<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number 814-00141
VENTURE LENDING & LEASING II, INC.
----------------------------------
(Exact Name of Registrant as specified in its charter)
MARYLAND 77-0456589
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2010 NORTH FIRST STREET, SUITE 310, SAN JOSE, CA 95131
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 436-8577
--------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (i) filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (ii) has been subject
to such filing requirements for the past 90 days.
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding as of November 1, 1997
- ------------------------------ ----------------------------------
Common Stock, $.001 par value 7,048.50
Page 1 of 13; Exhibit Index appears on Page 13
<PAGE>
VENTURE LENDING & LEASING II, INC.
INDEX
PAGE NUMBER
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position (Unaudited) 3
September 30, 1997
Statement of Operations (Unaudited) 4
For the period from September 15, 1997(commencement of
operations) to September 30, 1997
Statement of Changes in Shareholders Equity (Unaudited) 5
For the period from September 15, 1997(commencement of
operations) to September 30, 1997
Statement of Cash Flows (Unaudited) 6
For the period from September 15, 1997(commencement of
operations) to September 30, 1997
Notes to Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial 11 - 12
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits 13
SIGNATURES 13
2
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
AS OF SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------
September 30, 1997
------------------
ASSETS
Loans and leases, net of unearned income $ 525,125
Cash and cash equivalents 6,398,869
Investments in Warrants 36,000
Deferred organizational expenses 181,425
Interest Receivable 17,128
Accounts receivable 63,000
Other assets 2,577
------------
Total assets 7,224,124
------------
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses 125,665
Management fees 77,244
Refundable commitment fees 54,000
------------
Total liabilities 256,909
------------
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 200,000,000
shares authorized; issued and outstanding,
7,048.50 shares 7
Capital in excess of par value 7,048,493
Accumulated Deficit (81,285)
------------
Total shareholders' equity 6,967,215
------------
Total liabilities & shareholders'
equity $ 7,224,124
------------
------------
The accompanying notes are an integral part of these statements.
3
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD FROM SEPTEMBER 15, 1997 (COMMENCEMENT OF OPERATIONS), TO
SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------
INVESTMENT INCOME:
Interest on loans and leases $ 4,510
Interest on short-term investments 12,959
---------
Total Investment Income 17,469
---------
EXPENSES:
Management fees 77,244
Legal fees 12,955
Directors' fees and expenses 4,750
Amortization of organizational expenses 3,183
Regulatory reporting 93
Custody fees 192
Other operating expenses 337
---------
Total Expenses 98,754
---------
Net Loss $ (81,285)
---------
---------
Net Loss Per Share $ (11.58)
---------
---------
Weighted Average Shares Outstanding 7,022
---------
---------
The accompanying notes are an integral part of these statements.
4
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE PERIOD FROM SEPTEMBER 15, 1997 (COMMENCEMENT OF OPERATIONS), TO
SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Capital in
------------------------ Excess of Retained
Shares Amount Par Value Deficit Total
---------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, September 15, 1997 50.00 $ - $ 50,000 $ - $ 50,000
Shares sold 6,998.50 $ 7 $ 6,998,493 $ - $ 6,998,500
Net loss $ (81,285) $ (81,285)
-------- ------ ------------ ---------- ------------
Balance, September 30, 1997 7,048.50 $ 7 $ 7,048,493 $ (81,285) $ 6,967,215
-------- ------ ------------ ---------- ------------
-------- ------ ------------ ---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE PERIOD FROM SEPTEMBER 15, 1997 (COMMENCEMENT OF OPERATIONS), TO
SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (81,285)
Adjustments to reconcile net investment income
to net cash provided by operating activities:
Amortization of organizational expenses 3,183
Increase in accounts payable 202,910
Increase in refundable commitment fees 54,000
Increase in accounts receivable (80,128)
Increase in other assets (2,577)
------------
Net cash provided by operating activities 96,103
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (616,872)
Principal payments on loans and leases 91,747
Acquisition of warrants and common stock (36,000)
Deferred organizational expenses (184,609)
------------
Net cash used in investing activities (745,734)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net 7,048,500
Distributions to shareholders 0
------------
Net cash provided by financing activities 7,048,500
------------
Net Increase in cash and cash equivalents 6,398,869
------------
Cash and Cash Equivalents:
Beginning of period 0
------------
End of period $ 6,398,869
------------
------------
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
VENTURE LENDING & LEASING II, INC.
