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1940 Act File No. 811-9052
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2/A
(Check appropriate box or boxes)
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] AMENDMENT NO. 2
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
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Exact Name of Registrant as Specified in Charter
2200 WEST MAIN STREET, SUITE 900, DURHAM, NORTH CAROLINA 27705
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Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(919) 286-7000
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Registrant's Telephone Number, including Area Code
DAVID CHARLES BLIVIN, 2200 WEST MAIN STREET, SUITE 900, DURHAM, NORTH CAROLINA
27705
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Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
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SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
CROSS REFERENCE SHEET
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Caption in Registration
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Items in Parts A and B of Form N-2 Statement
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Item 1. Outside Front Cover Not Applicable
Item 2. Inside Front Cover and Outside Back Cover Page Not Applicable
Item 3. Fee Table and Synopsis Management Expenses;
Not Applicable
Item 4. Financial Highlights Not Applicable
Item 5. Plan of Distribution Not Applicable
Item 6 Selling Shareholders Not Applicable
Item 7. Use of Proceeds Not Applicable
Item 8. General Description of Registrant General; The Fund; Risk Factors;
Investment Policy and Strategy;
Industry Overview; Management of
the Fund; Federal Securities Acts;
Use of Proceeds
Item 9. Management Board of Directors; Investment
Advisor; Technical and Business
Consultants to the Advisor;
Management of the Fund; Custodian;
Management Expenses; Summary of the
Operating Agreement
Item 10. Capital Stock, Long-Term Debt, and Other Securities Distributions and Allocations;
Term; Determination of Net
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Asset Value; Federal Income Tax
Aspects; Investment by Employee
Benefit Plans and Individual
Retirement Accounts; Summary of the
Operating Agreement
Item 11. Default and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings Not Applicable
Item 13. Table of Contents of the Statement of Additional Table of Contents
Information
Item 14. Cover Page General
Item 15. Table of Contents Table of Contents
Item 16. General Information and History General
Item 17. Investment Objective and Policies Investment Policy and Strategy;
Industry Overview; Management of
the Fund
Item 18. Management Board of Directors; Investment
Advisor; Technical and Business
Consultants to the Advisor;
Management Expenses; Management of
the Fund; Custodian; Summary of the
Operating Agreement
Item 19. Control Persons and Principal Holders of Securities Not Applicable
Item 20. Investment Advisory and Other Practices Board of Directors; Investment
Advisor; Custodian; Independent
Accountants; Management Expenses;
Conflicts of Interest; Related
Parties and
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Transactions with Affiliates
Item 21. Brokerage Allocation and Other Practices Not Applicable
Item 22. Tax Status Income Tax Aspects; Investment by
Employee Benefit Plans and
Individual Retirement Accounts
Item 23. Financial Statements Attached hereto.
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TABLE OF CONTENTS
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Page
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PARTS A AND B - REQUIRED INFORMATION
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
INDUSTRY OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
INVESTMENT POLICY AND STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
INVESTMENT ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
TECHNICAL AND BUSINESS CONSULTANTS TO THE ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
DISTRIBUTIONS AND ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MANAGEMENT EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PRIVATE PLACEMENT STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CONFLICTS OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
RELATED PARTIES AND TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FIDUCIARY RESPONSIBILITY OF THE ADVISOR AND THE DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
FEDERAL INCOME TAX ASPECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
INVESTMENT BY EMPLOYEE BENEFIT PLANS AND
INDIVIDUAL RETIREMENT ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SUMMARY OF THE OPERATING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FEDERAL SECURITIES ACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
PART C - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
GENERAL
The Southeast Interactive Technology Fund I, LLC (the "Fund") is a
newly organized North Carolina limited liability company which is operated as a
closed-end, non-diversified management investment company. The Fund privately
offered up to 1,000 shares of membership interest in the Fund (the "Shares") on
the terms conditions herein described (the "Offering") in accordance with
Regulation D under the Securities Act of 1933, as amended (the "1933 Act"), and
applicable state securities laws. Accordingly, the Fund has not and presently
does not intend to register the Shares under the 1933 Act. This Registration
Statement on Form N-2 (this "Registration Statement") is being filed only under
the Investment Company Act of 1940, as amended (the "1940 Act" or "Investment
Company Act"). The Fund has been formed to invest principally in equity and
equity-related securities of technology companies located in the Southeast and
involved in the fields of interactive information and visual technologies.
The Offering resulted in the sale of 244 Shares at a price of $25,000
per Share to 168 investors who met the suitability standards set forth herein
("Investors"). Interstate/Johnson Lane Corporation (the "Selling Agent")
offered and sold the Shares on a "best efforts" basis as agent for the Fund.
The minimum investment was $25,000. Other registered broker-dealers may have
participated in the Offering. Subscriptions for Shares were effective upon
acceptance by Montrose Venture Partners, LLC, a North Carolina limited
liability company which has been engaged as the investment advisor to the Fund
and which is responsible for day-to-day management of the Fund's affairs (the
"Advisor"). The Offering of Shares was terminated on August 31, 1995 (the
"Closing Date").
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OFFERING SELLING PROCEEDS
PRICE COMMISSIONS (1) TO FUND (2)
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Per Share . . . . . . . . . . . . . . . $ 25,000 $ 1,250 $ 23,750
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Total . . . . . . . . . . . . . . . . . $6,100,000 $ 305,000 $5,795,000
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(1) The Fund paid the Selling Agent a sales commission equal to 5% of the
proceeds of the Offering. The Selling Agent also was reimbursed for
certain expenses as discussed below.
(2) Before deduction for certain organizational and offering expenses in the
amount of $250,000 (including printing costs, professional fees, filing
fees and other selling expenses) payable by the Fund in connection with
the organization of the Fund and the Offering and before deduction of an
organizational fee payable to the Advisor in the amount of one percent
of the proceeds of the Offering.
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THE SHARES ARE A SPECULATIVE INVESTMENT AND THE OFFERING INVOLVED
SUBSTANTIAL RISKS TO INVESTORS, INCLUDING THE RISK THAT INVESTORS MIGHT LOSE
THEIR ENTIRE INVESTMENT IN THE FUND. THERE ARE SEVERE RESTRICTIONS ON
TRANSFERS OF SHARES AND THERE IS NO LIQUIDITY IN THE INVESTMENT. (See "Risk
Factors" and "Conflicts of Interest.")
THE SHARES HAVE BEEN NEITHER REGISTERED WITH NOR APPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR BY THE
SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS ANY COMMISSION OR
AUTHORITY PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING OR THE ACCURACY OR
ADEQUACY OF THIS REGISTRATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The Offering was made only to persons qualifying as "Accredited
Investors" pursuant to Regulation D promulgated under the 1933 Act. Even
though an individual was an Accredited Investor, additional suitability
requirements may have applied depending on the investor's state of residence.
An Accredited Investor is any investor who falls into one of the following
categories:
(1) Any bank as defined in section 3(a)(2) of the 1933 Act, or any
savings and loan association or other institution as defined in section
3(a)(5)(A) of the 1933 Act whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934, as amended (the "1934 Act"); any insurance
company as defined in section 2(13) of the 1933 Act; any investment company
registered under the Investment Company Act or any business development company
as defined in section 2(a)(48) of the 1940 Act; any Small Business Investment
Company licensed by the U.S. Small Business Administration under section 301(c)
or (d) of the Small Business Investment Act of 1958; any employee benefit plan
within the meaning of Title I of the Employee Retirement Income Security Act of
1974 ("ERISA"), if the investment decision is made by a plan fiduciary, as
defined in section 3(21) of ERISA, which is either a bank savings and loan
association, insurance company or registered investment adviser, or if the
employee benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that are
accredited investors;
(2) Any private business development company as defined in
202(a)(22) of the Investment Advisers Act of 1940, as amended (the "Investment
Advisers Act");
(3) Any organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, corporation, Massachusetts or similar business
trust, or partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000;
(4) Any natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of his or her purchase exceeds
$1,000,000;
(5) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year;
(6) Any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person; or
(7) Any entity in which all of the equity owners fall within one
of the foregoing categories.
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RISK FACTORS
AN INVESTMENT IN THE FUND IS SUBJECT TO ALL OF THE RISKS CUSTOMARILY
ASSOCIATED WITH AN INVESTMENT IN SECURITIES. ACCORDINGLY, SHARES SHOULD BE
PURCHASED ONLY BY PERSONS WHO HAVE THE RESOURCES TO ASSUME THE RISKS
CHARACTERISTIC OF THIS TYPE OF INVESTMENT AND WHO CAN AFFORD TO INVEST ON A
LONG-TERM BASIS. THERE CAN BE NO ASSURANCE THAT THE FUND'S PORTFOLIO
INVESTMENTS WILL BE PROFITABLE OR THAT ANY DISTRIBUTIONS WILL BE MADE TO THE
INVESTORS. ANY RETURNS TO THE INVESTORS WILL BE DEPENDENT UPON THE FUND'S
MAKING SUCCESSFUL INVESTMENTS, OF WHICH THERE CAN BE NO ASSURANCE. THE
ADVISOR, WHICH IS AFFILIATED WITH CERTAIN OF THE DIRECTORS, WILL RECEIVE
SUBSTANTIAL COMPENSATION FROM THE FUND. IN ADDITION TO THE FACTORS SET FORTH
ELSEWHERE HEREIN, PROSPECTIVE INVESTORS WERE ADVISED TO CAREFULLY CONSIDER THE
FOLLOWING MATTERS:
NO MARKET FOR SHARES
No Investor may sell or transfer his or her Shares without the consent
of the Board of Directors. There are also additional restrictions on transfers
of Shares and one cannot predict, even if a Share could be sold, what price
could be obtained. Therefore, it is highly unlikely that an Investor would be
able to liquidate his or her investment prior to the termination of the Fund.
Also, any capital appreciation or distributions of the Fund's investments may
not begin to be realized or received until many years after this Offering. The
Investors under the Operating Agreement further agree not to transfer their
Shares in violation of federal or state securities laws and make additional
representations to that effect in their Subscription Agreements. Investors
have no right to require the Fund to redeem their Shares. Investors should
also note that under the Operating Agreement, the Directors are not obligated
to make a "Section 754 election." (See "Federal Income Tax Aspects.") Failure
to make this election prevents a proposed transferee from taking a "stepped-up"
basis in the Shares, and this might have an effect on the marketability of the
Shares. AN INVESTMENT IN THE FUND IS A LONG-TERM INVESTMENT. THERE IS NOT
EXPECTED TO BE ANY MARKET FOR THE SHARES.
LACK OF DIVERSIFICATION
The Fund intends to invest a majority of its assets, and may invest
substantially all of its assets, in equity and equity-related securities of
interactive information and visual technology companies in the Southeast
("Portfolio Companies"). As a result, an investment in the Fund will be
subject to greater risk and market fluctuation than an investment in a Fund
that diversifies its investments more broadly both by industry and geographic
region. Because the investments of the Fund will be concentrated in a highly
specialized market segment and further limited generally to one geographic
region, the investment offered hereby lacks diversification of risk with
respect to industry downturns, acts of God, local economic or environmental
problems and other similar matters, the impact of which might be better
absorbed or compensated for in a more diversified offering.
IMMEDIATE DEVALUATION
The Fund is a newly organized, closed-end investment company with no
previous operating history. The net asset value per Share immediately
following the completion of the Offering will be $25,000, less the per Share
commissions, fees and expenses of the Offering. Payment of the management fees
to the Advisor and other operating expenses will also reduce the net asset
value per Share.
RISKS OF INVESTMENT IN EMERGING TECHNOLOGY COMPANIES
Certain interactive technology companies may be dependent on the
development of new technologies and/or the application of existing or new
technologies. New technologies and applications may not necessarily be
generally accepted, or may be rendered obsolete by subsequent technological
developments. The success of any one company may depend, in part, on its
ability to develop, introduce
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and market products or services that meet changing user needs and that
successfully anticipate or respond to technological changes on a cost effective
and timely basis. There can be no assurance that the technologies of Portfolio
Companies will be successfully developed into profitable products or services.
A lack of compatibility with existing technology, the lack of standardization
among competing technologies attempting to serve the same market, a failure to
conform to accepted industry standards or obsolescence can also be significant
obstacles for interactive technology companies. In particular, emerging
companies may be subject to the following risks, among others:
Consumer and Business Acceptance - In order to achieve success,
interactive technology companies are dependent upon the acceptance of
their new technologies by consumers and businesses. In the event that
acceptance is slower than expected, interactive information and visual
technology companies may be delayed in their development. Moreover,
unless the products and services offered by these companies are priced
appropriately, they may fail to gain acceptance by consumers and
businesses.
Limited Operating History - Many of the Fund's investments will be in
smaller, dedicated technology companies which will have limited
operating histories. As a result, these companies may have
inexperienced management, face undeveloped or limited markets, have
limited products, have no proven profit-making history, may operate at
a loss or with substantial variations in operating results from period
to period, have limited access to capital and/or be in the
developmental stages of their businesses. There can be no assurance
that any interactive technology company will be profitable or
successful in implementing its business plans, or will provide any
return on an investment by the Fund. Nor can there be any assurance
that the Fund will not lose its entire investment in any company in
which it invests.
Proprietary Rights - Many technology companies rely on a combination
of patent, copyright, trademark and trade secret protection and
non-disclosure agreements to establish and protect their proprietary
rights, which are frequently essential to the growth and profitability
of a technology company. There can be no assurance that a particular
company will be able to protect these rights or will have the
financial resources to do so, or that competitors will not develop or
patent technologies that are substantially equivalent or superior to a
Portfolio Company's technologies. Conversely, other companies may
make infringement claims against a company in which the Fund invests,
which could have a material adverse effect on such company.
Competition - The markets in which many interactive technology
companies operate are extremely competitive. New technologies and
improved products and services are continually being developed,
rendering older technologies, products and services obsolete.
Moreover, competition can result in significant downward pressure on
pricing. There can be no assurance that companies in which the Fund
invests will successfully penetrate their markets or establish or
maintain competitive advantages.
Leveraged Capital Structure - The companies in which the Fund proposes
to invest will generally have highly leveraged capital structures,
especially after the Fund's investment is made, if it is in the form
of an interest bearing instrument. Should such companies suffer
reduced cash flows resulting from economic downturns or other factors,
the return on, or the recovery of, the Fund's investments in them may
be at greater risk than would investments in less highly leveraged
companies.
COMPETITION FOR INVESTMENT OPPORTUNITIES
A large number of investors may compete for the limited number of
investment opportunities which are consistent with the Fund's investment
objectives. This is expected to be mitigated somewhat by the regional focus
and location of the Fund. However, there is no assurance that competition for
these investments will not increase over time.
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LIMITED OPERATING HISTORY OF ADVISOR/DEPENDENCE ON MANAGEMENT
While the principals of the Advisor have experience in investing and
managing corporate assets and technologies, the Advisor has not previously
managed a closed-end, nondiversified management investment company. The
Advisor anticipates that the same qualities that have enabled its principals
to invest and manage individual investment opportunities will allow the
Advisor to invest the assets of the Fund. However, there is no assurance that
this will be the case. The success of the Fund will depend largely on the
capabilities of the Advisor, Montrose Venture Partners, LLC. The principals
of the Advisor are W. Clay Hamner, David C. Blivin and E. Lee Bryan. (See
"Strategic Focus - Management and Advisory Team.")
CONFLICTS OF INTEREST
The Advisor and its principals will be subject to certain conflicts of
interest in connection with their management of the Fund's investment
activities, including without limitation the valuation of Fund investments in
connection with the determination of the Advisor's management fee. (See
"Conflicts of Interest.") As a result, the valuation determined by the Board
of Directors must be approved by all disinterested Directors prior to being
used to calculate the Advisor's management fee.
UNSPECIFIED USE OF PROCEEDS
Because the Advisor has not identified the particular investments for
the net proceeds of the Offering, an Investor must rely on the ability of the
Advisor, with the assistance of its business and technical consultants, to
select and make investments consistent with the Fund's objectives. The
Investors will not have the opportunity to evaluate individually the
information used by the Advisor in making investment decisions.
RISKS FOR INDIVIDUAL RETIREMENT ACCOUNTS AND INVESTORS SUBJECT TO ERISA
Fiduciaries of individual retirement accounts ("IRAs") or other
pension, profit-sharing or employee benefit plans subject to ERISA, should
consider whether an investment in the Shares satisfies the investment
requirements of ERISA. In addition, tax-exempt entities should consider the
unrelated business income tax implications of investing in the Fund. (See
"Federal Income Tax Aspects.")
LIMITATIONS ON ACCOUNTABILITY OF THE DIRECTORS AND THE ADVISOR
To the fullest extent permitted by law, the Operating Agreement
provides that the Directors and the Advisor will not be liable, responsible or
accountable to the Fund or any of the Investors for any acts or omissions within
the scope of their authority as conferred by the Operating Agreement, except for
acts or omissions of willful malfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of their office
("disabling conduct"). In a published interpretive release, the staff of the
SEC announced its position that indemnification provisions in the governing
documents of investment companies do not violate the 1940 Act if they provide a
reasonable and fair means for determining whether indemnification shall be made.
As a result of the indemnification provisions in the Operating Agreement,
Investors may have a more limited right of action than they would have in the
absence of such provisions. (See "Fiduciary Responsibility of the Directors and
the Advisor.")
TAXABLE INCOME IN EXCESS OF DISTRIBUTIONS
No distributions can be assured. Fund investments or sales of Fund
assets may generate income that is taxable to the Investors, regardless of
whether actual distributions are made. However, the Advisor believes that such
an event is highly unlikely, and that the Fund will endeavor to make
distributions to Investors sufficient to allow Investors to pay income taxes
attributable to their ownership of Shares in the Fund.
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LACK OF SEPARATE COUNSEL
The Fund and the Advisor have engaged common counsel, and have not
relied upon separate counsel in connection with the organization of the Fund
and offering of Shares. There is, therefore, risk of a lack of independent
review of the terms of the Offering.
LIABILITY OF INVESTORS
Investors who are members of a limited liability company such as the
Fund, as such, are generally not liable for the obligations of the limited
liability company beyond the extent of their capital contributions and their
share of undistributed profits of the Fund. However, there are certain
statutory rules applicable to all limited liability companies dealing with
wrongful distributions which impair the solvency of the company. For example,
if an Investor has knowingly received a wrongful distribution in violation of
the Operating Agreement, or the North Carolina Limited Liability Company Act,
that Investor can be liable up to the amount of the wrongful distribution.
TAX CONSIDERATIONS
Tax Law Changes - The tax effects of ownership of Shares may be
altered by legislation, regulation or court decision, all of which could
adversely affect the tax status of the Fund or the individual Investors.
