<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, 2000
[ ] 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 incorporation or (I.R.S. Employer
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 X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding as of October 12, 2000
-------------------------------- ----------------------------------
<S> <C>
Common Stock, $.001 par value 101,159
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VENTURE LENDING & LEASING II, INC.
INDEX
PAGE NUMBER
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Position (Unaudited) 3
September 30, 2000 and June 30, 2000
Statements of Operations (Unaudited) 4
Three months ended September 30, 2000 and 1999
Statements of Changes in Shareholders' Equity (Unaudited) 5
For the year ended June 30, 2000 and the period ended September 30, 2000
Statements of Cash Flows (Unaudited) 6
Three months ended September 30, 2000 and 1999
Notes to Financial Statements 7 - 12
Item 2. Management's Discussion and Analysis of Financial 13 - 15
Condition and Results of Operations
Item 3. Quantitative & Qualitative Disclosure About Market Risk 15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities & Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
SIGNATURES 17
</TABLE>
2
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
------------------------- -----------------------
<S> <C> <C>
ASSETS
Loans and leases, at estimated fair value
(Cost of $180,586,903 and $158,723,975) $ 178,156,902 $ 156,293,975
Investments in securities, at estimated fair value
(Cost of $4,175,256 and $4,080,486) 73,407,975 19,919,042
Cash and cash equivalents 11,670,471 6,226,455
Other assets 10,134,665 692,001
------------------------- -----------------------
Total assets 273,370,013 183,131,473
========================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans 84,213,894 65,024,316
Accrued management & incentive fees 35,833,896 22,107,359
Accounts payable and other accrued liabilities 1,808,747 2,312,625
------------------------- -----------------------
Total liabilities 121,856,537 89,444,300
------------------------- -----------------------
Shareholders' equity:
Common stock, $.001 par value:
Authorized - 200,000 shares
Issued and outstanding - 101,159 and 90,530 shares 101 91
Capital in excess of par value 109,999,899 98,999,909
Distributions (99,866,130) (93,765,322)
Accumulated earnings 141,379,606 88,452,495
------------------------- -----------------------
Total shareholders' equity 151,513,476 93,687,173
------------------------- -----------------------
Total liabilities and shareholders' equity $ 273,370,013 $ 183,131,473
========================= =======================
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-----------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest on loans and leases $ 6,070,648 $ 2,996,175
Interest on short-term investments 241,145 92,464
-----------------------------------------
Total investment income 6,311,793 3,088,639
-----------------------------------------
EXPENSES:
Management fees 1,707,688 693,151
Interest expense 1,571,159 647,264
Other operating expenses 126,756 227,018
-----------------------------------------
Total expenses 3,405,603 1,567,433
-----------------------------------------
Net investment income 2,906,190 1,521,206
-----------------------------------------
Net change in unrealized gain from investment transactions 53,220,095 873,427
Net realized gain from investment transactions 9,973,118 6,181,041
Incentive management fee (13,172,292) (1,572,288)
-----------------------------------------
Income before cumulative effect of a change in accounting principle $ 52,927,111 $ 7,003,386
Cumulative effect on prior years of change in accounting principle (Note 5) - (2,174,665)
-----------------------------------------
Net Income $ 52,927,111 $ 4,828,721
=========================================
Amounts per common share:
Income before cumulative effect of a change in accounting principle $ 554.22 $ 134.78
Cumulative effect on prior years of change in accounting principle (Note 5)
- (41.85)
-----------------------------------------
Net Income $ 554.22 $ 92.93
=========================================
Weighted average shares outstanding 95,498 51,960
Pro Forma amounts assuming the new method is applied retroactively (Note 5)
Net Income $ 52,927,111 $ 7,003,386
Net Income per common share $ 554.22 $ 134.78
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 2000 AND
