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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 814-00141
VENTURE LENDING & LEASING II, INC.
(Exact name of registrant as specified in its charter)
Maryland 77-0456589
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2010 North First Street, Suite 310, San Jose, CA 95131
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(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (408) 436-8577
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock,
$0.001 par value
Indicate by check mark whether the registrant has (i) filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days: Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated be reference in Part II of this Form 10-K or any amendment to this
Form 10-K: X
As the registrant's shares are not publicly-traded, the aggregate market value
of the voting stock held by non-affiliates of the registrant cannot be
determined.
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 15, 1998 was 22,000.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT DESCRIPTION 10-K PART
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Specifically Identified Portions of the Registrant's
Proxy Statement for the Annual Meeting of Shareholders
to be held November 11, 1998 III
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PART I
ITEM 1. BUSINESS.
INTRODUCTION.
Venture Lending & Leasing II, Inc. ("Fund") is a closed-end,
non-diversified management investment company electing status as a business
development company ("BDC") under the Investment Company Act of 1940 ("1940
Act"). The Fund's investment objective is to achieve a high total return.
The Fund will provide asset-based financing to carefully selected venture
capital-backed companies, in the form of secured loans, installment sales
contracts or equipment leases. The Fund generally will receive warrants to
acquire equity securities in connection with its portfolio investments. The
Fund's Investment Manager is Westech Investment Advisors, Inc. ("Westech
Advisors" or the "Manager"). Siguler Guff Advisers, LLC ("Adviser to the
Manager") will act as adviser to Westech Advisors with respect to its
administrative duties to the Fund.
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 two
capital calls since inception for a total of 20% of committed capital. Total
committed capital as of June 30, 1998 was $110 million; a total of $22.0 million
has been called.
INVESTMENT PROGRAM.
GENERAL. As a BDC, the Fund will invest at least 70% of its total assets
("qualifying assets") in securities of companies that qualify as "eligible
portfolio companies." An eligible portfolio company generally is a United
States company that is not an investment company and that (i) does not have a
class of securities registered on an exchange or included in the Federal Reserve
Board's over-the-counter margin list; (ii) is actively controlled by a BDC and
has an affiliate of a BDC on its board of directors; or (iii) meets such other
criteria as may be established by the SEC. See "Regulation." The Fund may
invest up to 30% of its total assets in non-qualifying assets, including
companies that are not eligible portfolio companies (for example, because the
company's securities are listed on the National Association of Securities
Dealers' Automated Quotation System) and eligible portfolio companies as to
which the Fund does not offer to make available significant managerial
assistance. The foregoing percentages are determined, in the case of financings
in which the Fund commits to provide financing prior to funding the commitment,
by the amount of the Fund's total assets represented by the value of the maximum
amount of securities to be issued by the borrower or lessee to the Fund pursuant
to such commitment.
VENTURE LOANS AND LEASES. Venture loans generally consist of a promissory
note secured by the equipment or other assets to be purchased by the borrower.
The Fund generally obtains a security interest in the assets financed and
receives periodic payments of interest and principal, and generally receives a
final payment constituting additional interest at the end of the transaction's
term. Venture leases consist of a lease from the Fund to the lessee of the
assets to be financed, with periodic payments of rent and, in most cases, with a
put option to sell the assets to the borrower at the end of the lease term for a
predetermined or formula price. The interest rate and amortization terms of
venture loans, the rental rate and put provisions
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of leases and all other transaction terms are individually negotiated between
the Fund and each borrower or lessee. Because the Fund seeks to qualify as a
"regulated investment company" ("RIC") under the Internal Revenue Code of 1986
("Internal Revenue Code"), provisions of the Internal Revenue Code restrict the
terms upon which the Fund may enter into venture leases and the extent to which
venture leases may be used, and the Fund anticipates structuring the majority of
its transactions as venture loans.
Typically, loans or leases are structured as commitments by the Fund to
finance asset acquisitions by the borrower or lessee over a specified period of
time. The commitment of the Fund to finance future asset acquisitions is
typically subject to the absence of any default under the loan or lease and
compliance by the borrower with requirements relating to, among other things,
the type of assets to be acquired. Although the Fund's commitments generally
provide that the Fund is not required to continue to fund additional asset
purchases if there is a material adverse change in the borrower's or lessee's
financial condition, it is possible that a borrower's or lessee's financial
condition will not be as strong at the time the Fund finances an asset
acquisition as it was at the time the commitment was entered into.
WARRANTS AND EQUITY SECURITIES. The Fund generally acquires warrants to
purchase equity securities of the borrower or lessee in connection with asset
financings. The terms of the warrants, including the expiration date, exercise
price and terms of the equity security for which the warrant may be exercised,
are negotiated individually with each borrower or lessee. Substantially all the
warrants and underlying equity securities are restricted securities under the
1933 Act at the time of issuance; the Fund generally negotiates registration
rights with the borrower or lessee that may provide (i) "piggyback" registration
rights, which permit the Fund under certain circumstances to include some or all
of the securities owned by it in a registration statement filed by the borrower
or lessee or (ii) under rare circumstances, "demand" registration rights
permitting the Fund under certain circumstances to require the borrower or
lessee to register the securities under the 1933 Act (in some cases at the
Fund's expense).
INVESTMENT POLICIES.
For purposes of these investment policies and unless otherwise specified,
references to the percentage of the Fund's total assets "invested" in securities
of a company will be deemed to refer, in the case of financings in which the
Fund commits to provide financing prior to funding the commitment, to the amount
of the Fund's total assets represented by the value of the maximum amount of
securities to be issued by the borrower or lessee to the Fund pursuant to such
commitment; the Fund will not be required to divest securities in its portfolio
or decline to fund an existing commitment because of a subsequent change in the
value of securities the Fund has previously acquired or committed to purchase.
DIVERSIFICATION STANDARDS. The Fund is classified as a "non-diversified"
closed-end investment company under the 1940 Act. However the Fund seeks to
qualify as a RIC, and therefore must meet diversification standards under the
Internal Revenue Code.