Fund Status - The anticipated results of an investment in the Fund
are based upon the assumption that the Fund will be treated as a partnership
and not as an association taxable as a corporation. The Fund has not applied
and does not anticipate applying for a ruling from the Internal Revenue Service
with respect to any aspects of the treatment to be accorded Investors for
federal income tax purposes. If the Fund should be treated as an association
taxable as a corporation for federal income tax purposes, income and losses of
the Fund would be reflected and taxed on the Fund's tax return rather than
being passed through to the members and all or a portion of any distributions
made to the Investors would be taxed as dividends or capital gains income which
would not be deductible by the Fund. See "Federal Income Tax Aspects" for a
description of possible bases of challenge to the status of the Fund as a
partnership.
Allocations - The Fund's income, gains and losses will, for federal
income tax purposes, be allocated among the Investors in accordance with the
Operating Agreement. The Internal Revenue code of 1986, as amended (the
"Code") requires that a special allocation by a partnership of income, gains or
losses have "substantial economic effect." Treasury Department regulations
govern the circumstances in which the allocation of the Fund's income, gains
and losses will be recognized.
Character of Investor Income or Loss - Counsel for the Fund is of the
opinion that under present law an Investor's allocable share of the Fund's
income or loss will more likely than not be treated as portfolio income or
loss.
Risks of Audits - The costs incurred in connection with a tax audit of
the Fund and any ensuing administrative or legal proceedings may adversely
affect any profitability of the Fund.
Deductibility of Fees - The Advisor and its affiliates will receive
substantial payments, fees and other compensation from the Fund. The Internal
Revenue Service may scrutinize closely all of these fees and may take the
position that the fees represent unreasonable expenses, capital expenditures or
nondeductible distributions rather than payments for services.
See "Federal Income Tax Aspects" with respect to the tax aspects of the
Offering.
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THE FUND
Southeast Interactive Technology Fund I, LLC is a newly organized
closed-end, non-diversified management investment company that intends to
invest in equity and equity-related securities of companies located in the
Southeast and involved in the developing fields of interactive information and
visual technologies. The Advisor believes the Fund offers investors a
significant opportunity to invest in the role that Southeast technology
companies will play in the information and visual technology industries. The
Fund is organized and headquartered in North Carolina and has no operating
history. The Fund's principal office is located at 2200 West Main Street,
Suite 900, Durham, North Carolina 27705 and the telephone number is
919-286-7000.
USE OF PROCEEDS
The net proceeds of the Offering after deducting selling commissions
and organizational and offering expenses payable by the Fund were $5,795,000.
Such proceeds will be invested or allocated for follow-on investments in
Portfolio Companies in accordance with the Fund's investment objective and
policies over a period estimated to be approximately 24 months from the Closing
Date. The Advisor believes this time period is appropriate because many
potential Portfolio Companies will be closely-held entities in or emerging from
the development stage with less than $4 million in assets and less than $2
million in capital. Consequently, extensive financial analysis and other due
diligence will be required to adequately evaluate investment opportunities in
these companies. Pending such an investment, the proceeds will be invested in
high grade money market instruments under the management supervision of
Sovereign Advisers, Inc.
Set forth below is a table showing application of funds available upon
completion of the Offering. For a description of all fees and other
compensation to be paid to the Advisor, affiliates thereof, the Advisor's
technical and business consultants and the Selling Agent, see "Summary of the
Offering - Fees and Estimated Expenses."
<TABLE>
<CAPTION>
Subscriptions
(244 Shares)
------------
<S> <C> <C>
Gross Offering Proceeds (1) $6,100,000 100.00%
Sales Commissions (2) 305,000 5.00%
---------- -------
5,795,000 95.00%
Organizational Fee (3) 61,000 1.00%
Organizational and Offering
Expenses (4) 250,000 4.10%
---------- -------
Net Proceeds Available for Investment $5,484,000 89.90%
</TABLE>
(1) 244 Shares were offered at a price of $25,000 per Share.
(2) The Fund paid the Selling Agent a sales commission of five percent
(5%) of the gross proceeds of the Offering.
(3) The Fund paid the Advisor a fee equal to one percent (1%) of the gross
proceeds of the Offering in return for the Advisor's services in
structuring and organizing the Fund.
(4) These expenses include out-of-pocket expenses incurred in connection
with the organization of the Fund and offering and selling expenses,
including legal, accounting and printing costs; filing and
qualification fees; disbursements of the Advisor and the Selling
Agent; and reimbursements to the Advisor for expenses incurred while
engaged in organizing the Fund.
7
<PAGE> 13
INDUSTRY OVERVIEW
The Advisor believes that the shift taking place from analog to
digital technologies is creating a convergence of industries involving
computers, telecommunications, publishing, television, entertainment, catalog
shopping, consumer electronics and information services. These industries are
coming together in what is being called the Interactive Age by many
commentators and will create an industry where the eventual winners will
deliver many or all of these products through their fully integrated delivery
systems. The start of this can be seen by the number of alliances being formed
between previously separate industry leaders. Examples of this include the
alliances between phone and cable companies, cable and home shopping, on-line
services and television, computer software and catalog shopping, computers and
publishing, etc. The convergence of technologies enabling this new environment
includes:
The Information Highway - Visual information (i.e., television,
graphics, animation) requires large volumes of data for storage, processing and
transmission. Ten years ago, 9,600 bits per second was the standard dial phone
speed, acceptable for fax transmission but far too slow for video. The
information highway allows bandwidths of up to 155,000,000 bits per second.
Fiber-optic bundles and digital satellites create a worldwide network for the
transmission of voluminous data in any format.
CD-ROM/CD-I - CD-ROM laser/disc technology and industry standards now
permit a complete encyclopedia including video clips to be stored on a disc
smaller than a 45-RPM record. CD-I enables this basic technology to be used on
a television set with an adapter called a "set-top," bringing the power of the
computer into the television set.
Computers - The most rapid growth in computers today is in the area of
systems offering interactive multimedia. These new systems and their
retrofitted cousins enable the user to create and retrieve information in text,
video and audio formats.
Television - Television sets have accommodated electronic video game
playing devices for almost a decade. New television and set-top technologies
permit television to closely parallel computers in the utilization of
interactive multimedia. This enables noncomputer users to avail themselves of
the powerful learning techniques heretofore limited to computer users.
These converging technologies are also facilitating the expansion of
technologies to worldwide markets. Lesser developed countries, through the
existence of satellite technology, are able to leap-frog much of the
infrastructure investment previously required. As a result, the previous
barriers to the worldwide market for these technologies are quickly
diminishing. Linkage technologies that previously may have addressed one or
two of the above industries can now be leveraged across the entire converged
industry and across a worldwide market place. This development is expected to
present attractive investment opportunities for long-term capital appreciation.
The Advisor anticipates that the evolution of these technologies will create an
opportunity for development of interactive communication networks. Interactive
communication networks have been compared to an information highway which will
transport entertainment, information and interactive services among homes and
businesses. The Advisor expects that these interactive communication networks
will change the way we communicate, train our workers, educate our children and
access our entertainment.
The anticipated successful evolution of several digital based
technologies will be the key to the development of the full potential of the
Interactive Age. Such technologies will provide a means of converting letters,
numbers, images, and sounds into pieces of data that can be manipulated,
compressed, transported and stored with efficiency. In the Advisor's view, as
these key technologies converge, the creation of interactive networks will
foster new services and generate new revenue opportunities for many industries,
including entertainment, education, publishing, broadcasting, advertising, home
shopping, travel, recreation, health care and financial services. Interactive
information and visual technology companies are defined by the Fund as those
involved in any aspect of developing communication links for the interactive
transfer of digital information and the creation and/or presentation of that
information. Such companies include:
8
<PAGE> 14
Enablers - Technology and equipment companies whose products and
services are used by content, software and transmission companies.
Both the hardware and content providers will require new software and
associated systems to make the Interactive Age a reality. Although
great strides are being made in the hardware components required for
interactive communication and visual display, these components cannot
interact without software programmed to make them operate efficiently.
This is evident from many of the announced test markets which have
been proposed for interactive services which have been delayed due to
the absence of software needed to run the available hardware.
Enabling software will remove significant barriers to the ability to
create content and establish user interfaces which appeal to the mass
markets.
The software and component part suppliers should provide the basic
building blocks for the new interactive communication networks. The
development of value-added interactive information and visual
technology networks will require the melding of key technologies,
including information processing servers, low cost consumer
electronics, data compression systems, software, data storage,
semiconductors, computers and communication technologies. Increases
in information processing power will be required at both ends of the
application spectrum, from the top of the television set to the data
centers of the transmission companies.
Content Providers - Content or software companies that create and own
entertainment programs and information databases as well as
interactive services provided to home and business users.
Interactive communication will require the creation or re-engineering
of content to fill the pipelines being created by the major
communications companies. There have already been announcements by
these major companies of over $36 billion of planned capital
investment. Generally, the Fund does not plan to invest in companies
that will compete head-on with these major companies for their markets
and products. However, it is expected that these major companies will
be ideal strategic partners for the targeted investment companies.
The Advisor believes that their capital investments are being made
with the contemplation that there will be content and services to be
provided over this "pipeline." Accordingly, the Advisor believes that
companies with unique creative talent will wield significant leverage
in the Interactive Age.
These companies will create and own entertainment programs and
information databases as well as interactive services provided to
homes and offices. Examples include multimedia production houses,
gaming companies, education and training software developers, and
other production companies. With the tools that will be created for
the Interactive Age and the pipelines put in place to serve the mass
markets, the creative firms will be able to directly create and
distribute their content. This is similar to the way desktop
publishing has allowed the proliferation of newsletters and internally
created marketing packages, or the way CAD/CAM allowed architects to
both engineer and design buildings and other structures.
The content providers are expected to be the major beneficiaries of
the technological changes taking place because providing content that
adds value will be a key factor in realizing the full potential of the
interactive pipelines. Interactive industries will blend the skills
of entertainment and information with those of computer programmers to
create interactive products that represent creative responses to meet
consumer needs. Interactive communication has the potential to
revitalize existing revenue streams and create new opportunities for
content providers. Fully depreciated media libraries will be easily
accessible and could generate significant incremental revenues at
little additional cost. Companies that own copyrights to voice, data,
images, music, games, sports, characters and text may reap significant
benefits from the evolving communications networks.
The Fund recognizes that technologies and applications for interactive
information will evolve in the future. Accordingly, there is no assurance that
the Fund will invest in any of the specific types of companies described above.
In addition to the types of companies described above, the Fund may invest
9
<PAGE> 15
in other companies which may develop in the future and whose activities are
determined by the Advisor to fall within the scope of interactive information
and visual technology.
INVESTMENT POLICY AND STRATEGY
INVESTMENT POLICY
The Operating Agreement provides that the purpose of the Fund is to
invest in equity-oriented investment instruments such as convertible preferred
and common stock, hybrid investment instruments such as convertible notes, and
lending money or guaranteeing loans in private transactions in and to, and for
the benefit of, new and developing companies in the interactive information and
visual technology industries with an emphasis on proprietary technologies,
related industries and/or marketable products which work on existing hardware.
Amendment of the Operating Agreement, including modification of its purpose,
requires the affirmative vote of two-thirds of the outstanding Shares and
therefore constitutes a fundamental policy of the Fund as defined by the 1940
Act.
As a result of the limited purpose of the Fund provided in the
Operating Agreement, the following restrictions also constitute fundamental
policies which may not be changed without the vote of the holders of a majority
of the outstanding Shares:
(1) The Fund will not lend money to persons other than new and developing
companies in the interactive information and visual technology
industry.
(2) The Fund will not underwrite securities of other issuers, except
insofar as the Fund may be deemed and underwriter under the Securities
Act by virtue of disposing of its portfolio securities.
(3) The Fund will not purchase or sell commodities or commodity contracts.
(4) The Fund will not purchase real property.
(5) The Fund will not borrow money, issue senior securities, or otherwise
encumber its portfolio securities in order to implement its investment
strategy.
INVESTMENT STRATEGY
The Fund's investment strategy is based upon the belief that a
disciplined and focused investment strategy, in a region offering attractive
opportunities coupled with a lack of sufficient capital to leverage these
opportunities, offers the potential for capital appreciation for Investors.
The Fund's investment strategy and policies as set forth below, are not
fundamental policies and may be changed by the Fund's Board of Directors
without the approval of the Investors. There is no assurance that any
investment strategy will be successful. The Advisor expects to utilize the
following strategies:
Regional Focus. The Fund will have its headquarters in Durham, North
Carolina, near the Research Triangle Park ("RTP"), the approximate geographic
center of the Southeast region, which the Advisor defines as extending from
Washington, D.C. to the Gulf Coast.
By focusing on the Southeast region and especially the RTP area, the
Advisor will be able to take advantage of more than 50 major technology and
research companies located in this region and which specialize in
microelectronics, telecommunications and other industries supporting
interactive technologies. In the RTP area alone, Duke University, the
University of North Carolina at Chapel Hill ("UNC-CH") and North Carolina State
University ("NCSU") sponsor approximately one-half billion dollars in research
annually. In addition, technology companies in the RTP area and the Southeast
spend billions annually in research. They have contracts with major
corporations and government agencies including NASA, the US Army, the
Department of Defense and other companies where technologies currently being
developed can be funded partially by grants for specific products designed for
special projects.
According to the Council for Entrepreneurial Development, the RTP has
the highest annual percentage growth rate for high technology start-ups,
exceeding even California's famed Silicon Valley. In addition to the MCNC,
the RTP is the home of the virtual reality center at UNC-CH. This facility is
one of only two academic centers for virtual reality research in the country.
In addition, the North Carolina Visual Technology Center has been founded and
is expected to receive funding in 1995. This will be similar to the existing
North Carolina Biotechnology Center and will provide technological development
funds to statewide visual technology start-ups which can eventually be
investment targets of the Fund. Also, located in the Southeast region are the
Institute for Academic Technology in the RTP, the Georgia Institute of
Technology, the Huntsville/NASA complex in Alabama and other leading research
universities and government and private agencies. The Advisor believes the
Fund is positioned to identify, support and provide strategic guidance and work
with strategic partners to help its Portfolio Companies achieve their potential
profitability.
In spite of these opportunities, the Advisor believes the Southeast
region is significantly underfunded. For example, according to the North
Carolina Technological Development Authority, Inc. ("NCTDA"), in 1993, North
Carolina venture firms received no funding commitments of new venture
10
<PAGE> 16
capital dollars out of $2.9 billion committed nationally. Also according to
NCTDA, in 1992, $31.1 billion capital was under management nationwide by
venture capital funds, of which only $138 million was invested in North
Carolina--less than one-half of one percent. This compares with $8.3 billion
invested in California and $4.3 billion invested in Massachusetts, two other
major technology centers in the country. The Advisor believes that venture
capital managers tend to invest in companies geographically close to
themselves, and accordingly the lack of adequate investment capital
headquartered in the Southeast has posed difficulties for technology companies
in the Southeast in securing necessary funds. With the high level of research
being funded, facilities in place, and high per capita Ph.D.s residing in the
area, the Advisor feels there is substantial pent-up supply of venture
opportunities at attractive valuations.
The Advisor anticipates that at least 65% of the Fund's total assets will
be invested in companies that are headquartered in the Southeast or have a
significant interactive information and visual technology presence in the
Southeast.
Strategic Focus. The Fund will seek investment opportunities
concentrated in the areas of interactive information and visual technology.
While many of the base technologies have been under development for the last
twenty-five years, the Advisor believes that the technologies and linkages are
only now reaching the level of sophistication and affordability which makes
them appealing to the mass markets. Factors which the Advisor considers
important in its investment focus include:
(1) Diversification Within Industry - While investors would like to
participate in these emerging technology industries and companies
which are being developed in the Southeast, investment in technology
companies is generally considered difficult for investors due to the
complexity of the emerging industries and the almost daily
announcements of new products. The Fund will invest in a number of
entities within the industry, thereby increasing its chances to
identify profitable investments.
(2) Management and Advisory Team - W. Clay Hamner and David C. Blivin have
managed a number of financial transactions and companies. In
addition, E. Lee Bryan, one of the principals of the Advisor and a
Director of the Fund, has substantial experience and exposure in
technology, which the Advisor believes will add value to the Fund by
enabling the Advisor to conceive of and propose additional
applications for new technologies across industries. While many new
technologies are developed by scientists to solve specific problems,
the ability to see applications for these technologies across
industries is key to helping these companies develop the strategic
relationships and growth potential that their technologies represent.
As a result of its principals' previous activities, the Advisor has
relationships with many of the leaders of the region's money center
banks, as well as Fortune 500 companies which can become strategic
partners for Portfolio Companies. The Advisor also has relationships
with partners in many of the major regional and New York investment
banking firms. These relationships will be utilized whenever possible
to assist Portfolio Companies.
(3) Business and Technical Consultants - The Advisor has selected a group
of business leaders and technical consultants who are recognized
experts in the target industries and who are well connected and aware
of the opportunities and competing technologies being developed. The
Advisor intends to utilize the services of these consultants on an
as-needed basis. The Advisor believes this group will help the Fund
identify entities with truly promising technologies and will also
allow the Fund to quickly perform its due diligence, thereby allowing
the Portfolio Companies to maintain any technological leads they may
have over their competition. This is especially true where the Fund
has relationships with leaders of public institutional research
centers. As a result of their public status and roles as non-direct
competitors, these institutions have been able to forge alliances with
most of the major technology companies and in many cases are working
on collaborative efforts for their next generation products. Although
the business and technical consultants to the Advisor will not be able
to discuss the specifics of their work, their knowledge of where the
industries' leaders are heading can be utilized as a baseline for
evaluating investment opportunities for the Fund. Additionally, their
relationships with these
11
<PAGE> 17
major companies will allow them to present new technologies to the
right parties where these technologies could add to the utility of
products under development.
(4) Need for Capital - Due to the perceived risk of investing in emerging
technologies, many venture funds have been slow to invest in companies
in the interactive technology industry. This is especially true in
the Southeast where there has been a lack of capital for these
companies. The Advisor believes that the lack of significant
competition for these investments in the Southeast should allow the
Fund to select the best opportunities available in the region.
However, there can be no assurance that any such opportunities will
result in successful investments. The Advisor believes that a
synergistic phenomenon is taking place in the entrepreneurial
community that couples university technology centers, research and
development facilities, collaborative enterprises and local available
lead investors. The Southeast, in the opinion of the Advisor, has
developed all of the necessary ingredients for the interactive
multimedia evolution except indigenous venture capital funding. The
Advisor believes that the Fund will fill that void.
(5) Exit Flexibility - Interactive information and visual technologies are
generating interest from the media and investment community.