THE PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN ACCUMULATED
---------------------- EXCESS OF EARNINGS
SHARES AMOUNT PAR VALUE DISTRIBUTIONS (DEFICIT) TOTAL
---------------------- ------------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1999 44,000 $ 44 $ 43,999,956 $ (3,047,110) $ 14,511,442 $ 55,464,332
Sales of common stock 46,530 47 54,999,953 - - 55,000,000
Distributions - - - (90,718,212) - (90,718,212)
Net income - - - - 73,941,053 73,941,053
---------------------- ------------------- ----------------- ------------------ ------------------
BALANCE, JUNE 30, 2000 $ 90,530 $ 91 $ 98,999,909 $ (93,765,322) $ 88,452,495 $ 93,687,173
---------------------- ------------------- ----------------- ------------------ ------------------
Sales of common stock 10,629 10 10,999,990 - - 11,000,000
Distributions - - - (6,100,808) - (6,100,808)
Net income - - - - 52,927,111 52,927,111
---------------------- ------------------- ----------------- ------------------ ------------------
BALANCE, SEPTEMBER 30, 2000 101,159 $ 101 $ 109,999,899 $ (99,866,130) $ 141,379,606 $ 151,513,476
====================== =================== ================= ================== ==================
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,927,111 $ 8,575,673
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization of deferred assets, net of additions 36,324 2,707
Net change in unrealized gain from investment transactions (53,394,163) (873,427)
Net realized gain on investment transactions (9,973,118) (6,181,041)
Increase in other assets (9,478,987) (3,568,480)
Increase (decrease) in accounts payable and other accrued
liabilities and management fees 13,222,659 (8,801)
---------------- ---------------
Net cash used in operating activities (6,660,174) (2,053,369)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (37,701,003) (23,483,801)
Principal payments on loans and leases 15,838,075 14,354,971
Proceeds from sale of securities 10,536,514 6,342,216
Acquisition of warrants and stock (658,166) (2,475,963)
---------------- ---------------
Net cash used in investing activities (11,984,580) (5,262,577)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock 11,000,000 11,000,000
Distributions to shareholders (6,100,808) (1,164,240)
Payment of bank loan expenses - (50,000)
Loans from bank 20,000,000 -
Repayment of bank loans (810,422) -
---------------- ---------------
Net cash provided by financing activities 24,088,770 9,785,760
---------------- ---------------
Net increase in cash and cash equivalents 5,444,016 2,469,814
CASH AND CASH EQUIVALENTS:
Beginning of period 6,226,455 1,869,908
---------------- ---------------
End of period $ 11,670,471 $ 4,339,722
================ ===============
CASH PAID DURING THE PERIOD FOR:
Interest $ 1,561,410 $ 1,449,102
NONCASH TRANSACTIONS:
Unrealized loss on hedging activities $ 174,068 $ -
</TABLE>
The accompanying notes are an integral part of these statements
6
<PAGE>
VENTURE LENDING & LEASING II, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
The accompanying condensed financial statements in Management's opinion, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of financial position and results of operations for interim
periods. Certain information and note disclosures normally included in audited
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted; however, the Fund believes that the
disclosures made are adequate to make the information presented not misleading.
Certain amounts in the prior year financial statements have been reclassified to
conform to the current financial statement presentation. These reclassifications
had no impact on previously reported net income or shareholders' equity. The
interim results for the three months ended September 30, 2000 and 1999, are not
necessarily indicative of the results for the full year. It is suggested that
these financial statements be read in conjunction with the financial statements
and the notes included in the Fund's Annual Report for the year ended June 30,
2000.
2. 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 industries shown below. The
percentage of shareholders' equity (net assets) that each industry group
represents is shown with the industry totals below. (The sum of the percentages
does not equal 100 percent because the percentages are based on net assets as
opposed to total loans and leases. Also, the sum of the percentages of net
assets is greater than 100 percent due to the Fund's use of leverage (debt) as a
