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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
VENTURE LENDING & LEASING III, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
MARYLAND 77-0534084
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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
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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 III, Inc. ("Fund"), a Maryland
corporation, is a newly organized, non-diversified, closed-end management
investment company electing status as a business development company (a "BDC")
under the Investment Company Act of 1940 (the "1940 Act"). The Fund's investment
objective is to achieve a high total return. The Fund will provide asset-based
financing to, and make equity investments in, carefully selected venture
capital-backed companies; the asset-based financing will be 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 Investment 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 as 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 February 1, 2000. The Fund has not yet commenced operations and
is registering its shares of Common Stock, $.001 par value (the "Shares"),
pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the "Act" or
the "1934 Act"), in compliance with the requirement of Section 54(a)(2) of the
1940 Act. Its principal office is located at 2010 North First Street, Suite 310,
San Jose, California 95131 and its telephone number is (408) 436-8577.
OWNERSHIP OF THE FUND. Initially, the Fund will be owned entirely by
Venture Lending & Leasing III, LLC, a Delaware limited liability company (the
"Limited Liability Company" or "Company"), to which the Fund will sell 100,000
Shares ("Initial Shares"), at a price of $0.25 per Share in an offering exempt
from the registration requirements of the Securities Act of 1933 ("1933 Act")
pursuant to Section 4(2) and Regulation D ("Regulation D") thereof. The Limited
Liability Company will offer and sell membership interests (the "Interests") to
investors (the "Members") in an offering exempt from the registration
requirements of the 1933 Act pursuant to Regulation D, and will sell its
Interests in that offering solely to "accredited investors", as that term is
defined in Regulation D. To the extent called for by the Fund, the Limited
Liability Company, subject to its approval of the need for such funds, will make
further contributions to the capital ("LLC Contributions") of the Fund to the
extent of the Members' capital commitment to the Limited Liability Company
("Committed Equity Capital"). The Limited Liability Company intends to seek up
to $250 million in such capital commitments.
USE OF PROCEEDS. The Fund intends to apply the net proceeds of the sale
of the Initial Shares and of the LLC Contributions to enter into venture lending
and leasing transactions, to a greater extent, and equity investments, to a
lesser extent, with Eligible Portfolio Companies (as defined below) and with
other companies in furtherance of its investment objective and policies.
(b) Financial Information About Industry Segments.
Not applicable; the Fund has not commenced business and has no
reserves.
(c) Narrative Description of Business.
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Investment Program.
GENERAL. The Fund's investment objective is to achieve a high total
return. The Fund will provide financing to, and make equity investments in,
carefully selected venture capital-backed companies; such financing generally
will be 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 loans or equipment leases. The
Fund also may directly purchase equity securities of venture-backed companies
(including equity securities of companies whose loans are held by the Fund).
Such purchases will not exceed 10% of the aggregate cost of all investments of
the Fund and the Limited Liability Company determined over the life of the Fund
and the Limited Liability Company. 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) interests in "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 interests in 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 limit the extent to which the Fund may enter into venture leases,
which, in substance, do not constitute loans for this purpose.
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
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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
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. 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 as it was when the commitment was made.
WARRANTS. The Fund generally will acquire warrants to purchase equity
securities of the borrower or lessee in connection with asset financings. It is
anticipated that such warrants, generally, will be distributed by the Fund to
the Limited Liability Company shortly following their acquisition. 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 owner of the warrant 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 owners of the warrant under certain circumstances to
require the borrower or lessee to register the securities under the 1933 Act (in
some cases at the owner's expense). The Fund will generally negotiate "net
issuance" provisions in the warrants, which allow the owner of the warrant to
exercise the warrant without payment of any cash, and thereby receive 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.
EQUITY SECURITIES. The Fund also may make direct investments in equity
securities having an aggregate cost of up to 10% of the aggregate cost of all
investments of the Fund and the Limited Liability Company determined over the
life of the Fund and the Limited Liability Company. The Manager will seek to
make at least 80% of these investments in companies in which a professionally
managed venture capital fund is the lead investor, with up to 20% in seed-stage
companies or other early stage transactions where the Manager may take a more
active role, including a board of director's position. Such direct investments
generally will be in equity securities of borrowers in the Fund's portfolio,
although equity securities of other companies could also be purchased. It is
anticipated that the Fund would not make loans to companies in which the Fund
has made a direct equity investment until such time as a professionally managed
venture capital firm has made an investment as a lead and the Manager is no
longer in an active role. The Manager expects that the equity securities
generally will be convertible preferred stock, though it is possible the Fund
would invest directly in common stock of venture backed
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companies. The Manager also expects the transfer restrictions and registration
and other rights with respect to direct equity investments will be substantially
the same as those applicable to the equity securities underlying the warrants
which the Fund will receive in connection with its loans and leases. It is
likely that, as in the case of warrants, equity investments generally will be
distributed by the Fund to the Limited Liability Company shortly following their
acquisition, although, in this case, as a result of certain regulatory
requirements of the 1940 Act, the equity investments may be held by the Fund for
a longer period of time prior to their distribution to the Limited Liability
Company.
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 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).
INDUSTRY CONCENTRATION. 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/biotech-nology, Internet 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 development stage of the companies in which it
invests (either in the form of loans or leases) by limiting the Fund's aggregate
investment in securities of companies that, in its opinion, are in the start-up
stage, to 50% 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 its opinion,
are in the emerging growth stage or
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mezzanine stage, except that the Manager may invest up to 5% of the Fund's total
assets in securities of companies that, in its opinion, 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
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) that meet
the following criteria:
Company 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/or 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 for Loans and Leases
- The term of the loan or lease does not exceed 60 months, and
does not extend beyond December 31, 2008.
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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
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, and may
require that the Limited Liability Company provide guarantees or other credit
enhancement. 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 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
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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 equity investments, and until distributions to the shareholders
are made, 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
(except to the extent the Fund has a warrant for, or owns, shares equal to the
number of shares which is the subject of the proposed short sale), 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 (except interest rate hedging transactions in
connection with the Fund's permitted borrowings) 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.
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
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;
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(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,
on behalf of the Fund, and the officers of the Manager, on behalf of the Limited
Liability Company, 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 or the Manager might serve on the board of directors of borrowers or
lessees or of companies in which it makes an equity investment. As noted above,
the officers of the Manager, on behalf of the Limited Liability Company, will be
providing such managerial assistance in order to satisfy certain requirements of
the Employee Retirement Income Security Act of 1974.
An "eligible portfolio company" generally is a United States company
that is not an investment company and that either (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.
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
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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. Certain transactions, however, involving certain
persons related to the Fund, including its directors, officers, the Manager and
the Adviser to the Manager and the Limited Liability Company, 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. This discussion is based on the
Internal Revenue Code, regulations thereunder, published rulings, procedures and
announcements 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
temporary Treasury Regulations, 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 tax 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.
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. It should be noted that a distribution of
warrants or equity investments to the Limited Liability Company will be treated
as a sale by the Fund of such assets with the excess of the fair market value of
those assets over their tax basis being the amount of the income or gain to the
Fund. 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 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 (c) 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 could be substantial tax and
other costs associated with re-qualifying as a RIC. In this regard, except as
otherwise noted in this paragraph, the tax consequences described above under
the caption "Consequences of Converting from an Ordinary Corporation to a RIC"
would apply. Under the final Treasury regulations expected to be adopted,
however, the foregoing should not apply upon requalification so long as the Fund
had qualified as a RIC for at least one taxable year period prior to such
disqualification, and had remained disqualified for only one taxable year.
The Fund will 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,
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<PAGE> 12
plus certain other amounts. For these purposes, any taxable income retained by
the Fund, and on which it pays federal income tax, will 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 tax.
Effect of Certain Investments and Investment Practices. The Fund's
activities generally will 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 that the lessee must purchase 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 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 (and, therefore,
the Members of the Limited Liability Company) as ordinary income. Capital gain
distributions are taxable as long-term capital gains regardless of how long the
shareholder has held the Shares or the Member has held its Interest in the
Limited Liability Company. It is not anticipated that a significant portion of
the Fund's dividends will qualify for the dividends-received deduction for
corporate Members of the Limited Liability Company in respect of their
distributive share of Fund dividends.