Additionally, industry leaders are pursuing strategic relationships to
protect against missing out on the future of these technologies. This
has created an atmosphere where companies with unique or proprietary
technologies and products may have near-term exit opportunities either
through the public market or from a strategic partner. The Advisor
believes this creates the potential for favorable investment returns
over a period shorter than is typical of many venture capital
investments. It is anticipated that many of the companies in which
the Fund will invest, when coupled with strategic partners, can then
be positioned to raise additional capital either publicly or
privately, and to grow and expand their respective businesses.
(6) Technology Intercept - In many cases, synergistic development of new
technologies may be undertaken by companies in close proximity to each
other without the knowledge of either company. The Advisor and its
business and technical consultants expect to be catalysts in bringing
complementary developers together and in creating value. By employing
a strategy of technology intercept (projecting future trends in
technology and the impact they may have on target markets), the
Advisor and its business and technical consultants will survey a
universe of technology development, identify linkage opportunities and
work within their respective networks to identify promising investment
entities. The Advisor expects that this proactive investment strategy
will create substantial value for the Fund although there can be no
assurance that this will be the case.
The Advisor anticipates that at least 65% of the Fund's assets will
be invested in interactive information and visual technology companies. Such
investments primarily will be in the form of convertible preferred stock and
convertible subordinated debt instruments. Warrants to purchase common stock
may, in some instances, be attached to the primary investment instrument.
Strategic Partners. The Advisor believes that many major technology
companies are supplementing their in-house research and development with
strategic joint venture relationships. These relationships are not only with
other technology leaders but also with the younger emerging companies which are
developing next generation linkage technologies that will give the major
companies a market edge. The Advisor expects to invest in situations where
strategic partners are already in place or where the Advisor believes it can
bring a strategic partner in as a co- investor, major customer or in another
capacity. The existence of those strategic partners creates two key elements:
(1) substantiation of the market application of a particular technology and (2)
a user, a revenue source, or in many cases, a distribution network for the
product. In many cases, Investors in the Fund may be investing alongside major
technology partners, which the Advisor believes will reduce certain risks to
the Investors. However, there can be no assurance that the presence of a
strategic partner will result in a successful investment by the Fund.
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<PAGE> 18
As a general rule, the Fund intends to be the lead investor, but will
also consider co-investments in companies, later-stage financings in companies,
and investments in companies located outside the geographical area of the Fund
where the opportunities are unique and where there may be proprietary access to
technology that may assist a Portfolio Company. The Fund will probably not
lead investments located outside the Southeast. The Fund will also attempt to
develop relationships with larger venture capital funds as co-investment
partners where appropriate. Because the Fund expects a strategic partner may
co-invest alongside the Fund or will have already invested equity in the
company, the Fund will probably be more likely to co-invest with strategic
partners than with financial partners in the early stages. The Advisor expects
to develop an expert reputation for technology due diligence, in part due to
the strengths of its consultants, such that co-investment partners can be
attracted without lengthening the investment process. Where other venture
capital funds wish to co-invest with the Fund and are willing to accept the
terms initiated by the Fund without delaying the investment process,
co-investment will be encouraged. This will allow the Fund to make its
investments in a timely fashion to help ensure the maintenance of any
technology leads that the Portfolio Companies may have on their competition.
Equally important as having a strategic partner is having the right
strategic partner. Through its business and technical consultants, the Advisor
believes that it will have insight into promising technologies which may help
Portfolio Companies in the form of advantageous alliances with the strategic
partners relevant to their technologies. For example, for a video technology
company to have aligned itself with Sony/Beta technology rather than VHS
technology would not have been beneficial. The Advisor believes that in many
cases its consultants will have advance knowledge of the future technologies
under development and the likelihood of their acceptance by the technical
community. The Advisor hopes to be able to add substantial value to the Fund's
Portfolio Companies by the knowledgeable coaching it anticipates providing to
these companies.
It is expected that a majority of the Fund's investments will follow
this model.
THE INFORMATION CONCERNING THE INTERACTIVE TECHNOLOGY INDUSTRY AND ITS
EVOLUTION, THE RESEARCH TRIANGLE PARK AND SOUTHEAST REGION, THE LEVELS OF
RESEARCH EXPENDITURES MADE IN SUCH AREAS AND THE AVAILABILITY OF VENTURE
CAPITAL FOR INTERACTIVE TECHNOLOGY INVESTMENTS IN THE SOUTHEAST, WHICH ARE
DISCUSSED IN THIS SECTION AND THE PRECEDING SECTION ENTITLED "INVESTMENT
OPPORTUNITIES" HAVE BEEN COMPILED BY THE ADVISOR FROM INDUSTRY NEWSLETTERS,
PERIODICALS, PRIVATE CONSULTANT REPORTS, UNIVERSITY AND GOVERNMENT
PUBLICATIONS, AND OTHER SOURCES. THE ADVISOR BELIEVES SUCH INFORMATION TO BE
ACCURATE BUT HAS NOT INDEPENDENTLY VERIFIED SUCH INFORMATION.
BOARD OF DIRECTORS
The overall management of the business and affairs of the Fund are
vested solely in the Fund's managers, who will function in a manner similar to
a corporate board of directors and are referred to herein as the "Directors,"
provided that the investment activities and day-to-day operations of the Fund
will be delegated to the Advisor. The Directors will determine all agreements
between the Fund and persons or companies furnishing services to it,
including the Fund's agreements with its money manager, escrow agent and
Portfolio Companies, and the Advisory and Management Agreement with the
Advisor. The Advisory and Management Agreement is terminable upon sixty days'
notice by the Directors or by the holders of a majority of the Shares. The
Directors will be elected on an annual basis at an annual meeting of the
Investors. The initial Directors who will serve until the first meeting of
the Investors will consist of the following: W. Clay Hamner, David C. Blivin,
E. Lee Bryan, Terry Sanford and Wayne M. Rogers. Mr. Hamner, Mr. Blivin and
Mr. Bryan are principal members of the Advisor to the Fund. Senator Sanford
and Mr. Rogers are not affiliated with the Advisor or the Selling Agent and are
not "interested persons" with respect to the Fund, as such term is defined in
the Investment Company Act. At least 40% of the Directors must be persons who
are not "interested persons." Each Director will receive $1,000 for each
meeting attended in person, plus reimbursement of reasonable travel expenses.
To date, all actions taken by the Board have been by unanimous written consent.
Accordingly, no fees have been paid to Directors.
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The education and experience of Mr. Hamner, Mr. Bryan and Mr. Blivin
are discussed in the section entitled "Investment Advisor." Below is a summary
of the experience of Senator Sanford and Mr. Rogers:
Terry Sanford - Senator Sanford (77) has distinguished himself and the
State of North Carolina through his terms as a Governor of North
Carolina, President of Duke University, and United States Senator and
has gained a reputation as a lifelong educational leader and public
servant. Under his innovative leadership, Duke University gained
additional national recognition. A graduate of UNC-CH and its School
of Law, Senator Sanford holds honorary degrees from approximately 30
American colleges and universities. His years as Governor were marked
by innovation in the establishment of the community college system,
the Governor's School, the North Carolina School of the Arts, and
considerable new support for the public schools. As a member of the
United States Senate, he promoted legislation to require an honest and
balanced national budget, to reform political campaign practices, and
to broaden the opportunities for disadvantaged children in the Head
Start program, among numerous other issues. Senator Sanford continues
to exemplify a deep devotion to Duke University, serving as President
Emeritus and as a Professor of Public Policy. He practices law as a
senior partner in the McNair & Sanford, P.A. law firm in North and
South Carolina. He is Chairman of a 3-year North Carolina Bar
Association study of the causes of crime and corrective actions, the
Chairman of the Board of the North Carolina Museum of Art, the Board
of North Carolina Electronics Industry Trade Association and is
involved in many charitable, legal and educational activities. He has
also served on the Board of Directors of ITT Financial Corp., Fuqua
Industries, Inc., Golden Corral Corporation and Unocal, Inc.
Wayne M. Rogers - Mr. Rogers (61) is a well-known professional actor
who, in addition to his acting career, has been involved in investment
activities for over fifteen years. These include business management
of a number of motion picture personalities as well as co-ventures
with other prominent individuals and institutions. Mr. Rogers has
been a director of The Pantry, Inc. since 1990. He has also been a
director of P.H.C., Inc., Electronic Data Controls, Inc., Extek
Micro-Systems and Wadell Equipment Company. In addition, he is active
in several charitable and philanthropic affairs. He is also a member
of the Board of Trustees for the Kenan Institute of Private Enterprise
at UNC-CH. Mr. Rogers received a Bachelor of Arts degree from
Princeton University. In 1993 and 1994, Mr. Rogers was also a
director at Dabney/Resnick, Inc., an investment banking firm.
INVESTMENT ADVISOR
The investment activities of the Fund and the day-to-day operations of
the Fund will be managed by Montrose Venture Partners, LLC (the "Advisor").
The principals of the Advisor are W. Clay Hamner, David C. Blivin and E. Lee
Bryan.
Below is a summary of the experience of each of the principals of the
Advisor:
W. Clay Hamner - Mr. Hamner (49) is the Managing Director and Chief
Executive Officer of Montrose Capital Corporation. He received his
Undergraduate and Masters degrees from the University of Georgia and
Doctorate in Business Administration from Indiana University. Mr.
Hamner is on the Board of Directors of Vista Resources, Inc. (NYSE);
Wendy's International, Inc. (NYSE); The Pantry, Inc. (a privately held
company which owns 415 convenience stores where he is also Chairman
and Chief Executive Officer), and Interstate/Johnson Lane, Inc.
(NYSE), the parent company of Interstate/Johnson Lane Corporation, the
Selling Agent. He was also a Special Limited Partner in Intersouth I.
Formerly, Mr. Hamner served on the Board of Directors of Highland
Energy Corporation; Clinton Gas Systems (OTC); Fuqua Industries, Inc.
(NYSE); Triton Group, Ltd. (NYSE); and Capital Technology, Inc. Prior
to entering private business, Mr. Hamner taught in the Graduate
Schools of Business at Northwestern University and Duke University.
Mr. Hamner is a Director of the Institute of Private Enterprise at
UNC-CH
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<PAGE> 20
and serves on the Kenan-Flagler School of Business Board of Visitors
(UNC-CH), the Fuqua School of Business Board of Visitors (Duke), and
the Duke University Medical Center Board of Advisors. He also
analyzed and evaluated Duke's nontraditional investments portfolio
while on the faculty at Duke. Mr. Hamner will take an active role in
the identification of and negotiation with the selected Portfolio
Companies, as well as reviewing and helping direct the strategic
operations and planning of Portfolio Companies.
David C. Blivin - Mr. Blivin (37) is the Chief Financial Officer for
Montrose Capital Corporation. He is a 1985 graduate of the Duke
University Fuqua School of Business and a Certified Public Accountant.
Prior to joining Montrose Capital Corporation, Mr. Blivin worked as a
Senior Auditor with Arthur Andersen LLP and in this capacity audited
several companies in technology fields. As Chief Financial Officer
for Montrose Capital Corporation, Mr. Blivin has negotiated financings
and reviewed business plans for a number of entities in which Montrose
Capital Corporation has invested. Mr. Blivin serves on the Board of
Directors of The Pantry, Inc. and has served on the Triangle
Investment Club, a club sponsored by the Durham and Raleigh Chambers
of Commerce and the Council for Entrepreneurial Development, to review
plans of start-up businesses for investment potential.
E. Lee Bryan - Mr. Bryan (57) is the founder of One Room Systems,
Inc., a multimedia educational products creation and distribution
company. Prior to founding the company, he was a principal in a
number of successful business ventures. In 1984 Mr. Bryan founded
Vortech, Inc. ("Vortech"), a company which became a worldwide leader
in digital teleradiology. Vortech was subsequently sold to Eastman
Kodak Company. In 1988 Mr. Bryan joined CACI International ("CACI"),
a major U.S. government systems integrator. As Executive Vice
President of CACI, Mr. Bryan spearheaded a major technical and
business restructuring for the company. Prior to his involvement in
the entities listed, Mr. Bryan developed an extensive background in
government and private sector high technology endeavors. Mr. Bryan is
a graduate of the United States Naval Academy at Annapolis and a
retired officer from the nuclear submarine program. Mr. Bryan has
been a high level advisor to the government of the United States for
defense and intelligence information systems. He is a trustee of the
Center for Excellence in Education and the Profound Paralysis Group.
He is a member of the Heart Center board at Duke University Medical
Center and the Durham "Smart Start" program board.
TECHNICAL AND BUSINESS CONSULTANTS TO THE ADVISOR
The Advisor has established strong relationships with business and
technical consultants from a variety of disciplines who will be called upon by
the Advisor to provide in-depth perspective on Portfolio Company investments.
These individuals are business leaders and highly regarded scientists and
technical consultants in their fields. The consultants have been strategically
selected for their broad industry knowledge and relationships both in business
and in the interactive information and visual technology fields. One or more of
the consultants may serve on the boards of Portfolio Companies and may receive
compensation for their services from the Portfolio Companies in the form of
stock options or directors' fees. The consultants will be compensated by the
Advisor with up to 20% of the accrual portion of the management fee the Advisor
receives from the Fund, which will be payable at such time as the Fund makes
distributions of profits to Investors. The consultants also may, from time to
time, invest in Portfolio Companies. Under certain circumstances the ability of
the consultants to render services for compensation to, or invest in, Portfolio
Companies may be restricted or prohibited by the 1940 Act. In the event counsel
to the Fund determines such activities to be prohibited by the 1940 Act, the
Fund will apply for an exemptive order from the SEC pursuant to Section 17 of
the 1940 Act and will instruct the consultants to refrain from such activities
unless and until such an exemptive order is granted. Although the Advisor
reserves the right to add additional consultants that it believes will add value
to the Fund and to terminate consultants at any time, the current advisors are
listed below.
Glenn Boschetto - Mr. Boschetto is the Director and Senior Vice
President of Corporate Finance for Dabney/Resnick, Inc., a high yield
financing boutique founded by former senior professionals of Drexel
Burnham Lambert, Salmon Brothers and Donaldson Lufkin & Jenrette. At
Dabney/Resnick, he directs the firm's middle market leveraged buyout
financing for clients which include America's major leveraged equity
fund managers. Prior to joining Dabney/Resnick, Mr.
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<PAGE> 21
Boschetto worked with Drexel Burnham Lambert and Goldman, Sachs & Co.
in corporate finance and strategic planning, respectively. He is an
Economics graduate of Brigham Young University.
James N. Brown, Jr., Ph.D. - Dr. Brown is currently Chief Scientist in
the Electronics & Systems Unit of the Research Triangle Institute. In
this role since October 1988, he has been responsible for initiating
and participating in interdisciplinary research and development
projects. He has also served in the role of Acting Director of the
Institute's Center for Digital Systems Engineering and was responsible
for developing and implementing marketing plans for that program area.
Since October 1989, Dr. Brown has been the Institute's Representative
on the North Carolina Board of Science & Technology. As a member of
that Board, he serves as Chair of the Computer Graphics Committee and
Long-Range Planning Committee. He was also appointed a member of the
Technical Advisory Council of the North Carolina Supercomputing
Division of MCNC and is currently Chairman of a committee seeking
state sponsorship of the newly formed Interactive Visual Technology
Center.
Paul J. Coleman, Jr., Ph.D. - Dr. Coleman is professor of space
physics at the University of California at Los Angeles. He holds
B.S.E. degrees in mathematics and physics, an M.S. degree in physics,
and a Ph.D. in space physics. His professional experience includes
positions at the Ramo-Wooldridge Corporation (now TRW Systems),
initially as a research scientist and subsequently as manager of a
research group, and as manager of NASA's interplanetary sciences
program at its headquarters in Washington, D.C. Since 1981, Dr.
Coleman has also served as President and Chief Executive Officer of
the Universities Space Research Association (USRA), a non- profit
corporation owned by more than seventy universities and chartered to
facilitate research, development and education in space science and
technology. Also, Dr. Coleman is a Trustee of American Technology
Initiative, Inc., and has served as a founding member and Chairman of
the Oversight Committee for the San Diego Supercomputer Center, a
director of the National Institute for Space Commercialization, a
member of the Scientific Advisory Committee for the Los Alamos
National laboratory and the Lawrence Livermore National Laboratory,
and a founding member of the Steering Committee for the California
Space Institute. In addition, he is a consultant to the U.S.
government on research and development. In the private sector, Dr.
Coleman is a director of CACI International, Fairchild Space and
Defense Corporation, Applied Electron Corporation, and Lasertechnics,
Inc. and is a co-founder and a former director of University
Technology Transfer, Inc. In addition, he is a consultant to industry
on research and development and to the financial community on high-
technology enterprises.
James N. "Nick" England, III - Mr. England is currently a research
professor in the Computer Science Department at UNC-CH. He is part of
the PixelFlow high-performance computer graphics system development
team which is part of the UNC Virtual Reality Center. This center has
received worldwide recognition for its work and is a leading center in
the area of virtual reality development. Mr. England has been
involved in the development of computer graphics and image processing
software and hardware since he was a Ph.D. student at NCSU in the
1970s. In 1978, he co-founded Ikonas Graphic Systems, Inc. ("Ikonas")
to produce a high-performance programmable graphics processor based on
the work he did at N.C. State University. As President and Chief
Engineer, he was responsible for product design and corporate
development, helping make Ikonas a leading provider of graphics and
image processing systems to industrial, government and university
research labs. Ikonas had grown to 15 employees at the time of its
acquisition by Adage, Inc. ("Adage") in 1982. Mr. England served as
Vice President of Graphics Technology at Adage for four years and was
responsible for corporate strategy and development, product planning
and major customer programs. He also created a new application
software group and managed a team of 25 hardware and software
engineers. In 1986, he co-founded Transcepts Systems, Inc
("Transcepts"). Mr. England was President and managed the prototype
development and introduction of Transcepts' TAAC-1 graphics and
imaging processor. In 1987, he negotiated the sale of Transcepts to
Sun Microsystems, Inc. Mr. England served as director of Sun
Microsystems, Inc.'s North Carolina Research and Development Group
until 1993. In addition to his current position at UNC-CH, Mr.
England serves on the boards of the North Carolina Interactive Vision
Technology Center and the National Computer Graphic
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<PAGE> 22
Association, and the IEEE Computer Graphics Application Magazine's
editorial board, and has served on a number of SIGGRAPH Conference
Technical Programs committees. Also, he has published several
technology articles on graphics and imaging hardware.
L.J. "Bud" Evans, Jr. - Mr. Evans is President and CEO of CSAT, Inc.
("CSAT"), a private corporation founded to foster the market
introduction of advanced technologies. Prior to founding CSAT, Mr.