means of financing investments.)
<TABLE>
<S> <C>
APPLICATION SERVICE PROVIDERS
Applicast $ 1,030,924
Jamcracker 3,938,288
USInternetworking 5,054,754
-----------
SUBTOTAL: 6.6% $10,023,966
BIOTECHNOLOGY
Aesgen $ 2,565,110
Cellgate 849,235
Ceres 1,925,547
Genteric 159,233
Nobex 720,441
7
<PAGE>
Origen Therapeutics 786,871
Zyomyx 3,331,869
-----------
SUBTOTAL: 6.8% $10,338,306
</TABLE>
<TABLE>
<S> <C>
COMMUNICATIONS EQUIPMENT
Amber Networks $ 3,219,256
Cisco Systems [Cerent] 2,020,591
Cisco Systems [JetCell] 569,579
Corvis 5,832,663
Cosine Communications 1,713,854
Cyras 3,825,470
Longboard 601,019
Metro-OptiX 2,946,454
Nexsi 3,188,198
Nishan Systems 3,594,235
Optical Solutions 3,398,254
Procket Networks 654,554
Ramp Networks 3,825,226
Taqua 2,750,265
VxTel 1,471,885
-----------
SUBTOTAL: 26.1% $39,611,503
COMMUNICATIONS SERVICE PROVIDERS
Colo.com $ 280,666
Equinix 5,543,077
Exodus 1,416,796
iAsiaWorks 297,878
NewEdge Networks 5,661,545
Telera 3,173,315
UM Communications 8,681,681
-----------
SUBTOTAL: 16.5% $25,054,958
COMPUTERS & PERIPHERALS
BeeLine Networks $ 133,069
DAS Devices 60,000
Intera Systems 189,088
Quantum3D 64,014
Zayante 69,176
-----------
SUBTOTAL: 0.3% $ 515,347
INTERNET
Adforce $ 120,296
Backflip 2,013,057
BeVocal 2,609,915
Coremetrics 1,098,220
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
DoDots 1,217,377
ECtone 355,940
Eletter 1,246,234
Google 8,713,249
Keynote Systems 255,829
NetRatings $187,570
Postini 458,225
PrivateExpress 350,341
QuinStreet 3,373,255
Tradec.com 296,007
Viquity 220,298
Vividence 1,031,357
-----------
SUBTOTAL: 15.5% $23,547,170
MEDICAL DEVICES
Aerogen $ 85,616
HeartStent 68,626
IntraTherapeutics 1,354,299
Myelotec 178,463
Pi Medical 23,368
SurVivaLink 565,333
Vascular Innovations 318,538
Volumetrics 692,448
-----------
SUBTOTAL: 2.2% $ 3,286,691
OTHER
AtomicTangerine $ 861,106
Lumenare 460,455
OffRoad Capital 531,871
Webvan 2,166,070
-----------
SUBTOTAL: 2.7% $ 4,019,502
PHOTONICS
LightLogic $ 4,505,834
Lightwave Microsystems 188,957
New Focus 417,454
Newport Communications 1,825,613
Novalux 2,853,980
Tsunami Optics 554,929
-----------
SUBTOTAL: 6.8% $10,346,767
SEMICONDUCTOR EQUIPMENT
Abpac $ 173,597
Brooks Automation 800,396
Primaxx 370,251
Silicon Genesis 5,793,178
9
<PAGE>
Torrex 1,140,864
-----------
SUBTOTAL: 5.5% $ 8,278,286
</TABLE>
<TABLE>
<S> <C>
SEMICONDUCTORS
Abrizio $ 897,966
Chameleon 3,537,928
HotRail 612,359
iCompression 2,424,109
Ishoni Networks 5,143,239
Matrix Semiconductor 2,208,010
nDSP 1,523,831
NuCORE 1,030,577
Sandcraft 2,959,502
TeleCruz 2,254,156
Transmeta 1,540,910
Triscend 700,022
-----------
SUBTOTAL: 16.4% $24,832,609
SOFTWARE
Believe $ 197,251
Broad Daylight 821,167
CoWare 699,634
diCarta 852,588
E.piphany [Octane Software] 408,841
MineShare 270,688
North Systems 810,750
OnDemand 1,242,552
Open Telephone Networks 184,189
Personic Software 1,491,035
Steeleye Technology 3,321,525
Sycon Design 184,091
Taviz Technology 1,589,318
Xpede 4,959,063
Zero-In Design 228,097
Zoneworx 1,041,008
-----------
SUBTOTAL: 12.1% $18,301,797
TOTAL: 117.6% $178,156,902
</TABLE>
At September 30, 2000 there were 3 companies classified as non-accrual for $3.4
million, of which $2.4 million has been reserved.
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 September 30, 2000, the
Fund has unfunded commitments to borrowers of $128 million.
10
<PAGE>
The Fund's investments in warrants and stock 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
WARRANTS AND STOCK SHAREHOLDERS' EQUITY
INDUSTRY VALUE (NET ASSETS)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Application Service Provider $ 65,000 0.04%
Biotechnology 166,000 0.11%
Communication Equipment
Corvis (34.6% of net assets) 52,432,257
Cosine (5.1% of net assets) 7,668,939
Other communications Equipment 851,392
------------------------
Total Communications equipment 60,952,588 40.23%
Communications service provider 818,379 0.54%
Computer and peripherals 19,650 0.01%
Internet 1,276,700 0.84%
Medical devices 104,600 0.07%
Photonics
New Focus (5.3% of net assets) 8,042,402
Other Photonics 170,200
------------------------
Total Photonics 8,212,602 5.42%
Semiconductor 652,629 0.43%
Semiconductor equipment 340,759 0.22%
Software 325,323 0.22%
Other 473,745 0.32%
------------------------------------------------
Total warrants and stock value $ 73,407,975 48.45%
================================================
</TABLE>
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.