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<PAGE> 13
Distributions are generally taxable to shareholders at the time the
distribution is received. Any distribution, however, 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 (and, therefore, the Limited Liability Company) 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 (and, therefore, the
Limited Liability Company) to the extent of the shareholder's adjusted tax basis
in its shares and then as capital gain. The amount treated as tax-free return of
capital will reduce the adjusted tax 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 of the Fund by
the Limited Liability Company or a Member of its Interest in the Limited
Liability Company, the Limited Liability Company or Member will recognize a gain
or loss equal to the difference between the amount realized on the sale and the
seller's adjusted tax basis in the Shares or Interest. 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 or Interest
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 or Interest were held for more than
one year. In addition, if the Shares sold by a shareholder (and, therefore, the
Limited Liability Company) 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; this rule
will not apply to a sale by a Member of its Interest.
The Fund (as well as the Limited Liability Company) 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 (or the Limited Liability Company, as the case may
be ) with a correct taxpayer identification number or who otherwise are subject
to backup withholding. The certification of a Member's taxpayer identification
number will be included in the Subscription Agreement to be provided with the
Private Offering Memorandum for the Limited Liability Company.
Federal withholding taxes at a rate of 30% (or a lesser treaty rate)
may apply to distributions to shareholders of the Fund and Members of the
Limited Liability Company who are nonresident aliens or foreign partnerships,
trusts or corporations. The rules governing United States federal income
taxation of foreign shareholders and members of a limited liability company or
partners of a partnership are complex, and prospective non-U.S. owners 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 and Interests,
including any reporting requirements.
Individuals and certain other persons who are Members of the Limited
Liability Company 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 Limited Liability Company. These Members, therefore, will 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
Member as a miscellaneous itemized deduction, subject to the limitation on
miscellaneous itemized deductions not exceeding 2% of adjusted gross income.
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<PAGE> 14
The Fund will notify its shareholders (and, therefore, the Limited
Liability Company) following the end of each calendar year of the amounts of
dividends and capital gain distributions paid or deemed paid during the year.
Transactions Involving "Qualified Small Business Stock". Section 1202
of the Code permits a non-corporate taxpayer to exclude, for federal income tax
purposes, 50% of any gain (subject to certain limitations) realized upon the
sale or exchange of "qualified small business stock" held for more than five
years. Generally, qualified small business stock is stock of a small business
corporation acquired directly from the issuing corporation, which must (a) at
the time of issuance and immediately thereafter have assets of not more than $50
million and (b) throughout substantially all of the holder's holding period for
the stock be actively engaged in the conduct of a trade or business not excluded
by the Code. If either the Fund or the Company acquires qualified small business
stock, holds such stock for five years and disposes of such stock at a profit,
then a non-corporate Member who held his or her interest in the Limited
Liability Company at the time the qualified small business stock was acquired
and at all times thereafter until such stock is disposed of would be entitled to
exclude from his or her taxable income, subject to applicable limitations, 50%
of his or her share of such gain. Note, however, that 42% (28% for stock, the
holding period for which begins after December 31, 2000) of any amount so
excluded would be treated as a preference item for alternative minimum tax
purposes. Comparable rules apply under the qualified small business stock
"rollover" provisions of Section 1045 of the Code, under which gain otherwise
reportable by individual Members with respect to sales by either the Fund or the
Company of qualified small business stock held for more than six months can be
deferred if the sales proceeds are reinvested by the Fund or the Company (or if
a Member reinvests an amount equal to his or her share of such sales proceeds)
within 60 days in other qualified small business stock.
Tax-Exempt Investors. Qualified plans, Individual Retirement Accounts
and investors exempt from taxation under Section 501(c)(3) of the Internal
Revenue Code (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 a Tax-Exempt Entity's
distributive share from the Limited Liability Company of dividends from the Fund
will not be considered UBTI and, therefore, will 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
corporations 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. If a Tax-Exempt Entity,
however, borrows money to purchase its Interest in the Limited Liability
Company, 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 Sections 501(c)(7), (9), (17) and (20),
respectively, of the Internal Revenue Code, are subject to different UBTI rules,
which generally will require them to characterize distributions as UBTI.
Distributions 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.
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<PAGE> 15
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 of directors. Although
the principals of Westech Advisors have over 30 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 this investment for the long term.
Long-Term Investment. After the fourth anniversary following the first
closing of this offering, the Fund will cease to make new equity investments as
well as investments in venture loans or leases (except pursuant to commitments
made before such fourth anniversary) and will distribute 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, 2008, the Fund automatically will be
dissolved without any action by its 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 its shareholders. Although the Fund generally would not
invest in any loan or lease with a maturity date later than December 31, 2008,
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, to the extent those investments were retained by the Fund (and not
distributed earlier to its shareholders) 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 its shareholders. In such case, the
shareholders would bear any expenses attendant to the liquidation of such
assets.
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<PAGE> 16
Competition. Other entities and individuals compete for investments
similar to those proposed to be made by the Fund, some of whom, with respect to
investments in the form of loans and leases, and many of whom, with respect to
the equity investments, may have greater resources than the Fund and, in either
case, could obtain investments on better terms than are offered to 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
or companies in which it makes equity investments more attractive terms than
otherwise might be the case.
Leverage. The Fund's ability to borrow money to make additional loans
or leases creates leverage. Although the Fund intends to leverage its loans and
leases, it does not intend to do so with respect to its equity investments.
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, although such pledge
likely would not include equity investments, 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 for treatment as a RIC or, if qualified, to continue to so qualify.
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
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<PAGE> 17
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. 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 of the Fund.
When the Fund elects to convert its status from that of an ordinary, or
C, corporation to that of a RIC, it must choose either to (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.
Allocation of Expenses. If the Fund qualifies as a RIC, individuals and
certain other persons who are Members of the Limited Liability Company 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 Limited
Liability Company. These Members, therefore, will 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 Member 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, therefore,
will depend to a significant extent on the willingness of equity venture capital
investors to provide additional equity financing to the borrower or lessee,
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
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<PAGE> 18
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. II ("VLLI II") is a BDC organized by Westech Advisors and Siguler Guff
Advisers, LLC, and engaged in the same business as the Fund. The Fund and VLLI
II 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 II, 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 it is likely the value of the assets
underlying a loan or lease to finance such assets will 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 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.
Emerging Company Risks. The possibility that the companies in which the
Fund invests will not be able to commercialize their technology or product
concept presents significant risk to the Fund. Additionally, although some of
such companies may already have a commercially successful product or product
line at the time of investment, technology products and services often have a
more limited market or life span than products in other industries. Thus, the
ultimate success of these companies may depend on their ability to continually
innovate in increasingly competitive markets.
Privately-held Company Risks. The Fund intends to invest primarily in
privately-held companies. Generally, very little public information exists about
these companies and the Fund will be required to rely on the ability of the
Manager to obtain adequate information to evaluate the potential returns from
investing in these companies. Moreover, these companies typically depend upon
the management talents and efforts of a small group of individuals and the loss
of one or more of these individuals could have a significant impact on the
investment returns from a particular company. Also, these companies frequently
have less diverse product lines and smaller market presence than larger
companies. They are thus generally more vulnerable to economic downturns and may
experience substantial variations in operating results.
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<PAGE> 19
Eligible Portfolio Companies Will Need Additional Financing. Most of
the companies in which the Fund will invest will require substantial additional
equity financing to satisfy their continuing working capital requirements. Each
round of venture financing is typically intended to provide a company with
enough capital to reach the next stage of development. The circumstances or
market conditions under which such companies will seek additional capital is
unpredictable. It is possible that one or more of such companies will not be
able to raise additional financing or may be able to do so only at a price or on
terms which are unfavorable.