To qualify as a RIC, the Fund must meet the issuer diversification
standards under the Internal Revenue Code that require that, at the close of
each quarter of the Fund's taxable year, (i) not more than 25% of the market
value of its total assets is invested in the securities of a single issuer and
(ii) at least 50% of the market value of its total assets is represented by
cash, cash items, government securities, securities of other RICs and other
securities (with each investment in such other securities limited so that not
more than 5% of the market value of the Fund's total assets is invested in the
securities of a single issuer and the Fund
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does not own more than 10% of the outstanding voting securities of a single
issuer). For purposes of the diversification requirements under the Internal
Revenue Code, the percentage of the Fund's total assets "invested" in securities
of a company will be deemed to refer, in the case of financings in which the
Fund commits to provide financing prior to funding the commitment, to the amount
of the Fund's total assets represented by the value of the securities issued by
the borrower or lessee to the Fund at the time each portion of the commitment is
funded.
The Fund will invest no more than 25% of its total assets in securities of
companies in any single industry. The broad industry categories in which the
Fund anticipates that most of its investments will fall (and within each of
which there may be several "industries" for purposes of the industry
diversification policy) include computer and semiconductor-related,
medical/biotechnology and communications.
INVESTMENT GUIDELINES. In selecting investments for the Fund's portfolio,
the Manager will endeavor to meet the investment guidelines established by the
Fund's Board of Directors. The Fund may, however, make investments that do not
conform to one or more of these guidelines when deemed appropriate by the
Manager. Such investments might be made if the Manager believes that a failure
to conform in one area is offset by exceptional strength in another or is
compensated for by a higher yield, favorable warrant issuance or other
attractive transaction terms or features.
LEVERAGE. The Fund is permitted to borrow money from and issue debt
securities to banks, insurance companies and other lenders to obtain additional
funds to originate venture loans and leases. Under the 1940 Act, the Fund may
not incur borrowings unless, immediately after the borrowing is incurred, such
borrowings would have "asset coverage" of at least 200 percent. "Asset
coverage" means the ratio which the value of the Fund's total assets, less all
liabilities not represented by the borrowings and any other liabilities
constituting "senior securities" under the 1940 Act, bears to the aggregate
amount of such borrowings and senior securities. The practical effect of this
limitation is to limit the Fund's borrowings and other senior securities to 50%
of its total assets less its liabilities other than the borrowings and other
senior securities.
The use of leverage increases investment risk. The Fund's lenders require
that the Fund pledge portfolio assets as collateral for loans. If the Fund is
unable to service the borrowings, the Fund may risk the loss of such pledged
assets. Lenders also require that the Fund agree to loan covenants limiting the
Fund's ability to incur additional debt or otherwise limiting the Fund's
flexibility, and loan agreements may provide for acceleration of the maturity of
the indebtedness if certain financial tests are not met.
TEMPORARY INVESTMENTS. Pending investment in asset financing transactions
and pending distributions, the Fund invests excess cash in (i) securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities, (ii)
repurchase agreements fully collateralized by U.S. government securities or
(iii) short-term high-quality debt instruments of U.S. corporations. All such
investments will mature in one year or less. The U.S. government securities in
which the Fund may invest include U.S. government securities backed by the full
faith and credit of the U.S. government (such as Treasury bills, notes and
bonds) as well as securities backed only by the credit of the issuing agency.
Corporate securities in which the Fund may invest include commercial paper,
bankers' acceptances and certificates of deposit of domestic or foreign issuers.
The Fund also may enter into repurchase agreements that are fully
collateralized by U.S. government securities with banks or recognized securities
dealers, in which the Fund purchases a U.S. government
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security from the institution and simultaneously agrees to resell it to the
seller at an agreed-upon date and price. The repurchase price is related to an
agreed-upon market rate of interest rather than the coupon of the debt security
and, in that sense, these agreements are analogous to secured loans from the
Fund to the seller. Repurchase agreements carry certain risks not associated
with direct investments in securities, including possible declines in the market
value of the underlying securities and delays and costs to the Fund if the other
party to the transaction defaults.
OTHER INVESTMENT POLICIES. The Fund will not sell securities short,
purchase securities on margin (except to the extent the Fund's permitted
borrowings are deemed to constitute margin purchases), write puts or calls,
purchase or sell commodities or commodity contracts or purchase or sell real
estate. The Fund will not underwrite the securities of other companies, except
to the extent the Fund may be deemed an underwriter upon the disposition of
restricted securities acquired in the ordinary course of the Fund's business.
THE FUND'S INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND INVESTMENT
GUIDELINES (OTHER THAN ITS STATUS AS A BDC) ARE NOT FUNDAMENTAL POLICIES AND MAY
BE CHANGED BY THE FUND'S BOARD OF DIRECTORS AT ANY TIME WITHOUT SHAREHOLDER
APPROVAL.
REGULATION.
Generally, to be eligible to elect BDC status, a company must engage in the
business of furnishing capital and offering significant managerial assistance to
"eligible portfolio companies," as defined below. More specifically, in order
to qualify as a BDC, a company must (i) be a domestic company; (ii) have
registered as a class of its securities or have filed a registration statement
with the SEC pursuant to Section 12 of the Securities Exchange Act of 1934;
(iii) operate for the purpose of investing in the securities of certain types of
eligible portfolio companies; (iv) offer to extend significant managerial
assistance to such eligible portfolio companies; (v) have a majority of
disinterested directors; and (vi) file (or under certain circumstances, intend
to file) a proper notice of election with the SEC.
"Making available significant managerial assistance" is defined under the
1940 Act, in relevant part, as (i) an arrangement whereby the business
development company, through its officers, directors, employees or general
partners, offers to provide and, if accepted, does provide, significant guidance
and counsel concerning the management, operations or business objectives of a
portfolio company; or (ii) the exercise by a business development company of a
controlling influence over the management or polices of the portfolio company by
the business development company acting individually or as part of a group
acting together which controls the portfolio company. The officers of the Fund
intend to offer to provide managerial assistance, including advice on equipment
acquisition and financing, cash flow and expense management, general financing
opportunities, acquisition opportunities and opportunities to access the public
securities markets, to the great majority of companies to whom the Fund provides
venture loans or leases. In some instances, officers of the Fund might serve on
the board of directors of borrowers or lessees.