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 1997 (UNAUDITED)
________________________________________________________________________
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Venture Lending & Leasing II, Inc. (the "Fund") was incorporated in Maryland
on May 19, 1997 as a non-diversified, closed-end management investment
company electing status as a business development company under the
Investment Company Act of 1940. Prior to commencing its operations on
September 15, 1997 the Fund had no operations other than the sale to Westech
Investment Advisors, Inc. ("Westech Advisors") of fifty shares of Common
Stock, $.001 par value ("common stock"), for $50,000. Commencing with the
first year of its investment operations, the Fund will seek to meet the
requirements, including diversification requirements, to qualify as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986.
Costs incurred in connection with the organization of the Fund were paid
initially by Westech Advisors, however, the Fund reimbursed Westech Advisors
for such cost and paid other organizational costs directly which total
$184,600 as of September 30, 1997. This amount has been deferred and is
being amortized on the straight-line basis over a period of 60 months from
the date the Fund commenced operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financials statements and the reported amounts and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
VALUATION OF INVESTMENTS - The Fund anticipates that substantially all of its
portfolio investments (other than short-term investments) will consist of
securities that at the time of acquisition are subject to restrictions on
sale and for which no ready market will exist. Venture loans and leases are
privately negotiated transactions, and there is no established trading market
in which such loans or leases can be sold. Substantially all the Fund's
investments are restricted securities that cannot be sold publicly without
prior agreement with the issuer to register the securities under the 1933
Act, or by selling the securities under Rule 144 or the rules under the 1933
Act which permit only limited sales under specified conditions.
Investment in loans and leases are valued at their original purchase price less
amortization of principal unless, pursuant to procedures established by the
Fund's Board of Directors, Westech Advisors determines that amortized cost does
not represent fair value. Short-term debt instruments with 60 days or less
remaining to maturity are valued by the amortized cost method.
7
<PAGE>
VENTURE LENDING & LEASING II, INC.
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 1997 (UNAUDITED)
________________________________________________________________________
The Fund does not hold any short-term debt instruments that have a period of
maturity exceeding 60 days.
Warrants that are received in connection with loan and lease transactions
generally are valued at a nominal value assigned at the time of acquisition,
which generally occurs at the first drawdown under the commitment,
thereafter, warrants with readily ascertainable market values will be
assigned a fair value based on the difference, if any, between the exercise
price of the warrant and the market value of equity securities for which the
warrants may be exercised, adjusted for illiquidity.
CASH & CASH EQUIVALENTS - Cash & cash equivalents consist of cash on hand,
demand deposits in banks and repurchase agreements with original maturities
of 90 days or less.
LOANS & LEASES - Unearned income and commitment fees on loans and leases are
recognized using the effective interest method over the term of the loan or
lease. Commitment fees represent fees received for commitments upon which no
drawdowns have yet been made. The fee is included in unearned income and
recognized as described above.
RESERVES FOR LOSSES ON LOANS - Reserves for losses on loans are maintained at
levels that, in the opinion of management, are adequate to absorb losses
incurred in the loan portfolio. As of September 30, 1997 the Fund has no
reserve for non-performing loans.
FEDERAL TAX STATUS - Unless and until the Fund meets the requirements to
qualify as a RIC, it will be taxed as an ordinary corporation on its taxable
income for that year (even if that income is distributed to its shareholders)
and all distributions out of its earnings and profits will be taxable to
shareholders as ordinary income. If and when the Fund qualifies as a RIC, it
will not pay any federal corporate income tax on income which is distributed
to shareholders (pass-through status).
3. SUMMARY OF LOANS AND LEASES:
Loans and leases generally are made to borrowers pursuant to commitments
whereby the Fund commits to finance assets up to a specified amount for the
term of the commitment, upon the terms and subject to the conditions
specified by such commitment. At September 30, 1997, there are eleven
commitments totaling $16.3 million of which $617 thousand in loans and leases
have been disbursed with $525 thousand outstanding.
8
<PAGE>
VENTURE LENDING & LEASING II, INC.
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 1997 (UNAUDITED)
________________________________________________________________________
The Fund provides asset-based financing primarily to start-up and emerging
growth venture-capital-backed companies. As a result, the Fund is subject to
general credit risk associated with such companies.
4. WARRANTS:
Warrants are acquired to purchase equity securities of borrower or lessee in
connection with asset financings. As of September 30, 1997 the Fund held
warrants in two companies to purchase preferred stock of the companies. The
warrants are assigned a nominal value of $36,000.
