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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-22618
VENTURE LENDING & LEASING, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-3775187
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(State or other jurisdiction of incorporation or (I.R.S. Employer
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
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Indicate by check mark whether the registrant has (i) filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (ii) has been subject
to such filing requirements for the past 90 days: Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated be reference in Part II of this Form 10-K or any amendment to this
Form 10-K: |_|
As the registrant's shares are not publicly-traded, the aggregate market value
of the voting stock held by non-affiliates of the registrant cannot be
determined.
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 26, 1996 was 29,822.91.
Documents Incorporated by Reference
Document Description 10-K Part
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Specifically Identified Portions of the Registrant's Proxy Statement
for the Annual Meeting of Shareholders to be held October 16, 1996 III
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PART I
ITEM 1. BUSINESS.
Introduction.
Venture Lending & Leasing, Inc. ("Fund") is a non-diversified closed-end
management investment company electing status as a "business development
company" ("BDC") under the Investment Company Act of 1940 ("1940 Act") whose
investment objective is to achieve a high total return. The Fund provides
asset-based financing to carefully selected venture capital-backed companies, in
the form of secured loans, installment sales contracts or equipment leases. The
Fund generally receives warrants to acquire equity securities in connection with
its portfolio investments. There can be no assurance that the Fund will attain
its investment objective. Westech Investment Advisors, Inc. ("Westech Advisors")
is the Fund's Investment Manager and Siguler Guff Advisers, L.L.C. ("Siguler
Guff Advisers") is its Fund Manager. At a meeting held on September 26, 1995,
the Fund's shareholders approved a proposal to substitute Siguler Guff Advisers,
for the previous Fund Manager Mitchell Hutchins Institutional Investors Inc, and
Siguler Guff Advisers assumed responsibility as Fund Manager on December 22,
1995. The Investment Manager and the Fund Manager are referred to collectively
as the "Managers." The Fund was incorporated in Maryland on September 29, 1993
and commenced business on July 5, 1994.
The Fund's shares of Common Stock, par value (`Shares") are sold to
subscribers pursuant to one or more capital calls to be made from time to time
until July 5, 1998. The Fund will seek to require payment by investors pursuant
to each capital call of only that portion of the total dollar amount subscribed
for that the Fund expects will be needed to fund commitments entered into within
a reasonable time after such capital call. As of June 30, 1996 the Fund has made
three capital calls since inception for a total of 40% of committed capital.
Total committed capital as of June 30, 1996 was $46.6 million; a total of $18.6
million had been called.
Investment Program.
General. As a BDC, the Fund will invest at least 70% of its total assets
("qualifying assets") in securities of companies that qualify as "eligible
portfolio companies." 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. See "Regulation." The Fund may invest up to
30% of its total assets in non-qualifying assets, including companies that are
not eligible portfolio companies (for example, because the company's securities
are listed on the National Association of Securities Dealers' Automated
Quotation System) and eligible portfolio companies as to which the Fund does not
offer to make available significant managerial assistance. The foregoing
percentages are 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 consist of a promissory
note secured by the equipment or other assets to be purchased by the borrower.
The Fund generally obtains a security interest in the assets financed and
receives periodic payments of interest and principal, and generally receives a
final payment constituting additional interest at the end of the transaction's
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term. Venture leases 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 borrower 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 are individually negotiated between the Fund and each borrower
or lessee. Because the Fund seeks to qualify as a "regulated investment company"
("RIC") under the Internal Revenue Code of 1986 ("Internal Revenue Code"),
provisions of the Internal Revenue Code restrict the terms upon which the Fund
may enter into venture leases and the extent to which venture leases may be
used, and the Fund anticipates structuring the majority of its transactions as
venture loans.
Typically, loans or leases are structured as commitments by the Fund to
finance asset acquisitions by the borrower or lessee over a specified period of
time. The commitment of the Fund to finance future asset acquisitions is
typically subject to the absence of any default under the loan or lease and
compliance by the borrower with requirements relating to, among other things,
the type of assets to be acquired. Although the Fund's commitments generally
provide that the Fund is not required to continue to fund additional asset
purchases 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 finances an asset
acquisition as it was at the time the commitment was entered into.
Warrants and Equity Securities. The Fund generally acquires warrants to
purchase equity securities of the borrower or lessee in connection with asset
financings. The terms of the warrants, including the expiration date, exercise
price and terms of the equity security for which the warrant may be exercised,
are negotiated individually with each borrower or lessee. Substantially all the
warrants and underlying equity securities are restricted securities under the
1933 Act at the time of issuance; the Fund generally negotiates registration
rights with the borrower or lessee that may provide (i) "piggyback" registration
rights, which permit the Fund under certain circumstances to include some or all
of the securities owned by it in a registration statement filed by the borrower
or lessee or (ii) under rare circumstances, "demand" registration rights
permitting the Fund under certain circumstances to require the borrower or
lessee to register the securities under the 1933 Act (in some cases at the
Fund's expense).
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 is classified as a "non-diversified"
closed-end investment company under the 1940 Act. However the Fund seeks to
qualify as a RIC, and therefore must meet diversification standards under the
Internal Revenue Code.
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
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issuer and (ii) at least 50% of the market value of its total assets is
represented by cash, cash items, government securities, securities of other RICs
and other securities (with each investment in such other securities limited so
that not more than 5% of the market value of the Fund's total assets is invested
in the securities of a single issuer and the Fund does not own more than 10% of
the outstanding voting securities of a single issuer). For purposes of the
diversification requirements under the Internal Revenue Code, the percentage of
the Fund's total assets "invested" in securities of a company will be deemed to
refer, in the case of financings in which the Fund commits to provide financing
prior to funding the commitment, to the amount of the Fund's total assets
represented by the value of the securities issued by the borrower or lessee to
the Fund at the time each portion of the commitment is funded.
The Fund will invest no more than 25% of its total assets in securities of
companies in any single industry. The broad industry categories in which the
Fund anticipates that most of its investments will fall (and within each of
which there may be several "industries" for purposes of the industry
diversification policy) include computer and semiconductor-related,
medical/biotechnology and communications.
Investment Guidelines. In selecting investments for the Fund's portfolio,
the Managers endeavor to meet the investment guidelines 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
Managers. Such investments might be made if the Managers believe 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.
Leverage. The Fund is permitted 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 percent. "Asset coverage"
means the ratio which the value of the Fund's total assets, less all liabilities
not represented by the borrowings and 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 use of leverage increases investment risk. The Fund's lenders require
that the Fund pledge portfolio assets as collateral for loans. If the Fund is
unable to service the borrowings, the Fund may risk the loss of such pledged
assets. Lenders also 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.
Temporary Investments. Pending investment in asset financing transactions
and pending distributions, the Fund invests 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 or
(iii) short-term high-quality debt instruments of U.S. corporations. 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.
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The Fund also may enter into repurchase agreements that are fully
collateralized by U.S. government securities with banks or recognized securities
dealers, in which the Fund purchases a U.S. government security from the
institution and simultaneously agrees to resell it to the seller at an
agreed-upon date and price. The repurchase price is related to an agreed-upon
market rate of interest rather than the coupon of the debt security and, in that
sense, these agreements are analogous to secured loans from the Fund to the
seller. Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
the transaction defaults.
Other Investment Policies. The Fund will not sell securities short,
purchase securities on margin (except to the extent the Fund's permitted
borrowings are deemed to constitute margin purchases), write puts or calls,
purchase or sell commodities or commodity contracts or purchase or sell real
estate. The Fund will not underwrite the securities of other companies, except
to the extent the Fund may be deemed an underwriter upon the disposition of
restricted securities acquired in the ordinary course of the Fund's business.
The Fund's investment objective, investment policies and investment
guidelines (other than its status as a BDC) are not fundamental policies and may
be changed by the Fund's Board of Directors at any time without shareholder
approval.
Regulation.
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," as defined below. More
specifically, in order to qualify as a BDC, a company must (i) be a domestic
company; (ii) have registered as a class of its securities or have filed a
registration statement with the SEC pursuant to Section 12 of the Securities
Exchange Act of 1934; (iii) operate for the purpose of investing in the
securities of certain types of eligible portfolio companies; (iv) offer to
extend significant managerial assistance to such eligible portfolio companies;
(v) have a majority of disinterested directors; and (vi) file (or under certain
circumstances, intend to file) a proper notice of election with the SEC.
"Making available significant managerial assistance" is defined under the
1940 Act, in relevant part, as (i) an arrangement whereby the business
development company, 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 business development company of a
controlling influence over the management or polices of the portfolio company by
the business development company acting individually or as part of a group
acting together which controls the portfolio company. The officers of the Fund
intend to offer to provide managerial assistance, including advice on equipment
acquisition and financing, cash flow and expense management, general financing
opportunities, acquisition opportunities and opportunities to access the public
securities markets, to the great majority of companies to whom the Fund provides
venture loans or leases. In some instances, officers of the Fund might serve on
the board of directors of borrowers or lessees.
An "eligible portfolio company" generally is a United States company that
is not an investment company and that (i) does not have a class of securities
registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a BDC and has an
affiliate of a BDC on its board of directors; or (iii) meets such other criteria
as may be established by the SEC. Control under the 1940 Act is presumed to
exist where a BDC owns
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more than 25% of the outstanding voting securities of the eligible portfolio
company.
The 1940 Act prohibits or restricts companies subject to the 1940 Act 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 in or 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 that a majority of the Fund's disinterested
directors has determined that such sale would be in the best interests of the
Fund and its shareholders and upon the approval by the holders of a majority of
its outstanding voting securities, including a majority of the voting securities
held by non-affiliated persons, of such policy or practice within one year of
such sale. A majority of the disinterested directors also must determine in good
faith, in consultation with the underwriters of the offering if the offering is
underwritten, that the price of the securities being sold is not less than a
price which closely approximates market value of the securities, less any
distribution discounts or commissions. As defined in the 1940 Act, the term
"majority of the outstanding voting securities" of the Fund means the vote of
(i) 67% or more of the Fund's Shares present at a meeting, if the holders of
more than 50% of the outstanding Shares are present or represented by proxy, or
(ii) more than 50% of the Fund's outstanding Shares, whichever is less.
Many of the transactions involving a company and its affiliates (as well
as affiliates of those affiliates) which were prohibited without the prior
approval of the SEC under the 1940 Act prior to its amendment by the 1980
Provisions are permissible for BDCs, including the Fund, upon the prior approval
of a majority of the Fund's disinterested directors and a majority of the
directors having no financial interest in the transactions. However, certain
transactions involving certain persons related to the Fund, including its
directors, officers, and the Managers, 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 involving the person 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).
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Dividends and Distributions.
The Fund intends to distribute to shareholders substantially all of its
net investment income and net realized capital gains, if any, as determined for
income tax purposes. Applicable law, including provisions of the 1940 Act, may
limit the amount of dividends and other distributions payable by the Fund.
Income dividends will generally be paid quarterly to shareholders of record on
the last day of each preceding calendar quarter end. Substantially all of the
Fund's net capital gain (the excess of net long-term capital gain over net
short-term capital loss) and net short-term capital gain, if any, will be
distributed annually with the Fund's final quarterly dividend distribution for
the year.
Until the fourth anniversary following the first closing of the Fund's
initial offering of shares, the Managers will seek to reinvest the proceeds of
matured, repaid or resold investments, net of required distributions to
shareholders, principal payments on borrowings and expenses or other obligations
of the Fund, in new loans or leases. Beginning on the fourth anniversary of the
Fund's first closing, the Fund will also distribute to investors all proceeds
received from principal payments and sales of investments, net of reserves and
expenses, principal repayments on the Fund's borrowings, amounts required to
fund financing commitments entered into before such fourth anniversary, and any
amounts paid on exercise of warrants. Distributions of such amounts are likely
to cause annual distributions to exceed the earnings and profits of the Fund
available for distribution, in which case such excess will be considered a tax
free return of capital to a shareholder to the extent of the shareholder's
adjusted basis in his shares and then as capital gain.