An "eligible portfolio company" generally is a United States company that
is not an investment company and that (i) does not have a class of securities
registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a BDC and has an
affiliate of a BDC on its board of directors; or (iii) meets such other criteria
as may be established by the SEC. Control under the 1940 Act is presumed to
exist where a BDC owns more than 25% of the outstanding voting securities of the
eligible portfolio company.
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The 1940 Act prohibits or restricts companies subject to the 1940 Act from
investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms, and investment companies. Moreover, the
1940 Act limits the type of assets that BDCs may acquire to certain prescribed
qualifying assets and certain assets necessary for its operations (such as
office furniture, equipment, and facilities) if, at the time of acquisition,
less than 70% of the value of BDC's assets consist of qualifying assets.
Qualifying assets include: (i) privately acquired securities of companies that
were eligible portfolio companies at the time such BDC acquired their
securities; (ii) securities of bankrupt or insolvent companies; (iii) securities
of eligible portfolio companies controlled by a BDC; (iv) securities received in
exchange for or distributed in or with respect to any of the foregoing; and (v)
cash items, government securities and high-quality short-term debt. The 1940
Act also places restrictions on the nature of transactions in which, and the
persons from whom, securities can be purchased in order for the securities to be
considered qualifying assets. Such restrictions include limiting purchases to
transactions not involving a public offering and the requirement that securities
be acquired directly from either the portfolio company or its officers,
directors or affiliates.
The Fund, as a BDC, may sell its securities at a price that is below its
net asset value per share, provided that a majority of the Fund's disinterested
directors has determined that such sale would be in the best interests of the
Fund and its shareholders and upon the approval by the holders of a majority of
its outstanding voting securities, including a majority of the voting securities
held by non-affiliated persons, of such policy or practice within one year of
such sale. A majority of the disinterested directors also must determine in
good faith, in consultation with the underwriters of the offering if the
offering is underwritten, that the price of the securities being sold is not
less than a price which closely approximates market value of the securities,
less any distribution discounts or commissions. As defined in the 1940 Act, the
term "majority of the outstanding voting securities" of the Fund means the vote
of (i) 67% or more of the Fund's Shares present at a meeting, if the holders of
more than 50% of the outstanding Shares are present or represented by proxy, or
(ii) more than 50% of the Fund's outstanding Shares, whichever is less.
Many of the transactions involving a company and its affiliates (as well as
affiliates of those affiliates) which were prohibited without the prior approval
of the SEC under the 1940 Act prior to its amendment by the 1980 Provisions are
permissible for BDCs, including the Fund, upon the prior approval of a majority
of the Fund's disinterested directors and a majority of the directors having no
financial interest in the transactions. However, certain transactions involving
certain persons related to the Fund, including its directors, officers, and the
Managers, may still require the prior approval of the SEC. In general, (i) any
person who owns, controls, or holds power to vote, more than 5% of the Fund's
outstanding Shares (ii) any director, executive officer, or general partner of
that person; and (iii) any person who directly or indirectly controls, is
controlled by, or is under common control with, that person, must obtain the
prior approval of a majority of the Fund's disinterested directors, and, in some
situations, the prior approval of the SEC, before engaging in certain
transactions involving the person or any company controlled by the Fund. The
1940 Act generally does not restrict transactions between the Fund and its
eligible portfolio companies. While a BDC may change the nature of its business
so as to cease being a BDC (and in connection therewith withdraw its election to
be treated as a BDC) only if authorized to do so by a majority vote (as defined
by the 1940 Act) of its outstanding voting securities, shareholder approval of
changes in other fundamental investment policies of a BDC is not required (in
contrast to the general 1940 Act requirement, which requires shareholder
approval for a change in any fundamental investment policy).
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DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute to shareholders substantially all of its net
investment income and net realized capital gains, if any, as determined for
income tax purposes. Applicable law, including provisions of the 1940 Act, may
limit the amount of dividends and other distributions payable by the Fund.
Income dividends will generally be paid quarterly to shareholders of record on
the last day of each preceding calendar quarter end. Substantially all of the
Fund's net capital gain (the excess of net long-term capital gain over net
short-term capital loss) and net short-term capital gain, if any, will be
distributed annually with the Fund's final quarterly dividend distribution for
the year.
Until September 15, 2002, the Fund shall reinvest the proceeds of matured,
repaid or resold investments, net of required distributions to shareholders,
principal payments on borrowings and expenses or other obligations of the Fund,
in new loans or leases. Following that date, the Fund will begin to distribute
to investors all proceeds received from principal payments and sales of
investments, net of reserves and expenses, principal repayments on the Fund's
borrowings, amounts required to fund financing commitments entered into before
such date, and any amounts paid on exercise of warrants. Distributions of such
amounts are likely to cause annual distributions to exceed the earnings and
profits of the Fund available for distribution, in which case such excess will
be considered a tax free return of capital to a shareholder to the extent of the
shareholder's adjusted basis in his shares and then as capital gain. The Fund
may borrow money to fund shareholder distributions, to the extent consistent
with the 1940 Act and a prudent capital structure.
COMPETITION.
Other entities and individuals compete for investments similar to those
proposed to be made by the Fund, some of whom may have greater resources than
the Fund. Furthermore, the Fund's need to comply with provisions of the 1940
Act pertaining to BDCs and provisions of the Internal Revenue Code pertaining to
RICs might restrict the Fund's flexibility as compared with its competitors.
The need to compete for investment opportunities may make it necessary for the
Fund to offer borrowers or lessees more attractive transaction terms than
otherwise might be the case.
EMPLOYEES.
The Fund has no employees; all of its officers are officers and employees
of the Manager or the Adviser to the Manager, and all of its required services
are performed by officers and employees of the Manager or the Adviser to the
Manager.
ITEM 2. PROPERTIES.