Market Valuations. The public and private market valuations of
securities of companies engaged in Internet, Internet-related and
telecommunications businesses have reached unprecedented high levels, whether
measured as a multiple of earnings, revenues or assets. The market prices of
such securities have also at times experienced extraordinary volatility. These
factors can increase the Fund's risks associated with direct investments in
equity securities.
Speculative Nature of Warrants and Equity Investments. 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 and direct equity
investments 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 and direct equity investments 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 and equity investments are privately
negotiated transactions, and there is no established trading market in which
such loans, leases and equity investments 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 entity'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
18
<PAGE> 20
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.
CONFLICTS OF INTEREST
Transactions by Other Clients. The Manager also serves as manager of
VLLI II, and Venture Lending & Leasing, Inc. ("VLLI"; VLLI and VLLI II are
referred to collectively herein as the "Prior Funds"). VLLI has a similar
investment program to that of the Fund, but is currently making no new
investments; VLLI II is continuing to make new investments. The Fund's board of
directors has determined that, so long as VLLI II has capital available to
invest in loan or lease transactions with final maturities earlier than December
31, 2005 (the date on which VLLI II will be dissolved), the Fund, coincident
with its receiving its first draw down of the Committed Equity Capital (the
"First Draw"), will invest in each portfolio company in which VLLI II invests
("Investments"). The amount of each Investment will be allocated between the
Fund and VLLI II in accordance with the Committed Equity Capital of the Fund and
VLLI II so long as VLLI II has capital available to invest. The Committed Equity
Capital of VLLI II is $110,000,000. If the offering of Interests by the Limited
Liability Company is fully subscribed, the committed equity capital available to
the Fund would be $250,000,000. Therefore, if the offering is fully subscribed,
each Investment will be allocated approximately 69% to the Fund and 31% to VLLI
II. In any case, VLLI II can only invest to the extent that it has capital
available for investment; after VLLI II no longer has capital available for
investment, VLLI II will no longer invest in transactions in which the Fund
invests. As of February 16, 2000, VLLI II has approximately $33 million capital
committed to VLLI II which has not yet been called from its shareholders but
must be called if at all, by September 15, 2001. This means that the funds with
which VLLI II has available to invest with the Fund consist of (a) $33 million
plus (b) amounts which VLLI II borrows by leveraging its available capital funds
plus (c) any proceeds from principal payments received on loans and leases, plus
(d) the proceeds from the sale of securities in an amount equal to the cost
basis of securities sold. After September 15, 2001, VLLI II will no longer be
permitted to enter into new commitments to borrowers or lessees; however, VLLI
II 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 II
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 II and the Fund intend to invest in the same companies in
the respective proportions described above, it should be noted that VLLI II may
have made investments in companies prior to the Fund's First Draw and in which
both the Fund and VLLI II may thereafter make investments; if the investments
are in the form of loans or leases, depending on the collateral for such loans
and leases, Fund II may have a security interest, with respect to such prior
investment, in the same collateral which, upon a default, would have to be
satisfied prior to applying any remaining proceeds to the subsequent loan or
lease by the Fund and Fund II. In addition, the Fund may, at any time, with the
approval of its board of directors, (i) discontinue investing with VLLI II with
respect to any or all future investments or (ii) choose to invest in different
proportions with VLLI II than described above. Moreover, the Fund has no control
over VLLI II, which is not required to invest with the Fund in any particular
proportion or at all, and may choose to discontinue investing with the Fund or
to invest in different proportions than described in this paragraph. In the
event that VLLI II and the Fund invest other than in 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 II 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, or make equity investments
in, companies that are preexisting borrowers or lessees from VLLI II, with the
consequences described above where the Fund and VLLI II make a loan or lease to
a company which is a preexisting borrower or lessee of VLLI II.
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<PAGE> 21
To the extent that portfolios of clients, other than the Prior Funds,
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 II invest in the loans or lease financings with the same company, it is
expected that the Fund and VLLI II will enter into an intercreditor agreement
pursuant to which the Fund and VLLI II will cooperate in pursuing their remedies
following a default by the borrower or lessee. 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 II 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 II
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.
Effect of Borrowings. During the first two years of the Fund's
investment operations, the Management Fee will be calculated with reference to
the Committed Equity Capital of the Limited Liability Company which, therefor,
is Committed Equity Capital of the Fund, regardless of when or if all of such
capital is called. Thereafter, 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 indemnification 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.
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<PAGE> 22
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.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The Fund has no Shares outstanding as of the date of this Form 10. It
is anticipated that, prior to the first closing of interests in the Limited
Liability Company, the Manager will contribute $25,000 to the Limited Liability
Company, and the Limited Liability Company in turn will purchase 100,000 Shares
at a price of $0.25 per share as the Fund's initial capital. Therefore, until
immediately subsequent to the first call for further capital contributions to
the Fund, the Manager will be deemed to "control" the Fund through its control
of the Limited Liability Company.
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* 55 Chairman, Chief Executive Officer and Director
2010 North First Street, Suite 310
San Jose, CA 95131
Salvador O. Gutierrez* 56 President and Director
2010 North First Street, Suite 310
San Jose, CA 95151
George W. Siguler 52 Advisory Director
630 Fifth Avenue, 16th Floor
New York, NY 10111
Brian Best 33 Vice President, Chief Financial Officer and
2010 North First Street, Suite 310 Secretary
San Jose, CA 95131
Donald P. Spencer 44 Assistant Secretary
650 Fifth Avenue, 16th Floor
New York, NY 10111
</TABLE>
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 $10,000. 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 $1,000. 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
reimbursement of their expenses in attending meetings. The Fund's advisory
directors are employees of
- -----------------------------------
* Interested person of the Fund within the meaning of the 1940 Act.
21
<PAGE> 23
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 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 "The Manager".
SALVADOR O. GUTIERREZ is the President and Chief Financial Officer of
the Manager and his business background is set forth under "The Manager".
GEORGE W. SIGULER is Managing Director of the Adviser to the Manager
and his business background is set forth under "Adviser to the Manager".
BRIAN BEST is Vice President of the Manager and his business background
is set forth under "The Manager".
DONALD P. SPENCER is Managing Director of the Adviser to the Manager
and his business background is set forth under "Adviser to the Manager."
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, VLLI II and the Fund. Western Technology, an independent
asset-based financing organization headquartered in San Jose, California, was
founded in 1980; Westech Advisors and Western Technology have originated more
than $750 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. Since 1993, Mr. Swenson has been the Chief Executive
Officer of Westech Advisors; from 1980 through 1994, Mr. Swenson was 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.
SALVADOR O. GUTIERREZ. Since 1993, Mr. Gutierrez has been the President
and Chief Financial Officer of Westech Advisors; from 1987 through 1994, Mr.
Gutierrez was 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.
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<PAGE> 24
BRIAN BEST. Prior to joining the Manager in 1997, Mr. Best
served as the Director of Finance and Administration for Decisis Corporation, a
start-up software company. He has held various finance positions at Ross
Systems, Inc. and began his career at Ernst & Young. Mr. Best holds a B.S. with
honors from the University of the Pacific and an M.B.A. from U.C. Berkeley's
Haas School of Business.
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, VLLI and VLLI II, with total committed capital in
excess of $800 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. Mr. Siguler is 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. and Venture
Lending & Leasing II, Inc. (business development companies), CommonFund Capital
(private equity investment affiliate of The Common Fund) and a member of the
Visiting Committee of the Harvard Medical School.
DONALD P. SPENCER. Mr. Spencer is 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 VLLI and VLLI II. 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 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
$10,000. Such directors also will be reimbursed by the Fund for their expenses
in attending meetings of the Board
23
<PAGE> 25
of Directors or any committee thereof and will receive a fee for attendance in
person at any meeting at a per diem rate of $1,000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions With Management and Others
The Manager and the Adviser to the Manager also serve as Investment
Manager and Fund Manager, respectively, to the Prior Funds. The Fund will make
investments through venture loans and leases in companies in which VLLI II will
also invest. Under the policies adopted by the Fund's board of directors, the
Fund's investment and VLLI II's investment in the same transaction will be made,
pro rata in accordance with the Committed Equity Capital of the Fund and VLLI II
until such time as VLLI II is no longer able to make such investments by reason
of its term or available capital committed to VLLI II. While investing the
Fund's capital in the same companies in which VLLI II 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 II 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 II with
respect to any or all future investments or (ii) choose to invest in different
proportions with VLLI II than described above. In addition, the Fund has no
control over VLLI II, which is not required to invest with the Fund in any
particular proportion or at all, and may choose to discontinue investing with
the Fund or to invest in different proportions than described in this paragraph.