Competition.
Other entities and individuals compete for investments similar to those
proposed to be made by the Fund, some of whom may have greater resources than
the Fund. Furthermore, the Fund's need to comply with provisions of the 1940 Act
pertaining to BDCs and provisions of the Internal Revenue Code pertaining to
RICs might restrict the Fund's flexibility as compared with its competitors. The
need to compete for investment opportunities may make it necessary for the Fund
to offer borrowers or lessees more attractive transaction terms than otherwise
might be the case.
Employees.
The Fund has no employees; all of its officers are officers and employees
of the Managers, and all of its required services are performed by officers and
employees of the Managers.
ITEM 2. PROPERTIES.
All of the Fund's office space is provided by the Managers.
ITEM 3. LEGAL PROCEEDINGS.
The Fund is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Fund's security holders during
the last quarter of the fiscal year ended June 30, 1996.
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EXECUTIVE OFFICERS OF THE FUND
The following are the executive officers of the Fund. All officers serve
at the pleasure of the Board.
Name and Position With Age Occupation During Past Five Years
Fund
Ronald W. Swenson, 51 President and Director, Westech Investment
Director, Chairman and Advisors since 1994, and President and
Chief Executive Officer Director, Western Technology Investments since
1980.
Salvador O. Gutierrez, 53 Senior Vice President and Director, Westech
Director, President Investment Advisors since 1994, and Senior
and Chief Financial Vice President, Western Technology Investment
Officer since 1987.
George W. Siguler, 49 Managing Director, Siguler Guff Advisers &
Executive Vice affiliates since 1995; Managing Director of
President and Advisory Mitchell Hutchins Institutional Investors from
Director 1991 to 1995. Director and President,
Associated Capital Advisers, Inc. (investment
management firm) from 1990 to 1991, Vice
Chairman and a director of Monarch Capital
Corporation (financial services holding
company) from 1984 to 1991.
Patricia A. Breshears, 60 Vice President, Westech Investment Advisors
Vice President and since 1994; Administrator and Corporate
Secretary Secretary, Western Technology Investment
(venture leasing firm) since 1984.
Donald P. Spencer, 41 Managing Director, Siguler Guff Advisers and
Vice President and affiliates since 1995; Senior Vice President
Assistant Secretary (and other positions), Mitchell Hutchins
Institutional Investors and affiliates from 1989
to 1995.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Fund's Common Stock is not listed on any securities exchange, and all
holders of the Fund's Common Stock are subject to agreements significantly
restricting the transferability of their shares.
The approximate number of holders of record of the Fund's Common Stock at
September 12, 1996 was 52.
The Fund has established a policy of declaring dividends on a quarterly
basis, with the most recent dividend being paid on July 30, 1996 to holders of
record on June 28, 1996, in the amount of $29.50 per share. See "Dividends and
Distributions" under Item 1 for a description of the Fund's dividend policies.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain financial data and should be read
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere in this Form 10-K. The selected financial data set
forth below has been derived from the audited financial statements.
For the Period
From July 5 For the Year
1994* Ended
to June 30, 1995 June 30, 1996
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Statement of Operations Data:
Investment Income:
Interest on Loans and Leases $ 643,383 $3,481,702
Interest on Short - Term investments 222,092 351,093
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Total Investment Income 865,475 3,832,795
Expenses:
Management Fee to Managers 949,697 1,159,189
Interest Expense 154,513 895,269
Other Expenses 241,982 191,417
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Total Expenses 1,346,192 2,245,875
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Net Investment Income (Loss) (480,717) 1,586,920
Net Unrealized Gain From Investment
Transactions -- 1,308,016
Net Realized Gain From Investment
Transactions 99,501 22,134
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Net Gain (Loss) ($ 381,216) $2,917,070
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Net Gain (Loss) Per Share: ($ 46) $ 157
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Average Shares Outstanding 8,233 18,607
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Balance Sheet Data: As of June 30, As of June 30,
1995 1996
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Total Assets $20,995,852 $35,205,347
Long - term obligations $ 9,577,400 $14,738,460
* Commencement of Operations
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations -- Year Ended June 30, 1996 and Period Ended June 30, 1995
Total investment income for the year ending June 30, 1996 and for the
period from July 5, 1994 (commencement of operations) through June 30, 1995 was
$3.8 million and $0.9 million, respectively, of which $3.5 million and $0.6
million, respectively, consisted of interest on venture loans outstanding.
Remaining income consisted of interest on the temporary investment of the
proceeds of the Shares sold in the Fund's capital calls, pending investment in
venture loans and leases or application to the Fund's expenses. The increase in
investment income reflects the increase in capital called from investors from
approximately $11.4 million as of June 30, 1995 to
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approximately $18.6 million as of June 30, 1996, and the investment of that
capital (together with amounts derived from bank borrowings) in venture loans
and leases.
Expenses for the year ending June 30, 1996 and for the period from July 5,
1994 through June 30, 1995 were $2.2 million and $1.3 million, respectively,
resulting in net income of $2.9 million for the year ended June 30, 1996 and a
net loss of $0.4 million for the period from July 5, 1994 through June 30, 1995.
Net income for the year ended June 30, 1996 includes unrealized gain of $1.3
million and a realized gain of $0.02 million. The unrealized gain for the period
relates to warrants which were received in connection with loan and lease
transactions. Warrants with readily ascertainable market values are assigned a
fair value based on the difference, if any, between the exercise price of the
warrant and the fair value of the equity securities for which the warrant may be
exercised, adjusted for illiquidity. On a per share basis, for the year ending
June 30, 1996 net income was $157, and for the period from July 5, 1994 through
June 30, 1995 net loss was $46.
The primary factor contributing to the Fund's net loss for the period from
July 5, 1994 through June 30, 1995 was the Fund's management fee, which is
imposed at a rate of 2.5% of committed capital. The Fund's total assets
comprised a relatively low percentage of committed capital during the period
ending June 30, 1995, so the management fee for the period constituted a very
high percentage of total assets. Furthermore, a significant portion of the
Fund's assets as of June 30, 1995 consisted of cash and cash equivalents. The
combination of a fee based on assets in excess of total assets and a significant
portion of the Fund's assets being invested in cash and cash equivalents caused
the management fee to substantially exceed income on the Fund's invested assets
for the period from July 5, 1994 through June 30, 1995. As of June 30, 1996,
total assets invested in venture loans increased as a percentage of committed
capital to 61%, from 28% as of June 30, 1995, reflecting the investment of
capital called and additional borrowed funds, and cash balances as a percentage
of total assets were significantly reduced compared with the corresponding
period. Management fees, and certain other relatively fixed expenses, declined
significantly as a percentage of invested assets for the year as compared with
the corresponding period. Interest expense on the Fund's borrowings during the
year ended June 30, 1996, at $0.9 million, also impacted net income.
Expenses other than the management fee and interest expense declined from
$0.24 million for the period from July 5, 1994 through June 30, 1995 to $0.19
million for the year ended June 30, 1996. The decline in these expenses was due
primarily to the start-up expenses which occurred in the initial period. Because
many of these other expenses are relatively fixed and do not increase
significantly as total assets increase, these other expenses, like the
management fee, can be expected to continue to decrease as a percentage of
investment income as the Fund draws and invests additional capital.
Liquidity and Capital Resources -- June 30, 1996 and June 30, 1995
Total capital committed to the purchase of Shares pursuant to subscription
agreements was approximately $46.6 million at June 30, 1996 and $45.6 million at
June 30, 1995. As of June 30, 1996 and June 30, 1995, 40% and 25%, respectively,
of this committed capital was called to fund investments in venture loans and
leases and to meet the Fund's expenses. Additional capital may be drawn from
subscribers upon 15 days' notice.
The Fund has in place a $15 million bank credit facility to finance the
acquisition of venture loans and leases. The credit facility expires September
30, 1996, and can be drawn on from time to time during the commitment period.
The amortization schedule for each borrowing under the
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facility is expected to correspond to the amortization of the loans or leases
acquired with the proceeds of each borrowing, and interest rates will be
determined with reference to the lender's internal cost of funds at the time of
each borrowing. As of June 30, 1996 $14.7 million was outstanding under this
facility, compared with $9.6 million as of June 30, 1995. Subsequent to June 30,
1996, the Fund obtained a commitment for a total of $30 million from several
financial institutions.
As of June 30, 1996, 13% of the Fund's assets consisted of cash and cash
equivalents, compared with 39% as of June 30, 1995. The Fund continued to invest
its assets in venture loans and leases during the year. Amounts disbursed under
the Fund's loan commitments increased by approximately $22.9 million during the
year ended June 30, 1996, and net loan amounts outstanding after amortization
increased approximately $16.0 million. Amounts committed but undrawn increased
by approximately $12.0 million.
================================================================================
Period Ending Amount Principal Net Amount Committed but
Disbursed Amortization Undrawn
- --------------------------------------------------------------------------------
June 30, 1996 $36.8 million $8.2 million $28.6 million $23.5 million
- --------------------------------------------------------------------------------
June 30, 1995 $13.9 million $1.3 million $12.6 million $11.5 million
================================================================================
Because venture loans and leases are privately negotiated transactions,
investments in these assets are relatively illiquid.
The Fund seeks to meet the requirements to qualify for the special
pass-through status available to "regulated investment companies" ("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. 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"). To the extent that the terms of the
Fund's venture loans provide for the receipt by the Fund of additional interest
at the end of the loan term or the terms of venture leases provide for the
receipt by the Fund of a purchase price for the asset at the end of the lease
term ("residual income"), the Fund would be required to accrue such residual
income over the life of the loan or lease, and to include such accrued income in
its gross income for each taxable year even if it receives no portion of such
residual income in that year. Thus, in order to meet the Distribution
Requirement and avoid payment of income taxes or an 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.
11
<PAGE>
Quarterly Results - June 30, 1995 (Unaudited)
This information has been derived from unaudited financial statements
that, in the opinion of management, include all normal recurring adjustments
necessary for a fair presentation of such information. The operating results for
any quarter are not necessarily indicative of results for any future period.
Three Months Ended
September December March 31, June
30, 1994* 31, 1994 1995 30, 1995
-----------------------------------------------
Investment Income:
Interest on Loans and
Leases $ 7,022 $ 23,400 $ 202,776 $410,185
Interest on Short-Term
Investments 21,011 39,377 94,582 67,122
--------- --------- --------- --------
Total Investment Income 28,033 62,777 297,358 477,307
--------- --------- --------- --------
Expenses:
Management Fee to the
Managers 169,325 285,118 285,124 210,130
Interest Expense -- -- 120,833 33,680
Other Expense 54,953 85,249 64,911 36,869
--------- --------- --------- --------
Total Expenses 224,278 370,367 470,868 280,679
--------- --------- --------- --------
Net Investment Income (Loss) (196,245) (307,590) (173,510) 196,628
Net Realized Gain From
Investment Transactions -- -- -- 99,501
--------- --------- --------- --------
Net Income (Loss) $(196,245) $(307,590) $(173,510) $296,129
========= ========= ========= ========
Net Income (Loss) Per Share $ (78) $ (56) $ (14) $ 24
========= ========= ========= ========
Average Shares Outstanding 2,510 5,498 12,379 12,379
========= ========= ========= ========
- ----------
* Period from July 5, 1994 (commencement of operations) to September 30, 1994.