5. LONG - TERM DEBT FACILITY:
As of September 30, 1997 the Fund had no long term debt facility. Westech
Advisors is currently negotiating terms and conditions with a syndicate of
banks.
6. CAPITAL STOCK:
There are 200,000,000 shares of $.001 par value common stock authorized.
7,048.50 shares are issued and outstanding as of September 30, 1997.
The Fund has subscription agreements in effect with its shareholders under
which shareholders will purchase shares of the Fund, up to their full
committed capital amount, upon capital calls delivered at least fifteen days
before payment is due. Based on $70.4 million subscriptions received at the
first closing on September 15, 1997, $63.4million in unfunded and uncalled
capital commitments remained outstanding as of September 30, 1997. The Fund
expects to have over $100 million in committed capital by its final closing.
7. MANAGEMENT:
Westech Advisors serves as the Fund's Investment Manager and Siguler Guff
Advisers (the "Adviser") will serve as adviser to Westech Advisors with
respect to Westech Advisors' administrative duties to the Fund. As
compensation for their services to the Fund, Westech Advisors and the Adviser
to Westech Advisors, together, will receive a management fee ("Management
Fee"), at an annual rate of 2.5% of the Fund's committed capital computed and
paid quarterly for the first two years following the Fund's initial private
offering; and at an annual rate of 2.5% of the Fund's total assets (including
amounts derived from borrowed funds) as of the last day of each fiscal
quarter thereafter.
9
<PAGE>
VENTURE LENDING & LEASING II, INC.
NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 1997 (UNAUDITED)
________________________________________________________________________
In addition to the Management Fee, Westech Advisors and the Adviser will
together receive a monthly incentive fee (the "Incentive Fee") after
shareholders have received a return of funds ("Payout") equal to the
following: (a) cumulative dividends and distributions equal to 100% of all
amounts paid, as of the date of calculation, by shareholders to the Fund (and
not including placement fees paid to the Placement Agent by certain of the
shareholders) for the purchase of Shares plus (b) a preferred return on all
amounts paid, as of the date of calculation, equal to 8% cumulative,
non-compounded annual return on such amounts. After Payout has been
achieved, all amounts available to be paid as dividends and distributions to
shareholders in accordance with the Fund's distribution policies will be
distributed as follows: 80% as dividends to the Fund's shareholders, and 20%
to Westech Advisors and the Adviser, together, as the Incentive Fee. The
Incentive Fee shall not accrue or be paid until the Fund is no longer
permitted to make capital calls under the Subscription Agreements or
irrevocably waives any right to do so.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Venture Lending & Leasing II, Inc. ("Fund") is a closed-end,
non-diversified management investment company electing status as a business
development company under the Investment Company Act of 1940 ("1940 Act").
The Fund's investment objective is to achieve a high total return. The Fund
will provide asset-based financing to carefully selected venture
capital-backed companies, in the form of secured loans, installment sales
contracts or equipment leases. The Fund generally will receive warrants to
acquire equity securities in connection with its portfolio investments.
The Fund's shares of Common Stock, $.001 par value ("Shares") are sold
to subscribers pursuant to one or more capital calls to be made from time to
time until September 15, 2001. The Fund will seek to require payment by
investors pursuant to each capital call of only that portion of the total
dollar amount subscribed for that the Fund expects will be needed to fund
commitments entered into within a reasonable time after such capital call.
The Fund has made one capital call since inception for a total of 10% of
committed capital. Total committed capital as of September 30, 1997 was $70.4
million; a total of $7.0 million has been called.
RESULTS OF OPERATIONS -- FOR THE PERIOD FROM SEPTEMBER 15, 1997 (COMMENCEMENT
OF OPERATIONS), TO SEPTEMBER 30, 1997
Total investment income for the period ending September 30, 1997 was $17
thousand as the Fund did not commence operations until the last half of the
third month of the quarter. Investment income consisted of interest on cash
balances and venture loans outstanding during the period. Investment income
should increase in future periods as the Fund continues to make new
investments.
Expenses for the period ending September 30, 1997 were $99 thousand,
resulting in net loss of $81 thousand. On a per share basis, for the period
ending September 30, 1997 net loss was $11.58.