In the event that VLLI II and the Fund invest other than in 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 II 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, or make equity investments
in, companies that are pre-existing borrowers or lessees from VLLI II.
To the extent that portfolios of clients other than the Prior Funds
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 of Committed Equity Capital, 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, act as investment adviser or manager to
any pooled investment vehicle other than the Fund or the Prior Funds 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 the Limited Liability
Company and the Limited Liability Company, in turn, elects to irrevocably
release its Members from any uncalled portion of their respective commitments as
to new investments, the "total amount subscribed for by investors" will 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 January 31, 2000; 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 January 31, 2000. A "Controlled Person" of the
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<PAGE> 26
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 Limited Liability Company will have management rights with respect
to the loans, leases and equity investments made by the Fund co-extensive with
such management rights of the Fund. To the extent different persons manage the
Fund, on the one hand, and the Limited Liability Company, on the other, the two
entities may take conflicting positions with respect to such management rights.
(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
$500,000. The 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 preparing
and distributing reports and notices to its shareholders, (vi) costs of proxy
solicitation, (vii) costs of meetings of its shareholders and the board of
directors, (viii) charges and expenses of the Fund's custodian, (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 equity investments, and legal
actions to enforce the Fund's rights under such loans, leases and equity
investments; (xi) costs of any certificates representing the Shares, (xii) costs
of stationery and supplies,
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<PAGE> 27
(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 on 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 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 as a result of a closing of the sale of Interests in the Limited
Liability Company subsequent to the first closing (regardless of when or if such
committed capital is called) will be deemed to have been committed as of the
first closing. It should also be noted that the Manager, as the managing Member
of the Limited Liability Company, will be entitled to (i) a management fee with
respect to the Limited Liability Company commencing after the first two years
which is identical to the 2.5% it receives from the Fund but calculated with
reference to the assets of the Limited Liability Company, excluding its interest
in the Fund, and (ii) a 20% profits interest, subject to the Limited Liability
Company allocating to the Members thereof an 8% per annum cumulative,
non-compounded annual return. The 20% profits interest may align the interests
of the Manager with that of the Fund or the Limited Liability Company, but also
could encourage the Manager to make riskier investments than it would in the
absence of such profits interest.
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 Interests in the Limited Liability Company (including any amounts of such
obligations that have been satisfied). The aggregate fees and profits interests
of the Manager at both the Fund and Limited Liability Company levels are higher
than those of most investment companies, although they are comparable to those
of many privately-offered funds investing in venture capital investments.
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.
26
<PAGE> 28
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 as their issuance and sale is exempt from such registration requirements
pursuant to Section 4(2) and Regulation D of the 1933 Act.
Because the Shares will be acquired by investors in one or more
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 any other restrictions
imposed on the Shares and to execute such other instruments or certifications as
are reasonably required by the Fund or the Manager.
(b) Holders
The Fund has no Shares outstanding as of the date of this Form 10. It
is anticipated that, prior to the first closing of interests in the Limited
Liability Company, the Manager will contribute $25,000 to the Limited Liability
Company, and the Limited Liability Company in turn will purchase 100,000 Shares
at a price of $0.25 per share as the Fund's initial capital. Therefore, until
immediately subsequent to the first call for further capital contributions to
the Fund, the Manager will be deemed to "control" the Fund through its control
of the Limited Liability Company.
(c) Dividends
27
<PAGE> 29
The Fund intends to distribute to its shareholder, the Limited
Liability Company 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 the 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. The Fund
also expects to make in-kind distributions to its shareholders of any warrants
it receives in connection with loans and leases and any securities acquired as a
result of direct equity investments, although as a result of regulatory issues,
under the 1940 Act, equity investments from time to time may be retained.
Until the fourth anniversary following the first closing of this
offering, the Manager will seek to reinvest the proceeds of matured, repaid or
sold investments, net of required distributions to shareholders, principal
payments on borrowings and expenses or other obligations of the Fund, in new
loans or leases or equity investments. Beginning on the fourth anniversary of
the Fund's first closing, the Fund will also distribute to its shareholders 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
such shareholder's adjusted basis in his Shares, and then as capital gain.
ITEM 10. RECENT SALES OF UNREGULATED SECURITIES
See Item 9(b)
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
GENERAL. The Members will instruct the Limited Liability Company, pro
rata in accordance with each Member's percentage interest in the Limited
Liability Company, as to how to vote the Shares held by the Limited Liability
Company, as required by Section 12(d)(1)(E) of the 1940 Act. 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 10,000,000 Shares authorized.
Annual meetings be held beginning in 2000 and special meetings may be
called by the Chairman of the board of directors or President, a majority of the
board of directors or Members holding at least 25% of the Interests in the
Limited Liability Company. The Fund anticipates soliciting proxies from Members
for each annual meeting. The Fund's Articles of Incorporation can be amended by
the affirmative vote of at least a majority of the Interests in the Limited
Liability Company.
DISSOLUTION OF THE FUND. Until the fourth anniversary following the
first closing of the offering of interests in the Limited Liability Company, 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, leases and equity investments. Thereafter, the Fund will cease to make
new investments in venture loans, leases (other than amounts required to fund
financing commitments entered into before such fourth anniversary) and equity
investments 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
28
<PAGE> 30
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,
2008, 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, 2008, 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 as their issuance and sale are exempt from such
registration requirements pursuant to Section 4(2) of the 1933 Act and
Regulation D promulgated thereunder.
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). 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
any other restrictions imposed on the Shares and to execute such other
instruments or certifications as are reasonably required by the Fund or the
Manager.
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
29
<PAGE> 31
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 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 III, INC.
Date: April 7, 2000 By: /s/ RONALD W. SWENSON
---------------------------------
Ronald W. Swenson,
Chief Executive Officer
30
<PAGE> 32
VENTURE LENDING & LEASING III, INC.
(the "Fund")
EXHIBIT INDEX
TO
FORM 10 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
3(i) Articles of Incorporation of the Fund filed with the Maryland Secretary
of State on January 1, 2000.*
3(ii) Certificate of Correction of the Fund filed with the Maryland Secretary
of State on February 11, 2000.*
3(iii) Bylaws of the Fund as of February 1, 2000. *
3(iv) Amendment to the bylaws of the Fund dated April 6, 2000.
4.1 Form of Purchase Agreement between the Fund and the Limited Liability
Company.
10.1 Form of Custodian Agreement between the Fund and Investors Bank &
Trust.
10.2 Form of Intercreditor Agreement between the Fund and Venture Lending &
Leasing, Inc.
10.3 Form of Management Agreement between the Fund, the Manager and the
Adviser to the Manager.
</TABLE>
- ------------------------------------
* Filed with the Securities and Exchange Commission on February 17, 2000.
31
<PAGE> 1
VENTURE LENDING & LEASING III, INC.
Unanimous Written Consent of the Directors
The undersigned, constituting all of the members of the Board of
Directors of Venture Lending & Leasing III, Inc., a Maryland corporation (the
"Fund"), in accordance with Section 2-408(c) of the Corporations and
Associations Article of the Annotated Code of Maryland, do hereby take the
actions below set forth:
RESOLVED, that Article VII, Section 1 of the Bylaws of the Fund be
and hereby is revised to state:
"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"
This consent shall be filed with the minutes of meetings of the
Board of Directors and shall be treated for all purposes as a vote taken
at a meeting.