Quarterly Results - June 30, 1996 (Unaudited)
Three Months Ended
September December March 31, June
30, 1995 31, 1995 1996 30, 1996
----------------------------------------------
Investment Income:
Interest on Loans and Leases $594,539 $789,160 $ 935,083 $1,162,920
Interest on Short-Term
Investments 83,888 97,467 94,754 74,984
-------- -------- ---------- ----------
Total Investment Income 678,427 886,627 1,029,837 1,237,904
-------- -------- ---------- ----------
Expenses:
Management Fee to the Managers 287,468 293,769 287,382 290,570
Interest Expense 199,813 185,744 222,394 287,318
Other Expense 54,898 39,396 52,778 44,345
-------- -------- ---------- ----------
Total Expenses 542,179 518,909 562,554 622,233
-------- -------- ---------- ----------
Net Investment Income (Loss) $136,248 $367,718 $ 467,283 $ 615,671
Net Unrealized Gain From
Investment Transactions -- 485,993 333,940 488,083
Net Realized Gain From
Investment Transactions -- -- 22,134 --
-------- -------- ---------- ----------
Net Income $136,248 $853,711 $ 823,357 $1,103,754
======== ======== ========== ==========
Net Income Per Share $ 11 $ 42 $ 40 $ 54
======== ======== ========== ==========
Average Shares Outstanding 12,379 20,417 20,595 20,595
======== ======== ========== ==========
12
<PAGE>
VENTURE LENDING & LEASING, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1996, AND THE PERIOD FROM
JULY 5, 1994 (COMMENCEMENT OF OPERATIONS)
TO JUNE 30, 1995
ITEM 8
FINANCIAL STATEMENTS
13
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Financial Statements Included in Item 8:
See Item 14(a)
14
<PAGE>
[Letterhead of ARTHUR ANDERSEN LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Venture Lending & Leasing, Inc.:
We have audited the accompanying statements of financial position of Venture
Lending & Leasing, Inc. (a Maryland corporation) as of June 30, 1996 and 1995,
and the related statements of operations, changes in shareholders' equity and
cash flows for the year ended June 30, 1996, and for the period from July 5,
1994 (commencement of operations), to June 30, 1995. These financial statements
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Venture Lending & Leasing, Inc.
as of June 30, 1996 and 1995, and the results of its operations and its cash
flows for the year ended June 30, 1996, and for the period from July 5, 1994
(commencement of operations), to June 30, 1995, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California,
August 9, 1996
15
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF FINANCIAL POSITION
AS OF JUNE 30, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
Loans and leases, net of unearned income and fees $ 28,616,626 $ 12,524,101
Cash and cash equivalents 4,683,671 8,136,350
Investments in warrants 1,772,701 173,285
Deferred organizational expenses 90,080 120,081
Deferred bank loan expenses 19,808 28,500
Accounts receivable 16,545 10,099
Other assets 5,916 3,436
------------ ------------
Total assets $ 35,205,347 $ 20,995,852
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans $ 14,738,460 $ 9,577,400
Accounts payable 358,676 271,555
Interest payable 40,113 33,680
Commitment fees 124,735 67,500
------------ ------------
Total liabilities 15,261,984 9,950,135
------------ ------------
Shareholders' equity:
Common stock, $.001 par value-
Authorized--100,000,000 shares
Issued and outstanding--20,594.74 shares and
12,379.43 shares as of June 30, 1996 and
1995, respectively 20 12
Capital in excess of par value 18,669,745 11,426,921
Distributions (1,262,256) --
Accumulated earnings (deficit) 2,535,854 (381,216)
------------ ------------
Total shareholders' equity 19,943,363 11,045,717
------------ ------------
Total liabilities and shareholders'
equity $ 35,205,347 $ 20,995,852
============ ============
The accompanying notes are an integral part of these statements.
16
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996, AND FOR THE PERIOD FROM
JULY 5, 1994 (COMMENCEMENT OF OPERATIONS), TO JUNE 30, 1995
1996 1995
----------- -----------
INVESTMENT INCOME:
Interest on loans and leases $ 3,481,702 $ 643,383
Interest on short-term investments 351,093 222,092
----------- -----------
Total investment income 3,832,795 865,475
----------- -----------
EXPENSES:
Management fees to the Managers 1,159,189 949,697
Interest expense 895,269 154,513
Legal fees 22,129 67,829
Custody and accounting fees 17,305 20,344
Bank loan facility fee 40,310 57,610
Amortization of organizational expenses 30,001 29,919
Directors' fees and expenses 30,250 25,250
Audit fees 23,252 19,998
Transfer agency fees 6,623 6,001
Regulatory reporting 10,428 1,612
Other operating expenses 9,519 13,419
----------- -----------
Total expenses 2,244,275 1,346,192
----------- -----------
Net investment income (loss) 1,588,520 (480,717)
NET UNREALIZED GAIN FROM INVESTMENT TRANSACTIONS 1,308,016 --
REALIZED GAIN FROM INVESTMENT TRANSACTIONS 22,134 99,501
----------- -----------
Net income (loss) before provision for
income taxes 2,918,670 (381,216)
PROVISION FOR INCOME TAXES (1,600) --
----------- -----------
Net income (loss) $ 2,917,070 $ (381,216)
=========== ===========
NET INCOME (LOSS) PER SHARE $ 156.77 $ (46.30)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 18,607 8,233
=========== ===========
The accompanying notes are an integral part of these statements.
17
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996, AND FOR THE PERIOD FROM
JULY 5, 1994 (COMMENCEMENT OF OPERATIONS), TO JUNE 30, 1995
<TABLE>
<CAPTION>
Common Stock Capital in Retained
----------------------------- Excess of Earnings
Shares Amount Par Value Distributions (Deficit) Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 5, 1994 1.00 $ -- $ 1,000 $ -- $ -- $ 1,000
Shares sold 12,478.43 12 11,504,710 -- -- 11,504,722
Shares repurchased (100.00) -- (78,789) -- -- (78,789)
Net loss -- -- -- -- (381,216) (381,216)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1995 12,379.43 12 11,426,921 -- (381,216) 11,045,717
Shares sold 8,215.31 8 7,242,824 -- -- 7,242,832
Distributions -- -- -- (1,262,256) -- (1,262,256)
Net income -- -- -- -- 2,917,070 2,917,070
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1996 20,594.74 $ 20 $ 18,669,745 $ (1,262,256) $ 2,535,854 $ 19,943,363
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1996, AND FOR THE PERIOD FROM
JULY 5, 1994 (COMMENCEMENT OF OPERATIONS), TO JUNE 30, 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,917,070 $ (381,216)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Amortization of organizational expenses 30,001 29,919
Amortization of bank loan expenses 8,692 6,552
Gain on sale of warrants (22,134) (99,501)
Gain on prepayment of loan -- (77,656)
Unrealized gain from investment transactions (1,308,016) --
Increase in other assets (8,927) (3,435)
Increase in accounts payable 87,121 271,555
Increase in interest payable 6,433 33,680
Increase in receivable for securities sold -- (10,099)
Increase in commitment fees 57,235 67,500
------------ ------------
Net cash provided by (used in) operating
activities 1,767,475 (162,701)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (22,678,655) (14,156,004)
Principal payments on loans and leases 6,586,130 1,401,129
Proceeds from prepayment of loan -- 308,429
Acquisition of warrants (291,400) (272,250)
Proceeds from sale of warrants 22,134 198,466
Payment for organizational expenses -- (150,000)
------------ ------------
Net cash used in investing activities (16,361,791) (12,670,230)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net 7,242,832 11,425,933
Distributions to shareholders (1,262,256) --
Loan from bank 13,890,000 9,577,400
Repayment of bank loan and expenses (8,728,939) (35,052)
------------ ------------
Net cash provided by financing activities 11,141,637 20,968,281
------------ ------------
Net increase (decrease) in cash and
cash equivalents (3,452,679) 8,135,350
CASH AND CASH EQUIVALENTS:
Beginning of period 8,136,350 1,000
------------ ------------
End of period $ 4,683,671 $ 8,136,350
============ ============
CASH PAID DURING THE YEAR FOR:
Taxes $ 800 $ --
Interest 873,433 120,833
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
VENTURE LENDING & LEASING, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Venture Lending & Leasing, Inc. (the Fund) was incorporated in Maryland on
September 29, 1993, as a nondiversified, closed-end management investment
company electing status as a business development company under the Investment
Company Act of 1940. Prior to commencing its operations on July 5, 1994, the
Fund had no operations other than the sale to Mitchell Hutchins Institutional
Investors, Inc. (Mitchell Hutchins), which is an indirect wholly owned
subsidiary of PaineWebber Group Inc., of 1 share of common stock, $.001 par
value, for $1,000. As of June 30, 1996, the Fund meets the requirements,
including diversification requirements, to qualify as a regulated investment
company (RIC) under the Internal Revenue Code of 1986.
Costs incurred in connection with the organization of the Fund were paid
initially by Mitchell Hutchins and Westech Investment Advisors, Inc. (Westech
Advisors) (collectively, the Managers); however, the Fund reimbursed the
Managers $150,000 of such costs. This amount has been deferred and is being
amortized using the straight-line method over a period of 60 months from the
date the Fund commenced operations. During the year, the management contract of
the Fund was assigned from Mitchell Hutchins to Siguler Guff Advisers, L.L.C.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Valuation 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. Venture loans and leases are privately negotiated transactions, and
there is no established trading market in which such loans or leases can be
sold. Substantially all of the Fund's investments are restricted securities that
cannot be sold publicly without prior agreement with the issuer to register the
securities under the 1933 Act, or by selling the securities under Rule 144 or
other rules under the 1933 Act, which permit only limited sales under specified
conditions.
20
<PAGE>
Investments in loans and leases are valued at their original purchase price less
amortization of principal unless, pursuant to procedures established by the
Fund's Board of Directors, the Fund's Managers determine that amortized cost
does not represent fair value. Short-term debt instruments with 60 days or less
remaining to maturity are valued by the amortized cost method. The Fund does not
hold any short-term debt instruments that have a period of maturity exceeding 60
days.
Warrants that are received in connection with loan and lease transactions
generally will be assigned a minimal value at the time of acquisition, which
occurs at the first drawdown under the commitment. Thereafter, warrants with
readily ascertainable market values will be assigned a fair value based on the
difference, if any, between the exercise price of the warrant and the fair value
of the equity securities for which the warrant may be exercised, adjusted for
illiquidity.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits in banks and
repurchase agreements with original maturities of 90 days or less.
Loans and Leases
Unearned income and commitment fees on loans and leases are recognized using the
effective interest method over the term of the loan or lease. Commitment fees
represent fees received for commitments upon which no drawdowns have yet been
made. When the first draw is made, the fee is included in unearned income and
recognized as described above.
Federal Tax Status
As long as the Fund qualifies as a RIC, it will not pay any federal or state
corporate income tax on income that is distributed to shareholders (pass-through
status). Should the Fund lose its qualification as a RIC, it could be taxed as
an ordinary corporation on its taxable income for that year (even if that income
is distributed to its shareholders), and all distributions out of its earnings
and profits will be taxable to shareholders as ordinary income.