All of the Fund's office space is provided by the Manager.
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ITEM 3. LEGAL PROCEEDINGS.
The Fund is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Fund's security holders during
the last quarter of the fiscal year ended June 30, 1998.
EXECUTIVE OFFICERS OF THE FUND
The following are the executive officers of the Fund. All officers serve
at the pleasure of the Board.
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NAME AND POSITION AGE OCCUPATION DURING PAST FIVE YEARS
WITH FUND
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Ronald W. Swenson, 53 President and Director, Westech Investment
Director, Chairman Advisors since 1994, and President and
and Chief Executive Director, Western Technology Investments since
Officer 1980.
Salvador O. 55 Senior Vice President and Director, Westech
Gutierrez, Director, Investment Advisors since 1994, and Senior Vice
President and Chief President, Western Technology Investment since
Financial Officer 1987.
George W. Siguler, 51 Managing Director, Siguler Guff Advisers &
Executive Vice affiliates since 1995; Managing Director of
President and Mitchell Hutchins Institutional Investors from
Advisory Director 1991 to 1995. Director and President,
Associated Capital Advisers, Inc. (investment
management firm) from 1990 to 1991, Vice
Chairman and a director of Monarch Capital
Corporation (financial services holding
company) from 1984 to 1991.
Patricia A. 62 Vice President, Westech Investment Advisors
Breshears, Vice since 1994; Administrator and Corporate
President and Secretary, Western Technology Investment
Secretary (venture leasing firm) since 1984.
Donald P. Spencer, 43 Managing Director, Siguler Guff Advisers and
Vice President and affiliates since 1995; Senior Vice President
Assistant Secretary (and other positions), Mitchell Hutchins
Institutional Investors and affiliates from
1989 to 1995.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
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The Fund's Common Stock is not listed on any securities exchange, and all
holders of the Fund's Common Stock are subject to agreements significantly
restricting the transferability of their shares.
The approximate number of holders of record of the Fund's Common Stock at
September 15, 1998 was 108.
The Fund has established a policy of declaring dividends on a quarterly
basis, but has not yet declared any dividends as there has not been sufficient
earnings to begin dividend payments. See "Dividends and Distributions" under
Item 1 for a description of the Fund's dividend policies.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain financial data and should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere in this Form 10-K. The selected financial data set
forth below has been derived from the audited financial statements.
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For the Period from
September 15, 1997
to June 30, 1998
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Statement of Operations Data:
Investment Income:
Interest on Loans and Leases $945,610
Interest on Short - Term investments 270,369
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Total Investment Income 1,215,979
Expenses:
Management Fee to Managers 2,183,048
Interest Expense 195,143
Other Expenses 245,173
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Total Expenses 2,623,364
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Net Investment Income (Loss) (1,407,385)
Net Unrealized Gain From Investment Transactions 643,692
Net Realized Gain From Investment Transactions 278,655
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Net Income (Loss) (485,038)
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Net Income (Loss) Per Share: $(38.70)
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Average Shares Outstanding 12,534
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Balance Sheet Data: As of June 30, 1998
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Total Assets $31,603,724
Bank Loans $9,008,210
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS -- PERIOD ENDED JUNE 30, 1998
Total investment income for the period ended June 30, 1998 was $1.2
million, of which $.9 million, consisted of interest on venture loans
outstanding. Remaining income consisted of interest on the temporary
investment of cash, pending investment in venture loans and leases or
application to the Fund's expenses. Interest on Loans and Leases is expected
to be the largest component of investment income in future periods as the
assets invested in Loans and Leases grows as a proportion of total assets.
Expenses for the period ended June 30, 1998 were $2.6 million, resulting
in a net investment loss of $1.4 million. Net income for the period ended June
30, 1998 of $.5 million includes an unrealized gain of $0.6 million and a
realized gain of $.3 million. Warrants with readily ascertainable market
values are assigned a fair value based on the difference, if any, between the
exercise price of the warrant and the fair value of the equity securities for
which the warrant may be exercised, adjusted for illiquidity. On a per share
basis, for the period ended June 30, 1998 the net loss was $38.70.
There were several factors that contributed to the net loss for the period
ended June 30, 1998. The Fund began operations on September 15, 1997 and had
no loans outstanding prior to that time. As of June 30, 1998, total assets
invested in venture loans stood at 103% of called capital, reflecting the
investment of capital called and additional borrowed funds. The most
significant factor contributing to the net loss for the period ended June 30,
1998 was the management fee of $2.2 million which is imposed at a rate of
2.5% of committed capital. The Funds total assets comprised a relatively low
percentage of committed capital during the period, therefor the management
fee for the period constituted a relatively high percentage of total assets.
Reducing the net loss for the period ended June 30, 1998 was interest generated
by the Fund's investments of $1.2 million and the realized and unrealized
gains from investment transactions of $.9 million.
LIQUIDITY AND CAPITAL RESOURCES -- JUNE 30, 1998
Total capital committed to the purchase of Shares pursuant to
subscription agreements was approximately $110 million at June 30, 1998. As
of June 30, 1998, $22 million of this committed capital was called to fund
investments in venture loans and leases and to meet the Fund's expenses.
The Fund has in place a $35 million revolving credit warehouse facility to
finance the acquisition of asset-based loans and leases. Outstanding balances
bear interest at either the financial institution's prime rate or 1.15% above
LIBOR. The Fund pays a commitment fee of .25% annually on the total average
amount of unused commitment with respect to this facility. Borrowings under the
facility are collateralized by the assets financed by the Fund under loans and
leases with assignment to the financial institution, plus other assets of the
Fund. As of June 30, 1998 the Fund had $9 million outstanding under this
facility.
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As of June 30, 1998, 22% of the Fund's assets consisted of cash and cash
equivalents. The Fund invested its assets in venture loans and leases during
the year. Amounts disbursed under the Fund's loan commitments were
approximately $25.4 million during the year ended June 30, 1998, and net loan
amounts outstanding after amortization increased to approximately $22.8 million.
Unfunded commitments were approximately $45.3 million.