Evans held a number of positions in and out of government. These
included senior executive positions at The White House, the Nuclear
Regulatory Commission and NASA. At NASA, Mr. Evans was responsible
for the creation of the Commercial Programs Office. Mr. Evans also
chaired The White House Cabinet Council on Commerce and Trade and was
responsible for the National Commercial Space Policy. Mr. Evans has
founded and held executive positions with a number of private firms in
the aerospace, health services and teletraining fields. In addition
to being Chairman of the Board of CSAT, Inc., ESSI, Inc., SaraTech
Finance, Inc. and SpaceTech, Inc., Mr. Evans sits on the Board of
Trustees of the Environmental Research Institute of Michigan, the
National Advisory Committee of the University of Michigan, the
Applications Committee of the National Research Council and the Boards
of Advisors of ORSI, Inc. and the American Astronautical Society. Mr.
Evans holds a B.A. in Economics from Colby College and a J.D. from
Cornell University.
William H. Graves, Ph.D. - Dr. Graves earned a Ph.D. in mathematics
from Indiana University in 1966. In 1967, he joined the faculty at
UNC-CH, where he now is Associate Provost for Information Technology,
Professor of Mathematics, and Professor of Information Science. He
has served the University in other capacities, as well, including two
terms as Associate Dean for General Education and an interim term as
Vice Chancellor for Academic Affairs. As Associate Provost, Professor
Graves has institutional responsibility for a range of computer and
video technologies, networks, classrooms, and services. He is also
responsible for the University's Institute for Academic Technology,
which has been funded by IBM since 1989 when he proposed this
collaborative effort to advance national educational goals. The
Institute emerged from his earlier work with IBM, first within the
University to create software development opportunities in the general
education program, and then nationally to help create the IBM
Consulting Scholar Program. Professor Graves has given over 200
invited presentations on the role of information technology in
education and has written and edited extensively on the subject. He
currently chairs the planning committee for EDUCOM's National Learning
Infrastructure Initiative. EDUCOM's 600 member colleges and
universities and 100 corporate associates are helping to shape the
national information infrastructure. The goal of the initiative is to
apply this collective knowledge of the new infrastructure to foster
new instructional delivery models that are learner-centered, broadly
affordable, and scalable.
Jane Smith Patterson - Ms. Patterson is currently serving as the Chief
Policy Advisor for Budget and Technology for the State of North
Carolina under Governor Jim Hunt. Ms. Patterson was educated at
UNC-CH, N.C. State and Harvard Universities and worked both in the
private sector and the university community until the late 1970s when
she was hired by Governor Hunt to serve in his cabinet as Deputy
Secretary. Her tenure there was marked by an emphasis on advancing
North Carolina Information Transmission Systems to the forefront of
the Governor's technology initiatives and directing a focus on
innovative management practices and government. She has since worked
as a Vice President of ITT-Network Systems Group and as Vice
Chancellor for University Advancement at UNC-Wilmington. In her
current role as an advisor to Governor Hunt, she is responsible for
management of policy issues, policy oversight for budget issues and
state planning, development of technology policy and employment
strategies and other areas of responsibilities as assigned by the
Governor. A special focus of her office is the information highway
project which is the leader among all 50 states in the development and
employment of a fiber-optic information transmissions system that will
be the first of its kind and scope in the world. She is currently
serving on the board of MCNC, UNC School of Medicine, North Carolina
Equity, Inc. and North Carolina Rural Economic Development Center,
among others. She has also served on the boards of the Research
Triangle World Trade Center, BB&T and North Carolina School of Science
and Mathematics. Recently she was named to the National
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<PAGE> 23
Infrastructure Advisory Council by Vice President Al Gore. She will
serve on this council along with the Presidents and CEOs of
corporations such as MCI Communications Corporation, AT&T Company,
Microsoft Corporation, Silicon Graphics, Inc. and Corning, Inc.
Robert M. Price - Mr. Price is retired Chairman of the Board and Chief
Executive Officer of Control Data Corporation. Mr. Price worked at
Control Data from 1961 to 1990 serving in a variety of positions. He
was instrumental in leading Control Data's early strategic and
international expansion, in both operations and marketing. He led
Control Data's strategic move from hardware into information and
systems integration services, principally through the start-up and
growth of small subsidiary companies. Mr. Price received his
Bachelors Degree from Duke University and his Masters Degree in
Applied Mathematics from Georgia Institute of Technology. He has
worked at Lawrence Livermore Radiation Laboratory, Convair
Corporation, the Georgia Institute of Technology and Standard Oil of
California, Inc. prior to joining Control Data Corporation.
Currently, Mr. Price is President and CEO of PSV, Inc. ("PSV"), a
consortium of consultants specializing in management of technology.
PSV offers services in technology commercialization, corporate
strategy, human resource management and general management practice.
Additionally, Mr. Price teaches management of technology at the Fuqua
School of Business at Duke University. He is also Chairman of the
Alpha Center which provides training and business strategy systems to
entrepreneurs in the field of human services. Mr. Price serves on
the Boards of Directors of International Multifoods, Inc., Premark
International Inc., Rohr, Inc., Public Service Company of New Mexico
Inc., and Forth Shift Corporation. He also serves on the Board of
Visitors of Duke University's Fuqua School of Business and is on the
board of the United Way of Minneapolis.
David A. Smith - Mr. Smith is Chairman of the Board and Chief
Executive Officer of Virtus Corporation ("Virtus"). He is author of
the award-winning computer adventure game The Colony. During the
early 1980s, he worked in systems development and robotics with major
corporations and start-ups. In 1986, Mr. Smith joined Lord
Corporation in Cary, N.C. where he performed research in
human-computer interfaces for robotics. In January, 1990, Mr. Smith
co-founded Virtus, a pioneer in virtual reality-based modeling and
visualization for the desktop. The company's flagship product, Virtus
Walkthrough, began shipping in November 1990 and won MacUser
magazine's "Breakthrough Product of the Year" Award. His follow-on
products, Walkthrough Pro, Voyager and VR, have all won similar
industry recognition. He has worked on joint development projects
with Apple Computer and Taligent. Virtus also recently received an
equity investment from Motorola and they are working on several joint
projects.
Peter Julian Sprague - Mr. Sprague is Chairman and Chief Executive
Officer of Wave Systems Corp. ("Wave Systems") and has been Chairman
of National Semiconductor Corporation since 1965. Wave Systems was
started in 1988 to develop the technology for an electronic
information metering system that will revolutionize the distribution
and retrieval of electronic information. Mr. Sprague received his
Bachelor of Arts degree in Political Science from Yale in 1961,
studied Political Science at M.I.T. and participated in the doctoral
program in Economics at Columbia University. He holds a patent in the
area of projection cathode ray tubes and has applied for a patent in
the field of information distribution. In 1985, Mr. Sprague was
inducted into the Academy of Distinguished Entrepreneurs at Babson
College as well as received an Honorary Doctorate of Law from Babson
College. Mr. Sprague also serves as a trustee of Stevens Institute of
Technology.
Carl B. Wootten - Mr. Wootten was the Director of the Office of
Technology Transfer for the University of California system from 1989
to 1994. As director of this office, he was responsible for the
University system's licensing program operations, the licensing of
technology from nine campuses and the overseeing of similar operations
at the three federal labs operated by the University. Under his
tenure, the income from such operations increased from $9 million to
$50 million. Prior to joining the University of California, Mr.
Wootten was President of the University Technology Corporation, the
Director of Patent Administration at Duke University, and the
Executive Director of the University of Virginia Patents Foundation.
Prior to 1965, Mr.
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<PAGE> 24
Wootten spent over eleven years working with the technology industry
and held positions as an officer and board member of several
profitable U.S. corporations whose interests primarily focused within
the nuclear field and irradiation processing. He has served on the
Board of Trustees of the Licensing Executive Society and the Society
of University Patent Administrators. Mr. Wootten is a graduate of the
U.S. Naval Academy and spent eight years in the U.S. Navy, finishing
his career as chief engineer of a nuclear powered Polaris missile
submarine.
MCNC - North Carolina's microelectronics, supercomputing and
communications center has been in the forefront of advanced electronic
and information technologies since its establishment in 1980. The
MCNC has recognized experts and leading research in the areas of
microelectronics, communications and advanced visualization. The Fund
has established a relationship with the MCNC which will provide the
Fund access to the MCNC's experts for field specific technology
reviews of targeted investment companies. They will also be available
to provide further due diligence, consulting and other support
services on a negotiated basis. Additionally, the MCNC has an annual
research budget exceeding $45 million. As technologies are developed
to the point of commercial viability, the Advisor expects that the
Fund will have access to investing in these spin-out opportunities.
MANAGEMENT OF THE FUND
The day-to-day operations of the Fund are delegated to the Advisor
subject to the Fund's investment objectives and policies. As previously
stated, the Fund will target investments in interactive information and visual
technology companies that the Advisor believes provide superior and long-term
return potential. The Fund intends to invest principally in early-stage
companies; however, its industry focus will support an investment in any stage
of leading edge technology companies seeking private equity, including
privately placed equity-related securities by public companies.
In early-stage companies, initial investments will typically be small.
Upon the companies' achievement of established milestones, additional funding
will be made available. This staged investing approach is designed to give the
Fund substantial positions in the better investments. The size of the
investment in any one company will vary, but in general will not be less than a
total commitment of $1 million and not more than 10% of the Fund's capital.
The Advisor expects to consider, among others, some or all of the following
factors in reviewing and analyzing a potential investment:
(1) Management Team - Management is the single most important criteria for
any investment. In some cases, the Advisor may provide financial
expertise and strategic guidance in the early stages. In many cases
the Advisor will work with executive search firms or its consultants
to identify appropriate personnel to complete the management team.
(2) Proprietary Technology or Product - Generally the Fund will invest in
companies which have products which can be protected and have
protective properties, which are key to product market applications
and which the Advisor believes will address a significant potential
market.
(3) Availability of Strategic Partner - In cases where a strategic partner
is not in place, the Fund may help identify a partner and may provide
some equity-related bridge financing while the relationship with the
strategic partner is being formalized.
(4) Acceptable Projected Cash Flow - Unless there are other favorable
investment attributes, the Fund will generally expect a potential
Portfolio Company to project having a positive cash flow by at least
the end of the third year after the Fund's investment. Additionally,
sources of financing to carry the Portfolio Company through a point of
breakeven cash flow will be anticipated to prevent the Fund from being
"forced" into unplanned fundings. The Fund will monitor its
investments in Portfolio Companies and will provide financial
expertise where needed to help ensure that additional funding and
financing will be available as needed to support the growth of
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<PAGE> 25
the companies after the completion of Fund's investment. However,
there can be no assurance that a Portfolio Company will meet any cash
flow projections.
(5) Acceptable Investment Structure - The Fund will in many cases attempt
to invest in its Portfolio Companies through securities which the
Advisor believes will provide a senior or preferential return, such as
convertible preferred stock, convertible debt or anti-dilutive common
stock where available, as opposed to common stock.
(6) Exit Strategy - Attention to the process of trying to achieve
liquidity for the Fund's investments will be an important
consideration in every investment. Typical exit strategies will
include (i) the sale of the Portfolio Company to a third party for
cash, promissory notes, securities (which may be restricted
securities), or a combination thereof, (ii) a public offering or
private placement of the Portfolio Company's stock, and (iii) the sale
of the Fund's interest in the Portfolio Company to the company itself
or its management. There can be no assurance that any of these exit
strategies will be successful.
The Advisor has retained business and technical consultants who can
aid the Advisor in reviewing and analyzing the above factors and in assisting
the management of Portfolio Companies. Such business and technical consultants
will be solely acting as consultants to the Advisor and will not vote in, or
have any control over, the actions of the Advisor or the Fund.
The Fund will have an arrangement with Sovereign Capital Management,
Inc., d/b/a Sovereign Advisers, Inc. ("Sovereign"), a registered investment
advisor founded in 1979, whereby Sovereign will manage the idle cash of the
Fund. Sovereign is a wholly-owned subsidiary of Interstate/Johnson Lane, Inc.,
the parent company of the Selling Agent. Sovereign will charge a quarterly
management fee at the rate of one-half of one percent (0.5%) per annum of the
average daily balance of the Fund's cash under management.
CUSTODIAN
First Union National Bank of North Carolina serves as the Custodian
for the firm's securities and investments. The Custodian does not participate
in the Fund's investment decisions.
DISTRIBUTIONS AND ALLOCATIONS
DISTRIBUTIONS
The Fund intends to distribute in the first quarter of each year the
proceeds of all dispositions of securities which occurred within the preceding
year, except to the extent that the Directors determine that such amounts
should be retained to pay reasonable and anticipated expenses of the Fund or
reserved for investment in existing Portfolio Companies requiring additional
capital. The Fund expects to make cash distributions in each year sufficient
to allow Investors to pay the income taxes incurred by them which result from
their investment in the Fund. Distributions will be made in cash or marketable
securities. Net proceeds of dispositions of portfolio securities and current
net income will be distributed on a cumulative basis to the Investors in
proportion to their ownership of Shares.
Discretionary In-Kind Distributions - Distributions of Fund assets
during the term of the Fund will generally consist of cash or securities listed
on a national securities exchange or quoted through NASDAQ. In the case of a
distribution in kind, the distributed property will be distributed to all
Investors in proportion to their respective ownership of Shares. Any such
distribution will likely consist of securities whose resale may be subject to
restrictions imposed by federal and state securities laws.
In general, the Directors intend to distribute capital gains as
realized and not to reinvest such capital gains. However, the Directors may
cause the Fund to hold securities, especially restricted securities, until a
distribution of those securities is deemed consistent with the company's
progress and
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<PAGE> 26
market conditions. The Directors also have the authority to reinvest capital
gains in existing Portfolio Companies if they believe such an investment is in
the interest of the Investors. The Directors expect that operating income from
such sources as interest and dividends will generally be reinvested or used to
cover operating expenses.
At the termination of the Fund, there will be a period of orderly
liquidation during which the Fund assets will be distributed to any creditors
and to the Investors in accordance with the allocation process described above.
Such distributions will be made in accordance with the Investors' positive
capital account balances, in cash or in kind (including, in certain instances,
private equity holdings) as the Directors may determine.
ALLOCATIONS OF TAXABLE INCOME AND LOSS
For tax purposes, gains and losses will generally be allocated to the
Investors in accordance with their ownership of Shares.
TERM
The Fund's term will be seven years, but may be extended for up to two
additional two-year periods by the Directors, with further extensions subject
to the approval of the holders of a majority of the Shares. The Directors also
have the sole authority to terminate the Fund at any time.
MANAGEMENT EXPENSES
The Fund will pay the Advisor an annual management fee of five percent
(5%) of the net asset value of the Fund for its administrative and investment
management services. Beginning with the first full year of operations of the
Fund, the management fee will be based on the net asset value of the Fund (see
"Determination of Net Asset Value") as follows:
(1) two and one-half percent (2.5%) of the net asset value of the Fund as
of the last day of the preceding fiscal year (the "Valuation Date")
will be payable in twelve equal monthly installments, each of which
will be due on or before the last day of each month of such fiscal
year; and
(2) two and one-half percent (2.5%) of the net asset value of the Fund as
of the Valuation Date will be accrued and paid, from time to time, as
the Fund liquidates portfolio investments; provided, however, that
until such time as Investors have received cumulative distributions
from the Fund equal to the gross proceeds of the Offering, only 20% of
the profit realized upon liquidation of a portfolio investment will
be available for payment of accrued management fees.
The management fee for the first year or part thereof of the Fund will
be an amount equal to two and one-half percent (2.5%) of the total Offering
proceeds (before reduction for selling commissions and expenses) prorated for
the portion of the first year after the Closing Date. Because the annual
management fee will be based upon the Fund's net asset value only on the
Valuation Date, fluctuations in the net asset value of the Fund during a
fiscal year will cause the annual management fee, as a percentage of net
asset value, to fluctuate as well. Specifically, decreases in the Fund's net
asset value during a fiscal year will cause the annual management fee to
exceed 5% of the Fund's net asset value.
The Advisor will pay out of its management fees certain expenses associated
with managing and administering the Fund, including, but not limited to, general
overhead expenses, including salaries and fringe benefits of the Advisor's
personnel, office rental and office equipment, fire and theft insurance,
cleaning and utilities of office space, bookkeeping and general travel and
entertainment expenses. The Advisor or one or more of its principals may
perform financial advisory services for Portfolio Companies, including without
limitation, investment banking, merger and acquisition assistance, real estate
and equipment leasing advice, and service as a director, and receive
compensation therefor. Pursuant to the Advisory and Management Agreement, one
hundred percent (100%) of any directors' fees and fifty percent (50%) of any
financial advisory fees paid by Portfolio Companies to the Advisor or one or
more of its principals must be remitted to the Fund. Under certain
circumstances, the ability of the Advisor and its principals to render financial
advisory services for compensation to Portfolio Companies may be restricted or
prohibited by the 1940 Act. In the event counsel to the Fund determines such
activities to be prohibited by the 1940 Act, the Fund will apply for an
exemptive order from the SEC pursuant to Section 17 of the 1940 Act and the
Advisor and its principals will refrain from such activities unless and until
such an exemptive order is granted.
The Fund will pay or reimburse the Advisor or its affiliates for all
direct operating expenses which are related to the Fund's investment
activities, including stationery, postage, telephone and copying charges, dues
and charges for national and/or regional industry associations, fees and
expenses of
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<PAGE> 27
consultants, and other expenses including fees and expenses for outside
consulting services, legal, accounting, and auditing expenses, litigation
expenses, and organizational and marketing expenses of the Fund. The Fund will
also pay costs incurred in the investigation of investment opportunities and in
the oversight of portfolio investments, including travel and entertainment
expenses directly related thereto. In many cases the Fund will recoup all or a
portion of such expenses from the Portfolio Company upon the successful closing
of an investment by the Fund in a Portfolio Company.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund's assets will be determined as soon as
practical after and as of the end of each calendar year in good faith by the
Directors. In calculating the value of the Fund's total assets, the Directors
will value securities which are traded in the over-the-counter market or on a
national or regional stock exchange at the prevailing market price on the
Valuation Date, unless the investment is subject to certain restrictions upon
alienation which require a discount to such price, in which case such
discount will be determined in good faith by the Directors who are not
"interested persons."
However, the Advisor anticipates that a substantial portion of the
Fund's assets will consist of securities which have no market quotations readily
available. The value of such securities will be determined in good faith by
the Board of Directors.
PRIVATE PLACEMENT STATUS
As a purchaser of an interest in a private placement not registered
under the 1933 Act, each Investor will be required to represent that it is
acquiring the Shares for investment and not with a view on resale or
distribution. Further, each Investor must be prepared to bear the economic
risk of the investment for an indefinite period, since the Shares cannot be
sold unless they are subsequently registered under the 1933 Act or an exemption
from such registration is available. It is extremely unlikely that the Shares
will ever be registered under the 1933 Act.