21
<PAGE>
3. SUMMARY OF LOANS AND LEASES:
Loans and leases generally are made to borrowers pursuant to commitments whereby
the Fund commits to finance assets up to a specified amount for the term of the
commitments, upon the terms and subject to the conditions specified by such
commitment. Commitments, loans and leases outstanding at June 30, 1996, are as
follows:
Outstanding
Borrower Commitment June 30, 1996
-------------------------------------- ----------- -------------
Active Software, Inc. $ 800,000 $ --
Advanced Therapies, Inc. 500,000 433,655
BigBook, Inc. 500,000 292,887
Biosys, Inc. 2,500,000 1,492,890
Brocade Communications, Inc. 1,100,000 898,281
Caps Software, Inc. 1,000,000 747,462
Cardiogensis Corporation 1,500,000 --
Ciphergen Biosystems 740,000 583,610
Datamind Corporation 300,000 180,678
Desmos, Inc. 1,000,000 122,392
Distrivision Development Corporation 500,000 37,148
Exponential Technology, Inc. 3,200,000 2,435,812
Fabrik Communications, Inc. 800,000 502,299
Fluid Propulsion Technologies, Inc. 250,000 118,428
Idec Pharmaceuticals Corporation 5,000,000 3,609,451
Infoseek Corporation 3,500,000 2,570,063
Integ Incorporated 5,000,000 815,981
Ipsilon Networks, Inc. 1,000,000 825,747
I-Cube, Inc. 1,000,000 --
Jetstream Communications, Inc. 300,000 268,900
JT Storage, Inc. 4,500,000 3,374,706
Larex, Inc. 2,500,000 863,216
Neomagic Corporation 3,000,000 1,000,499
Netpower, Inc. 500,000 251,651
Optimal Networks Corp. 400,000 166,067
Oratec Interventions, Inc. 500,000 163,085
Persistence Software, Inc. 500,000 249,905
Photon Dynamics, Inc. 1,000,000 706,294
Release Software Corporation 1,000,000 --
ROI Technology 750,000 --
Socket Communications, Inc. 500,000 179,818
Solopoint, Inc. 400,000 175,593
Spectrum Wireless, Inc. 2,000,000 --
Starlight Networks Incorporated 2,000,000 1,122,287
Tenth Planet Exploration, Inc. 750,000 470,117
Tessera, Inc. 2,500,000 505,493
Transmeta Corporation 500,000 202,327
Ulsi Systems, Inc. 500,000 372,823
Uniax Corporation 2,000,000 --
VidaMed, Inc. 3,000,000 2,192,244
Xatrix Entertainment, Inc. 1,000,000 684,817
----------- -----------
Total $60,290,000 $28,616,626
=========== ===========
The Fund provides asset-based financing primarily to start-up and emerging
growth venture-capital-backed companies. As a result, the Fund is subject to
general credit risk associated with such companies.
22
<PAGE>
As of the year ended June 30, 1996, the Fund had outstanding loan balances of
$4,235,114 to three borrowers that potentially subject the Fund to
concentrations of credit risk; however, the Fund's managers have determined that
no allowance for credit losses is necessary to date. In addition, the Fund had
one borrower with an outstanding balance of $16,545 that was past-due over 30
days and was brought current subsequent to year-end.
4. WARRANTS:
At June 30, 1996, the Fund held 2,676,786 warrants to purchase shares of common
and preferred stock in 35 companies, of which 7 companies are publicly traded.
The quoted market value of the stock underlying the warrants issued by the
publicly traded companies, adjusted for illiquidity, was $1,488,016. The
estimated fair value of the following warrants exceeded the Fund's recorded cost
and was recorded as an unrealized gain for the year ended June 30, 1996.
Cost Discounted Unrealized
Company Basis Market Value Gain
-------------------------------- ------- ------------ ----------
Idec Pharmaceuticals Corporation $50,000 $1,109,992 $1,059,992
Infoseek Corporation 10,000 176,500 166,500
VidaMed, Inc. 30,000 111,524 81,524
------- ---------- ----------
Total $90,000 $1,398,016 $1,308,016
======= ========== ==========
Restricted equity securities for which a public market exists are valued with
reference to the market price for unrestricted equity securities of the same
issuers, taking into consideration various factors as applicable, including the
nature of the market in which the securities are traded, the amount of the
public float, the existence and terms of any registration rights, the proportion
of the issuer's securities held by the Fund, the price at which the securities
in question were acquired relative to the market price for unrestricted
securities at the time of issuance, changes in the issuer's financial conditions
or prospects, and other factors that may affect their fair value. Restricted
securities for which an established market exists are valued at a discount from
their value determined by the foregoing methods, with the amount of the discount
decreasing as the restriction period decreases.
The remainder of the warrants issued by private companies did not have a readily
ascertainable market value and were assigned a minimal value at the time of
acquisition. These warrants had a value of $284,685 at June 30, 1996.
5. LONG-TERM DEBT FACILITY:
The Fund has in place a $15 million bank credit facility to finance the
acquisition of asset-based loans and leases. The credit facility expires
September 30, 1996, and can be drawn on from time to time during the commitment
period. The amortization schedule for each borrowing under the facility is
expected to correspond to the amortization of the loans and leases acquired with
the proceeds of each borrowing, and interest rates will be determined with
reference to the lender's internal cost of funds at the time of each borrowing.
The Fund pays a commitment fee of 0.25 percent annually with respect to this
facility and is required to maintain compensating balances with the bank of
23
<PAGE>
$250,000 or, in lieu thereof, pay a fee at the rate of prime plus 1 percent on
any deficiencies therein.
Borrowings under the facility are collateralized by the equipment financed by
the Fund under loans and leases with assignment to the financial institution,
plus other assets of the Fund.
Debt outstanding under the facility at June 30, 1996 and 1995, was as follows:
1996 1995
----------- ----------
Term note at 8.67 percent interest,
due in monthly installments therough
June 1998 $ 6,648,460 $9,577,400
Term note at 9.0 percent interest,
with interest-only payments due
monthly through September 1, 1996,
and with principal and remaining 8,090,000 --
interest due September 30, 1996
----------- ----------
$14,738,460 $9,577,400
=========== ==========
Future principal payments under this credit facility are as follows:
1997 $11,281,458
1998 3,457,002
-----------
Total $14,738,460
===========
Expenses of $35,052 were incurred in connection with procuring the loan and
credit facility. These expenses have been capitalized and are being amortized
over a period of four years, the term of the bank loan described above.
At June 30, 1996, the Fund was in negotiations with several financial
institutions to obtain an additional $15 million credit facility. Subsequent to
June 30, 1996, the Fund obtained a commitment for a total of $30 million from
several financial institutions.
6. CAPITAL STOCK:
There are 100,000,000 shares of $.001 par value common stock authorized. As of
June 30, 1996, 20,594.74 shares are issued and outstanding.
The Fund has subscription agreements in effect with its shareholders under which
shareholders will purchase shares of the Fund, up to their full committed
capital amount, upon capital calls delivered at least 15 days before payment is
due. As of June 30, 1996, $27.9 million in unfunded and uncalled capital
commitments remained outstanding.
24
<PAGE>
7. MANAGEMENT:
Westech Advisors serves as the Fund's investment manager, and Siguler Guff
Advisers, L.L.C. serves as its fund manager. As compensation for their services
to the Fund, the Managers receive a management fee computed and paid at the end
of each quarter, at an annual rate of 2.5 percent of the Fund's committed equity
capital for the first two years following the first closing of the Fund's
initial private offering and at an annual rate of 2.5 percent of the Fund's
total assets (including amounts derived from borrowed funds) as of the last day
of each fiscal quarter thereafter. Fees of $1,159,189 and $949,697 were
recognized for the years ended June 30, 1996 and 1995, respectively.
The Managers will also receive an aggregate annual incentive fee equal to 20
percent of all amounts available for distribution to investors after investors
have received cash distributions equal to 100 percent of all amounts paid for
the purchase of shares plus a preferred return calculated at a cumulative
noncompounded annual rate of 8 percent. To date, the Managers have earned no
incentive fee.
25
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the
caption "Executive Officers of the Fund" in Part I hereof, and the remainder is
contained in the Fund's Proxy Statement for the Annual Meeting of Shareholders
to be held October 16, 1996 ("1996 Proxy Statement") under the caption "Proposal
2 -- To Elect Eight Directors of the Fund" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Fund's 1996
Proxy Statement under the caption "Proposal 2 -- To Elect Eight Directors of the
Fund" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Fund's 1996
Proxy Statement under the caption "Annex A -- Beneficial Ownership of Fund
Shares" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Fund's 1996
Proxy Statement under the captions: "Other Information -- Management" and is
incorporated herein by reference.
26
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financials Statements and Financial Statement Schedules
Page
----
Report of Independent Public Accountants 15
Statement of Financial Position as of June 30, 1996 and 1995 16
Statement of Operations for the Year Ended June 30, 1996 and the 17
Period From July 5, 1994 (commencement of operations) to June 30, 1995
Statement of Changes in Shareholders' Equity for the Year Ended June 18
30, 1996 and the Period From July 5, 1994 (commencement of
operations) to June 30, 1995
Statement of Cash Flows for the Year Ended June 30, 1996 and the 19
Period From July 5, 1994 (commencement of operations) to June 30, 1995
Notes to Financial Statements 20
Financial Statement Schedules for the Year Ended June 30, 1996 and the
Period From July 5, 1994 (commencement of operations) to June 30, 1995
included in Item 14(d):
No schedules are required because the required information is not present or not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the financial statements and the notes
thereto.
Listing of Exhibits
3.1 Articles of Incorporation -- incorporated by reference to the Fund's
Registration Statement on Form 10 filed with the Securities and Exchange
Commission ("Commission") on October 13, 1984.
3.2 By-Laws, as amended to date -- filed herewith.
10.1 Management Agreement, dated as of December 22, 1995, between the Fund on
the one hand, and Westech Advisors and Siguler Guff Advisers, on the other
hand -- filed herewith
27 Financial Data Schedule
Reports on Form 8-K
The Fund filed no reports on Form 8-K with the Commission during the
fiscal quarter ended June 30, 1996.
27
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Security
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VENTURE LENDING & LEASING, INC.
(Registrant)
By: /s/ Ronald W. Swenson By: /s/ Salvador 0. Gutierrez
-------------------------------- -------------------------------------
Ronald W. Swenson Salvador 0. Gutierrez
Chairman and Chief Executive Officer President, Chief Financial Officer
and Chief Accounting Officer
Date: September __, 1996 Date: September __, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
By: /s/ John J. Cogan Director September 16, 1996
- ------------------------------
John J. Cogan
By: /s/ J. Michael Egan Director September 16, 1996
- ------------------------------
J. Michael Egan
By: /s/ Salvador 0. Gutierrez President and Director September 16, 1996
- ------------------------------
Salvador 0. Gutierrez
By: /s/ Scott Malpass Director September 16, 1996
- ------------------------------
Scott Malpass
By: /s/ Roger V. Smith Director September 16, 1996
- ------------------------------
Roger V. Smith
By: /s/ Arthur Spinner Director September 16, 1996
- ------------------------------
Arthur Spinner
By: /s/ Ronald W. Swenson Director September 16, 1996
- ------------------------------
Ronald W. Swenson
By: /s/ George Von Gehr Director September 16, 1996
- ------------------------------
George Von Gehr
<PAGE>
EXHIBIT INDEX
EXHIBIT
3.1 Articles of Incorporation -- incorporated by reference to the Fund's
Registration Statement on Form 10 filed with the Securities and Exchange
Commission ("Commission") on October 13, 1984.
3.2 By-Laws, as amended to date -- filed herewith.
10.1 Management Agreement, dated as of December 22, 1995, between the Fund on
the one hand, and Westech Advisors and Siguler Guff Advisers, on the other
hand -- filed herewith
27 Financial Data Schedule
VENTURE LENDING & LEASING, INC.
A Maryland Corporation
BYLAWS
September 29, 1993; as amended June 16, 1994, August 16, 1995 and August 21,
1996
<PAGE>
BYLAWS
OF
VENTURE LENDING & LEASING, INC.
(A MARYLAND CORPORATION)
ARTICLE I
NAME OF CORPORATION, LOCATION OF
OFFICES AND SEAL
Section 1. Name. The name of the corporation is Venture Lending & Leasing, Inc.
Section 2. Principal Offices. The principal office of the Corporation in the
State of Maryland shall be located in the City of Baltimore. The Corporation
may, in addition, establish and maintain such other offices and places of
business as the Board of Directors may, from time to time, determine.
