<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 December 31, 1999
[ ] 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:
Class Outstanding as of January 30, 2000
- ------------------------------------- ----------------------------------
Common Stock, $.001 par value 60,568
Page 1 of 15; Exhibit Index appears on Page 15
<PAGE>
VENTURE LENDING & LEASING II, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Position (Unaudited) 3
December 31, 1999 and June 30, 1999
Statements of Operations (Unaudited) 4
Three and six months ended December 31, 1999 and December 31, 1998
Statements of Changes in Shareholders' Equity (Unaudited) 5
For the year ended June 30, 1999 and the six months ended December 31, 1999
Statements of Cash Flows (Unaudited) 6
Six months ended December 31, 1999 and December 31, 1998
Notes to Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of Financial 12 - 15
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits 15
SIGNATURES 15
</TABLE>
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
------------------------- -----------------------
<S> <C> <C>
ASSETS
Loans and leases, at estimated fair value, $ 104,165,637 $ 78,293,229
(Cost of $104,265,637 and $80,414,104)
Investments in securities, at estimated fair value
(Cost of $2,717,146 and $1,525,015) 12,984,119 14,494,863
Cash and cash equivalents 6,702,417 1,869,908
Other assets 6,398,061 189,182
------------------------- -----------------------
Total assets 130,250,234 94,847,182
========================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans 41,416,244 37,208,210
Accrued management & incentive fees 18,225,254 687,500
Accounts payable and other accrued liabilities 1,772,829 1,487,140
------------------------- -----------------------
Total liabilities 61,414,327 39,382,850
------------------------- -----------------------
Shareholders' equity:
Common stock, $.001 par value:
Authorized - 200,000 shares
Issued and outstanding - 60,568 and 44,000 shares 61 44
Capital in excess of par value 65,999,939 43,999,956
Distributions (71,319,867) (3,047,110)
Accumulated earnings 74,155,774 14,511,442
------------------------- -----------------------
Total shareholders' equity 68,835,907 55,464,332
------------------------- -----------------------
Total liabilities and shareholders' equity $ 130,250,234 $ 94,847,182
========================= =======================
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest on loans and leases $ 3,854,559 $ 1,409,361 $ 6,850,734 $ 2,422,803
Interest on short-term investments 193,310 108,384 285,774 181,192
------------------------------------------------------------------------
Total investment income 4,047,869 1,517,745 7,136,508 2,603,995
------------------------------------------------------------------------
EXPENSES:
Management fees 801,022 687,500 1,494,173 1,375,000
Interest expense 710,227 347,484 1,345,508 507,346
Other operating expenses 255,308 96,613 494,310 163,344
------------------------------------------------------------------------
Total expenses 1,766,557 1,131,597 3,333,991 2,045,690
------------------------------------------------------------------------
Net investment income 2,281,312 386,148 3,802,517 558,305
------------------------------------------------------------------------
Net change in unrealized gain from investment
transactions (1,555,427) (307,000) (682,000) (643,692)
Net realized gain from investment transactions 67,761,009 1,662,489 73,942,050 1,662,489
Incentive Management Fee (13,671,282) (15,243,570)
------------------------------------------------------------------------
Income before cumulative effect of a change in
accounting principle $ 54,815,612 $ 1,741,637 $ 61,818,997 $ 1,577,102
Cumulative effect on prior years (To June 30,
1999) of change in accounting principle $ (2,174,665)
(Note 5) ------------------------------------------------------------------------
Net Income $ 54,815,612 $ 1,741,637 $ 59,644,332 $ 1,577,102
========================================================================
Amounts per common share:
Income before cumulative effect of a change in
accounting principle $ 1,013.54 $ 56.68 $ 1,165.92 $ 59.82
Cumulative effect on prior years (To June 30, 1999)
of change in accounting principle (Note 5) $ (41.01)
------------------------------------------------------------------------
Net Income $ 1,013.54 $ 56.68 $ 1,124.91 $ 59.82
========================================================================
Weighted average shares outstanding 54,083 30,728 53,022 26,364
Pro Forma amounts assuming the new method is
applied retroactively (Note 5)
Net Income $ 54,815,612 $ 1,741,637 $ 61,818,997 $ 1,577,101
Net Income per common share $ 1,013.54 $ 56.68 $ 1,165.92 $ 59.82