During the course of the transaction and prior to sale, each Investor
and his or her purchaser representative(s), if any, are invited to ask
questions of the Advisor concerning the terms and conditions of the Offering
and to obtain any additional information.
INDEPENDENT ACCOUNTANTS
The annual financial statements to be provided to Investors will be
reviewed by, and certain other matters will be passed upon by, independent
public accountants Price Waterhouse LLP, Raleigh, North Carolina.
CONFLICTS OF INTEREST
TIME DEVOTED TO FUND BUSINESS
Although the Advisor is required to devote such time as may be
necessary for the proper performance of its duties as manager of the Fund, the
Advisor and its affiliates and principals are entitled to and currently do
engage in a number of other activities. Accordingly, conflicts may arise with
respect to the time and attention that the Advisor may devote to the Fund.
(See "Fiduciary Responsibility of the Advisor.") However, the Advisor does not
currently manage any other technology-focused venture capital funds, and will
not begin to invest funds from any subsequent venture capital fund until the
Fund's available capital is fully invested or committed for investment.
Therefore, the Advisor does not believe it will have conflicts arising from the
allocation of proposed investments among competing funds under its management.
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<PAGE> 28
INTERESTS IN PORTFOLIO COMPANIES
Due to the narrow focus of the Fund and the Fund's desire to have
industry leaders involved in the consulting group, it is anticipated that,
where permitted by the 1940 Act, investments may be made in companies in which
a principal of the Advisor or one or more of its consultants has a financial
interest. In some cases they may have a controlling interest. Subject to the
1940 Act, such individuals may also receive stock options and fees for their
board positions, receive consulting fees directly from Portfolio Companies, and
may be allowed to invest alongside the Fund in certain investments. The
Advisor will be sensitive to these potential conflicts in its decision making
and will communicate with its consultants as appropriate. To the extent
practicable, the Advisor will cause investment decisions to be made by parties
without such conflicts, although the Advisor may continue to receive input and
analysis from such parties. In the event counsel to the Fund determines such
activities to be prohibited by the 1940 Act, the Fund will apply for an
exemptive order from the SEC pursuant to Section 17 of the 1940 Act and the
Advisor, its principals or its consultants, as applicable, will refrain from
such activities unless and until such an exemptive order is granted.
DETERMINATION OF NET ASSET VALUE
The Advisor's management fee is based upon the net asset value of the
Fund from time to time. Because the Fund's investments are likely to be in
private companies with no established market quotations, the valuation of their
securities in the portfolio of the Fund is subject to the good faith
determination of the Directors, of which up to 60% of the members may be
principals or affiliates of the Advisor. Because a majority of the Board of
Directors is likely to consist of principals or affiliates of the Advisor, such
persons will have a conflict of interest in determining the net asset value of
the Fund. The valuation of any Fund asset for the purpose of determining the
Advisor's management fee must be approved by the disinterested Directors.
COMMON COUNSEL
The Fund has engaged the firm of Moore & Van Allen, PLLC, Charlotte,
North Carolina, as counsel to the Fund to render the tax opinion referenced in
this Registration Statement and an opinion relating to certain organizational
matters with respect to the Fund under North Carolina law and to advise the
Fund on matters affecting the Fund. Such counsel also serves as special
counsel to the Advisor (and affiliates thereof) and also represents the Selling
Agent in matters unrelated to the Fund. Such counsel may further receive
compensation from the Advisor (and affiliates thereof) or the Fund from time to
time in connection with other matters.
SUCH COUNSEL DOES NOT PURPORT TO HAVE MADE ANY INVESTIGATION OR TO
HAVE ACTED INDEPENDENTLY ON BEHALF OF THE INVESTORS. EACH INVESTOR MUST LOOK
TO HIS OR HER OWN COUNSEL IN CONNECTION WITH AN INVESTMENT IN THE FUND.
RELATED PARTIES AND TRANSACTIONS WITH AFFILIATES
Investors should be aware of the following relationships and
transactions among certain parties to this Offering and their affiliates:
W. Clay Hamner, one of the principals of Montrose Venture Partners,
serves on the Board of Directors of Interstate/Johnson Lane, Inc., the parent
company of the Selling Agent.
The Selling Agent and Sovereign, the investment advisor engaged by the
Fund to manage its idle cash, are both wholly-owned subsidiaries of
Interstate/Johnson Lane, Inc.
Investment decisions will be made by the Advisor in reliance in part
upon advice from its business and technical consultants, some of whom may be in
control of, receive fees or other compensation from, or have investments or
other financial interests in potential Portfolio Companies of the Fund or the
competitors of such companies.
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The Fund anticipates that it may purchase technical services related to its
due diligence functions or other services from One Room Systems, Inc. ("One
Room"), an affiliate of E. Lee Bryan, a Director and a principal of the Advisor.
One Room develops and distributes multimedia educational and entertainment
products and accordingly, certain of its employees have considerable expertise
in the field of interactive information and visual technology. Access to such
expertise may, from time to time, be required to thoroughly evaluate potential
Portfolio Companies. Any compensation paid to One Room for such services will
be determined pursuant its standard customer fee schedule.
FIDUCIARY RESPONSIBILITY OF THE ADVISOR AND THE DIRECTORS
The Directors are accountable to the Fund as fiduciaries and are
required to exercise good faith and integrity in all dealings with the Fund.
This is a rapidly changing area of law and prospective investors should consult
their own counsel concerning the Directors' duties. The Advisor will have
similar obligations arising out of the Advisory and Management Agreement.
The Operating Agreement provides that the Directors and the Advisor
will have no liability to the Fund for any losses arising out of any act or
omission within the scope of their authority as conferred by the Operating
Agreement, except for acts or omissions of willful malfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office ("disabling conduct"). In a published interpretive release, the staff
of the SEC has announced its position that indemnification provisions in the
governing documents of investment companies do not violate the 1940 Act if they
provide a reasonable and fair means for determining whether indemnification
shall be made. The permissible means by which such a determination could be
made include (i) a final a decision on the merits by a court or other body that
the person to be indemnified was not liable by reason of disabling conduct;
(ii) the vote of a majority of disinterested, nonparty directors; or (iii) a
written opinion by independent legal counsel. In the event a claim for
indemnification is made, the determination to indemnify the claimant will be
made by one of the permissible means. Investors may have a more limited right
of action than they would have in the absence of such provisions. The
Operating Agreement also provides in certain situations for indemnification of
the Directors and the Advisor by the Fund for liabilities they may incur in
dealings with third parties on behalf of the Fund.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO THE DIRECTORS, THE ADVISOR AND
AFFILIATES OR PERSONS CONTROLLING THE FUND PURSUANT TO THE FOREGOING
PROVISIONS, THE FUND HAS BEEN INFORMED THAT IN THE OPINION OF THE SEC, SUCH
INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS
THEREFORE UNENFORCEABLE.
FEDERAL INCOME TAX ASPECTS
INTRODUCTION
EACH PURCHASER OF SHARES (an "Investor") SHOULD CONSULT HIS PERSONAL
TAX ADVISOR CONCERNING THE FEDERAL, STATE AND LOCAL TAX LAWS WHICH MAY APPLY TO
HIS PARTICIPATION IN THE FUND.
The following discussion is a summary of the material federal tax
considerations which may be relevant to an investment in the Fund and is not
intended as a substitute for personal tax planning and professional tax advice
with regard to an investment in the Fund. The tax consequences of an
investment in the Fund will vary substantially for each Investor based upon
such factors as the Investor's sources and levels of income, the nature of his
investment portfolio and the nature and amount of his tax deductions unrelated
to the Fund, and therefore, the advisability from a tax standpoint of any
investment in the Fund depends primarily upon the income tax situation of a
particular Investor. NO RULINGS HAVE BEEN OR WILL BE REQUESTED FROM THE
INTERNAL REVENUE SERVICE (THE "IRS" OR THE
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<PAGE> 30
"SERVICE") WITH RESPECT TO ANY OF THE MATTERS DESCRIBED HEREIN. IN READING THE
DISCUSSION WHICH FOLLOWS, IT SHOULD BE NOTED THAT COUNSEL HAS GIVEN ADVICE ONLY
AS TO SUCH MATTERS AS ARE SPECIFICALLY STATED HEREIN TO BE THE OPINION OF
COUNSEL.
The opinion of Moore & Van Allen, PLLC, Charlotte, North Carolina
("Counsel" to the Fund), has been rendered only in connection with the material
federal income tax issues arising from an investment in the Fund. The
discussion of the federal income tax considerations relating to an investment
in the Fund and Counsel's opinion, where specifically rendered, are based upon
representations of the Advisor and a review of other documents and information,
which Counsel believes to be pertinent to the Offering. Counsel has made
inquiry into relevant facts, and is satisfied that the material facts are
accurately and completely described in the offering materials. An independent
verification by Counsel of the asserted facts was not required under existing
Treasury Regulations, however, because Counsel has no reason to believe that
any relevant facts asserted to Counsel or representations, documents or other
information relied on by Counsel are untrue. ANY MODIFICATION OR ALTERATION OF
ANY FACTS, REPRESENTATIONS OR OTHER INFORMATION RELIED ON BY COUNSEL IN ITS
INQUIRY COULD ADVERSELY AFFECT THE FOLLOWING DISCUSSION AND COUNSEL'S OPINIONS
DESCRIBED HEREIN.
The discussion contained herein and Counsel's opinions, where
specifically rendered, are based on existing statutory law contained in the
Internal Revenue Code of 1986 (the "Code" and, with respect to a particular
section, "Code Section") treasury regulations, court decisions, published
revenue rulings and revenue procedures of the IRS through the date of this
Registration Statement. No assurances can be given that existing tax laws,
regulations and rulings, and judicial decisions will not be amended, modified,
altered, or reversed at any time and applied either retrospectively or
prospectively. Any such changes may adversely affect the following discussion
and the opinions of Counsel described herein and the anticipated tax
consequences of an investment in the Fund.
There have been a number of pieces of major tax legislation passed by
Congress in recent years, many provisions of which have not been interpreted by
regulations or other authority. Investors should be aware that they may be
adversely affected, perhaps, retroactively, by the resolution of current
uncertainties in the tax laws or by future legislature, judicial or
administrative changes.
In the opinion of Counsel, subject to certain conditions, limitations
and restrictions expressed herein it is more likely than not that: (1) the
Fund will be treated as a partnership for federal income tax purposes; and (2)
items of Fund income, gain, loss, deduction and credit allocated to the
Investors in accordance with the Agreement will be respected pursuant to Code
Section 704. No opinion is expressed with regard to the deductibility of any
fees paid to the Advisor and affiliates, because of the inherently factual
nature of the reasonableness and character of such fees and the absence of
clear authority regarding these issues.
The factual basis for the opinions of Counsel on the material tax
issues is set out hereinafter, along with other information pertaining to the
federal tax consequences of an investment in the Fund. A copy of the opinion
of Counsel may be obtained from the Advisor.
The discussion below is directed primarily to individual Investors who
are United States citizens. A potential Investor which is a corporation,
trust, estate, tax-exempt organization or nonresident alien should consult his
or its own tax counsel regarding the specific rules applicable to an investment
in the Fund.
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CLASSIFICATION AS A PARTNERSHIP FOR TAX PURPOSES
The Fund has not and will not apply for a ruling from the IRS that the
Fund will be classified as a partnership and not as an association taxable as a
corporation for federal income tax purposes. Rather, the Fund will rely upon
the opinion of Counsel as to the tax status of the Fund. In the opinion of
Counsel, the Fund as constituted under the Operating Agreement should be
classified as a partnership and not as an association taxable as a corporation
for federal income tax purposes. Counsel's opinion is subject to the
conditions that the organization and operation of the Fund is in accordance
with the North Carolina Limited Liability Company Act and the Operating
Agreement.
Counsel's opinion is based upon Regulations Section 301.7701-2 and -3
which indicate that an organization will be classified as a partnership for
federal tax purposes where the organization possesses no more than two of the
following four specified corporate characteristics" (1) continuity of life,
(2) centralization of management, (3) limited liability, and (4) free
transferability of interests. The Regulations further indicate that, in some
cases, other factors may be significant in determining the proper
classification of an organization. Treas. Reg. Section 301.7701-2(a). See
Phillip G. Larson, 66 T.C. 159 (1976) (other factors not of critical
significance independent of their bearing on the four major characteristics);
Acq., Rev. Rul. 79-106, 1979-1 C.B. 448.
Counsel's opinion that the Fund will not have more corporate
characteristics than noncorporate characteristics results from the following
analysis.
a. Continuity of Life. Under the Regulations, the corporate
characteristic of continuity of life exists if the death, insanity, bankruptcy,
retirement, resignation, or expulsion of any member of the organization will
not cause a dissolution. Pursuant to the Operating Agreement, any of such
events with respect to certain of the Directors will result in the dissolution
of the Fund unless a majority in interest of the Investors vote to continue the
Fund and, if necessary, appoint a new Director. While the Directors subject to
such dissolution events may or may not be members of the Fund, Counsel believes
that the applicability of such dissolution events with respect to such
Directors results in a meaningful possibility of the dissolution of the Fund,
in contrast to a corporation which would not be dissolved upon the happening of
such events to its directors.
Thus, based on the foregoing, the Fund should not be deemed to possess
the corporate characteristic of continuity of life.
b. Centralized Management. An organization is considered to have
centralized management if any person (or group of persons that does not include
all members) has continuing exclusive authority to make the management
decisions necessary to the conduct of the business for which the organization
was formed. Accordingly, the corporate characteristic of centralized
management would likely be found to exist because all of the interests in the
Fund will be owned by the Investors and the Directors have management
authority.
c. Limited Liability. The corporate characteristic of limited
liability exists if under local law there is no member of the organization who
is personally liable for the debts of, or claims against, the organization.
Because of the statutory limitation of liability of Members pursuant to the
North Carolina Limited Liability Company Act, the corporate characteristic of
limited liability will exist with respect to the Fund.
d. Free Transferability of Interests. Finally, an organization
is considered under the Regulations to have free transferability of interests
if each of its members or those members owning
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<PAGE> 32
substantially all of the interests in the organization have the power, without
the consent of the other members, to substitute for themselves in the same
organization a person who is not a member of the organization. Such
substitution of interests must confer on the transferee all the attributes of
the transferor's interest in the organization. Treas. Reg. Section
301.7701-2(e)(1).
The court in Larson concluded that a requirement in a partnership
agreement permitting the assignment of limited partners' interests in the Fund
with the consent of the general partner, which consent could not be
unreasonably withheld, was not a restriction on transfer. Hence, the partners'
interests were held to be freely transferable. To the contrary, however, free
transferability would appear not to exist in the case where an assignee could
become a substitute limited partner only with the consent of the general
partner when there is no additional mandate in the partnership agreement that
such consent may not be unreasonably withheld. See Treas. Reg. Section
301.7701-3(b)(2) Example 1.
Because the Operating Agreement requires the unrestricted consent of
the Directors before an assignee may become a substitute Investor, Counsel is
of the opinion that the corporate characteristic of free transferability of
interest should not be found to exist.
In analyzing whether an unincorporated organization has more corporate
characteristics than noncorporate characteristics, Larson and the Regulations
suggest that the four major characteristics are to be accorded equal weight
except that the characteristic of free transferability will be accorded less
significance when it exists in "modified" form such that each member is first
required to offer his interest to the other members. Thus, based on the above
analysis, the Fund should have only two corporate characteristics --
centralized management and limited liability -- and such corporate
characteristics should not cause the Fund to be treated as an association
taxable as a corporation.
This conclusion has been reached despite the presence of other
factors, such as the promotion of the Fund by means of a Private Placement
Memorandum, that might constitute corporate characteristics. See Zuckman v.
United States, 524 F.2d 721 (Ct. Cl. 1975); Reg. Section 301.7701-2(a)(3); Rev.
Rul. 79-106, supra. The IRS has recently issued Rev. Proc. 95-10 setting
forth conditions under which the IRS will issue an advance ruling on the tax
classification of a limited liability company. The Fund will not meet all of
the conditions of Rev. Proc. 95-10, and accordingly would likely be unable to
obtain a ruling from the IRS as to its tax classification. No ruling will be
requested from the Service with respect to this or any other issue discussed in
this Registration Statement. Although the Rev. Proc. 95-10 conditions relate
only to the issuance of an advance ruling and do not necessarily represent the
litigation position of the Service, it is possible that the Service will seek
to classify the Fund as a corporation.
Classification by the Service of the Fund as an association taxable as
a corporation for income tax purposes would result in dramatic changes in the
tax treatment of the Fund's transactions, most notably (i) income, gain, loss,
deductions and credits would not flow through to the Investors for reporting on
their own individual income tax returns, (ii) distributions to the Investors
would be treated as corporate distributions, subject to tax as ordinary income
in certain circumstances, and (iii) the taxable income of the Fund would be
subject to the corporate federal income tax. The Fund intends to contest any
contention by the IRS that the Fund constitutes an association taxable as a
corporation unless such contention is based upon a clearly applicable
substantive change of law. Such a contest might result in the Fund incurring a
liability for substantial legal fees.
PUBLICLY TRADED PARTNERSHIPS.
Code Section 7704 provides that certain publicly traded partnerships
will be treated as corporations for tax purposes. A publicly traded
partnership is defined as a partnership whose shares are
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<PAGE> 33
traded on an established securities market or are readily tradable on a
secondary market or the substantial equivalent thereof.
The Advisor has represented to the Fund and its Counsel that Shares
will not be traded on a established securities market nor will any other trades
be permitted if after such trade the Fund will not be classified as a
partnership for federal income tax purposes or will the same be offered with
the expectation that there will be a secondary market for such interest. Under
the Operating Agreement, the Fund may require, as a condition precedent to
transfer of a Fund interest, delivery to the Fund of an opinion of counsel that
the transfer will not violate such restriction. While the Fund and the Selling
Agent may, in their discretion, assist Investors in disposing of or purchasing
Shares, the same will be limited to isolated transactions. The Advisor has
represented to Counsel that under no circumstances will the Fund, the Advisors
or the Selling Agent undertake a course of conduct which would cause the Fund
to be treated as a publicly traded partnership.
Based upon the placement of the Shares as proposed by the Advisor, it
is likely that the Fund will not be classified as a publicly traded partnership
under Code Section 7704.
FEDERAL TAXATION OF INVESTORS
Subchapter K of the Internal Revenue Code provides that an entity
classified as a partnership shall not be subject to federal income tax.
Instead, a partnership must file an annual information return setting forth all
items of income, gain, loss, deduction, credit and tax preference of the Fund.