The primary expense of the Fund was the management fee of $77 thousand
incurred during the period, which is imposed at an annual rate of 2.5% of
committed capital. Because the management fee is imposed on committed
capital, it will represent more than 2.5% of invested assets (and reduce net
income correspondingly) until invested assets equal or exceed committed
capital. The Fund incurred $184 thousand in organizational expenses through
September 30, 1997. The Fund reimbursed Westech Advisors for the portion of
these costs that they paid prior to the closing of the Fund. This amount has
been deferred and is being amortized on a straight-line basis over a period
of 60 months from the date the Fund commenced operations.
Expenses other than the management fee, and interest expense are
relatively fixed and should decrease as a percentage of investment income as
the Fund's assets increase. Interest and
11
<PAGE>
bad debt expenses were zero for the period as the Fund has funded only two
loans and currently has no debt outstanding. Actual future bad debt expense
will depend on the success of the fund's investments. Interest expense is
expected to become a significant portion of the Fund's operating expense as
the Fund begins to use borrowed money in addition to its equity capital to
fund loans.
LIQUIDITY AND CAPITAL RESOURCES -- SEPTEMBER 30, 1997
Total capital committed to the purchase of shares pursuant to
subscription agreements was approximately $70.4 million at September 30,
1997. As of September 30, 1997, 10% of this committed capital was called to
fund investments in venture loans and leases and to meet the Fund's expenses.
Additional capital may be drawn from subscribers upon 15 days' notice.
The Fund is in the process of establishing a credit facility with a
syndicate of major banks to finance the acquisition of asset-based loans and
leases.
As of September 30, 1997, 89% of the Fund's assets consisted of cash and
cash equivalents. The Fund invested $617 thousand in venture loans and leases
during the quarter, and net loan amounts outstanding after amortization stand
at approximately $525 thousand. Amounts committed but undrawn increased to
approximately $15.7 million. Because venture loans and leases are privately
negotiated transactions, investments in these assets are relatively illiquid.
The Fund is anticipating to hold a second closing during the quarter ended
December 1997. In conjunction with this closing the fund will call 10% of
the capital subscribed for in such closing. The Fund expects to have over
$100 million in committed capital by its final closing.
The Fund will seek to meet the requirements to qualify for the special
pass-through status available to "regulated investment companies" ("RICs")
under the Internal Revenue Code, and thus to be relieved of federal income
tax on that part of its net investment income and realized capital gains that
it distributes to shareholders. To meet this requirement, the Fund must,
among other things, reach a specified level of diversification of its assets.
If the Fund qualifies as a RIC, it will become subject to continuing
diversification requirements, as well as other requirements mandating annual
distributions of net income and realized gain, and limiting the nature and
source of the Fund's income. The Fund cannot predict with certainty when or
if it will achieve RIC status.
12
<PAGE>
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 8, 1997 Westech Investment Advisors, Inc., as the sole shareholder
of the Fund on that date, consented to the following:
- - The appointment of each of the following persons as a Director of the Fund:
Ronald W. Swenson
Salvador O. Gutierrez
Arthur W. Aeder
Louis W. Moelchert, Jr.
S. Allan Johnson;
- - The execution and delivery of a Management Agreement between the Fund on
the one hand, and Westech Advisors and Siguler Guff Advisers, on the other
hand;
- - The execution and delivery of an Engagement Letter, among Robertson,
Stephens & Company, LLC, Westech Advisors and Siguler Guff Advisers; and
- - The appointment of Arthur Andersen LLP as the independent auditors of
the Fund.
ITEM 6. EXHIBITS
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
VENTURE LENDING & LEASING II, INC.
----------------------------------
Registrant
/s/ Salvador O. Gutierrez
Date: November 14, 1997 --------------------------------------
Salvador O. Gutierrez
President and Chief Financial Officer
[Duly Authorized Officer]
/s/ Ronald W. Swenson
Date: November 14, 1997 --------------------------------------
Ronald W. Swenson
Chairman
[Chief Executive Officer]
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> SEP-15-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 561,125
<INVESTMENTS-AT-VALUE> 561,125
<RECEIVABLES> 63,000
<ASSETS-OTHER> 6,599,999
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,224,124
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 256,909
<TOTAL-LIABILITIES> 256,909
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,048,500
<SHARES-COMMON-STOCK> 7,049
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (81,285)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 6,967,215
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,469
<OTHER-INCOME> 0
<EXPENSES-NET> 98,754
<NET-INVESTMENT-INCOME> (81,285)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> (81,285)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,049
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6,967,215
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 77,244
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 98,754
<AVERAGE-NET-ASSETS> 3,483,608
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> (11.58)
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 988.47
<EXPENSE-RATIO> 2.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