/s/ Ronald W. Swenson Date: 04/06/2000
- ----------------------------------------
Ronald W. Swenson
/s/ Salvador O. Gutierrez Date: 04/06/2000
- ----------------------------------------
Salvador O. Gutierrez
<PAGE> 1
Exhibit 4.1
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement"), is made effective as
of March 14, 2000, between Venture Lending & Leasing III, Inc., a Maryland
corporation ("Seller"), and Venture Lending & Leasing III, LLC, a Delaware
limited liability company ("Buyer").
RECITALS
Seller was incorporated effective January 28, 2000 and, thus far,
Seller has issued no shares of its capital stock. Now, Seller wishes to issue
and sell to Buyer, and Buyer wishes to purchase from Seller, 100,000 shares of
Seller's common stock (the "Shares"), all on the terms and conditions herein set
forth, and all with the result that, after consummation of the transaction
contemplated hereunder, Buyer will be the sole shareholder of Seller. Buyer
intends to hold the Shares as its primary, but not necessarily its only, asset.
Buyer also intends to offer and sell (the "Offering") ownership interests in
Buyer ("Membership Interests") to investors ("Members"), who shall be both
"qualified purchasers" within the meaning of Section 2(a)(51)(A) of the
Investment Company Act of 1940, as amended, and "accredited investors" within
the meaning of the Securities Act of 1933, as amended (the "Act"), in an
offering exempt from the registration requirements of the Act pursuant to
Regulation D promulgated thereunder.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Purchase and Sale. Seller hereby sells to Buyer, and Buyer
hereby purchases from Seller, the Shares.
2. Purchase Price and Certificates. The purchase price for the
Shares is $25,000 (the "Purchase Price"), or $0.25 per Share. Seller hereby
acknowledges its receipt of the full Purchase Price in the form of a transfer of
funds, made contemporaneously herewith, to the account designated, and pursuant
to the instructions provided, by Seller. Buyer hereby acknowledges receipt of a
certificate for the Shares.
3. Capital Contributions. From time to time, Seller may request
that Buyer make contributions to Seller's capital ("Capital Contributions") to
pay expenses ("Expenses") or fund investments which Seller proposes to make
("Proposed Investments"). In connection with any requested Capital Contribution,
Seller shall furnish Buyer (a) in the case of an Expense, with invoices or other
documentation relating to such Expense or (b) in the case of a Proposed
Investment, with such materials as are reasonably sufficient to allow Buyer to
evaluate the Proposed Investment (in either case, the "Materials"). Buyer shall
then, in a reasonably timely manner, review the Materials and may, in its sole
and absolute discretion, but in no case shall be required to, make the Capital
Contribution requested by Seller. Notwithstanding the foregoing, the parties
hereby agree and acknowledge that in no event shall Capital Contributions
exceed, in the aggregate, the Members' aggregate amount of subscription
obligations for the purchase of Membership Interests in Buyer.
<PAGE> 2
4. Buyer's Representations and Warranties. Buyer represents and
warrants to, and covenants with, Seller as follows:
4.1 Investment Purposes. Except in connection with the
Offering, (a) the Shares are being acquired for investment for Buyer's own
account, not as a nominee or agent, and not with a view to the sale or
distribution of any part thereof, (b) Buyer has no intention of selling,
granting any participation in, or otherwise distributing the Shares, and (c)
Buyer does not have any contract, undertaking, agreement or arrangement to sell,
transfer or grant participations to any person with respect to any of the
Shares.
4.2 Lack of Registration. Buyer understands and
acknowledges that the Shares have not been registered under either the Act or
under the applicable securities laws of any state ("State Acts") by reason of
specific exemptions therefrom. Buyer must bear the economic risk of its
investment for an indefinite period of time since the sale of the Shares has not
been registered under the Act or State Acts and the Shares cannot be transferred
by Buyer unless such transfer is registered under the Act and qualified under
the State Acts or exemptions from such registration or qualification as may be
available. Seller has made no agreement, covenant or undertaking whatsoever to
register or qualify the transfer by Buyer of any of the Shares under the Act or
State Acts or qualify for an exemption therefor. Buyer acknowledges that there
is no market for the Shares and none will develop.
4.3 Buyer's Covenants. Buyer shall not dispose of any of
the Shares unless and until (a) Buyer shall have notified Seller of the proposed
disposition and shall have furnished Seller with a statement of the
circumstances surrounding the proposed disposition and (b) Buyer shall have
furnished Seller with an opinion of counsel satisfactory in form and substance
to Seller and Seller's counsel to the effect that such disposition will not
require registration under the Act or qualification under the State Acts and
that appropriate action necessary for compliance with the Act and the State Acts
and any other applicable local or foreign law has been taken. Buyer recognizes
and acknowledges that the certificate for the Shares, if any, shall contain the
following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE. THEY MAY BE
OFFERED AND SOLD ONLY IF REGISTERED OR QUALIFIED PURSUANT TO THE
RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF AN
EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION IS AVAILABLE.
4.4 Access to Information. Buyer has had the opportunity
to ask questions of, and to receive answers from, Seller with respect to the
terms and conditions of the transaction contemplated hereunder and with respect
to the Seller's proposed investments, business affairs and operations. Buyer has
had access to such financial and other information as is necessary in order for
it to make a fully-informed decision as to an investment in Seller by way of
purchase of the Shares, and has had the opportunity to obtain any additional
information necessary to verify any of such information to which he has had
access.
2
<PAGE> 3
5. Representations and Warranties of Seller. Seller represents
and warrants to, and covenants with, Buyer as follows:
5.1 Organization and Authority; Articles and Bylaws.
Seller is a corporation duly organized, validly existing and in good standing
under the laws of Maryland and has the corporate power and authority to own and
operate the properties and to carry on the business as it does now and as it
proposes to do in the future. Seller has furnished Buyer with copies of its
articles of incorporation and its bylaws and such copies are true, correct and
complete and contain all amendments through the date hereof.
5.2 Capitalization. Immediately prior to consummation of
the transaction contemplated hereunder, the authorized capital stock of Seller
consisted of 10,000,000 shares of common stock, $001 par value, none of which
had been issued and none of which were outstanding, such that, immediately after
consummation of the transaction contemplated hereunder, Buyer shall be the sole
shareholder of Seller. There are no outstanding warrants, options or conversion
privileges, or other rights or agreements to purchase or otherwise acquire or
issue any shares of common stock of Seller.
6. Miscellaneous Provisions.
6.1 Survival of Representations and Warranties. The
representations and warranties herein made shall survive consummation of the
transaction contemplated hereunder.
6.2 Entire Agreement; Modification; Waiver. This Agreement
constitutes the entire agreement between the parties pertaining to the subject
matter contained herein and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. Each party hereto represents
that, in entering into this Agreement, such party has relied solely upon the
express provisions of this Agreement and has not relied upon any other party's
inducements, promises, representations or obligations to make any disclosures.
No supplement, modification, or amendment of this Agreement shall be binding
unless executed in writing by both parties. No waiver of any of the provisions
of this Agreement shall be deemed, or shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver.
6.3 Assignment. This Agreement shall be binding on and, subject to
the provisions of Section 4, hereof, shall inure to the benefit of the parties'
respective successors and assigns, each of whom, subject to the provisions of
Section 4 hereof and the requirement that the written consent of the other party
be first obtained, which consent may be withheld for any reason whatsoever or no
reason at all, shall have the right to assign and otherwise transfer all or any
portion of this Agreement or the benefits thereof.
6.4 Effect of Headings. The subject headings of the sections and
subsections of this Agreement are included for convenience only and shall not
affect the construction or interpretation of any of its provisions.
6.5 Counterparts. This Agreement may be executed in one or more
counterparts and by facsimile with the same effect as if the parties had all
signed the same
3
<PAGE> 4
document in ink. All counterparts shall be construed together and shall
constitute one agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed effective as of the date first above written.