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Year Ending Amount Principal Balance Unfunded
Disbursed Amortization Outstanding Commitments
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June 30, 1998 $25.4 million $2.6 million $22.8 million $45.3 million
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</TABLE>
Because venture loans and leases are privately negotiated transactions,
investments in these assets are relatively illiquid.
The Fund seeks to meet the requirements to qualify for the special
pass-through status available to "regulated investment companies" ("RICs") under
the Internal Revenue Code, and thus to be relieved of federal income tax on that
part of its net investment income and realized capital gains that it distributes
to shareholders. To qualify as a RIC, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gain) ("Distribution Requirement"). To the extent that the terms of the
Fund's venture loans provide for the receipt by the Fund of additional interest
at the end of the loan term or the terms of venture leases provide for the
receipt by the Fund of a purchase price for the asset at the end of the lease
term ("residual income"), the Fund would be required to accrue such residual
income over the life of the loan or lease, and to include such accrued income in
its gross income for each taxable year even if it receives no portion of such
residual income in that year. Thus, in order to meet the Distribution
Requirement and avoid payment of income taxes or an excise tax on undistributed
income, the Fund may be required in a particular year to distribute as a
dividend an amount in excess of the total amount of income it actually receives.
Those distributions will be made from the Fund's cash assets, from amounts
received through amortization of loans or leases or from borrowed funds.
This information has been derived from unaudited financial statements that,
in the opinion of management, include all normal recurring adjustments necessary
for a fair presentation of such information. The operating results for any
quarter are not necessarily indicative of results for any future period.
YEAR 2000 ISSUE
The fund utilizes software and related information technologies that
will be affected by the date change in the year 2000. The year 2000 issue
exists because many computer systems and applications currently use two-digit
date fields to designate a year. When the century date change occurs, certain
date-sensitive systems may recognize the year 2000 as 1900, or not at all.
This inability to recognize or properly treat the year 2000, may result in
a systems failure or cause systems to process critical financial and
operational information incorrectly. Additionally, many of the Fund's
customers and service providers use software and information technology that
could also be affected by the date change.
Based on ongoing assessments and testing, the Fund believes that there
is no material risk of business interruption as a result of computer errors or
inefficiencies. The Fund is also working with its vendors and customers to
obtain reasonable assurances that they are taking comparable steps with
respect to their year 2000 exposures. However, the steps the Fund is taking
and intends to take do not guarantee complete success or eliminate the
possibility that the Fund will not be adversely affected by the matters
related to the year 2000.
QUARTERLY RESULTS - JUNE 30, 1998 (UNAUDITED)
This information has been derived from unaudited financial statements
that, in the opinion of management, include all normal recurring adjustments
necessary for a fair presentation of such information. The operating results
for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
Three Months Ended
September 15 to ------------------------------------------------------
September 30, 1997 December 31, 1997 March 31, 1998 June 30, 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest on Loans and Leases $4,510 $26,216 $255,774 $659,410
Interest on Short -Term Investments 12,959 99,993 38,704 118,713
------ ------ ------ -------
Total Investment Income 17,469 126,209 294,478 777,823
------ ------- ------- ---------
Expenses:
Management Fee to the Managers 77,244 730,804 687,500 687,500
Interest Expense - - 39,412 155,731
Other Expense 21,510 39,520 86,215 97,928
------ ------ ------ -------
11
<PAGE>
Total Expenses 98,754 770,324 813,127 941,159
------ ------- ------- ---------
Net Investment Income (Loss) $(81,285) $(644,115) $(518,619) $(163,336)
Net Unrealized Gain From Investment
Transactions - - 60,418 583,274
Net Realized Gain From Investment Transactions - - - 278,655
-------- --------- --------- --------
Net Income (Loss) $(81,285) $(644,115) $(458,231) $698,593
-------- --------- --------- --------
-------- --------- --------- --------
Net Income (Loss) Per Share $(11.58) $(72.76) $(41.66) $37.29
------- ------- ------- ------
------- ------- ------- ------
Average Shares Outstanding 7,022 8,852 11,000 18,734
----- ----- ------ ------
----- ----- ------ ------
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the
caption "Executive Officers of the Fund" in Part I hereof, and the remainder is
contained in the Fund's Proxy Statement for the Annual Meeting of Shareholders
to be held November 11, 1998 ("1998 Proxy Statement") under the caption
"Proposal 1 -- To Elect Five Directors of the Fund" and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Fund's 1998 Proxy
Statement under the caption "Proposal 1 -- To Elect Five Directors of the Fund"
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Fund's 1998 Proxy
Statement under the caption "Annex A -- Beneficial Ownership of Fund Shares" and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Fund's 1998 Proxy
Statement under the captions: "Other Information -- Management" and is
incorporated herein by reference.
12
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO FINANCIALS STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F2
Statement of Financial Position as of June 30, 1998 F3
Statement of Operations for the Period from Inception,
September 15, 1997, to June 30, 1998 F4
Statement of Changes in Shareholders' Equity for the Period from
Inception, September 15, 1997, to June 30, 1998 F5
Statement of Cash Flows for the Period from Inception,
September 15, 1997, to June 30, 1998 F6
Notes to Financial Statements F7
</TABLE>
Financial Statement Schedules for the Years Ended June 30, 1998 and 1997
included in Item 14(d):
No schedules are required because the required information is not present or not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the financial statements and the notes
thereto.
(a) 2. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------- -------------
<S> <C>
3(i) Articles of Incorporation of the Company filed with the Maryland
Secretary of State on May 19, 1997, Incorporated by reference to
the Funds Registration Statement on Form 10 filed with the
Securities and Exchange Commission on July 2, 1997.
3(ii) Bylaws of the Company, Incorporated by reference to the Funds
Registration Statement on Form 10 filed with the Securities and
Exchange Commission on July 2, 1997.
4.1 Form of Subscription Agreement between the Company and Individual
Investors, Incorporated by reference to the Funds Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on July 2, 1997.
4.2 Form of Subscription Agreement between the Company and
Institutional Investors, Incorporated by reference to the Funds
Registration Statement on Form 10 filed with the Securities and
Exchange Commission on July 2, 1997.