The Fund must furnish to each Investor information containing the partner's
distributive share of the income, gain, loss, deduction, credit and tax
preference, together with such other information as may be required by the
Regulations. A partner's ability to deduct a share of partnership losses or
deductions is subject to many restrictions: (a) partnership level items can be
deducted by a partner only if such items are property allocated to him, (b) a
partner may not deduct partnership losses in excess of his basis in his
partnership interest, (c) a partner's ability to deduct losses from a
partnership activity are restricted by his amount "at risk" in such partnership
activity and (d) a partner's ability to deduct net losses from a limited
partnership will generally be limited by the passive activity loss
restrictions. All Investors will be taxed on their allocable shares of the
Fund's taxable income whether or not that income is actually distributed.
Investors should note that the preparation and filing of any individual return
of an Investor and the payment of any taxes, penalties or interest due on
account of such return will be the sole responsibility of each Investor.
PASSIVE ACTIVITY RULES
Certain taxpayers (including individuals, certain closely-held
C-corporations and certain personal service corporations) generally may deduct
their losses from so-called "passive activities" only to the extent of their
income from passive activities. Similarly, tax credits from passive activities
generally may be used only to offset tax liabilities attributable to passive
activities. The following discussions address the passive and portfolio
activity restrictions only as they affect individual Investors.
Passive activities generally include any activity involving the
conduct of a trade or business in which the taxpayer does not materially
participate (such as an investment in a limited partnership) and any activity
involving the receipt of payments principally for the use of tangible property
(such as rental real estate or equipment leasing). Passive activities do not
include a taxpayer's employment or day-to-day business, nor portfolio
investments (e.g., dividends, royalties, and interest), and thus, income from
those sources cannot be sheltered by passive activity losses. An investment in
the Fund is not expected to constitute an investment in a passive activity, as
the Fund's investment activities are not expected to rise
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<PAGE> 34
to the level of a trade or business for this purpose. Rather, the Investors'
allocable shares of Fund income will likely be portfolio income, which cannot
be offset by passive losses from other sources.
CASH DISTRIBUTIONS TO INVESTORS
The tax treatment of cash distributions to the Investors should be
distinguished from the tax treatment of the Investors' shares of income and
loss, which is discussed above. Cash distributed to an Investor from the Fund
will not be taxable unless it exceeds the basis of the Investor's Shares.
However, cash distributions will reduce the tax basis of the Investor's Shares,
although not below zero. If a distribution exceeds the partner tax basis, the
excess is taxed as gain from the sale of the Shares.
INVESTOR'S TAX BASIS IN THE FUND
Code Section 704(d) permits a partner to deduct his or her
distributive share of partnership loss, if any, only to the extent of the
adjusted basis of such partner interest in the partnership at the end of the
partnership year in which such loss occurred. Any excess of loss over basis,
however, may be carried over indefinitely and deducted if, and to the extent
that, at the end of any succeeding taxable year the tax basis of the partner
interest in the partnership exceeds zero.
An Investor's adjusted tax basis in his or her Shares will initially
be determined by the amount of his or her contributions to the Fund represented
by the purchase price of the Shares. The Investor's basis will be increased by
his or her distributive share of the Fund's taxable income and tax-exempt
income, if any.
Conversely, the Investor's adjusted tax basis in the Shares will be
decreased, but not below zero, by the Investor's proportionate share of: (1)
cash (and property) distributions and (2) Fund losses and nondeductible
expenditures.
In addition to the above increases and decreases, an Investor's
adjusted tax basis in the Shares can also be affected by Fund liabilities and
liabilities to which Fund assets are subject. Code Section 752(a) provides for
an increase in a partner's tax basis to the extent of his share of partnership
liabilities. However, the Fund does not anticipate incurring significant
amounts of liabilities.
LIMITATION ON DEDUCTION OF LOSSES - AT RISK PROVISIONS
Section 465 generally limits an individual's deductions for losses
from an activity to the aggregate amount such individual has economically
placed at risk and, thus, could actually lose from the activity. Amounts
considered to be at risk generally include the amount of money and the adjusted
basis of property contributed to the activity and amounts borrowed on which the
individual is personally liable or has pledged property, other than property
used in the activity. An individual is not considered to be at risk with
respect to amounts protected against loss through nonrecourse financing or
similar arrangements.
ALLOCATIONS OF FUND INCOME AND LOSS
The Fund will rely on the opinion of Counsel as to the validity of
allocations of Fund income, gain, loss, deduction or credit. Based upon
Counsel's conclusion that allocations made pursuant to the Agreement will be in
accordance with the current provisions of the Code and the accompanying
Regulations, including Regulations issued in December, 1985, Counsel is of the
opinion that such allocations should be respected.
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<PAGE> 35
The conclusion that allocations made in accordance with the Agreement
will be sustained is based upon the following discussion. Code Section 704(a)
provides generally that a partner's distributive share of income, gain, loss,
deduction or credit will be determined by the partnership agreement unless
otherwise provided in the Income Tax Chapter of the Internal Revenue Code. Code
Section 704(b) indicates, however, that where the agreement does not have
"substantial economic effect," each partner's distributive share must be
determined in accordance with the partner's interest in the partnership,
determined by taking into account all facts and circumstances. The question of
whether a partnership allocation has substantial economic effect requires an
inherently factual determination.
Regulations under Code section 704(b) set forth specific criteria for
determining whether an allocation has substantial economic effect. Such
Regulations set forth a two part test which initially requires that the
allocation have economic effect and, thereafter, requires that the economic
effect be substantial.
a. Economic Effect. An allocation will be considered to have
economic effect under the "Primary Economic Effect Test" of the Final
Regulations if throughout the full term of the partnership, the partnership
agreement provides: (i) for the determination and maintenance of capital
accounts in accordance with the Final Regulations; (ii) liquidation proceeds
upon dissolution of the partnership are to be distributed in accordance with
the partners' positive capital account balances determined after taking into
account all capital account adjustments for the partnership taxable year during
which such liquidation occurs; and (iii) any partner with a deficit capital
account following the liquidation of his or her interest in the partnership is
required to restore the amount of such deficit to the partnership, to be paid
to creditors or distributed to partners with positive capital account balances.
The Operating Agreement does not require the Investors to fund deficit
capital account balances. Therefore, the Primary Economic Effect Test will not
be satisfied by the Fund. However, the allocations of net income and net loss
to the Investors will be respected if the Alternate Economic Effect Test is
satisfied (see discussion below) or if the allocations to the Investors
otherwise are in accordance with the Investors' interests in the Fund (also
discussed below).
If the Primary Economic Effect Test is not satisfied, the Section 704
Regulations provide an alternate test for economic effect (the "Alternate
Economic Effect Test") under which allocations of Fund tax items which do not
reduce an Investor's capital account below zero (or increase a deficit balance
in such person's capital account) will nevertheless have economic effect if
requirements (i) and (ii) of the Primary Economic Effect Test are satisfied and
if the partnership agreement contains a "qualified income offset"; i.e., the
partnership agreement provides that a partner who unexpectedly receives an
adjustment, allocation or distribution of certain prescribed items which cause
his capital account to fall below zero will be allocated income and gain in an
amount and manner sufficient to eliminate such deficit balance as quickly as
possible. The Operating Agreement contains such a provision.
The Section 704 Regulations provide a special set of tests where
losses are attributable to nonrecourse debt. In order for allocations of such
losses to be deemed to be in accordance with the "partners' interests in the
partnership," the following requirements must be met: (i) the capital account
maintenance and capital account liquidation rules set forth in the Section 704
Regulations, as described above, must be satisfied throughout the term of the
partnership; (ii) nonrecourse deductions must be allocated in a manner
"reasonably consistent" with allocations, which have substantial economic
effect, of some other significant item (other than minimum gain) attributable
to the property securing the nonrecourse liabilities; (iii) the partnership
agreement must contain a "minimum gain chargeback" provision; and (iv) all
other material allocations and capital account adjustments must be valid under
the Section 704 Regulations. For purposes of requirement (v), minimum gain
generally is the gain a
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<PAGE> 36
partnership would have to recognize if the property securing the partnership's
nonrecourse debt were foreclosed upon, which typically would be the excess of
the amount of the debt over the tax basis of the property. A "minimum gain
chargeback" provision provides that if there is a decrease in the partnership's
minimum gain during the year, all partners with deficit capital account
balances at the end of the year will be allocated items of income and gain for
that year so as to eliminate the deficits as quickly as possible. The
Operating Agreement contains such a provision.
b. Substantiality. The economic effect of a partnership
allocation must further be substantial under the Final Regulations. An effect
is substantial when there is a reasonable possibility that the allocations will
substantially affect the dollar amounts to be received from the partnership,
independent of tax consequences. One general rule and two specific rules must
be satisfied. The general rule renders an allocation's economic effect
insubstantial if, at the time the allocation becomes a part of the partnership
agreement:
(1) the after-tax economic consequences of at least one partner may, in
present value terms, be enhanced compared to such consequences if the
allocation (or allocations) were not contained in the partnership
agreement, and
(2) there is a strong likelihood that the after-tax economic consequences
of no partner will, in present value terms, be substantially
diminished compared to such consequences if the allocations were not
contained in the partnership agreement. Treas. Reg. Section
1.704-1(b)(2)(iii)(a).
The two specific rules for substantiality relate to the shifting of
tax consequences and to transitory allocations. Under the shifting of tax
consequences rule, an allocation's economic effect is deemed insubstantial if,
at the time the allocation became a part of the partnership agreement, there is
a strong likelihood that (1) the net adjustments to the partners' capital
accounts for the taxable year would not differ from the net adjustments if the
allocations were not in the partnership agreement, and (2) the total tax
liabilities for the partners would be less than if the allocations were not in
the partnership agreement, taking into account the partners' respective
nonpartnership tax attributes. Treas. Reg. Section 1.704-1(b)(2)(ii)(b).
The transitory allocations rule looks to whether the partnership
agreement provides for the possibility that one or more original allocations
will be largely offset by one or more other allocations, or "offsetting
allocations." Provided an offset will not likely occur within 5 years, the
transitory allocation rule will not render the economic effect of the
allocations insubstantial. Treas. Reg. Section 1.704-1(b)(2)(iii)(c).
The Operating Agreement provides that if an allocation of net loss to
an Investor would reduce his or her capital account below zero (or increase a
deficit balance in the capital account), such allocation will instead be made
to Investors having positive capital account balances. The Operating Agreement
also contains a "qualified income offset" provision and a "minimum gain
chargeback" provision requiring that in certain situations where an Investor's
capital account balance falls below zero at the end of any year, the Investor
will be allocated items of income and gain as quickly as possible to the extent
necessary to eliminate the deficit capital account balance. In addition, the
Operating Agreement provides (i) for the determination and maintenance of the
Investors' capital accounts in accordance with the Section 704 Regulations; and
(ii) that liquidating distributions will in all cases be made in accordance
with the positive capital account balances of the Investors. Counsel is of the
opinion that, based on these factors, and the Section 704 Regulations, it is
more likely than not that the Funds's allocations of net income and net loss to
the Investors will not be substantially modified if challenged by the IRS.
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The Operating Agreement gives the Directors the right to amend the tax
allocation provisions of the Operating Agreement to take account of any
amendments to Code Section 704 or the Regulations thereunder or any
administrative or judicial interpretations thereof.
If the allocations are determined not to have the requisite
substantial economic effect, then each partner's distributive share would be
determined in accordance with the partner's interest in the Fund by taking into
account all facts and circumstances. The allocations that might result from a
successful challenge by the Service could be less favorable than those set
forth in the Operating Agreement.
RETROACTIVE ALLOCATIONS
Items of partnership income, gain, loss, deduction or credit are
allocable to a partner only if realized, paid or incurred by the partnership
during the portion of the year in which the partners are admitted to the
partnership and not retroactively to periods prior to entry.
In 1984, the IRS issued a news release (IR-84-129) announcing that
partnerships using the "interim-closing-of-the-books" method to take into
account the varying interests of partners during a taxable year will be
permitted to use a "semi-monthly convention" pursuant to which the varying
interests of partners used to determine their distributive shares of
partnership items is determined by treating partners entering during the first
15 days of the month as entering on the first day of the month and partners
entering after the 15th day of the month as entering on the 16th day of the
month. It is likely that the Internal Revenue Service will permit partnerships
to use other conventions not described in this news release. For example, the
release states that the IRS is preparing regulations that will address this and
other issues, "including the possible use of other conventions..." Further,
the Conference Committee Report accompanying the enactment of the relevant
Internal Revenue Code provision provides that "the conferees understand that
the Secretary will provide for a monthly convention by regulation... Under
this convention, partners entering after the 15th day of a month will be
treated as entering on the first day of the following month and partners
entering during the first 15 days of a month will be treated as entering on the
first day of the month. The Fund intends to use such a monthly convention.
Thus, any Investors who are admitted to the Fund on an early date will be
allocated a larger share of Fund income, losses, credits and deductions than
Investors entering the Fund at a later date.
DEDUCTIBILITY OF MISCELLANEOUS EXPENSES
Under Section 67 of the Internal Revenue Code, non-corporate taxpayers
may deduct certain miscellaneous expenses (e.g., investment advisory fees, tax
preparation fees, unreimbursed employee expenses, subscriptions to professional
journals, etc.) only to the extent such deductions exceed in the aggregate 2%
of the taxpayer's adjusted gross income. Each Investor's share of the
management fee paid by the Fund to the Advisor will be included among the
miscellaneous expenses potentially subject to the 2% floor. However,
corporations and tax exempt organizations are not affected by the 2% floor.
For individual taxpayers, such expenses are also potentially subject to the
overall limitation of itemized deductions to the excess of such deductions over
the lesser of (i) 3% of the difference between the Investor's adjusted gross
income and the "applicable amount" ($111,800 for individuals and married
couples filing jointly, and $55,900 for married individuals filing separately)
or (ii) 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
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DEDUCTIBILITY OF FEES AND OPERATING EXPENSES GENERALLY
The Fund may incur and deduct certain items that may be subject to
close scrutiny by the IRS to determine whether they represent expenses of the
Fund that are currently deductible, rather than capital expenditures or
expenditures that cannot provide any present or future tax benefit.
a. Reasonableness. In determining whether an expenditure is
properly deductible, the Service, upon audit, would make a facts and
circumstances inquiry as to the "reasonableness" of the expenditure. Generally
an expenditure is determined to be reasonable where it is paid or incurred as
the result of arm's-length negotiations between unrelated parties. Under the
Operating Agreement and the Advisory and Management Agreement, certain
expenditures incurred on behalf of the Fund will be paid by the Fund to the
Advisor or affiliates for services rendered by the Advisors or affiliates on
behalf of the Fund. The Service, upon examination, may challenge any of such
fees or reimbursements as being excessive and not reasonable. Accordingly, to
the extent the Fund could not establish the reasonableness of such expenses,
they would be disallowed. On the other hand, expenses arising from
arm's-length negotiations between unrelated parties should be respected as
reasonable. The Advisor anticipates that any such fees or reimbursements will
be reasonable in amount and properly deductible.
b. Capitalization or Amortization Requirement. In addition to
the above requirement, an expenditure that has a useful life extending
substantially beyond the tax year in which it was made will not be currently
deductible. Instead, such expenditure must be capitalized or amortized.
Treas. Reg. Section 1.461-1(a), 1.263-2(a). Case authority and revenue
rulings indicate that an expenditure must be capitalized or amortized when it
has a useful life in excess of one year.
DEDUCTIBILITY OF ORGANIZATION AND SYNDICATION EXPENDITURES
The Fund is expected to incur significant expenses for the offer and
sale of the Shares and for other syndication expenses. These amounts and any
other organization and syndication expenses, although financed by the deferral
of part of the purchase price of the Property, will be paid by the Fund. The
treatment of such expenditures should be as follows:
Under Code Section 709, a partnership is not permitted a current
deduction for organization expenses, but may elect to amortize such expenses
over a period of not less than sixty months. Organization expenses include
those expenses which are incident to the creation of the partnership,
chargeable to a capital account, and are of a character which, if expended
incident to the creation of a partnership having an ascertainable life, would
be amortized over such life. Illustrative of organization expenses, the
Regulations list legal fees for services incurred in negotiating and preparing
the partnership agreement, accounting fees for the establishment of a
partnership accounting system and certain other filing fees. The Regulations
indicate that the organization expenses to which the election to amortize
applies include only those expenditures incurred before the end of the taxable
year in which the partnership begins business. No amortization of any
organization expenditures incurred after the first year of Fund operations is
permitted.
Syndication expenses, to the contrary, are specifically excluded from
classification as organization expenses. Accordingly, such expenses must be
capitalized and are non-deductible and non-amortizable. The Regulations define
syndication expenses as expenses connected with the issuing and marketing of
interests in the partnership. Examples include brokerage fees, registration
fees, and legal fees of the issuer for securities advice and advice pertaining
to the adequacy of tax disclosures in the placement memorandum. Hence, selling
commissions paid to the Selling Agent for offering and selling the Shares will
not be deductible in any event.
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SALE OR OTHER DISPOSITION OF AN INVESTOR'S INTEREST
The Operating Agreement places certain restrictions on an Investor's
ability to assign, sell or otherwise dispose of his or her Shares. The
following discussion assumes that the Investor complies in all respects with
the requirements of the Operating Agreement.
Investors should be aware that they may be unable to sell their
interests because no market for such interests may exist. In the event an
Investor does dispose of his or her interest, however, such Investor's gain or
loss will be determined by the difference in the amount realized and the
adjusted basis of his interest.
Any gain or loss realized by a limited partner on a sale of a
partnership interest is generally taxable as long-term capital gain or loss if
the selling Investor has held his interest for longer than one year.
Investors should also note that under Code Section 708(b)(1)(B) a
partnership is terminated for federal tax purposes if, within a 12-month
period, there is a sale or disposition (other than by gift or inheritance) of
50 percent or more of the total interest in partnership capital and profits.
Notwithstanding that a partnership may continue under state law, the
Regulations indicate that where a partnership is technically terminated
pursuant to Code Section 708(b)(1)(B), the partnership will be deemed to
distribute all its property to the purchaser(s) and remaining partners in
accordance with their pro rata interests in liquidation of the "old"
partnership, and the purchaser(s) and remaining partners will be deemed to
contribute all the property to a "new" partnership. In addition, a termination
under Code Section 708 will result in the closing of the Fund's taxable year
pursuant to Code Section 706(c). Such termination of the Fund and closing of
Fund tax year could have an adverse impact on the Investors.
However, the admission of new partners (such as the Investors) to a
partnership does not generally give rise to a Section 708 termination, even
though the interests of existing partners are reduced by 50% or more. See Rev.
Rul. 75-423, 1975-2 CB 260.