"SELLER"
VENTURE LENDING & LEASING III, INC.,
a Maryland corporation
Dated
- ------------------------------ --------------------------------
By: Salvador O. Gutierrez
Its: President
"BUYER"
VENTURE LENDING & LEASING III, LLC,
a Delaware limited liability company
By: VLLI Capital, LLC,
a Delaware limited liability company
Its: Manager
By: Westech Investment Advisors, Inc.,
a California corporation
Its: Managing Member
Dated
-------------------------- -----------------------
By: Ronald W. Swenson
Its: Chief Executive Officer
4
<PAGE> 1
Exhibit 10.1
Form of
CUSTODIAN AGREEMENT
THIS AGREEMENT, made as of this __________ day of _______________,
2000, between Venture Lending & Leasing III, 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 ______________________ with its principal place of business at
_______________________________ (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 or 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").
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
1
<PAGE> 2
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 changes 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 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.
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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 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.
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<PAGE> 4
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 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,
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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.
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 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
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<PAGE> 6
hereunder, to the extent the Custodian receives indemnification from such
foreign sub-custodian pursuant to part A(i) of this Section 6.
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 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 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 such amounts 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
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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 in obtaining any refund of local taxes to which 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 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 account of
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 transfers of Assets made hereunder and for all other
necessary and proper
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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 or by it under this Agreement as may be
required under the laws of any jurisdiction to exempt from taxation any
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 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
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<PAGE> 9
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 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
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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 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 foreseeable 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.
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Section 20. Governing Law.
This Agreement shall be governed and construed in accordance with the
laws of ______________________________________.
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 _____________________________,
Attention: _______________, and, (b) 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 III, INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
----------------------------------
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
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EXHIBIT A
<PAGE> 13
ADDENDUM NO. 1 TO
CUSTODIAN AGREEMENT
DOCUMENT CUSTODY SERVICE
FOR
VENTURE LENDING & LEASING III, INC. (VLLI III)
This Addendum supplements and constitutes a part of the Custodian Agreement made
by and between VLLI III (the "Customer") and ______________________ (the "Bank")
dated _______________, 2000.
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.
Venture Lending & Leasing III, Inc.
- --------------------------------
By: By:
--------------------------- --------------------------------
Title: Title:
------------------------ -----------------------------
Date: Date:
------------------------- ------------------------------
<PAGE> 14
INSTITUTIONAL CUSTODY FEE SCHEDULE
for
VENTURE LENDING & LEASING III, INC.
<PAGE> 1
Exhibit 10.2
FORM OF
INTERCREDITOR AGREEMENT
([NAME OF BORROWER])
This Intercreditor Agreement is made effective as of the _____
day of ___________, 2000, by and between Venture Lending & Leasing III, Inc.,
and Venture Lending & Leasing II, Inc., both Maryland corporations (referred to
herein jointly as "Lenders", and individually as a "Lender").
Recitals
A. Each Lender has entered into a separate Loan and
Security Agreement [OF EVEN DATE HEREWITH] (each, a "Loan Agreement") with
_____________________, a ______________ corporation ("Borrower"), pursuant to
which each Lender has agreed, severally and not jointly, to make secured, term
loans to Borrower up to the amount of such Lender's Commitment. Pursuant to the
Loan Agreements, Borrower has granted to each Lender a security interest in
certain now owned and hereafter acquired personal property collateral described
on Exhibit "A" to this Agreement, as such Exhibit may be amended or supplemented
from time to time (the "Collateral") [OR DESCRIBE EACH LENDER'S COLLATERAL IF
OVERLAPS BUT NOT IDENTICAL]. Borrower has also executed or will execute one or
more Uniform Commercial Code financing statements in favor of each Lender, which
have been filed or will be filed with the Secretary of State of ___________ and
in other jurisdictions or offices, and has executed or will execute such
additional collateral assignments, pledge agreements, and mortgages as Lenders
may request (collectively, with the Loan Agreements, the "Security Documents").
B. This Agreement sets forth certain rights and duties
of the parties with respect to the Collateral, the parity of each Lender's
security interest in the Collateral and the products and proceeds thereof, and
other rights and obligations among the parties.
NOW, THEREFORE, in consideration of the mutual agreements and
covenants contained herein the parties agree as follows:
1. Definitions. Unless otherwise defined herein, each capitalized
term used in this Agreement has the meaning ascribed thereto in the Loan
Agreements. "Pro Rata" means, as to any Lender at any time, the percentage
equivalent at such time of such Lender's aggregate unpaid principal amount of
Loans, divided by the combined aggregate unpaid principal amount of all Loans of
both Lenders.
2. Priority of Security Interests. Notwithstanding any contrary
priority established by (a) the filing dates of their respective financing
statements, (b) the recording dates of any other security perfection documents,
or (c) which Lender has possession of any of the Collateral, the parties agree
that the Lien of each Lender in the Collateral perfected or to be perfected by
such Lender's Security Documents shall be of equal rank and priority to the
other Lender's Liens in the same Collateral, and the Lien of each Lender in the
Collateral shall be deemed an
<PAGE> 2
undivided Pro Rata security interest in all items of Collateral. The equality in
priority and pari passu nature of the Lenders' Liens specified in this Agreement
are applicable irrespective of: the time or order of attachment or perfection of
security interests; the time or order of filing of any Security Documents; or
the time of giving or failure to give notice of the acquisition or expected
acquisition of purchase money or other security interests. This Agreement
applies only to Liens held by Lenders to secure Loans and other advances made
under the Loan Agreements.
3. Effect of Lender's Nonperfection. The agreement herein as to
the equality in priority of Lenders' Liens is expressly conditioned upon the
perfection and nonavoidability of the Lien of each Lender. If the Lien of any
Lender is (i) determined by a court of competent jurisdiction to be avoidable
for any reason, or (ii) such Lender fails to timely perfect its Lien with
respect to all or any portion of the Collateral (or such perfection is not
maintained without lapse) and as a result thereof the priority of such Lender's
Lien becomes subordinate or junior to a perfected Lien in favor of a third party
under the Uniform Commercial Code or other applicable law, (such Lender being
referred to as an "Affected Lender"), then all losses by Affected Lender from
the Collateral (a "Loss") resulting from such failure to timely perfect or
maintain perfection or from such avoidability shall be borne solely by the
Affected Lender. In the event of any dispute between the Lenders as to the
amount of the Loss, the amount determined by the perfected Lender shall be
presumed correct unless and until rebutted by competent evidence presented by
the Affected Lender. The Affected Lender shall bear the burden of persuasion.
Notwithstanding anything to the contrary in this Section 3, if both Lenders'
Liens are perfected as to particular Collateral on the same day, then the
agreement herein as to the equality in priority of their Liens shall apply to
such Collateral.
4. Notices of Equal Priority. At the request of any Lender, each
Security Document under the Loan Agreement naming an individual Lender as
secured party, collateral assignee or mortgagee shall contain an unqualified
statement in substantially the following form:
"The security interests of [one Lender] and its successors and
assigns described herein are subject to a certain
Intercreditor Agreement dated ___________, 199_, among
Borrower, [Lender] and [the other Lender]."
Each Lender agrees to execute any and all financing statements, financing
statement amendments, notices and other documents reasonably deemed necessary by
any other Lender to establish and maintain the relative priority agreement made
herein as a matter of public record. Any financing statement in favor of an
individual Lender with respect to the Collateral shall include a statement
substantially as follows:
"Secured Party's security interest in the collateral covered
by this financing statement is subject to an Intercreditor
Agreement dated __________, 199_, between Secured Party and
[other Lender]."
5. Lender as Bailee. Each Lender agrees that any time it receives
or otherwise is in possession of any Collateral, whether through foreclosure,
bankruptcy, insolvency proceedings or otherwise, such Collateral and any
proceeds thereof shall be received or held by such Lender
2
<PAGE> 3
as a bailee for the other Lender for purposes of: maintaining the perfection of
Lenders' security interests in such Collateral; Pro Rata distribution between
the Lenders; and application to their respective claims against Borrower as
provided herein and in any other Loan Document.