Section 3. Seal. The corporate seal of the Corporation shall be circular in form
and shall bear the name of the Corporation, the year of its incorporation, and
the word "Maryland". The form of the seal shall be subject to alteration by the
Board of Directors and the seal may be used by causing it or a facsimile to be
impressed or affixed or printed or otherwise reproduced. Any officer or director
of the Corporation shall have authority to affix the corporate seal of the
Corporation to any document requiring the same.
ARTICLE II
SHAREHOLDERS
Section 1. Annual Meetings. An annual meeting of shareholders to elect directors
and transact any other business within the Corporation's powers will be held at
such time as is set by the Board of Directors during the month of October of
each calendar year.
Section 2. Special Meetings. Special meetings of shareholders may be called at
any time by the Chairman of the Board or President or by a majority of the Board
of Directors, and shall be held at such time and place as may be stated in the
notice of the meeting.
Special meetings of the shareholders may be called by the Secretary upon the
written request of the holders of shares entitled to vote not less than 25
percent of all the votes entitled to be cast at such meeting, provided that (1)
such request shall state the purposes of such meeting and the matters proposed
to be acted on, and (2) the shareholders requesting such meeting shall have paid
to the Corporation the reasonably estimated cost of preparing and mailing the
notice thereof, which the Secretary shall determine and specify to such
shareholders. No special meeting shall be called upon the request of
shareholders to consider any matter which is substantially the same as a matter
voted upon at any special meeting of the shareholders held during the preceding
twelve months, unless requested by the holders of a majority of all shares
entitled to be voted at such meeting.
Section 3. Notice of Meetings. The Secretary shall cause notice of the place,
date and hour, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, to be mailed, postage prepaid, not less than
ten nor more than ninety days before the date of the meeting, to each
shareholder entitled to vote at such meeting at his or her address as it appears
on the records of the Corporation at the time of such
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mailing. Notice shall be deemed to be given when deposited in the United States
mail addressed to the shareholders as aforesaid. Notice of any shareholders'
meeting need not be given to any shareholder who shall sign a written waiver of
such notice whether before or after the time of such meeting, or to any
shareholder who is present at such meeting in person or by proxy. Notice of
adjournment of a shareholders' meeting to another time or place need not be
given if such time and place are announced at the meeting. Irregularities in the
notice of any meeting to, or the nonreceipt of any such notice by, any of the
shareholders shall not invalidate any action otherwise properly taken by or at
any such meeting.
Section 4. Quorum and Adjournment of Meetings. The presence at any shareholders'
meeting, in person or by proxy, of shareholders entitled to cast a majority of
the votes shall be necessary and sufficient to constitute a quorum for the
transaction of business. In the absence of a quorum, the holders of a majority
of shares entitled to vote at the meeting and present in person or by proxy, or,
if no shareholder entitled to vote is present in person or by proxy, any officer
present entitled to preside or act as secretary of such meeting may adjourn the
meeting without determining the date of the new meeting or from time to time
without further notice to a date not more than 120 days after the original
record date. Any business that might have been transacted at the meeting
originally called may be transacted at any such adjourned meeting at which a
quorum is present.
Section 5. Voting and Inspectors. Except as otherwise provided in the Articles
of Incorporation or by applicable law, at each shareholders' meeting each
shareholder shall be entitled to one vote for each share of stock of the
Corporation validly issued and outstanding and registered in his or her name on
the books of the Corporation on the record date fixed in accordance with Section
5 of Article VI hereof, either in person or by proxy appointed by instrument in
writing subscribed by such shareholder or his or her duly authorized attorney,
except that no shares held by the Corporation shall be entitled to a vote.
Except as otherwise provided in the Articles of Incorporation or these Bylaws or
as required by provisions of the Investment Company Act of 1940, as amended
("1940 Act"), all matters shall be decided by a vote of the majority of the
votes validly cast. The vote upon any question shall be by ballot whenever
requested by any person entitled to vote, but, unless such a request is made,
voting may be conducted in any way approved by the meeting.
At any meeting at which there is an election of Directors, the chairman of the
meeting may, and upon the request of the holders of ten percent of the stock
entitled to vote at such election shall, appoint two inspectors of election who
shall first subscribe an oath or affirmation to execute faithfully the duties of
inspectors at such election with strict impartiality and according to the best
of their ability, and shall, after the election, make a certificate of the
result of the vote taken. No candidate for the office of Director shall be
appointed as an inspector.
Section 6. Validity of Proxies. The right to vote by proxy shall exist only if
the instrument authorizing such proxy to act shall have been signed by the
shareholder or by his or her duly authorized attorney. Unless a proxy provides
otherwise, it shall not be valid more than eleven months after its date. All
proxies shall be delivered to the Secretary of the Corporation or to the person
acting as Secretary of the meeting before being voted, who shall decide all
questions concerning qualification of voters, the validity of proxies, and the
acceptance or rejection of votes. If inspectors of election have been appointed
by the chairman of the meeting, such inspectors shall decide all such questions.
A proxy with respect to stock held in the name of two or more persons shall be
valid if executed by one of them unless at or prior to exercise of such proxy
the Corporation receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a shareholder
shall be deemed valid unless challenged at or prior to its exercise.
Section 7. Stock Ledger and List of Shareholders. It shall be the duty of the
Secretary or Assistant Secretary of the Corporation to cause an original or
duplicate stock ledger to be maintained at the office of the Corporation's
transfer agent. Such stock ledger may be in written form or any other form
capable of
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being converted into written form within a reasonable time for visual
inspection.
Any one or more persons, each of whom has been a shareholder of record of the
Corporation for more than six months next preceding such request, who owns in
the aggregate 5% or more of the outstanding capital stock of the Corporation,
may submit (unless the Corporation at the time of the request maintains a
duplicate stock ledger at its principal office in Maryland) a written request to
any officer of the Corporation or its resident agent in Maryland for a list of
the shareholders of the Corporation. Within 20 days after such a request, there
shall be prepared and filed at the Corporation's principal office in Maryland a
list containing the names and addresses of all shareholders of the Corporation
and the number of shares of each class held by each shareholder, certified as
correct by an officer of the Corporation, by its stock transfer agent, or by its
registrar.
Section 8. Action Without Meeting. Any action required or permitted to be taken
by shareholders at a meeting of shareholders may be taken without a meeting if
(1) all shareholders entitled to vote on the matter consent to the action in
writing, (2) all shareholders entitled to notice of the meeting but not entitled
to vote at it sign a written waiver of any right to dissent, and (3) the
consents and waivers are filed with the records of the meetings of shareholders.
Such consent shall be treated for all purposes as a vote at the meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. Except as otherwise provided by operation of law, by the
Articles of Incorporation, or by these Bylaws, the business and affairs of the
Corporation shall be managed under the direction of and all the powers of the
Corporation shall be exercised by or under authority of its Board of Directors.
Section 2. Number and Term of Directors. Except for the initial Board of
Directors, the Board of Directors shall consist of not fewer than three nor more
than fifteen Directors, as specified by a resolution of a majority of the entire
Board of Directors. Directors need not be shareholders of the Corporation. All
acts done at any meeting of the Directors or by any person acting as a Director,
so long as his or her successor shall not have been duly elected or appointed,
shall, notwithstanding that it be afterwards discovered that there was some
defect in the election of the Directors or of such person acting as a Director
or that they or any of them were disqualified, be as valid as if the Directors
or such other person, as the case may be, had been duly elected and were or was
qualified to be Directors or a Director of the Corporation. Each Director shall
hold office until his or her successor is elected and qualified or until his or
her earlier death, resignation or removal.
Section 3. Election. Unless otherwise required by the 1940 Act, at the each
annual meeting of shareholders, Directors shall be elected by vote of the
holders of a majority of the shares present in person or by proxy and entitled
to vote thereon. A plurality of all the votes cast at a meeting at which a
quorum is present is sufficient to elect a Director.
Section 4. Vacancies and Newly Created Directorships. If any vacancies shall
occur in the Board of Directors by reason of death, resignation, removal or
otherwise, or if the authorized number of Directors shall be increased, the
Directors then in office shall continue to act, and such vacancies (if not
previously filled by the shareholders) may be filled by a majority of the
Directors then in office, although less than a quorum, except that a newly
created Directorship may be filled only by a majority vote of the entire Board
of Directors; provided, however, that if, at any time that there are
shareholders of the Corporation, immediately after filling such vacancy at least
two-thirds (2/3) of the Directors then holding office shall have been elected to
such office by the shareholders of the Corporation. In the event that at any
time, other than the time preceding the first annual shareholders' meeting, less
than a majority of the Directors of the Corporation holding office at that time
were elected by the shareholders, a meeting of the shareholders shall
3
<PAGE>
be held promptly and in any event within sixty days for the purpose of electing
Directors to fill any existing vacancies in the Board of Directors, unless the
Securities and Exchange Commission shall by order extend such period.
Section 5. Removal. At any shareholders' meeting duly called, provided a quorum
is present, the shareholders may remove any director from office (either with or
without cause) and may elect a successor or successors to fill any resulting
vacancies for the unexpired terms of the removed director or directors. A
majority of all the votes entitled to be cast for the election of directors is
sufficient to remove a Director.
Section 6. Annual and Regular Meetings. The annual meeting of the Board of
Directors for choosing officers and transacting other proper business shall be
held at such other time and place as the Board may determine. The Board of
Directors from time to time may provide by resolution for the holding of regular
meetings and fix their time and place within or outside the State of Maryland.
Except as otherwise provided in the 1940 Act, notice of such annual and regular
meetings need not be given, provided that notice of any change in the time or
place of such meetings shall be sent promptly to each Director not present at
the meeting at which such change was made, in the manner provided for notice of
special meetings. Except as otherwise provided under the 1940 Act, members of
the Board of Directors or any committee designated thereby may participate in a
meeting of such Board or committee by means of a conference telephone or similar
communications equipment that allows all persons participating in the meeting to
hear each other at the same time.
Section 7. Special Meetings. Special meetings of the Board of Directors shall be
held whenever called by the Chairman of the Board, the Vice Chairman, the
President (or, in the absence or disability of the President, by any Vice
President), the Treasurer or by two or more Directors, at the time and place
(within or without the State of Maryland) specified in the respective notice or
waivers of notice of such meetings. Notice of special meetings, stating the time
and place, shall be (1) mailed to each Director at his or her residence or
regular place of business at least three days before the day on which a special
meeting is to be held or (2) delivered to him or her personally or transmitted
to him or her by telegraph, telecopy, telex, cable or wireless at least one day
before the meeting.
Section 8. Waiver of Notice. No notice of any meeting need be given to any
Director who is present at the meeting or who waives notice of such meeting in
writing (which waiver shall be filed with the records of such meeting), either
before or after the time of the meeting.
Section 9. Quorum and Voting. At all meetings of the Board of Directors, the
presence of one half or more of the number of Directors then in office shall
constitute a quorum for the transaction of business, provided that, at any time
that there shall be more than one director, there shall be present at least two
directors. In the absence of a quorum, a majority of the Directors present may
adjourn the meeting, from time to time, until a quorum shall be present. The
action of a majority of the Directors present at a meeting at which a quorum is
present shall be the action of the Board of Directors, unless concurrence of a
greater proportion is required for such action by law, by the Articles of
Incorporation or by these Bylaws.
Section 10. Action Without a Meeting. Except as otherwise provided under the
1940 Act, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting if
a written consent to such action is signed by all members of the Board or of
such committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board or committee.
Section 11. Compensation of Directors. Directors shall be entitled to receive
such compensation from the Corporation for their services as may from time to
time be determined by resolution of the Board of Directors.