In order to prevent a termination of the Fund under Code Section 708
as a result of sales or exchanges of 50 percent or more of the partnership
profits and capital interests, Section 7.1 of the Operating Agreement has a
prohibition against any sales, assignments, or exchanges, which in the opinion
of Counsel, would cause a Code Section 708 termination. Thus, as long as the
Investors adhere to the Agreement, problems inherent in a Code Section 708
technical termination should not arise with respect to the Fund.
SALE OR OTHER DISPOSITION OF FUND ASSETS
In the event the Fund disposes of any securities of its Portfolio
Companies, gain or loss will be realized and recognized under Code Section
1001, which provides that gain or loss is generally equal to the difference
between the amount realized and the adjusted basis.
Fund investments or sales of Fund assets may generate income that is
taxable to the Investors, regardless of whether actual distributions are made.
However, the Advisor believes that such an event is highly unlikely, and that
the Fund will be able to make distributions to Investors sufficient to allow
Investors to pay income taxes attributable to their ownership of Shares in the
Fund.
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TARGETED CAPITAL GAINS EXCLUSION
The Revenue Reconciliation Act of 1993 added to the Code Section 1202,
which permits the exclusion, for federal income tax purposes, of 50% of any
gain (subject to certain limitations) realized upon the sale or exchange of
"qualified small business stock" held more than five years. Generally,
qualified small business stock is stock of a small business corporation
acquired directly from the issuing corporation, which must at the time of
issuance and immediately thereafter have assets of not more than $50,000,000
and be actively engaged in the conduct of a trade or business not excluded by
law. Per investor and per investment, any gain, 50% of which may be excluded,
may not exceed the greater of ten times the cost of the investment or
$10,000,000. For the purpose of this limitation, an investment company is
treated as a single investor. It is possible that in some cases investments
made by the Fund will be in qualified small business stock, that the Fund will
hold such stock for more than five years and that the Fund will ultimately
dispose of such stock at a profit. If that were to occur, each Investor who
held his or her Shares at the time the Fund purchased the qualified small
business stock and at all times thereafter until the disposition of such stock
by the Fund would be entitled to exclude from his or her taxable income 50% of
such Investor's share of such gain, whether distributed or deemed distributed.
One half of any amount so excluded would be treated as a preference item for
alternative minimum tax purposes.
NORTH CAROLINA CREDITS FOR INVESTMENT IN QUALIFIED BUSINESSES
Individual Investors in the Fund may under certain circumstances be
entitled to credits against their North Carolina income taxes. To the extend
the Fund invests in certain "qualified businesses," the Fund will be eligible
for up to a 25% credit in the year following the investment, which will be
allocated to all Investors in accordance with their interests in the Fund.
However, qualifying for these tax credits will not be an overriding concern as
to the making or liquidation of portfolio investments.
REGISTRATION AS QUALIFIED GRANTEE BUSINESS
The Fund has been registered with the State of North Carolina as a
"qualified grantee business" for purposes of the credit against North Carolina
income taxes for investments in qualified business ventures and qualified
grantee businesses. Subject to the following discussion and the other
qualifications discussed in this Registration Statement, individual Investors
in the Fund who have North Carolina taxable income may claim as a credit
against North Carolina income taxes an amount equal to 25% of their investment
in the Fund up to a maximum credit of $50,000.
The credit is available for the year following the year of investment
in the Fund, so for investors admitted to the Fund in 1995 the credit would be
available against North Carolina income taxes for the year 1996 and available
for carryforward for up to five years. An Investor must file a claim for the
credit with the North Carolina Department of Revenue by April 15 of the year
following the year in which the investment is made (i.e., by April 15, 1996 for
Investors admitted to the Fund in 1995).
The maximum amount of credits available to all taxpayers in any year
is $12,000,000. If the total amount of credits claimed is greater than the
amount available, the state will allocate the available credits among claimants
on a pro rata basis. Investors will be notified of any reduction in claimed
credits as a result of such allocation on or before December 31 of the year
following the year in which the investment is made.
The credit for investment in the Fund would be independent of any
credits which might be claimed by the Fund and allocated to the Investors in
respect of the Fund's own investment in qualified
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<PAGE> 41
North Carolina business ventures, although each Investor would be subject to an
additional limitation in an aggregate amount of $50,000 per year for both types
of credit. Any aggregate unused credits from these two sources may be carried
forward for up to five years. An Investor's basis in Shares of the Fund is
generally required to be reduced for North Carolina purposes for credits
allowed.
THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE EXPLANATION OF THE
NORTH CAROLINA CREDIT FOR INVESTMENTS IN QUALIFIED BUSINESSES. EACH INVESTOR
SHOULD CONSULT HIS OR HER OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE AND
LOCAL TAX LAWS WHICH APPLY TO THE INVESTOR'S PARTICIPATION IN THE FUND.
UNRELATED BUSINESS TAXABLE INCOME
Certain entities, such as charitable and other organizations described
in Section 501(c) of the Code and trusts formed as part of profit sharing or
pension plans that qualify under Section 401(a) of the Code, are generally
exempt from tax. In addition, participants in pension plans normally do not
recognize gains or losses incurred by or passed through to such plans. The
Fund is permitted to sell interests to such tax-exempt entities. However,
investment by such entities involves complex tax, regulatory, and business
issues. THEREFORE, TAX-EXEMPT ENTITIES SHOULD CONSULT THEIR TAX AND BUSINESS
ADVISORS BEFORE INVESTING IN THE FUND.
Although tax-exempt entities do not generally pay taxes, such entities
are subject to tax on their unrelated business taxable income ("UBTI"), defined
below. An entity that generates UBTI is taxed on that income at regular
corporate or trust rates, as applicable. If the Fund generates income that
would be UBTI if generated by the tax-exempt Investor, such Investor will
realize UBTI whether or not such UBTI is actually distributed from the Fund.
Even though an Investor is allocated UBTI, this allocation will generally not
affect the tax-exempt status of the entity.
UBTI is the gross income derived by a tax-exempt entity from an
unrelated trade or business less the deductions mentioned above. Items that
are generally excludable from UBTI include dividends, gains from the sale or
exchange of property held for investment, rents from real property, interest,
and rents from personal property being leased as an incident to real property.
Therefore, it is anticipated that the operations of the Fund will not generate
UBTI to tax-exempt Investors.
Under the Fund Operating Agreement the Fund will use its best efforts
so as not to make any investment, incur any liability, or otherwise take any
action which would result in the realization by a tax-exempt member of
"unrelated business taxable income" within the meaning of Section 512 of the
Internal Revenue Code.
CODE SECTION 754 ELECTION
The Operating Agreement gives the Directors the power to cause the
Fund to make a Code Section 754 election. Such an election would permit the
Fund to make adjustments to the basis of the Fund Property: (1) under Code
Section 734(b) in the case of certain distributions of cash and Fund property,
and (2) under Code Section 743(b) in the case of certain transfers of an
interest in the Fund by a sale or exchange or upon the death of an Investor.
In the first instance, the adjustment is permitted to prevent double
taxation of the gain from appreciation in the value of the Property. For
example, where a withdrawing Investor receives a cash distribution in exchange
for his Fund interest, such distribution would include any increase in the
value
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of his interest resulting from appreciation in the Property. The Investor
would likely recognize gain on the distribution from the appreciation, but
since he received cash rather than property, the property which had appreciated
in value would get no corresponding increase in basis in the "hands" of the
Fund as a result of the gain recognized by such Investor. Should the Fund
thereafter sell the appreciated property, the remaining Investors would be
forced to recognize gain from the appreciation in value of the property,
including the distributee-Investor's proportionate share of the gain which he
had previously realized and recognized. The adjustment, therefore, allows the
Fund to obtain an increase in the basis of certain assets to the extent of the
gain recognized by the distributee-Investor from the appreciation in the value
of the Property.
With regard to a transferee, Code Section 743(b) permits the Fund to
adjust the basis of Fund property (with respect to the transferee-Investor
only) so that the transferee-Investor's proportionate share of the adjusted
basis of such property is equal to the initial cost basis of his Fund interest.
If such partner's cost basis includes amounts attributable to appreciation in
the value of the Property, the election will generally result in the
transferee-Investor recognizing less taxable income upon the disposition of the
property.
Certain disadvantages may result from making the Code Section 754
election. One problem is that once the election is made, it will apply with
respect to all subsequent distributions of property by the Fund and to all
subsequent transfers of interests in the Fund. Thus, in the event the Property
is declining in value, rather than appreciating, the election will be
unfavorable to the remaining partners in the case of a distribution to which
734(b) would apply, and unfavorable to the transferee in the case of a sale or
exchange to which 743(b) would apply. Secondly, a Code Section 754 election
could require a costly appraisal upon a distribution to an Investor or a
transfer of an Investor's interest. Investors should note, however, that if
the election is not made, an Investor's interest is likely to be less
marketable.
STATE AND LOCAL TAXES
Investors should consider the potential state and local income tax
consequences of an investment in the Fund. Each Investor is advised to consult
his own tax advisor to determine if the state or locality in which he is a
resident imposes a tax upon his share of the income or loss of the Fund.
The Fund's operations will be based in North Carolina, and thus an
Investor may be required to report his distributive share of income or loss in
North Carolina, whether or not the Investor is a resident. However, the
Advisor believes that the activities of the Fund in investing for long-term
capital appreciation will not be a "trade or business" and thus nonresidents of
North Carolina will not be required to include income from the Fund as North
Carolina income.
Investors should also be aware that the amount of deductions available
to the Fund for state income tax purposes may be different from those available
for federal income tax purposes in those states which do not fully coordinate
with federal income tax principles.
INVESTMENT BY EMPLOYEE BENEFIT PLANS AND
INDIVIDUAL RETIREMENT ACCOUNTS
A fiduciary of a pension, profit-sharing, or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), should consider fiduciary standards under ERISA in the context of
the plan's particular circumstances before authorizing an investment of all or
any portion of such plan's assets in the Fund. Among other factors, such
fiduciary should consider
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(i) whether the investment satisfies the prudence requirements of Section
404(a)(1)(B) of ERISA, (ii) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA, (iii) whether
the investment is in accordance with the documents and instruments governing
the plan as required by Section 404(a)(1)(D) of ERISA, (iv) whether the value
of the investment can be determined annually as required by Section 301(d)(5)
of ERISA and Revenue Ruling 80-155, 1980-1 C.B. 84, (v) how the definition of
the term "plan assets" under ERISA and the Department of Labor regulations
regarding the definition of "plan assets" affects the proposed investment, and
(vi) whether a prohibited transaction in violation of Section 406 of ERISA or
Section 408(e)(2) of the Internal Revenue Code of 1986 ("Code") will occur. In
addition, persons who control the investments of individual retirement accounts
("IRAs") should consider the applicable items listed above.
The definition of the term "plan assets" under ERISA and recently
finalized Department of Labor regulations must be considered to determine
whether the assets held by the Fund will be treated as "plan assets." The
treatment of the Fund's assets as "plan assets" is important because it
determines whether (a) those who have discretion with respect to the management
of the Fund and its assets are considered fiduciaries of an investing plan and
thus subject to ERISA's fiduciary duties and liabilities, (b) the other
fiduciaries of an investing plan may have improperly delegated asset management
responsibility to the management of the Fund, (c) the Fund's assets must be
reported to the Department of Labor under ERISA's reporting and disclosure
rules, and (d) the prohibited transactions rules under ERISA and the Internal
Revenue Code apply to the Fund's activities.
The "plan asset" regulations will not apply to the Fund if less than
25% of the Shares are held by employee benefit plans. In addition, the
regulations will not apply the Fund so long as it qualifies as a Venture
Capital Operating Company ("VCOC"). Generally, the regulations define a VCOC
as a company which invests at least one-half of its assets in entities in which
the company has management rights, which rights are actually exercised to some
degree. In determining whether the company has management rights, factors such
as the right to elect a director, the right to inspect books and records of a
non-public issuer, and ownership of a significant portion of the equity of a
non-public issuer will be considered. It is the intention of the Advisor to
conduct the operations of Fund so that it falls within the definition of a
VCOC.
In addition to the fiduciary standards under ERISA, fiduciaries of
ERISA plans IRAs should consider the unrelated business income tax implications
of investing in the Fund. See "Federal Tax Aspects."
SUMMARY OF THE OPERATING AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN PROVISIONS OF THE
OPERATING AGREEMENT WHICH HAVE NOT BEEN DISCUSSED ELSEWHERE IN THIS
REGISTRATION STATEMENT. THIS SUMMARY DOES NOT PURPORT TO BE A COMPLETE SUMMARY
OF ALL MATTERS SET FORTH IN THAT DOCUMENT. THIS SECTION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE COMPLETE DOCUMENT FILED AS AN EXHIBIT HERETO.
(Section references cited below refer to sections in the Operating Agreement,
and capitalized terms which are not defined herein are defined in the Operating
Agreement.)
CAPITAL CONTRIBUTIONS
Directors. The Directors are not obligated to make capital
contributions to the Fund.
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Investors. Assuming all 1,000 Shares are sold, the Investors will
contribute an aggregate of $25,000,000 to the capital of the Fund payable in
full upon subscription.
No Investor may withdraw his or her capital from the Fund without the
approval of the Directors, nor will any Investor receive interest on his or her
capital. The Directors are not responsible for the return of capital of any
Investor.
CASH DISTRIBUTIONS
The Fund intends to make distribute in the first quarter of each year
the net proceeds from dispositions of portfolio investments which occurred
during the preceding year, after making provision for expenses, including the
payment of management fees, reserves and possible investment in other existing
Portfolio Companies. The Fund anticipates that distributions to Investors will
in any event be sufficient to defray the Federal and state taxes attributable
to the Investors' receipt of taxable income as a result of investment in the
Fund. (See "Risk Factors -- Taxable Income.")
ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS
Net profits and net losses of the Fund shall be allocated to the
Investors generally in accordance with their ownership of Shares, provided
however that under applicable tax law and the Operating Agreement losses will
not be allocated to any Investor that would result in the Investor's having a
negative capital account. All distributions and, in general, all allocations
to the Investors shall be in proportion to the number of Shares owned by each
Investor as compared to the aggregate number of Shares owned by all Investors.
LIMITATION ON TRANSFER OF FUND INTERESTS
An Investor will be required to covenant that he or she is acquiring
the Shares for investment purposes only and not with a view to the resale or
transfer thereof. Transfers by Investors of their Shares are prohibited
without the written consent of the Directors. If an Investor desires to
transfer Shares with the consent of the Directors, the Investor must first give
notice to the Directors of the terms of such transfer. In no event shall an
assignee of an Investor be substituted as an Investor in the place of his
assignor without the prior written consent of the Directors. An assignee who
does not become a substituted Investor has no rights in the Fund except to
receive his or her share of profits, losses, distributions and benefits to
which the assignor would otherwise be entitled. In addition to the consent of
the Directors, the following conditions must be met before an assignee of an
Investor can become a substituted Investor: (i) a duly executed and
acknowledged instrument of assignment has been filed with the Fund setting
forth that the assignee becomes a substituted Investor in the place of the
assignor, (ii) the Fund interest being acquired by the assignee consists of the
entire interest of the assigning Investor, and (iii) the assignor and the
assignee execute and acknowledge such other instruments as the Directors may
deem necessary or desirable to effect such admission.
THERE ARE SEVERE RESTRICTIONS ON TRANSFERS OF SHARES AND THERE IS NO
LIQUIDITY IN THE INVESTMENT IN THE SHARES.
In addition, the Directors may in their discretion require as a
condition precedent to the transfer of a Fund interest, delivery to the Fund of
an opinion of counsel satisfactory to the Directors to the effect that such
transfer does not constitute a violation of the Securities Act of 1933, as
amended, or any applicable state securities or real estate syndication laws and
the transfer will not cause the partnership to cease to be classified as a
partnership for federal income tax purposes. Section 708 of the Code
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provides that a partnership will terminate for federal income tax purposes then
50% or more of the total interests in partnership capital and profits are sold
or exchanged within any period of 12 consecutive months. Therefore, the
Directors will not permit any assignment which might terminate the Fund for
federal income tax purposes. Any assignment of Fund interests to which the
Directors do not consent shall be deemed void ab initio.
REPORTS TO INVESTORS
The Directors will cause the Fund to deliver to the Investors a number
of reports including quarterly reports from the Directors and audited annual
financial statements, annual balance sheets and annual profit and loss
statements; and all information necessary for the preparation of each
Investor's federal income tax return including a Form K-l (which shall be
delivered on or before March 31 of each year).
TERM OF FUND
The Fund shall continue for a seven-year term, subject to the
Directors' right to extend for up to two additional two-year periods, with
additional extensions requiring the consent of the holders of a majority of the
Shares, unless sooner terminated upon the happening of any one or more of the
following events:
(a) upon the removal, dissolution, voluntary or involuntary
adjudication of bankruptcy, or liquidation or receivership or
assignment for the benefit of creditors or other withdrawal of
any of the following Directors: W. Clay Hamner, David C.
Blivin or E. Lee Bryan, unless a majority in interest of the
Investors elect to continue the business of the Fund and, if
there is no remaining Director, appoint a new Director; or
(b) upon the sale (or other disposition) of all or substantially
all of the assets of the Fund; or
(c) upon the Directors' election to terminate the Fund; or
(d) upon the occurrence of any event which, under North Carolina
law, causes the dissolution or termination of the Fund.
Upon any termination or dissolution of the Fund, the winding up of the
Fund's affairs will be conducted by the Directors or by another person selected
by the holders of a majority of the Shares if no Director remains to act as
Director. In winding up the Fund, the Directors may arrange for the collection
and disbursement to the Investors of future receipts from the Fund's assets,
either by themselves or others, or may sell the Fund's assets for such
consideration and on such terms as shall be consistent with obtaining the fair
market value thereof.
REIMBURSEMENT OF EXPENSES OF THE ADVISOR
The Advisor will bear certain costs associated with managing and
administering the Fund, including salaries and benefits paid to personnel of
the Advisor, office rental, office equipment, property and casualty insurance,
janitorial and utilities expenses associated with the Advisor's office space,
bookkeeping, and general travel and entertainment expenses. The Fund will
reimburse the Advisor for expenses directly related to investment activities
conducted by the Advisor on behalf of the Fund, including stationary, postage,
telephone and photocopy expenses, dues for membership in industry associations,
fees and expenses of outside consultants, attorneys, accountants and auditors,
organizational and marketing expenses, and expenses associated with the
oversight of Portfolio Companies, including travel and entertainment expenses
directly attributable thereto. To the extent reasonably practicable, the
Advisor will negotiate for the recovery of such expenses from the Portfolio
Companies to which they relate.