13
<PAGE>
4.3 Form of Subscriptions Agreement between the Company and
Individual Investors Purchasing Through the Placement Agent
(including Investor Questionnaire), Incorporated by reference to
the Funds Registration Statement on Form 10 filed with the
Securities and Exchange Commission on July 2, 1997.
4.4 Form of Subscription Agreement between the Company and
Institutional Investors Purchasing Through the Placement Agent
(including Investor Questionnaire), Incorporated by reference to
the Funds Registration Statement on Form 10 filed with the
Securities and Exchange Commission on July 2, 1997.
10.1 Form of Custodian Agreement between the Company and BankBoston,
N.A., Incorporated by reference to the Funds Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on July 2, 1997.
10.2 Form of Stock Transfer Agent Fee Services Agreement between the
Company and BankBoston, N.A., Incorporated by reference to the
Funds Registration Statement on Form 10 filed with the Securities
and Exchange Commission on July 2, 1997.
10.3 Form of Intercreditor Agreement between the Company and Venture
Lending & Leasing, Inc., Incorporated by reference to the Funds
Registration Statement on Form 10 filed with the Securities and
Exchange Commission on July 2, 1997.
10.4 Form of Management Agreement between the Company, Westech
Investment Advisors, Inc. and Siguler Guff Advisers, LLC.,
Incorporated by reference to the Funds Registration Statement on
Form 10 filed with the Securities and Exchange Commission on July
2, 1997.
10.5 Form of Engagement Letter between Robertson, Stephens & Company
LLC and Westech Investment Advisors, Inc., Incorporated by
reference to the Funds Registration Statement on Form 10 filed
with the Securities and Exchange Commission on July 2, 1997.
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
The Fund filed no reports on Form 8-K with the Commission during the fiscal
quarter ended June 30, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VENTURE LENDING & LEASING II, INC.
(Registrant)
By: /S/ Ronald W. Swenson By: /S/ Salvador O. Gutierrez
------------------------------- ----------------------------------
Ronald W. Swenson Salvador O. Gutierrez
Chairman and Chief Executive Officer President, Chief Financial Officer and
Chief Accounting Officer
Date: September 30, 1998 Date: September 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
By: /S/ Arthur Aeder Director September 30, 1998
---------------------------
Arthur Aeder
By: /S/ Salvador O. Gutierrez President & Director September 30, 1998
---------------------------
Salvador O. Gutierrez
By: /S/ S. Allan Johnson Director September 30, 1998
---------------------------
S. Allan Johnson
By: /S/ Louis Moelchert Director September 30, 1998
---------------------------
Louis Moelchert
By: /S/ Ronald W. Swenson CEO & Director September 30, 1998
---------------------------
Ronald W. Swenson
15
<PAGE>
VENTURE LENDING & LEASING II, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F2
Statement of Financial Position as of June 30, 1998 F3
Statement of Operations for the Period from Inception,
September 15, 1997, to June 30, 1998 F4
Statement of Changes in Shareholders' Equity for the Period from
Inception, September 15, 1997, to June 30, 1998 F5
Statement of Cash Flows for the Period from Inception,
September 15, 1997, to June 30, 1998 F6
Notes to Financial Statements F7
</TABLE>
F1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Venture Lending & Leasing II, Inc.:
We have audited the accompanying statement of financial position of Venture
Lending & Leasing II, Inc. (a Maryland corporation) as of June 30, 1998, and the
related statements of operations, changes in shareholders' equity and cash flows
for the period from inception, September 15, 1997, to June 30, 1998. These
financial statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Venture Lending & Leasing II,
Inc. as of June 30, 1998, and the results of its operations and its cash flows
for the period from inception, September 15, 1997, to June 30, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
August 13, 1998
F2
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENT OF FINANCIAL POSITION
AS OF JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Loans and leases, at estimated fair value (cost: $22,768,445) $ 22,768,445
Investments in warrants, at estimated fair value (cost: $487,850) 487,850
Investments in stocks, at estimated fair value (cost: $328,655) 972,347
Cash and cash equivalents 7,091,890
Other assets 283,192
------------
Total assets $ 31,603,724
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans $ 9,008,210
Management fees payable 687,500
Accounts payable and other accrued liabilities 393,052
------------
Total liabilities 10,088,762
------------
Shareholders' equity:
Common stock, $.001 par value:
Authorized--200,000 shares
Issued and outstanding--22,000 shares 22
Capital in excess of par value 21,999,978
Accumulated deficit (485,038)
------------
Total shareholders' equity 21,514,962
------------
Total liabilities and shareholders' equity $ 31,603,724
------------
------------
</TABLE>
The accompanying notes are an integral part of these statements.
F3
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION, SEPTEMBER 15, 1997, TO JUNE 30, 1998
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest on loans and leases $ 945,610
Interest on short-term investments 270,369
-----------
Total investment income 1,215,979
-----------
EXPENSES:
Management fees to the Managers 2,183,048
Interest expense 195,143
Professional fees 74,056
Bank loan facility fee 83,312
Other operating expenses 87,805
-----------
Total expenses 2,623,364
-----------
Net investment loss (1,407,385)
UNREALIZED GAIN FROM INVESTMENT TRANSACTIONS 643,692
NET REALIZED GAIN FROM INVESTMENT TRANSACTIONS 278,655
-----------
Net loss $ (485,038)
-----------
-----------
BASIC NET LOSS PER SHARE $(38.70)
-----------
-----------
WEIGHTED AVERAGE SHARES OUTSTANDING 12,534
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these statements.