4
<PAGE>
ARTICLE IIIA
ADVISORY DIRECTORS
Section 1. Advisory Directors. The Board of Directors may elect one or more
persons (who may or may not be officers of the Corporation) to serve as Advisory
Directors of the Corporation. Advisory Directors shall attend meetings of the
Board of Directors, and provide advice and assistance to the Board of Directors
as requested. Advisory Directors will not be deemed members of the Board of
Directors, and will not vote on any matter requiring a vote of the Board of
Directors.
Section 2. Election, Removal, etc. The election, tenure, qualifications, removal
and resignation of Advisory Directors shall be governed by the provisions of
Article V of these By-Laws dealing with the election, tenure, qualifications,
removal and resignation of officers.
Section 3. Indemnification and Insurance. An Advisory Director shall be entitled
to the same Indemnification and Insurance provided under Article IX of these
By-Laws as that which would apply to an officer or director of the Corporation.
ARTICLE IV
COMMITTEES
Section 1. Organization. By resolution adopted by the Board of Directors, the
Board may designate one or more committees of the Board of Directors, including
an Executive Committee. The Chairmen of such committees shall be elected by the
Board of Directors. Each committee must be comprised of two or more members,
each of whom must be a Director and shall hold committee membership at the
pleasure of the Board. The Board of Directors shall have the power at any time
to change the members of such committees and to fill vacancies in the
committees. The Board may delegate to these committees any of its powers, except
the power to declare a dividend or distribution on stock, authorize the issuance
of stock, recommend to shareholders any action requiring shareholders' approval,
amend these Bylaws, approve any merger or share exchange which does not require
shareholder approval, approve or terminate any contract with an "investment
adviser" or "principal underwriter," as those terms are defined in the 1940 Act,
or to take any other action required by the 1940 Act to be taken by the Board of
Directors.
Section 2. Executive Committee. Unless otherwise provided by resolution of the
Board of Directors, when the Board of Directors is not in session, the Executive
Committee, if one is designated by the Board, shall have and may exercise all
powers of the Board of Directors in the management of the business and affairs
of the Corporation that may lawfully be exercised by an Executive Committee. The
President and Chairman shall automatically be members of the Executive
Committee.
Section 3. Proceedings and Quorum. In the absence of an appropriate resolution
of the Board of Directors, each committee may adopt such rules and regulations
governing its proceedings, quorum and manner of acting as it shall deem proper
and desirable. In the event any member of any committee is absent from any
meeting, the members thereof present at the meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member.
Section 4. Other Committees. The Board of Directors may appoint other
committees, each consisting of one or more persons, who need not be Directors.
Each such committee shall have such powers and perform such duties as may be
assigned to it from time to time by the Board of Directors, but shall not
exercise any power which may lawfully be exercised only by the Board of
Directors or a committee thereof.
ARTICLE V
5
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OFFICERS
Section 1. General. The officers of the Corporation shall be a Chairman, Vice
Chairman, President, a Secretary, and a Treasurer, and may include one or more
Vice Presidents, Assistant Secretaries or Assistant Treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 11 of
this Article.
Section 2. Election, Tenure and Qualifications. The officers of the Corporation,
except those appointed as provided in Section 11 of this Article V, shall be
elected by the Board of Directors at its first meeting or such subsequent
meetings as shall be held prior to its first annual meeting, and thereafter
annually at its annual meeting. If any officers are not elected at any annual
meeting, such officers may be elected at any subsequent regular or special
meeting of the Board. Except as otherwise provided in this Article V, each
officer elected by the Board of Directors shall hold office until the next
annual meeting of the Board of Directors and until his or her successor shall
have been elected and qualified. Any person may hold one or more offices of the
Corporation except that no one person may serve concurrently as both President
and Vice President. A person who holds more than one office in the Corporation
may not act in more than one capacity to execute, acknowledge, or verify an
instrument required by law to be executed, acknowledged, or verified by more
than one officer. No officer, other than the Chairman or Vice Chairman, need be
a Director.
Section 3. Vacancies and Newly Created Officers. If any vacancy shall occur in
any office by reason of death, resignation, removal, disqualification or other
cause, or if any new office shall be created, such vacancies or newly created
offices may be filled by the Board of Directors at any regular or special
meeting or, in the case of any office created pursuant to Section 11 hereof, by
any officer upon whom such power shall have been conferred by the Board of
Directors.
Section 4. Removal and Resignation. Any officer may be removed from office by
the vote of a majority of the members of the Board of Directors given at a
regular meeting or any special meeting called for such purpose. Any officer may
resign from office at any time by delivering a written resignation to the Board
of Directors, the President, the Chairman, the Secretary, or any Assistant
Secretary. Unless otherwise specified therein, such resignation shall take
effect upon delivery.
Section 5. President. The President shall be the chief executive officer of the
Corporation and, in the absence of the Chairman and Vice Chairman, shall preside
at all shareholders' meetings and at all meetings of the Board of Directors.
Subject to the supervision of the Board of Directors, the President shall have
general charge of the business, affairs and property of the Corporation and
general supervision over its officers, employees and agents. Except as the Board
of Directors may otherwise order, the President may sign in the name and on
behalf of the Corporation all deeds, bonds, contracts, or agreements. The
President shall exercise such other powers and perform such other duties as from
time to time may be assigned by the Board of Directors.
Section 6. Chairman. The Chairman shall be an executive officer of the
Corporation and shall preside at all shareholders' meetings and at all meetings
of the Board of Directors, and may be ex officio a member of all committees of
the Board of Directors. Except as the Board of Directors may otherwise order,
the Chairman may sign in the name and on behalf of the Corporation all deeds,
bonds, contracts, or agreements. The Chairman shall exercise such other powers
and perform such other duties as from time to time may be assigned by the Board
of Directors.
Section 7. Vice Chairman. The Vice Chairman shall be the chief operating officer
of the Corporation and, in the absence of the Chairman, shall preside at all
shareholders' meetings and at all meetings of the Board of Directors. Except as
the Board of Directors may otherwise order, the Vice Chairman may sign in the
name and on behalf of the Corporation all deeds, bonds, contracts, or
agreements. The Vice Chairman shall exercise such other powers and perform such
other duties as from time to time may be assigned by the
6
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Board of Directors.
Section 8. Vice President. The Board of Directors may from time to time elect
one or more Vice Presidents who shall have such powers and perform such duties
as from time to time may be assigned to them by the Board of Directors or the
President. The Board of Directors may establish titles among the Vice Presidents
denoting their relative seniority. At the request of, or in the absence or in
the event of the disability of, the President, the Vice President (or, if there
are two or more Vice Presidents, then the senior of the Vice Presidents present
and able to act) may perform all the duties of the President and, when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President.
Section 9. Treasurer and Assistant Treasurers. The Treasurer shall be the
principal financial and accounting officer of the Corporation and shall have
general charge of the finances and books of account of the Corporation. Except
as otherwise provided by the Board of Directors, the Treasurer shall have
general supervision of the funds and property of the Corporation and of the
performance by the Custodian of its duties with respect thereto. The Treasurer
shall render to the Board of Directors, whenever directed by the Board, an
account of the financial condition of the Corporation and of all transactions as
Treasurer; and as soon as possible after the close of each financial year the
Treasurer shall make and submit to the Board of Directors a like report for such
financial year. The Treasurer shall perform all acts incidental to the office of
Treasurer, subject to the control of the Board of Directors.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, may perform all the duties of the Treasurer.
Section 10. Secretary and Assistant Secretaries. The Secretary shall attend to
the giving and serving of all notices of the Corporation and shall record all
proceedings of the meetings of the shareholders and Directors in books to be
kept for that purpose. The Secretary shall keep in safe custody the seal of the
Corporation, and shall have responsibility for the records of the Corporation,
including the stock books and such other books and papers as the Board of
Directors may direct and such books, reports, certificates and other documents
required by law to be kept, all of which shall at all reasonable times be open
to inspection by any Director. The Secretary shall perform such other duties
which appertain to this office or as may be required by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, may perform all the duties of the Secretary.
Section 11. Subordinate Officers. The Board of Directors from time to time may
appoint such other officers and agents as it may deem advisable, each of whom
shall have such title, hold office, for such period, have such authority and
perform such duties as the Board of Directors may determine. The Board of
Directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties. Any officer or agent
appointed in accordance with the provisions of this Section 11 may be removed,
either with or without cause, by any officer upon whom such power of removal
shall have been conferred by the Board of Directors.
Section 12. Remuneration. The salaries or other compensation, if any, of the
officers of the Corporation shall be fixed from time to time by resolution of
the Board of Directors in the manner provided by Section 9 of Article III,
except that the Board of Directors may by resolution delegate to any person or
group of persons the power to fix the salaries or other compensation of any
subordinate officers or agents appointed in accordance with the provisions of
Section 11 of this Article V.
Section 11 Surety Bond. The Board of Directors may require any officer or agent
of the Corporation to execute a bond (including, without limitation, any bond
required by the 1940 Act and the rules and
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regulations of the Securities and Exchange Commission promulgated thereunder) to
the Corporation in such sum and with such surety or sureties as the Board of
Directors may determine, conditioned upon the faithful performance of his or her
duties to the Corporation, including responsibility for negligence and for the
accounting of any of the Corporation's property, funds or securities that may
come into his or her hands.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates of Stock. The interest of each shareholder of the
Corporation may be evidenced by certificates for shares of stock in such form as
the Board of Directors may from time to time authorize; provided, however, the
Board of Directors may, in its discretion, authorize the issuance of
non-certificated shares. No certificate shall be valid unless it is signed by
the Chairman, President or a Vice President and countersigned by the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation and sealed with the seal of the Corporation, or bears the facsimile
signatures of such officers and a facsimile of such seal. In case any officer
who shall have signed any such certificate, or whose facsimile signature has
been placed thereon, shall cease to be such an officer (because of death,
resignation or otherwise) before such certificate is issued, such certificate
may be issued and delivered by the Corporation with the same effect as if he or
she were such officer at the date of issue.
In the event that the Board of Directors authorizes the issuance of
non-certificated shares of stock, the Board of Directors may, in its discretion
and at any time, discontinue the issuance of share certificates and may, by
written notice to the registered owners of each certificated share, require the
surrender of share certificates to the Corporation for cancellation. Such
surrender and cancellation shall not affect the ownership of shares of the
Corporation.
Section 2. Transfer of Shares. Subject to the provisions of the next sentence of
this Section 2 of Article VI, Shares of the Corporation shall be transferable on
the books of the Corporation by the holder of record thereof in person or by his
or her duly authorized attorney or legal representative (i) upon surrender and
cancellation of any certificate or certificates for the same number of shares of
the same class, duly endorsed or accompanied by proper instruments of assignment
and transfer, with such proof of the authenticity of the signature as the
Corporation or its agents may reasonably require, or (ii) as otherwise
prescribed by the Board of Directors. The Board of Directors may, from time to
time, adopt limitations and rules and regulations with reference to the transfer
of the shares of stock of the Corporation to comply with the requirements of the
Securities Act of 1933, as amended, or other applicable laws. The Corporation
shall be entitled to treat the holder of record of any share of stock as the
absolute owner thereof for all purposes, and accordingly shall not be bound to
recognize any legal, equitable or other claim or interest in such share on the
part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise expressly provided by law or the statutes of the
State of Maryland.
Section 3. Stock Ledgers. The stock ledgers of the Corporation, containing the
names and addresses of the shareholders and the number of shares held by them
respectively, shall be kept at the principal offices of the Corporation or, if
the Corporation employs a transfer agent, at the offices of the transfer agent
of the Corporation.
Section 4. Transfer Agents and Registrars. The Board of Directors may from time
to time appoint or remove transfer agents and registrars of transfers for shares
of stock of the Corporation, and it may appoint the same person as both transfer
agent and registrar. Upon any such appointment being made all certificates
representing shares of capital stock thereafter issued shall be countersigned by
one of such transfer agents or by one of such registrars or by both and shall
not be valid unless so countersigned. If the same person shall be both transfer
agent and registrar, only one countersignature by such person shall be required.