6. Unanimity in Enforcement.
6.1 Lenders' Standstill. Without the prior written
consent of the other Lender or its assignee, which consent shall not be withheld
unreasonably (and which withholding shall be deemed unreasonable if it would
prevent the other Lender or its assignee from taking action which such Lender,
its assignee or its respective counsel deems commercially reasonable under the
Uniform Commercial Code or other applicable law), no Lender or its assignee (the
"Enforcing Lender") shall collect, take possession of, foreclose upon, or
exercise any rights or remedies with respect to the Collateral or Borrower,
judicially or non-judicially, in order to satisfy or collect any Obligations
owed in connection with such Lender's Loan Agreement or attempt to do any of the
foregoing. In any event, such consent shall be deemed given if such other Lender
or its assignee has not objected in writing within 30 days after receipt of
notice from the Enforcing Lender of its intention to take any such action.
Except as expressly limited by this Section 6, each Lender (or its assignee) may
unilaterally exercise any rights and remedies under its Loan Documents,
including without limiting the generality of the foregoing, the cessation of any
future Loans to Borrower and the acceleration of then outstanding Loans upon the
occurrence of an Event of Default
6.2 Enforcement Action. Upon default and acceleration of
the Loans by an Enforcing Lender under applicable provisions of its Loan
Agreement, such Lender may, with the consent of the other Lender (as required
under Section 6.1), proceed with the enforcement of Lenders' rights against the
Collateral for the benefit of Lenders under the Loan Documents. Any
repossession, sale or distribution of proceeds of Collateral shall be
accomplished as required by this Agreement, the Loan Documents, and applicable
law. Effective upon receipt of such consent, the Enforcing Lender is authorized
to exercise all rights and remedies of Lenders under the Loan Documents (an
"Enforcement Action"). Unless the Enforcing Lender shall request further
guidance or consents, any direction by the other Lender to begin Enforcement
Action shall only state that the Enforcing Lender shall begin enforcement, and
shall not specify the manner in which enforcement should proceed. Once the
Enforcing Lender receives an enforcement direction from the other Lender, all
decisions as to how to proceed to enforce the Lenders' rights and remedies,
including, without limitation, the methods and timing of proceeding, may be made
by the Enforcing Lender in its good faith business judgment, with such
consultation with other Lender as Enforcing Lender in its sole discretion deems
reasonable under the circumstances. In the event of one or more foreclosure
sales, Enforcing Lender shall have the right to credit bid on behalf of all
Lenders in respect of their Loans and all other Obligations of Borrower under
the Loan Documents.
6.3 Acquisition of Collateral. If Collateral is acquired
by a Lender by foreclosure sale or otherwise, at the option of such Lender,
title may be taken in the name of such Lender or in the name of a corporation
affiliated with such Lender or other nominee designated by such Lender, in any
case, for the ratable benefit of both Lenders subject to the terms of this
Agreement. Each Lender shall consult with the other Lender as to the general
operation and
3
<PAGE> 4
disposition of any Collateral for which title has been acquired through
foreclosure or otherwise. Neither Lender shall withhold its consent unreasonably
in matters and decisions by the other Lender relating to the management,
operation, or repair of the Collateral so acquired.
6.4 Costs. The costs of repossession, sale, possession
and management (including, without limitation, any costs of holding any
Collateral the title to which is acquired by one Lender on behalf of the
Lenders), and distribution shall be borne Pro Rata by Lenders until repaid by
Borrower. Each Lender shall reimburse the other Lender, as applicable, for its
Pro Rata share of all such costs promptly upon demand. Without limiting any
obligations of one Lender to reimburse the other as contained herein, in the
event of Borrower's failure to pay taxes, assessments, insurance premiums,
claims against the Collateral or any other amount required to be paid by
Borrower pursuant to any Loan Documents, either Lender may (but shall not be
obligated to) advance amounts necessary to pay the same, and the other Lender
agrees to reimburse such Lender promptly upon demand for its Pro Rata share of
any such payments.
6.5 Monitoring of Collateral, Risks and Standard of Care.
Whenever a Lender is acting as an Enforcing Lender it shall be acting for the
other Lender for purposes of convenience in enforcing the rights and remedies of
the Lenders arising after an Event of Default and, although such Enforcing
Lender shall have the right, it shall have no obligation to inspect or monitor
any Collateral or to determine whether any Default or Event of Default has
occurred under the other Lender's Loan Documents. The Enforcing Lender shall not
be responsible for the performance or observance of any term, covenant or
condition on the part of Borrower under the other Lender's Loan Documents. Each
Lender shall undertake such inspections or other monitoring of the Collateral
and Borrower's observance of the terms of such Lender's Loan Documents as such
Lender deems appropriate for its own purposes, and agrees that it shall not be
relying upon the other Lender for the same.
6.6 Relationship of Lenders. Neither the making of their
respective Commitments to Borrower, the execution of this Agreement, the Loan
Agreements or the other Loan Documents, nor any agreement to share any proceeds
or Collateral, nor any Lender acting as an Enforcing Lender is intended to be,
nor shall it be construed to be, the formation of a partnership or joint venture
between the Lenders or the creation of any express, implied or constructive
trust relationship between them. Lenders agree that neither is acting as a
trustee for the other.
6.7 Lender Cooperation. If either Lender obtains
possession of any Collateral (other than cash collateral received in payment of
a Loan in the ordinary course), such Lender shall hold such Collateral for the
Pro Rata benefit of both Lenders. Each Lender agrees to cooperate with each
other Lender in its efforts to realize upon Collateral and to exercise the
rights of Lenders under the Security Documents, including the execution of such
instruments, powers of attorney or other documents as an Enforcing Lender may
require to perform in such capacity.
6.8 Pro Rata Treatment. If at any time after the Loans
shall have been declared due and payable pursuant to the terms of the Loan
Agreements, either Lender shall obtain any payment (whether voluntary,
involuntary, by foreclosure, by application of setoff, or
4
<PAGE> 5
otherwise) of any principal of or interest on its Loans in excess of its Pro
Rata share of payments ("Excess Payment") received by both Lenders on principal
of and interest on their Loans, then the Lender receiving such Excess Payment
shall make payments ("Sharing Payments") to the other Lender as shall result in
both Lenders receiving their Pro Rata share of payments; provided, however, that
if all or any portion of the Excess Payment is thereafter recovered from the
Lender who received it, then the Sharing Payments theretofore made by the Lender
to the other Lender shall be rescinded and returned to the extent necessary so
the Lenders shall have received the Pro Rata shares to which they are entitled
under the Loan Agreements and this Agreement. References to "Pro Rata" in this
Agreement shall mean "Pro Rata" after any adjustment required under this
Section.
7. Demand for Satisfaction Deemed Given. By executing this
Agreement, each Lender hereby demands of the other Lender satisfaction of its
indebtedness, if such demand is required under Section 9504(1)(c) of the
California UCC. The rights and duties of Lenders in any foreclosure situation
not addressed in this Agreement shall be determined by the provisions of
applicable California law.
8. Consents Under Security Documents. Without the prior written
consent of the other Lender, no Lender will consent to any material
modification, supplement or waiver under any of the Security Documents, or
release any Collateral or otherwise terminate any Lien under any of the Security
Documents, except that no such consent shall be required to release any Lien
covering property which is the subject of a disposition of property permitted
under both of the Loan Agreements.
9. Other Indebtedness of Borrower to Either Lender. Lenders agree
that the Security Documents and financing statements executed in connection
therewith shall provide and perfect security interests and liens in the
Collateral only to secure the Indebtedness of Borrower to Lenders as
contemplated under the Loan Documents even though Borrower may be indebted to
one or both Lenders on account of obligations existing prior to the execution of
the Loan Documents; and each Lender agrees not to make, after the date of this
Agreement, any secured loans to Borrower which are not contemplated by the Loan
Agreements in their form as of the date hereof (without amendment or
modification thereof) without the prior written consent of the other Lender. In
addition, notwithstanding any provision of this Agreement to the contrary, this
Agreement is not intended to affect the priority of either Lender's security
interests in any specified items of Borrower's equipment which such Lender has
financed prior to the date of such party's Loan Documents. In furtherance, and
not by way of limitation, of the foregoing, such Lender will not share its
priority position or any proceeds of such equipment collateral with any other
Lender or any other party as a result of this Agreement.
