Letter.
Promptly after receipt by any Indemnified Persons of notice of any
pending or threatened litigation, such Indemnified Persons will promptly notify
the Sponsors in writing of such matter, provided, however, that the failure to
provide such prompt notice to the Sponsors shall not relieve the Sponsors of any
liability which it may have to RS & Co. unless such failure to provide such
prompt notice to the Sponsors has prejudiced the defense of the litigation. In
the event any such action is brought against any Indemnified Person, the
Sponsors shall be entitled to participate therein and to assume the defense
thereof, with counsel reasonably satisfactory to the Indemnified Person; unless,
however, the Indemnified Person reasonably determines that defenses may be
available to the Indemnified Person that are not available to the Sponsors
and/or may not be consistent with the best Shares of the Sponsors. In such
event, the Indemnified Person shall have the right to assume its own defense,
with counsel reasonably satisfactory to the Sponsors, and shall so signify by
promptly notifying the Sponsors in writing of its decision; provided, however,
that in no event shall the Company be required to pay fees and expenses for more
than one firm of attorneys in any one legal action or group of related legal
actions. Such decision shall not relieve the Sponsors of any liability which it
may have to the Indemnified Person, including the reimbursement of any
reasonable legal or other expenses incurred in connection with the Indemnified
Person's defense. The Sponsors shall not, without the prior written consent of
the Indemnified Person, effect any
<PAGE> 6
April 1, 1997 Page 6
Engagement Letter
Westech Investment Advisors, Inc.
settlement of any pending or threatened proceeding arising out of or relating to
the engagement and containing asserted or potential claims against an
Indemnified Person, unless such settlement includes an express, complete release
of such Indemnified Person from all liability as to all asserted or potential
claims against such Indemnified Person.
The obligations of the Sponsors referred to above shall be in addition
to any rights that any Indemnified Person may otherwise have and shall be
binding upon and inure to the benefit of any successors, assigns, heirs and
personal representatives of any Indemnified Person and the Sponsors. The
provisions set forth in this Exhibit A shall remain operative and in full effect
regardless of any termination of any Indemnified Person by the Sponsors. This
Indemnification Agreement shall be governed by and construed in accordance with
the internal laws of the State of California without regard to principles of
conflicts of law. Capitalized terms not otherwise defined herein shall have the
meanings set forth in the Agreement.
WESTECH INVESTMENT ADVISORS, INC.
By: __________________________________
Its:
ROBERTSON, STEPHENS & SPONSORS LLC
By: Robertson, Stephens & Sponsors Group, L.L.C.
______________________________________
Authorized Signatory