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<PAGE>
Section 5. Fixing of Record Date. The Board of Directors may fix in advance a
date as a record date for the determination of the shareholders entitled to
notice of or to vote at any shareholders' meeting or any adjournment thereof, or
to express consent to corporate action in writing without a meeting, or to
receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, provided that
(1) such record date shall be within ninety days prior to the date on which the
particular action requiring such determination will be taken; (2) the transfer
books shall not be closed for a period longer than twenty days; and (3) in the
case of a meeting of shareholders, the record date shall be at least ten days
before the date of the meeting.
Section 6. Lost, Stolen or Destroyed Certificates. Before issuing a new
certificate for stock of the Corporation alleged to have been lost, stolen or
destroyed, the Board of Directors or any officer authorized by the Board may, in
its discretion, require the owner of the lost, stolen or destroyed certificate
(or his or her legal representative) to give the Corporation a bond or other
indemnity, in such form and in such amount as the Board or any such officer may
direct and with such surety or sureties as may be satisfactory to the Board or
any such officer, sufficient to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate.
ARTICLE VII
FISCAL YEAR AND ACCOUNTANT
Section 1. Fiscal Year. The fiscal year of the Corporation shall, unless
otherwise ordered by the Board of Directors, be twelve calendar months ending on
the 31st day of December.
Section 2. Accountant.
A. The Corporation shall employ an independent public accountant or a firm of
independent public accountants as its Accountant to examine the accounts of the
Corporation and to sign and certify financial statements filed by the
Corporation. The Accountant's certificates and reports shall be addressed both
to the Board of Directors and to the shareholders. The employment of the
Accountant shall be conditioned upon the right of the Corporation to terminate
the employment forthwith without any penalty by vote of a majority of the
outstanding voting securities at any shareholders' meeting called for that
purpose.
B. A majority of the members of the Board of Directors who are not "interested
persons" (as defined in the 1940 Act) of the Corporation shall select the
Accountant at any meeting held within thirty days before or after the beginning
of the fiscal year of the Corporation or before the annual shareholders' meeting
in that year. The selection shall be submitted for ratification or rejection at
the next succeeding annual shareholders' meeting. If the selection is rejected
at that meeting, the Accountant shall be selected by majority vote of the
Corporation's outstanding voting securities, either at the meeting at which the
rejection occurred or at a subsequent meeting of shareholders called for the
purpose of selecting an Accountant.
C. Any vacancy occurring between annual meetings due to the resignation of
the Accountant may be filled by the vote of a majority of the members of the
Board of Directors who are not interested persons.
ARTICLE VIII
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Corporation shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments owned by the
Corporation. The Custodian (and any sub-custodian) shall be a bank or trust
company of
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<PAGE>
good standing having an aggregate capital, surplus, and undivided profits not
less than fifty million dollars ($50,000,000) or such other financial
institution or other entity as shall be permitted by rule or order of the
Securities and Exchange Commission. The Custodian shall be appointed from time
to time by the Board of Directors, which shall fix its remuneration.
Section 2. Termination of Custodian Agreement. Upon termination of the agreement
for services with the Custodian or inability of the Custodian to continue to
serve, the Board of Directors shall promptly appoint a successor Custodian, but
in the event that no successor Custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors shall call as
promptly as possible a special meeting of the shareholders to determine whether
the Corporation shall function without a Custodian or shall be liquidated. If so
directed by resolution of the Board of Directors or by vote of the holders of a
majority of the outstanding shares of stock of the Corporation, the Custodian
shall deliver and pay over all property of the Corporation held by it as
specified in such vote.
Section 3. Other Arrangements. The Corporation may make such other arrangements
for the custody of its assets (including deposit arrangements) as may be
required by any applicable law, rule or regulation.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
Section 1. Indemnification of Officers, Directors, Employees and Agents. The
Corporation shall indemnify its present and past directors, officers, employees
and agents (including any "investment adviser" or "principal underwriter," as
those terms are defined in the 1940 Act), and any persons who are serving or
have served at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, or
enterprise, to the full extent provided and allowed by Section 2-418 of the
Annotated Corporations and Associations Code of Maryland concerning
corporations, as amended from time to time or any other applicable provisions of
law. Notwithstanding anything herein to the contrary, no director, officer,
investment adviser or principal underwriter of the Corporation shall be
indemnified in violation of Sections 17(h) and (i) of the 1940 Act. Expenses
incurred by any such person in defending any proceeding to which he or she is a
party by reason of service in the above-referenced capacities shall be paid in
advance or reimbursed by the Corporation to the full extent permitted by law,
including Sections 17(h) and (i) of the 1940 Act.
Section 2. Insurance of Officers, Directors, Employees and Agents. The
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against that person and incurred by
that person in or arising out of his or her position, whether or not the
Corporation would have the power to indemnify him or her against such liability.
Notwithstanding the foregoing, any such insurance so purchased will not protect
or purport to protect any officer or director against liabilities for willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
Section 3. Amendment. No amendment, alteration or repeal of this Article or the
adoption, alteration or amendment of any other provision of the Articles of
Incorporation or Bylaws inconsistent with this Article shall adversely affect
any right or protection of any person under this Article with respect to any act
or failure to act which occurred prior to such amendment, alteration, repeal or
adoption.
ARTICLE X
AMENDMENTS
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Section 1. General. Except as provided in Section 2 of this Article X, all
Bylaws of the Corporation, whether adopted by the Board of Directors or the
shareholders, shall be subject to amendment, alteration or repeal, and new
Bylaws may be made by the affirmative vote of a majority of either: (1) the
holders of record of the outstanding shares of stock of the Corporation entitled
to vote, at any annual or special meeting, the notice or waiver of notice of
which shall have specified or summarized the proposed amendment, alteration,
repeal or new Bylaw; or (2) the Directors, at any regular or special meeting the
notice or waiver of notice of which shall have specified or summarized the
proposed amendment, alteration, repeal or new Bylaw.
Section 2. By Shareholders Only. No amendment of any section of these Bylaws
shall be made except by the shareholders of the Corporation if the Bylaws
provide that such section may not be amended, altered or repealed except by the
shareholders. From and after the issue of any shares of the capital stock of the
Corporation, no amendment, alteration or repeal of this Article X shall be made
except by the affirmative vote of the holders of either: (a) more than
two-thirds of the Corporation's outstanding shares present at a meeting at which
the holders of more than fifty percent of the outstanding shares are present in
person or by proxy, or (b) more than fifty percent of the Corporation's
outstanding shares.
MANAGEMENT AGREEMENT
Agreement made as of December 22, 1995 between VENTURE LENDING & LEASING,
INC. ("Fund"), a Maryland corporation, on the one hand, and WESTECH INVESTMENT
ADVISORS, INC. ("Westech Advisors"), a California corporation, and SIGULER GUFF
& COMPANY, L.L.C. ("Siguler Guff & Company"), a Delaware limited liability
company, on the other hand. Westech Advisors and Siguler Guff & Company are
sometimes referred to collectively herein as the "Managers."
WHEREAS the Fund is a 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"); and
WHEREAS each Manager is an investment adviser registered as such under the
Investment Advisers Act of 1940 ("Advisers Act"); and
WHEREAS the Fund desires to retain the Managers to furnish certain
investment advisory, portfolio management and administrative services to the
Fund and the Managers are willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Westech Advisors as Investment
Manager and Siguler Guff & Company as Fund Manager for the period and on the
terms set forth in this Agreement. Westech Advisors and Siguler Guff & Company
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 Managers 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 Managers 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. Without limiting the generality of the foregoing, it is
understood that, as Investment Manager, Westech Advisors will have primary
responsibility for origination and servicing of venture loans and leases and
that, as Fund Manager, Siguler Guff & Company will have primary responsibility
for the organization of the Fund, oversight of Fund administration and
shareholder relations.
3. Administrative Duties. The Managers will administer the affairs of the
Fund subject to the supervision of the Board and the following understandings:
<PAGE>
(a) The Managers will supervise all aspects of the operations of the Fund,
including oversight of transfer agency, custodial and accounting services;
provided, however, that nothing herein contained shall be deemed to relieve or
deprive the Board of its responsibility for and control of the conduct of the
affairs of the Fund.
(b) The Managers 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 Managers 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 Managers 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 Managers hereby agree 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 to surrender promptly to the
Fund any records which it maintains for the Fund upon request by 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 Managers 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 of
directors of the Fund.
4. Further Duties. In all matters relating to the performance of this
Agreement, the Managers will act in conformity with the Articles of
Incorporation and By-Laws 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. Authority of Individual Managers. Any action required or permitted to
be performed under this Agreement by the Managers may be performed by either of
Westech Advisors or Siguler Guff & Company individually. The Managers may enter
into arrangements between themselves requiring joint approval of any action or
class of actions, and will advise the Board of any such arrangement. No such
arrangement, however, will modify the liability of the Managers, which shall be
joint and several, for actions taken under this Agreement, or limit the extent
to which third parties may rely upon the authority of either Manager to act
under this Agreement.
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<PAGE>
6. Services Not Exclusive. The services furnished by the Managers
hereunder are not to be deemed exclusive and the Managers shall be free to
furnish similar services to others so long as its services under this Agreement
are not impaired thereby. Nothing in this Agreement shall limit or restrict the
right of any director, officer or employee of the Managers, 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.
7. Expenses.
(a) The Fund will pay all expenses (including without limitation
accounting, legal, printing, clerical, filing and other expenses) incurred by
the Fund, either of the Managers or their affiliates on behalf of the Fund in
connection with the organization of the Fund and the initial offering of its
shares. Except as otherwise expressly provided for in Section 7(b) of this
Agreement, 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 agent, (ix) compensation
and expenses of the Fund's directors who are not interested persons of the Fund
or the Managers, and of any of the Fund's officers who are not interested
persons of the Managers, 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 Managers are limited to the following:
(i) all costs and fees incident to the selection and investigation of
prospective Fund investments, such as travel expenses and professional fees (but
excluding legal and accounting fees and other costs incident to the closing,
documentation or consummation of such transactions), (ii) the cost of adequate
office space for the Fund and all necessary office equipment and services,
including telephone service, heat, 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 Managers 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 Managers under this
Agreement.
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<PAGE>
(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 Managers and
acknowledged as otherwise payable by the Managers pursuant to this Agreement,
the Fund may reduce the fee payable to the Managers pursuant to Paragraph 0
thereof by such amount. To the extent that such deductions exceed the fee
payable to the Managers 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 Managers of any expense of the Fund
that the Managers are not required by this Agreement to pay or assume shall not
obligate the Managers to pay or assume the same or any similar expense of the
Fund on any subsequent occasion.
8. Compensation.
(a) For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Managers a fee ("Management Fee"), computed
and paid quarterly, at an annual rate of 2.5% of the amount of the Fund's
Committed Equity Capital (as defined below) as of the last day of each fiscal
quarter until the last day of the eighth full fiscal quarter following the first
closing of the Fund's initial public offering; and 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 fiscal quarter thereafter. The Fund's Committed Equity
Capital, as of the end of any fiscal quarter, shall be the aggregate amount of
subscription obligations for the purchase of the Fund's shares (including any
amounts of such obligations that have been satisfied) as of the end of such
fiscal quarter.
(b) For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Managers an annual fee ("Incentive Fee"), in
addition to the Management Fee, calculated as provided in Annex A hereto. The
Incentive Fee will be payable as promptly as practicable following the end of
any fiscal year for which it is earned.