F4
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION, SEPTEMBER 15, 1997, TO JUNE 30, 1998
<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 $ 0 $ 50,000 $ 0 $ 50,000
Sale of common stock 21,950 22 21,949,978 0 21,950,000
Net loss 0 0 0 (485,038) (485,038)
----------------------------------------------------------------------
BALANCE, JUNE 30, 1998 22,000 $ 22 $21,999,978 $(485,038) $21,514,962
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F5
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, SEPTEMBER 15, 1997, TO JUNE 30, 1998
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (485,038)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred assets 86,922
Gain on sale of securities (278,655)
Unrealized gain from investment transactions (643,692)
Payment for deferred expenses (247,645)
Increase in other assets (69,969)
Increase in management fees payable 687,500
Increase in accounts payable and other accrued liabilities 393,052
------------
Net cash used in operating activities (557,525)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (25,369,046)
Principal payments on loans and leases 2,600,601
Acquisition of warrants (537,850)
------------
Net cash used in investing activities (23,306,295)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net 22,000,000
Loan from bank 9,008,210
Payment for bank loan expenses (52,500)
-----------
Net cash provided by financing activities 30,955,710
-----------
Net increase in cash and cash equivalents 7,091,890
CASH AND CASH EQUIVALENTS:
Beginning of period 0
-----------
End of period $ 7,091,890
-----------
-----------
CASH PAID DURING THE YEAR FOR:
Taxes $ 800
Interest 182,176
</TABLE>
The accompanying notes are an integral part of these statements.
F6
<PAGE>
VENTURE LENDING & LEASING II, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Venture Lending & Leasing, II, Inc. (the Fund) was incorporated in Maryland on
May 19, 1997, as a nondiversified closed-end management investment company
electing status as a business development company under the Investment Company
Act of 1940. Prior to commencing its operations on September 15, 1997, the Fund
had no operations other than the sale to Westech Investment Advisors, Inc.
(Westech Advisors) of 50 shares of common stock, $.001 par value, for $50,000.
As of June 30, 1998, the Fund has met the requirements, including
diversification requirements, to qualify as a regulated investment company (RIC)
under the Internal Revenue Code of 1986 and will file for such registration.
A portion of the costs incurred in connection with the organization of the Fund
were paid initially by Westech Advisors; however, the Fund reimbursed Westech
Advisors for such costs and paid other organizational costs directly, which
total approximately $198,202 as of June 30, 1998. 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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
VALUATION OF INVESTMENTS
The Fund anticipates that substantially all of its portfolio investments (other
than short-term investments) will consist of securities that at the time of
acquisition are subject to restrictions on sale and for which no ready market
will exist. Venture loans and leases are privately negotiated transactions, and
there is no established trading market in which such loans or leases can be
sold. Substantially all of the Fund's investments are restricted securities
that cannot be sold publicly without prior agreement with the issuer to register
the securities under the 1933 Act, or by selling the securities under Rule 144
or other rules under the 1933 Act, which permit only limited sales under
specified conditions.
Investments in loans and leases are valued at their original purchase price less
amortization of principal unless, pursuant to procedures established by the
Fund's Board of Directors, the Fund's Managers determine that amortized cost
does not represent fair value. Short-term debt instruments with 60 days or less
remaining to maturity are valued by the amortized cost method. The Fund does
not hold any short-term debt instruments that have a period of maturity
exceeding 60 days.
F7
<PAGE>
Warrants that are received in connection with loan and lease transactions
generally are valued at a nominal value 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 warrant may be exercised,
adjusted for illiquidity.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, demand deposits in banks and
repurchase agreements with original maturities of 90 days or less.
LOANS AND LEASES
Loans and Leases are carried at estimated fair value. Unearned income and
commitment fees on loans and leases are recognized using the effective interest
method over the term of the loan or lease. Commitment fees represent fees
received for commitments upon which no drawdowns have yet been made. When the
first draw is made, the fee is included in unearned income and recognized as
described above.
The Fund's policy is to place a loan on nonaccrual status when either principal
or interest has become past due for 90 days or more. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is
reversed.
TAX STATUS
As long as the Fund qualifies as a RIC, it will not pay any federal or state
corporate income tax on income that is distributed to shareholders (pass-through
status). Should the Fund lose its qualification as a RIC, it could be taxed as
an ordinary corporation on its taxable income for that year (even if that income
is distributed to its shareholders), and all distributions out of its earnings
and profits will be taxable to shareholders as ordinary income.
LOSS PER SHARE
Loss per share computations are computed using the weighted average number of
common and dilutive common equivalent shares assumed to be outstanding during
the period using the treasury stock method. As of June 30, 1998, there are no
common stock equivalents outstanding.
3. SUMMARY OF INVESTMENTS:
Loans and leases generally are made to borrowers pursuant to commitments whereby
the Fund commits to finance assets up to a specified amount for the term of the
commitments, upon the terms and subject to the conditions specified by such
commitment. The Fund's investments in loans and leases are entirely within the
United States and are diversified among the following industries. The
percentage of net assets that each industry group represents is shown with the
industry totals:
<TABLE>
<CAPTION>
OUTSTANDING
INDUSTRY JUNE 30,
1998
- --------------------------------------------------------------------------------
<S> <C>
Communications:
Aunet, Inc. $ 718,053
Digital Generation Systems, Inc. 3,401,811
F8
<PAGE>
<CAPTION>
OUTSTANDING
INDUSTRY JUNE 30,
1998
- --------------------------------------------------------------------------------
<S> <C>
Exodus Communications, Inc. 3,491,082
Juniper Networks, Inc. 2,102,671
-------------
Total communications (45.1%) 9,713,617
-------------
Computers and peripherals:
Das Devices, Inc. 793,698
SVision, Inc. 1,166,123
-------------
Total computers and peripherals (9.1%) 1,959,821
-------------
Internet:
Imgis, Inc. 305,019
Keynote Systems Incorporated 202,317
Netratings, Inc. 147,323
Wallop Software, Inc. 2,090,415
-------------
Total internet (12.8%) 2,745,074
-------------
Medical device:
Aerogen, Inc. $ 461,080
Heartstent Corporation 241,682
Intratherapeutics, Inc. 950,855
Myelotec, Inc. 303,541
Spinal Concepts, Inc. 61,852
Survivalink Corporation 1,256,827
-------------
Total medical device (15.2%) 3,275,837
-------------
Semiconductors and equipment:
Abpac, Inc. 1,477,225
Icompression, Inc. 148,703
Lightwave Microsystems Corporation 438,066
Poseidon Technology, Inc. 684,451
Quantum3D, Inc. 251,537
Telecruz Technology, Inc. 1,194,033
Transmeta Corporation 365,231
O-In Design Automation 188,862
ZSP Corporation 325,988
-------------
Total semiconductors and equipment (23.6%) 5,074,096
-------------
Total $ 22,768,445
-------------
-------------
</TABLE>
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. At June 30, 1998, the Fund
has unfunded commitments to borrowers of $45,286,513.