10. General Provisions.
10.1 Binding Effect; Assigns. This Agreement shall be
binding on and inure to the benefit of the parties' respective successors and
assigns, each of whom shall have the right to assign and otherwise transfer all
or any portion of this Agreement or the benefits thereof; provided, that neither
party shall delegate or transfer any of its obligations or duties hereunder
5
<PAGE> 6
for any reason (except as collateral security for a Lender's obligations for
borrowed money), without the prior written approval of the other party, which
will not be unreasonably withheld.
10.2 Entire Agreement. This Agreement represents the
entire understanding and agreement between the parties with respect to the
subject matter hereof, and supersedes and replaces all other agreements and
understandings, oral or written.
10.3 Notices. All notices, requests, consents and other
communications required or permitted under this Agreement shall be given in the
manner set forth in the Loan Agreements.
10.4 Validity. If any provision of this Agreement is
contrary to, prohibited by or deemed invalid under applicable law or regulation,
such provision shall be inapplicable and deemed omitted to the extent so
contrary, prohibited or invalid, but the remainder hereof shall not be
invalidated thereby and shall be given full force and effect so far as possible,
provided that no such severability of provisions shall be effective if it
materially changes the economic benefit of this Agreement to any party.
10.5 Governing Law; Captions. This Agreement shall in all
respects be governed, interpreted and construed by the laws of the State of
California. Captions where used herein are solely for convenience and shall not
be deemed to affect in any manner the meaning or intent of this Agreement or any
provision hereof.
10.6 Amendments. This Agreement (including any schedule or
exhibit hereto) may be modified or amended only by a writing signed by both
Lenders. Each Lender agrees that if the assignee of either Lender is a creditor
of such Lender to whom such Lender has granted a security interest in this
Agreement, then following the occurrence of an event of default (however
defined) under or with respect to the indebtedness held by such assignee or the
occurrence of an event which with the giving of notice or the passage of time or
both would constitute such an event of default, the written consent of such
assignee, rather than of such assignor Lender, shall be required for any
modification or amendment to this Agreement.
10.7 Attorneys' Fees. If the services of an attorney are
engaged by any party to secure the payment or performance of this Agreement or
otherwise upon the breach or default of another party to this Agreement, or if
any judicial remedy or arbitration is necessary to enforce or interpret any
provision of this Agreement or the rights and duties of any person in relation
thereto, the prevailing party shall be entitled to reasonable attorneys' fees,
costs and other expenses, in addition to any other relief to which such party
may be entitled. The "prevailing party" shall be determined based upon an
assessment by the court or arbitrator of which party's major arguments made or
positions taken in the action or proceedings fairly could be said to have
prevailed over the other party's major arguments or positions on major disputed
issues in the decision or award. Any award of damages following judicial remedy
or arbitration as a result of the breach of this Agreement or any of its
provisions shall include an award of prejudgment interest from the date of the
breach at the lower of 10% per annum or the maximum amount of interest allowed
by law.
6
<PAGE> 7
10.8 Counterparts. This Agreement may be executed in any
number of counterparts and by facsimile with the same effect as if the parties
had all signed the same document in ink. All counterparts shall be construed
together and shall constitute one agreement.
10.9 No Third Party Benefit. This Agreement is not
intended to and shall not confer upon any third party any rights or benefits,
and is made solely for the benefit of Lenders.
10.10 Assignee Rights. Each Lender agrees that if the
assignee of either Lender is a creditor of such Lender to whom such Lender has
granted a security interest in this Agreement, then following the occurrence of
an event of default (however defined) under or with respect to the indebtedness
held by such assignee or the occurrence of an event which with the giving of
notice or the passage of time or both would constitute such an event of default,
all rights (but not the obligations) of the assignor Lender under this Agreement
shall thereafter be exercisable solely by such assignee except to the extent
such assignee may otherwise consent in writing.
IN WITNESS WHEREOF, the parties have executed this
Intercreditor Agreement as of the date first above written.
LENDERS:
VENTURE LENDING & LEASING III, INC.
By:
---------------------------------
Its:
--------------------------------
VENTURE LENDING & LEASING II, INC.
By:
---------------------------------
Its:
--------------------------------
7
<PAGE> 8
Exhibit 10.2
Borrower's Acknowledgment of Intercreditor Agreement
The undersigned, as Borrower, has entered into [TWO SEPARATE
BUT LIKE LOAN AND SECURITY AGREEMENTS DATED AS OF __________________] (each, a
"Loan Agreement"), one with Venture Lending & Leasing III, Inc., and the other
with Venture Lending & Leasing II, Inc., as lenders (each, a "Lender"), pursuant
to which each Lender has agreed, severally and not jointly, to make secured
loans to Borrower up to a certain committed amount.
Pursuant to the Loan Agreements, Borrower grants to each
Lender a security interest in certain now owned and hereafter acquired personal
property defined therein as "Collateral". Borrower has also executed or will
execute one or more Uniform Commercial Code financing statements in favor of
each Lender covering the Collateral.
The Lenders have represented to Borrower that the Lenders have
entered into an Intercreditor Agreement which, among other things, establishes
the parity of each Lender's security interest in the Collateral.
Borrower acknowledges that each Lender's security interests in
the Collateral, as perfected or to be perfected by such Lender's Security
Documents and financing statements, shall be of equal rank and priority to the
other Lender's security interests in the same Collateral, and the security
interest of each Lender in the Collateral is an undivided, pro rata security
interest in all items of Collateral based upon the ratio of each Lender's
aggregate unpaid principal amount of Loans, to the combined aggregate unpaid
principal amount of all Loans of both Lenders.
Borrower further agrees that neither the Lenders' making of
their respective Commitments to Borrower nor any agreement between them to share
any proceeds or Collateral shall be construed as a partnership or joint venture
between the Lenders or the creation of any trust relationship between them.
[BORROWER]
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Dated:
-------------------------------
<PAGE> 1
Exhibit 10.3
MANAGEMENT AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of ______________, 2000,
between VENTURE LENDING & LEASING III, 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"), whose
sole shareholder is Venture Lending & Leasing III, LLC, a California limited
liability company (the "LLC");
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.
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.
<PAGE> 2
(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.
5. 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
5, 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 5, 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 the investors in the LLC, 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, Venture Lending & Leasing, Inc., a Maryland
corporation or Venture Lending &
2
<PAGE> 3
Leasing II, Inc., a Maryland corporation 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. If (i) the LLC
elects irrevocably to release the Members from any uncalled portion of their
subscription obligations or (ii) the Fund elects irrevocably to release the LLC
from any uncalled portion of its capital commitment to the Fund, then the "total
amount subscribed for" 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
__________, 2000; 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 __________, 2000.
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.
6. Expenses.
(a) The Fund will pay all expenses (including, without
limitation, accounting, legal, printing, clerical, filing and other expenses)
incurred by the Fund 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 6(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
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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, 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 7 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.
7. Management Fee.
(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
Member 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 LLC 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 to the LLC as of the first
closing. The "Member Committed Equity Capital", as of the end of any fiscal
quarter, shall be the aggregate amount of subscription obligations for the
purchase of interests in the LLC (including any amounts of such obligations that
have been satisfied) as of the end of such fiscal quarter.
(b) 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.
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(c) If (i) the Manager or the Adviser to the Manager,
(ii) an officer, director or employee of the Manager or the Adviser 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.
8. 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.
9. 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.
(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.
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10. 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.
11. 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.
12. 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 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 III, INC. WESTECH INVESTMENT ADVISORS, INC.
By: By:
-------------------------------- ---------------------------------
Salvador O. Gutierrez, Ronald W. Swenson
President Chief Executive Officer
SIGULER GUFF ADVISERS, LLC
By:
---------------------------------
George W. Siguler,
Managing Director
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