(c) If this Agreement is terminated by the Fund for any reason prior to
the dissolution of the Fund and the final distribution in liquidation of all the
Fund's assets to shareholders, the Fund will pay the Managers an annual fee
("Post-Termination Fee"), in addition to any Management Fee and Incentive Fee
previously paid to or earned by the Managers, calculated as provided in Annex B
hereto; provided, however, that such Post-Termination Fee will be paid only if,
prior to the payment of any such Post-Termination Fee, the Fund receives an
opinion of its counsel to the effect that payment of the Post-Termination Fee is
permissible under the applicable provisions of the 1940 Act and the Advisers
Act, and applicable rules, regulations and interpretations of the SEC
thereunder. The Fund will consult with its counsel as to the permissibility of
the Post-Termination Fee under the 1940 Act and the Advisers Act within a
reasonable time after the Fund commences operations. If the Fund's counsel
concludes that an exemptive order or no-action relief of the SEC is required to
permit the
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Fund to pay the Post-Termination Fee or to provide such counsel with adequate
assurances upon which the aforementioned opinion can be based, the Fund agrees
to seek, together with the Managers, to obtain such an exemptive order or
no-action relief within a reasonable time after the Fund commences operations.
The Post-Termination Fee will be payable as promptly as practicable following
the end of any fiscal year for which it is earned.
(d) If this Agreement becomes effective or terminates before the end of
any fiscal quarter, the Management Fee for the period from the effective day to
the end of the fiscal quarter or from the beginning of such fiscal quarter to
the date of termination, as the case may be, shall be prorated according to the
proportion which such period bears to the full fiscal quarter in which such
effectiveness or termination occurs.
(e) If (i) a Manager, (ii) an officer, director or employee of a Manager,
(iii) a company controlling, controlled by or under common control with a
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 Managers 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 Managers shall pay such excess
amounts to the Fund upon termination.
9. Limitation of Liability of Managers. The Managers shall not 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 their part
in the performance of their duties or from reckless disregard by them of their
obligations and duties under this Agreement. Any person, even though also an
officer, director, employee or agent of a 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 for the Fund and not as an officer,
director, employee, or agent or one under the control or direction of a Manager
even though paid by it.
10. Duration and Termination.
(a) This Agreement shall become effective upon the date hereabove written
provided that this Agreement shall not take effect unless it has first been
approved (i) by a vote of a majority of those directors of the Fund who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval, and (ii) by vote
of a majority of the Fund's outstanding voting securities.
(b) Unless sooner terminated as provided herein, this Agreement shall
continue in effect for two years from the above written date. Thereafter, 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
5
<PAGE>
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 at any
time, without the payment of any penalty, by vote of the Board or by a vote of a
majority of the outstanding voting securities of the Fund on sixty days' written
notice to the Managers or by the Managers at any time, without the payment of
any penalty, on sixty days' written notice to the Fund. This Agreement will
automatically terminate in the event of its assignment.
11. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved by vote of a majority of the Fund's outstanding voting
securities.
12. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Maryland, without giving effect to the conflicts of
laws principles thereof, and in accordance with the 1940 Act. To the extent that
the applicable laws of the State of Maryland conflict with the applicable
provisions of the 1940 Act, the latter shall control.
13. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of the outstanding voting securities",
"affiliated person", "interested person", "assignment," "broker", "investment
adviser", "national securities exchange", "net assets," "security" and
"significant managerial assistance" shall have the same meaning as such terms
have in the 1940 Act, subject to such exemption as may be granted by the
Securities and Exchange Commission by any rule, regulation or order. Where the
effect of a requirement of the 1940 Act reflected in any provision of this
Agreement is relaxed by a rule, regulation or order of the Securities and
Exchange Commission, whether of special or general application, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
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<PAGE>
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, INC.
By /s/ Ronald W. Swenson
-------------------------------------
Name: Ronald W. Swenson
Title: Chairman
WESTECH INVESTMENT ADVISORS, INC.
By /s/ Salvador O. Gutierrez
-------------------------------------
Name: Salvador O. Gutierrez
Title: Senior Vice President
SIGULER GUFF & COMPANY, LLC
By /s/ George W. Siguler
-------------------------------------
Name: George W. Siguler
Title: Managing Director
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ANNEX A
-to-
Management Agreement
-of
Venture Lending & Leasing, Inc.
Calculation Of Incentive Fee
The Managers will be entitled to receive, in addition to the Management
Fee, an annual Incentive Fee, payable as promptly as practicable after the end
of the Fund's fiscal year. The Incentive Fee is intended to result in the
payment to the Managers of an amount equal to 20% of all dividends and
distributions that would have been paid to shareholders if the Incentive Fee
were not paid, after shareholders have received dividends and distributions in
an amount equal to 100% of all amounts paid for the purchase of Shares plus a
preferred return calculated at a cumulative non-compounded annual rate of 8%.
The Incentive Fee will be calculated in accordance with the following formula;
provided, however, that if application of this formula under specific
circumstances would result in payment of an Incentive Fee inconsistent with that
described in the preceding sentence, the formula will be equitably adjusted to
permit payment of an Incentive Fee that is consistent.
Incentive Fee Formula
20% X (Excess Distributions/0.8 - Unrealized Loss Adjustment)
In calculating the Incentive Fee, the definitions set forth below shall
apply.
Definitions
Begin Paid-In Capital Zero in the fiscal year in which the Fund first issues
Shares to subscribing shareholders; thereafter End
Paid-In Capital (as defined below) for the previous
fiscal year.
Capital Contributions Amounts paid by shareholders for the purchase of Shares
during a fiscal year.
Total Distribution All cash distributions paid or deemed paid to
shareholders during a fiscal year, including cash
distributions reinvested in additional Shares and
distributions paid subsequent to the end of the fiscal
year that are deemed for federal income tax purposes to
have been paid during the fiscal year.
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Adjusted Paid-In Capital (Begin Paid-In Capital + End Paid-In Capital) / 2.
Preferred Return (Adjusted Paid-In Capital X 8%) + Preferred Return
Carryover (as defined below), if any.
Preferred Return Payment The lesser of a fiscal year's (a) Total
Distribution or (b) Preferred Return.
Preferred Return Carryover The greater of (a) zero or (b) Preferred Return
for the previous fiscal year - Preferred Return
Payment for the previous fiscal year.
Carryover Payment The lesser of (a) Preferred Return Carryover, if
any, or (b) Total Distribution.
Cumulative Capital The sum of all Capital from the first fiscal year
Contributions in Contributionswhich the Fund first issues Shares
to subscribing shareholders through the end of the
fiscal year for which Cumulative Capital
Contributions are being computed.
Cumulative Capital Payback The sum of all Capital Paybacks (as defined below)
from the first fiscal year in which the Fund first
issues Shares to subscribing shareholders through
the end of the fiscal year prior to the fiscal
year for which Cumulative Capital Payback is being
computed.
Net Unreturned Capital The greater of (a) zero or (b) Cumulative Capital
Contributions -Cumulative Capital Payback.
Capital Payback The greater of (a) zero or (b) the lesser of (i)
Net Unreturned Capital or (ii) the amount
determined by solving the following algebraic
formula:
(Total Distribution - Carryover Payment) - ((2 X Begin Capital + Capital
Contributions - Capital Payback)/2 *.08) = Capital Payback
End Paid-In Capital The greater of (a) zero or (b) Begin Paid-In
Capital + Capital Contribution - Capital Payback.
Excess Distribution The greater of (a) zero or (b) Total Distribution
- Preferred Return Payment - Capital Payback.
Unrealized Loss Gross long-term and short-term unrealized capital
loss as of the
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end of the fiscal year.
Unrealized Loss Adjustment (a) If Excess Distribution for the fiscal year is
zero, zero; (b) for the first fiscal year in which
Excess Distribution exceeds zero, Unrealized Loss
for that year; and (c) for subsequent fiscal
years, Unrealized Loss for that fiscal year -
Unrealized Loss for the previous fiscal year.
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ANNEX B
-to-
Management Agreement
-of-
Venture Lending & Leasing, Inc.
Subject to the conditions set forth in the Management Agreement, if the
Management Agreement is terminated by the Fund for any reason prior to the
dissolution of the Fund and the final distribution in liquidation of all the
Fund's assets to shareholders, the Fund will pay the Managers an annual fee
("Post-Termination Fee"), in addition to any Management Fee and Incentive Fee
previously paid to or earned by the Managers, payable as promptly as practicable
after the end of the Fund's fiscal year and calculated as follows:
1) The "Attributable Assets" of the Fund will be determined. Attributable
Assets shall be all securities or other assets held in the Fund's portfolio,
including securities receivable, as of the time of termination of the Management
Agreement, and any assets to which the Fund is or may become entitled under the
terms of any securities or other assets held in the Fund's portfolio, including
but not limited to warrants issuable under the terms of venture loans or leases,
and securities issuable upon exercise of any warrants, but excluding cash and
cash equivalents.
2) The Post-Termination Fee shall be calculated and paid with respect to
the Attributable Assets of the Fund, in the same manner as the Incentive Fee is
calculated and paid, as though the entire Fund consisted of the Attributable
Assets as of the date of termination.
3) Any Capital Contributions made by investors subsequent to the date of
termination shall be disregarded, and any amounts paid by the Fund to acquire
additional Attributable Assets, including but not limited to amounts paid to
fund venture loans or leases pursuant to commitments existing on the date of
termination and amounts paid on exercise of warrants, shall be treated as
additional Capital Contributions.
4) All Total Distributions on or prior to the date of termination shall be
taken into account in calculating the Post-Termination Fee, and Total
Distributions as of the date of termination shall be deemed to include all cash
and cash equivalents held by the Fund on the date of termination.
5) After the date of termination, Total Distributions shall be deemed to
consist of (i) the proceeds of any sale or other disposition of Attributable
Assets during the fiscal year that is recognized by the Fund for federal income
tax purposes, plus (ii) all income received or recognized in a fiscal year with
respect to Attributable Assets, including without limitation interest,
dividends, amortization of discount and accrual of residual payments, minus
(iii) an amount of the Fund's Allocable Expenses (as defined below) for the
fiscal year determined by multiplying such Allocable Expenses by a fraction, the
numerator of which is the average of
11
<PAGE>
the beginning and end values of Attributable Assets for that fiscal year and the
denominator of which is the average of the beginning and end values of the
Fund's total assets for that fiscal year. Allocable Expenses shall consist of
all Fund expenses other than accrual of the Post-Termination Fee, accrual of any
incentive fee paid to a successor manager and any management or advisory fee
paid to a successor manager to the extent any such management or advisory fee
exceeds 2.5% of the Fund's total assets less Attributable Assets.
12
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 29,081
<INVESTMENTS-AT-VALUE> 30,389
<RECEIVABLES> 17
<ASSETS-OTHER> 4,799
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 35,205
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 14,738
<OTHER-ITEMS-LIABILITIES> 524
<TOTAL-LIABILITIES> 15,262
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,670
<SHARES-COMMON-STOCK> 20
<SHARES-COMMON-PRIOR> 12
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 34
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,308
<NET-ASSETS> 19,943
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,833
<OTHER-INCOME> 0
<EXPENSES-NET> 2,244
<NET-INVESTMENT-INCOME> 1,589
<REALIZED-GAINS-CURRENT> 22
<APPREC-INCREASE-CURRENT> 1,308
<NET-CHANGE-FROM-OPS> 2,917
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,898
<ACCUMULATED-NII-PRIOR> (381)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,159
<INTEREST-EXPENSE> 895
<GROSS-EXPENSE> 2,244
<AVERAGE-NET-ASSETS> 17,380
<PER-SHARE-NAV-BEGIN> 892.26
<PER-SHARE-NII> 85.37
<PER-SHARE-GAIN-APPREC> 71.49
<PER-SHARE-DIVIDEND> 57.52
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 968.37
<EXPENSE-RATIO> 7.76
<AVG-DEBT-OUTSTANDING> 12,158
<AVG-DEBT-PER-SHARE> 653.41
</TABLE>