4. IMPLEMENTATION OF 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.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, and
the Fund has adopted its provisions effective July 1, 2000. Derivatives that are
used to hedge the company's floating rate debt are
11
<PAGE>
now marked to market at the end of each quarter. The resulting gain or loss is
recorded as an increase or decrease in unrealized gains from other security
transactions. The market value of the instrument is treated either an asset or
as a liability depending on if its value is negative or positive. The effect of
adopting SFAS No. 133 was not material.
5. CHANGE IN ACCOUNTING PRINCIPLE
In the 2nd quarter of Fiscal Year End June 30, 2000, the Company changed its
method of accounting for its incentive management fee. The previous method was
to record the incentive management fee as the Company became legally obligated.
The new method is to record the fee based on the Company's current income.
According to the management of the Company, this change was made to more closely
match the incentive fee to current performance. The new method has been applied
to management incentive fee calculations of prior years. The $2,174,665
cumulative effect of the change on prior years is included in income of the 3
months ended September 30, 1999. The effect of the change on the quarter ended
Sept 30, 1999 was to decrease income before cumulative effect of a change in
accounting principle $1,572,288 ($30.26 per share) to $7,003,386 ($134.78 per
share) and net income $3,746,953 ($72.11 per share) to $4,828,721 ($92.93 per
share).
12
<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
ten capital calls since inception for a total of 100% of committed capital.
Total committed capital as of December 31, 1998 was $110 million when the Fund
stopped accepting new subscriptions.
In addition to the historical information contained herein, this
Quarterly Report contains certain forward-looking statements. The reader of this
Quarterly Report should understand that all such forward-looking statements are
subject to various uncertainties and risks that could affect their outcome. The
Fund's actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments and competition effects as
well as other factors. This entire Quarterly Report should be read to put such
forward-looking statements in context and to gain a more complete understanding
of the uncertainties and risks involved in the Fund's business.
RESULTS OF OPERATIONS -- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total investment income for the three months ending September 30, 2000
and 1999 was $6.3 million and $3.1 million, respectively, of which $6.1 million
and $3.0 million, consisted of interest on venture loans outstanding during the
period. The 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. The increase in investment income reflects the increase in
loans & leases outstanding from September 30, 1999 to September 30, 2000.
13
<PAGE>
Expenses for the quarters ended September 30, 2000 and 1999 were $3.4
million and $1.6 million, respectively. Management fees increased due to the
increase in total assets. Interest expense increased to $1.6 million in the
three months ended September 30, 2000 from $0.6 million in the prior year
period. This increase was largely due to an increase in the average debt
outstanding. Other operating expenses decreased to $0.1 million in the three
months ended September 30, 2000 from $0.2 million in the prior year. This
decrease was mostly due to decreased legal expenses incurred. Expenses increased
as a percentage of investment income for the three months ended September 30,
2000 from the corresponding period ended September 30, 1999 due primarily from
the change in basis of calculation of management fees.
The Fund experienced an increase in the amount of unrealized gain from
investment transactions of $53.2 million in the quarter ended September 30, 2000
as opposed to an increase of $0.9 million in the prior year. This was primarily
due to the increase in value of warrants and stocks held in several of the
Fund's portfolio companies at quarter end September 30. The Fund had $10.0
million of realized gains during the quarter ended September 30, 2000 as opposed
to $6.2 million for the same period in 1999. These gains were generated by sales
and distributions of stock in several of the Fund's portfolio companies.
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.
Net income before cumulative effect of a change in accounting principal
increased to $52.9 million for the quarter ended September 30, 2000 from $7.0
million for the quarter ended September 30, 1999. Net income for the quarter
ended September 30, 2000 increased to $52.9 million compared to $4.8 million for
the quarter ended September 30, 1999.
In the 2nd quarter of fiscal year end June 30, 2000, the Company
changed its method of accounting for its incentive management fee. The previous
method was to record the incentive management fee as the Company became legally
obligated. The new method is to record the fee based on the Company's current
income. According to the management of the Company, this change was made to more
closely match the incentive fee to current performance. The new method has been
applied to management incentive fee calculations of prior years. The $2.2
million cumulative effect of the change on prior years is included in income of
the 3 months ended September 30, 1999. The effect of the change on the quarter
ended Sept 30, 1999 was to decrease income before cumulative effect of a change
in accounting principle $1.6 million ($30.26 per share) to $7.0 million ($134.78
per share) and net income $3.7 million ($72.11 per share) to $4.8 million
($92.93 per share).