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MISCELLANEOUS FUND PROVISIONS
The Directors have the sole right to manage the business of the Fund
and no Investor may participate in or control the Fund's business. The
Investors have voting rights only in certain limited situations, including the
election of the Directors, the approval or termination of investment advisory
contracts, the selection of the Fund's accountants, the extension of the term
of the Fund after the Director's two discretionary two-year extensions, the
amendment of the Operating Agreement, the authorization of certain
extraordinary transactions, and certain other items.
The books and records of the Fund will be available at the Fund's
office for inspection by the Investors upon reasonable notice, at reasonable
hours, during the business day.
AMENDMENT OF OPERATING AGREEMENT
The Operating Agreement may generally be amended by the consent of the
Directors and the holders of more than 66 2/3 of the Shares. Certain
amendments require the unanimous consent of the Investors.
FEDERAL SECURITIES ACTS
The Shares offered hereby were not registered under the 1933 Act. The
Shares were offered in compliance with applicable state securities laws and
pursuant to an exemption from federal registration under the 1933 Act pursuant
to Regulation D as promulgated under the 1933 Act to a limited number of
purchasers able to bear the economic risks thereof, with each of such
purchasers (or his purchaser-representative) possessing a level of expertise,
knowledge and sophistication in matters such as those described herein so as to
make intelligently and knowingly a proper economic decision relative to the
acquisition of Fund interests. All Investors were required to represent that
the Share or Shares being purchased were being acquired for their own account
for investment and not with a view to distribution. The Shares may not be
sold, transferred or otherwise disposed of by the Investor and must, therefore,
be held indefinitely unless they are hereafter registered under the 1933 Act,
or, in the opinion of counsel satisfactory to the Fund and its counsel, an
exemption from registration under the 1933 Act is available.
There is no right to require registration of these Shares under the
1933 Act, and, in view of the nature of this transaction, the Fund does not
intend to make available the current public information necessary to exempt the
Shares from registration under the 1933 Act pursuant to Rule 144 of the 1933
Act. The assignability of the Shares is further limited under the Operating
Agreement as above described.
The Fund is registering as an investment company under the 1940 Act
and the Advisor has registered as an investment adviser under the Investment
Advisers Act.
GLOSSARY OF TERMS
"Advisor" refers to Montrose Venture Partners, LLC, a North Carolina limited
liability company whose principal members are W. Clay Hamner, David C. Blivin
and E. Lee Bryan.
"Custodian" refers to First Union National Bank of North Carolina
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"Director" refers to a person appointed or elected as a member of the Fund's
Board of Directors, initially consisting of W. Clay Hamner, David C. Blivin, E.
Lee Bryan, Terry Sanford and Wayne M. Rogers.
"Escrow Agent" refers to First Union National Bank, N.A.
"Fund" refers to Southeast Interactive Technology Fund I, LLC, a limited
liability company organized under the laws of North Carolina.
"Investors," unless the context requires otherwise, refers to the purchasers of
the Shares who will be admitted to the Fund.
"Offering" refers to the offering of Shares to prospective investors under the
conditions set forth in this Registration Statement.
"Operating Agreement" refers to that certain Operating Agreement to be entered
into by W. Clay Hamner, David C. Blivin and E. Lee Bryan as initial members and
filed herewith as an Exhibit.
"Portfolio Company" refers to a company in which the Fund invests.
"Selling Agent" refers to Interstate/Johnson Lane Corporation, Charlotte, North
Carolina, which has been retained to offer and sell the Shares to Investors.
"Share" refers to the interest of an Investor representing an initial capital
contribution of $25,000.
"Sovereign" means Sovereign Capital Management, Inc., d/b/a Sovereign Advisers.
42
<PAGE> 48
PART C - OTHER INFORMATION
<TABLE>
<S> <C> <C>
Item 24. Financial Statement and Exhibits
1. Financial Statements of the Fund Attached hereto.
2. Exhibits The exhibits to this Registration Statement are
listed in the Exhibit Index.
Item 25. Marketing Agreements Not Applicable.
Item 26. Other Expenses of Issuance and Distribution The following are estimates of the fees and expenses
to be incurred by the Fund in connection with the
Offering:
SEC Registration Fee $ 1,000
Legal Fees 120,000
Blue Sky Fees 9,000
Accounting Fees 40,000
Printing Expenses 10,000
Miscellaneous Costs 70,000
--------
Total $250,000
========
Item 27. Persons Controlled by or Under Common The Fund will not be controlled by or
Control under common control with any person other than the
Investors whose subscriptions are accepted.
Item 28. Indemnification See "Fiduciary Responsibility of the Advisor and the
Directors."
Item 30. Business and Other Connections of the See "Management of the Fund; Conflicts
Investment Advisor of Interest; Related Parties and Transactions with
Affiliates."
Item 31. Location of Accounts and Records Accounts, books and other records required by
Section 31(a) of the 1940 Act will be maintained and
kept at the offices of Montrose Venture Partners,
LLC at 2200 West Main Street, Suite 900, Durham,
North Carolina 27705.
Item 32. Management Services Except as described in Parts A and B of this
Registration Statement, the fund is not a party to
any material management-related service contract.
Item 33. Undertakings Not Applicable
</TABLE>
43
<PAGE> 49
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, hereunto duly authorized, in the City of Durham, and
State of North Carolina, on the 20th day of May, 1996.
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
By: /s/ DAVID C. BLIVIN
-----------------------------------------
David C. Blivin, Manager
44
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
2(a) Articles of Organization of Southeast Interactive
Technology Fund I, LLC*
2(b) Not Applicable
2(c) Not Applicable
2(d) Operating Agreement, dated January 16, 1995, of Southeast
Interactive Technology Fund I, LLC*
2(e) Not Applicable
2(f) Not Applicable
2(g)(i) Advisory and Management Agreement, dated June 14, 1995,
by and between Southeast Interactive Technology Fund I, LLC
and Montrose Venture Partners, LLC *
2(g)(ii) Investment Advisory Agreement, dated June 13, 1995,
by and between Southeast Interactive Technology Fund I, LLC
and Sovereign Advisors, Inc.*
2(h) Not Applicable
2(i) Not Applicable
2(j) Custodian Agreement, dated June 14, 1995, by and between
Southeast Interactive Technology Fund I, LLC and
First Union National Bank of North Carolina *
2(k)(i) Escrow Agreement, dated as of January 16, 1995,
by and between Interstate/Johnson Lane Corporation,
Southeast Interactive Technology Fund I, LLC
and First Union National Bank of North Carolina
(the "Escrow Agreement") *
2(k)(ii) Amendment to the Escrow Agreement, dated April 24, 1995*
2(k)(iii) Stock Purchase Agreement, dated June 15, 1995, by and
between Southeast Interactive Technology Fund I, LLC
and Virtus Corporation *
2(k)(iv) Registration Rights Agreement, dated June 15, 1995, by
and between Southeast Interactive Technology Fund I, LLC and
Virtus Corporation *
2(k)(v) Investment Agreement By and Among Southeast
Interactive Technology Fund I, LLC and One Room
Systems, Inc.*
2(k)(vi) Series A Convertible Preferred Stock Purchase
Agreement, dated August 30, 1995, by and among
NETTECH, INC. and multiple purchasers including
Southeast Interactive Technology Fund I, LLC*
2(k)(vii) Registration Rights Agreement, dated August 30, 1995,
by and between NETTECH, INC. and Southeast
Interactive Technology Fund I, LLC*
2(k)(viii) Put and Call Agreement, dated August 30, 1995, by and
between NETTECH, INC. and Southeast Interactive
Technology Fund I, LLC*
2(k)(ix) Voting Agreement, dated August 30, 1995, by and
between NETTECH, INC. and Southeast Interactive
Technology Fund I, LLC*
2(k)(x) Conditional Stock Purchase Warrant of NETTECH, INC.
Issue to Southeast Interactive Technology
Fund, LLC on August 30, 1995*
2(k)(xi) Fixed Rate Convertible Note Due December 15, 1996
issued by Wave Interactive Network, Inc. to
Southeast Interactive Technology Fund I, LLC*
2(k)(xii) Warrant to Purchase Common Stock dated December 15,
1995, issued by Wave Interactive Network, Inc. to
Southeast Interactive Technology Fund I, LLC*
2(l) Not Applicable
2(m) Not Applicable
2(n) Not Applicable
2(o) Not Applicable
2(p) Form of Subscription Agreement and Power of Attorney *
2(q) Not Applicable
27 Financial Data Schedule
</TABLE>
_________________
* Previously filed.
45
<PAGE> 51
SOUTHEAST INTERACTIVE
TECHNOLOGY FUND I, LLC
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
<PAGE> 52
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Independent Accountants F-1
Financial Statements:
Statement of Assets and Liabilities F-2
Schedule of Investments F-3
Statement of Operations F-4
Statement of Changes in Net Assets F-5
Statement of Cash Flows F-6
Financial Highlights F-7
Notes to Financial Statements F-8
</TABLE>
<PAGE> 53
Appendix
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Southeast Interactive Technology Fund I, LLC
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations, of
changes in net assets and of cash flows, and the financial highlights present
fairly, in all material respects, the financial position of Southeast
Interactive Technology Fund I, LLC (the "Fund") at December 31, 1995, and the
results of its operations, the changes in its net assets, the cash flows and
the financial highlights for the period June 15, 1995 (commencement of
operations) through December 31, 1995 in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 1995 by correspondence with the
custodian and bond issuer, provides a reasonable basis for the opinion
expressed above.
As explained in Note 1, the financial statements include securities, valued at
$1,387,457 (25 percent of net assets), whose values have been estimated by the
Board of Directors in the absence of readily ascertainable market values. We
have reviewed the procedures used by the Board of Directors in arriving at its
estimate of value of such securities and have inspected underlying
documentation, and, in the circumstances, we believe the procedures are
reasonable and the documentation appropriate. However, those estimated values
may differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material to the
financial statements.
Price Waterhouse LLP
Raleigh, North Carolina
February 16, 1996
F-1
<PAGE> 54
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value, (cost $1,349,994) (Note 1) $ 1,387,457
Cash and cash equivalents (Note 2) 4,134,213
Organization costs, net of $5,346 accumulated amortization 74,841
Interest receivable 2,479
Other assets 25,108
-----------
Total assets 5,624,098
-----------
LIABILITIES
Accounts payable 42,020
-----------
Total liabilities 42,020
-----------
Net assets $ 5,582,078
===========
Net assets were comprised of:
Shares, no par value, 244 shares authorized, issued
and outstanding (Note 1) $ 5,568,267
Accumulated net investment loss (23,652)
Unrealized gain on investments 37,463
-----------
$ 5,582,078
===========
Net asset value per share based on 244 shares
issued and outstanding $ 22,877.37
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 55
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
SHARES VALUE
<S> <C> <C>
Convertible preferred stocks - 82%
Virtus Corporation 29,268 $ 637,457
NetTech, Inc. 250,000 500,000
-----------
Total convertible preferred stocks (cost $1,099,994) 1,137,457
-----------
Convertible bonds - 18%
Wave Interactive Network, Inc. - 10%
debenture due December 15, 1996 (cost $250,000) $ 250,000 250,000
-----------
Total - 100% (cost $1,349,994) $ 1,387,457
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 56
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
STATEMENT OF OPERATIONS
PERIOD FROM JUNE 15, 1995(*) THROUGH DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Investment income
Interest $ 126,713
---------
Expenses
Investment advisory fee (Note 3) 78,541
Professional fees 37,000
Custodian and cash manager fees 10,105
Amortization of organization costs 5,346
Other expenses 19,373
------
Total expenses 150,365
---------
Investment loss - net (23,652)
---------
Unrealized gain on investments 37,463
---------
Net increase in net assets resulting from operations $ 13,811
=========
</TABLE>
- ------------------
(*) Commencement of operations
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 57
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 15, 1995(*) THROUGH DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Increase in net assets from operations
Investment loss - net $ (23,652)
Unrealized gain on investments 37,463
-----------
Net increase in net assets resulting from operations 13,811
Net assets
Beginning of period -
Offering proceeds - net 5,568,267
-----------
End of period $ 5,582,078
===========
</TABLE>
- -------------------
(*) Commencement of operations
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 58
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
STATEMENT OF CASH FLOWS
PERIOD FROM JUNE 15, 1995(*) THROUGH DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net increase in net assets resulting from operations $ 13,811
Adjustments to reconcile net increase in net assets
resulting from operations to net cash used by
operating activities:
Amortization of organization costs 5,346
Unrealized gain on investments (37,463)
Change in interest receivable (2,479)
Change in accounts payable 42,020
Change in other assets (25,108)
Organization costs (80,187)
----------
Net cash used by operating activities (84,060)
----------
Cash flows from investing activities:
Purchases of investments (1,349,994)
----------
Net cash used by investing activities (1,349,994)
----------
Cash flows from financing activities:
Offering proceeds, net of commissions 5,734,000
Offering costs charged to capital (165,733)
----------
Net cash provided by financing activities 5,568,267
----------
Net increase in cash 4,134,213
Cash at beginning of period -
----------
Cash at end of period $4,134,213
==========
</TABLE>
- --------------
(*) Commencement of operations
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 59
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
FINANCIAL HIGHLIGHTS
PERIOD FROM JUNE 15, 1995(*) THROUGH DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Selected per share data and ratios for a share outstanding throughout the period
<TABLE>
<S> <C>
Per Share Data:
Investment income $ 519.32
Expenses 616.25
----------
Investment loss - net (96.93)
Unrealized gain on investments 153.54
----------
Net increase in net assets resulting
from operations 56.61
Net asset value:
Beginning of period -
Offering proceeds, net of commissions 23,500.00
Offering costs charged to capital (679.24)
----------
End of period $22,877.37
==========
Ratios:
Ratio of expenses to average net assets (1) 4.98%
Ratio of investment income - net, to average
net assets (1) 4.20%
Portfolio turnover rate 0
</TABLE>
- --------------------
(1) Annualized
(*) Commencement of operations
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 60
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 15, 1995 THROUGH DECEMBER 31, 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
THE ORGANIZATION
Southeast Interactive Technology Fund I, LLC (the "Fund") is a limited
liability company organized in the State of North Carolina. The Fund
was registered under the Investment Company Act of 1940 on May 26,
1995, as a closed-end non-diversified management investment company.
The Fund has been formed to invest principally in equity and
equity-related securities of technology companies located in the
Southeast and involved in the fields of interactive information and
visual technologies.
SECURITIES VALUATION
All securities have been valued by the board of directors after
considering certain pertinent factors, including the results of
operations of portfolio companies and subsequent private placement
transactions. There are no quoted market prices for any of the
portfolio companies' shares or debentures.
USE OF ESTIMATES
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 of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
FEDERAL INCOME TAXES
The Fund is classified as a partnership for federal income tax
purposes under Subchapter K of the Internal Revenue Code. As such,
the Fund must file an annual information return setting forth all
items of income, gain, loss, credit and tax preference of the Fund.
All investors will be taxed on their allocable shares of the Fund's
taxable income. Therefore, no federal income tax provision is
required.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund intends to distribute in the first quarter of each year the
net proceeds from dispositions of portfolio investments which occurred
during the preceding year, after making provisions for expenses,
including the payment of management fees, reserves and possible
investment in other existing portfolio companies. All net profits and
net losses of the Fund shall be allocated to the investors in
proportion of their shares owned as compared to the aggregate number
of shares owned by all investors in the Fund.
F-8
<PAGE> 61
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 15, 1995 THROUGH DECEMBER 31, 1995
- --------------------------------------------------------------------------------
ORGANIZATION AND OFFERING COSTS
The Fund incurred organization costs of $80,187, which have been
capitalized and are being charged to operations ratably over a period
of sixty months from the commencement of operations. Costs of
$165,733 incurred by the Fund in connection with the offering of
shares were recorded as a reduction of capital.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are considered to include short-term, highly
liquid investments with original maturities of three months or less.
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
<S> <C>
Operating account $ 109,213
Certificate of deposit (First Union National Bank,
5.62% due 1/4/96) 4,025,000
-----------
$ 4,134,213
===========
</TABLE>
3. INVESTMENT ADVISOR
The Fund pays advisory fees for investment management and advisory
services under an operating agreement with Montrose Venture Partners,
LLC ("MVP"). Three Directors of the Fund are managers of MVP. This
agreement provides for fees to be computed as follows, beginning in
the first full year of operations:
(1) two and one-half percent (2.5%) of the net asset value of the
Fund as of the valuation date, as defined by the operating
agreement, will be payable in twelve equal monthly
instalments, due on or before the last day of each month;
(2) two and one-half percent (2.5%) of the net asset value of the
Fund as of the valuation date, as defined by the operating
agreement, will be accrued and paid, from time to time, as the
Fund liquidates portfolio investments. However, only 20% of
the profit realized upon liquidation of a portfolio investment
will be available for payment of accrued management fees until
the investors in the Fund have received cumulative
distributions equal to the gross proceeds of the offering.
The investment advisory fee for the first year or part thereof will be
in the amount of two and one-half percent (2.5%) of the gross offering
proceeds, prorated for the portion of the first year after the initial
closing date. Investment advisory fees of $78,541 were paid to MVP
during 1995.
F-9
<PAGE> 62
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JUNE 15, 1995 THROUGH DECEMBER 31, 1995
- --------------------------------------------------------------------------------
4. RELATED PARTIES
The Fund invested $849,994 in companies owned in part by technical
advisors to MVP, the Fund's investment advisor. Technical advisors
provide consulting services and do not function in a decision-making
capacity.
The Fund paid commission costs of $61,000 to MVP. Additionally, the
placement agent, a company listed on the New York Stock Exchange, was
paid commission costs of $305,000. One Director of the Fund serves on
the placement agent's board of directors.
Approximately $54,000 in offering related costs were paid to companies
owned by a Director of the Fund who is also a Manager of MVP. Other
costs of $2,680 were paid to the same Director during 1995.
F-10
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1995 FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS AMENDED
REGISTRATION STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUN-15-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,349,994
<INVESTMENTS-AT-VALUE> 1,387,457
<RECEIVABLES> 0
<ASSETS-OTHER> 25,108
<OTHER-ITEMS-ASSETS> 4,211,533
<TOTAL-ASSETS> 5,624,098
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,020
<TOTAL-LIABILITIES> 42,020
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,568,267
<SHARES-COMMON-STOCK> 244
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (23,652)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 37,463
<NET-ASSETS> 5,582,078
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 126,713
<OTHER-INCOME> 0
<EXPENSES-NET> 150,365
<NET-INVESTMENT-INCOME> (23,652)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 37,463
<NET-CHANGE-FROM-OPS> 13,811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,582,078
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 78,541
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 150,365
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> (96.93)
<PER-SHARE-GAIN-APPREC> 153.54
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22,877.37
<EXPENSE-RATIO> 4.98<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>ANNUALIZED
</FN>
</TABLE>