F9
<PAGE>
The Fund's investments in warrants are entirely within the United States and are
diversified among the following industries. The percentage of net assets that
each industry group represents is shown with the industry totals:
<TABLE>
<CAPTION>
PERCENTAGE OF
INDUSTRY WARRANT VALUE NET ASSETS
--------------------------------------------------------------
<S> <C> <C>
Biotechnology $ 28,000 0.1%
Communications 117,000 0.5
Computer and peripherals 99,000 0.5
Internet 37,550 0.2
Medical devices 75,100 0.3
Semiconductor 126400 0.6
Software 4,800 0.0
------------------------------
Total warrants $487,850 2.3%
------------------------------
------------------------------
</TABLE>
The Fund's investment in common stock at June 30, 1998, consists of an
investment in one security within the United States, Exodus Communications.
This investment, which is in the communications industry, has a carrying value
of $972,347 and a cost of $328,655 and represents 4.5 percent of the Fund's net
assets.
F10
<PAGE>
4. WARRANTS AND STOCK:
At June 30, 1998, the Fund held warrants to purchase 2,280,178 shares of common
and preferred stock in 26 companies, of which one company is publicly traded.
The quoted market value of the stock underlying the warrant issued by the
publicly traded company, adjusted for illiquidity, was less than the cost basis
of $55,000. The following is a summary of the activity for investments in
warrants and investments in stocks for the year ended June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Investments in warrants:
Balance, September 15, 1997 $ 0
Acquisition of warrants 487,850
--------
Balance, June 30, 1998 $487,850
--------
--------
Investments in stocks:
Balance, September 15, 1997 $ 0
Conversion of warrants to stock 328,655
Unrealized gain 643,692
--------
Balance, June 30, 1998 $972,347
--------
--------
</TABLE>
Restricted equity securities for which a public market exists are valued with
reference to the market price for unrestricted equity securities of the same
issuers, taking into consideration various factors as applicable, including the
nature of the market in which the securities are traded, the amount of the
public float, the existence and terms of any registration rights, the proportion
of the issuer's securities held by the Fund, the price at which the securities
in question were acquired relative to the market price for unrestricted
securities at the time of issuance, changes in the issuer's financial conditions
or prospects, and other factors that may affect their fair value. Restricted
securities for which an established market exists are valued at a discount from
their value determined by the foregoing methods, with the amount of the discount
decreasing as the restriction period decreases.
The remainder of the warrants issued by private companies did not have a readily
ascertainable market value and were assigned a minimal value at the time of
acquisition. These warrants had a value of $432,850 at June 30, 1998.
At June 30, 1998, the Fund held 32,591 shares of common stock of a company,
which were received when the Fund exercised its warrants in the company, which
had a cost basis of $50,000. The quoted market value of the stock, adjusted for
illiquidity, was $972,347. The Fund realized a gain of $278,655 from the
exercise.
F11
<PAGE>
5. LONG-TERM DEBT FACILITY:
The Fund has in place a $35 million revolving credit warehouse facility to
finance the acquisition of asset-based loans and leases. Outstanding balances
bear interest at either the financial institution's prime rate or 1.15 percent
above LIBOR. The Fund pays a commitment fee of .25 percent annually on the
total average amount of unused commitment with respect to this facility.
Borrowings under the facility are collateralized by the assets financed by the
Fund under loans and leases with assignment to the financial institution, plus
other assets of the Fund.
As of June 30, 1998, the Fund had $9 million outstanding under this facility,
all of which is to be paid in fiscal year 1999.
6. CAPITAL STOCK:
There are 200,000 shares of $.001 par value common stock authorized. As of
June 30, 1998, 22,000 shares are issued and outstanding.
The Fund has subscription agreements in effect with its shareholders under which
shareholders will purchase shares of the Fund, up to their full committed
capital amount, upon capital calls delivered at least 15 days before payment is
due. Based on $110 million subscriptions received by the final closing during
December 1997, $88 million in unfunded and uncalled capital commitments remained
outstanding as of June 30, 1998.
7. EARNINGS PER SHARE:
The Fund adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," effective December 31, 1997. SFAS No. 128 replaces
primary and fully diluted earnings per share with basic and diluted earnings per
share calculations. Basic earnings per share are computed by dividing net
income, less dividends on preferred stock, by the weighted average common shares
outstanding. Diluted earnings per share are computed by dividing net income,
less dividends on preferred stock, by the weighted average common shares
outstanding, including the dilutive effects of potential common shares (e.g.,
stock options). The Fund has no preferred stock or instruments that would be
potential common shares; thus, reported basic and diluted earnings are the same.
8. 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 (the Management Fee) at an annual rate
of 2.5 percent 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 percent of the Fund's total assets (including amounts derived
from borrowed funds) as of the last day of each fiscal quarter thereafter.
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 percent 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
F12
<PAGE>
plus (b) a preferred return on all amounts paid, as of the date of calculation,
equal to an 8 percent cumulative noncompounded 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 percent as dividends to the Fund's
shareholders and 20 percent 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.
9. FUTURE FINANCIAL ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, and
the Fund plans to adopt its provisions effective July 1, 1999. From time to
time, the Fund enters into interest rate swaps to hedge its interest rate.
Additionally, certain of its investments and long-term borrowings may have
embedded options due to call or put features that would be required to be
accounted for differently under SFAS No. 133 as compared to current accounting
principles. The Fund has not yet quantified the impact of adopting SFAS No. 133
on its financial statements; however, SFAS No. 133 could increase the volatility
of future earnings.
F13
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<PAGE>
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