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES -- SEPTEMBER 30, 2000 AND JUNE 30, 2000
Total capital committed to the purchase of shares pursuant to
subscription agreements was approximately $110 million at September 30 2000 and
June 30, 2000. As of September 30, 2000 and June 30, 2000, 100% and 90%
respectively 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 $102 million in debt facilities to finance the
acquisition of asset-based loans and leases. As of September 30, 2000 and June
30, 2000, $84.2 million and $65.0 million were outstanding under these
facilities. The Fund enters into interest rate swap transactions to hedge its
interest rate on the debt facility. At September 30, 2000 and June 30, 2000, the
Fund had interest rate swap transactions outstanding with a total notional
principal amount of $50.0 million. The effect of these swap transactions is to
convert the variable LIBOR rate into a fixed rate on the contract notional
value. The amortization schedule for each borrowing under the facility is
expected to correspond to the amortization of the loans or leases acquired with
the proceeds of each borrowing.
As of September 30, 2000, 4% of the Fund's assets consisted of cash and
cash equivalents, compared with 3% as of June 30, 2000. The Fund continued to
invest its assets in venture loans and leases during the period. Amounts
disbursed under the Fund's loan commitments increased by approximately $37.7
million during the three month period ended September 30, 2000. Net loan amounts
outstanding after amortization increased by approximately $21.9 million.
Unfunded commitments decreased by approximately $43.4 million.
<TABLE>
<CAPTION>
=====================================================================================================================
Amount Principal Balance Unfunded
Disbursed Reductions Outstanding Commitments
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 2000 $272.9 million $94.7 million $178.2 million $127.9 million
---------------------------------------------------------------------------------------------------------------------
June 30, 2000 $235.2 million $78.9 million $156.3 million $171.3 million
=====================================================================================================================
</TABLE>
Because venture loans and leases are privately negotiated transactions,
investments in these assets are relatively illiquid.
Not all of the unfunded commitments are expected to fund. Management
believes there is sufficient access to capital in order to meet outstanding
commitments that will fund.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Fund's business activities contain elements of risk. The Fund
considers the principal types of market risk to be interest rate risk and
valuation risk. The Fund considers the management of risk essential to
conducting its businesses and to maintaining profitability. Accordingly, the
Fund's risk management procedures are designed to identify and analyze the
Fund's risks, to set appropriate policies and limits and to continually monitor
these risks and limits by means of reliable administrative and information
systems and other policies and programs.
15
<PAGE>
The Fund manages its market risk by maintaining a portfolio that is
diverse by industry, size of investment, stage of development, and borrower. The
Fund has limited exposure to public market price fluctuations as the Fund
primarily invests in private business enterprises. Since there is typically no
public market for the equity interests of the companies in which the Fund
invests, the valuation of the equity interests in the Fund's portfolio is
subject to the estimate of the Fund's management. In the absence of a readily
ascertainable market value, the estimated value of the Fund's portfolio of
equity interests may differ significantly from the values that would be placed
on the portfolio if a ready market for the equity interests existed. Any changes
in estimated value are recorded in the Fund's statement of operations as "Net
unrealized gains (losses)." Each hypothetical 1% increase or decrease in value
of the Fund's portfolio of equity interests of $73.4 million at September 30,
2000 would have resulted in unrealized gains or losses and would have increased
or decreased net income for the quarter by less than 1%.
The Fund's sensitivity to changes in interest rates is regularly monitored and
analyzed by measuring the characteristics of assets and liabilities. The Fund
utilizes various methods to assess interest rate risk in terms of the potential
effect on interest income net of interest expense, the value of net assets and
the value at risk in an effort to ensure that the Fund is insulated from any
significant adverse effects from changes in interest rates.
Based on the model used for the sensitivity of interest income net of interest
expense, if the balance sheet were to remain constant and no actions were taken
to alter the existing interest rate sensitivity, a hypothetical immediate 100
basis point change in interest rates would have affected net income by less than
1% during the quarter. Although management believes that this measure is
indicative of the Fund's sensitivity to interest rate changes, it does not
adjust for potential changes in credit quality, size and composition of the
balance sheet and other business developments that could affect net income.
Accordingly, no assurances can be given that actual results would not differ
materially from the potential outcome simulated by this estimate.
16
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Fund will become party to certain lawsuits from time to time in the
normal course of business. While the outcome of these legal proceedings cannot
at this time be predicted with certainty, the Fund does not expect these
proceedings will have a material effect upon the Fund's financial condition or
results of operation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6 EXHIBITS
27. Financial Data Schedule
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)
By: /s/ Ronald W. Swenson By: /s/ Brian R. Best
-------------------------------- -------------------------------
Ronald W. Swenson Brian R. Best
Chairman and Chief Executive Officer Chief Financial Officer
Date: November 14, 2000 Date: November 14, 2000
17