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 1999 AND
THE PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
------------------------- EXCESS OF ACCUMULATED
SHARES AMOUNT PAR VALUE DISTRIBUTIONS EARNINGS TOTAL
(DEFICIT)
------------------------- ----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998 22,000 $ 22 $21,999,978 $ - $ (485,038) $ 21,514,962
Sales of common stock 22,000 22 21,999,978 - - 22,000,000
Distributions - - - (3,047,110) - (3,047,110)
Net income - - - - 14,996,480 14,996,480
------------------------- ----------------- ----------------- ---------------- ----------------
BALANCE, JUNE 30, 1999 44,000 44 43,999,956 (3,047,110) 14,511,442 55,464,332
Sales of common stock 16,568 17 21,999,983 - - 22,000,000
Distributions - - - (68,272,757) - (68,272,757)
Net income - - - - 59,644,332 59,644,332
------------------------- ----------------- ----------------- ---------------- ----------------
BALANCE, December 31, 1999 60,568 $ 61 $65,999,939 $ (71,319,867) $ 74,155,774 $ 68,835,907
========================= =================================== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months For the Six Months
Ended December 31, Ended December 31,
1999 1998
---------------------- ------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 59,644,332 $ 1,577,102
Adjustments to reconcile net income to net cash
used in operating activities:
Amortization of deferred assests (Net) 34,349 21,579
Unrealized loss from investment transactions 681,997 643,692
Net realized gain on investment transactions (73,942,049) (1,662,489)
Increase in other assets (6,193,226) (1,996,891)
Increase in accounts payable and other accrued
liabilities 17,823,444 188,618
----------------------- ------------------------
Net cash used in operating activities (1,951,153) (1,228,389)
----------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (53,596,448) (33,499,293)
Principal payments on loans and leases 26,923,337 6,429,643
Proceeds from sale of securities 79,737,510 1,991,144
Acquisition of warrants and stock (4,166,015) (576,200)
----------------------- ------------------------
Net cash provided by (used in) investing activities 48,898,384 (25,654,706)
----------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net 22,000,000 11,000,000
Distributions to shareholders (68,272,756) -
Loans from bank 8,000,000 13,200,000
Repayment of bank loans (3,791,966)
Payment of bank loan expenses (50,000) -
----------------------- ------------------------
Net cash provided by (used in) financing activities (42,114,722) 24,200,000
----------------------- ------------------------
Net increase (decrease) in cash and cash equivalents 4,832,509 (2,683,095)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,869,908 7,091,890
----------------------- ------------------------
End of period $ 6,702,417 $ 4,408,795
======================= ========================
CASH PAID DURING THE PERIOD FOR:
Interest $ 1,375,674 $ 521,862
Taxes $ 800 $ 1,600
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
VENTURE LENDING & LEASING II, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1999
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. The interim results for the 3 months
ended December 31, 1999 and 1998, 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, 1999.
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>
<CAPTION>
INDUSTRY OUTSTANDING
DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C>
BIOTECH:
Cellgate, Inc. $1,115,018
Ceres, Inc. 2,382,335
Genteric, Inc. 215,362
Protein Delivery, Inc. 359,194
Zyomyx, Inc. 1,586,562
--------------------------
Total biotech (8.22%) 5,658,471
--------------------------
COMMUNICATION EQUIPMENT:
Amber Networks $ 1,169,706
Cerent Corporation 2,939,865
Corvis Corporation 7,177,547
Cosine Communications, Inc. 2,437,150
Cyras Systems, Inc. 4,285,625
<PAGE>
Jetcell, Inc. 497,910
Longboard (Magellan Network Systems, Inc.) 831,481
Nishan Systems 326,573
Optical Solutions 1,618,485
Ramp Networks, Inc. 5,201,883
Taqua Systems 1,452,799
--------------------------
Total communications equipment (40.59%) 27,939,024
--------------------------
COMMUNICATIONS SERVICE PROVIDER:
Applicast, Inc. 1,303,352
Colo.com 319,606
Digital Generation Systems, Inc. 3,148,667
Equinix 6,547,336
Exodus Communications, Inc. 2,197,908
IasiaWorks (Aunet) 461,737
USInternetworking, Inc. 6,981,510
--------------------------
Total communications service provider (30.45%) 20,960,116
--------------------------
COMPUTERS AND PERIPHERALS:
Applied Magnetics Corporation 84,000
Intera Systems, Inc. 244,600
New Focus, Inc. 577,051
Zayante 85,782
--------------------------
Total computers and peripherals (1.44%) 991,433
--------------------------
INTERNET:
Adforce 189,562
Backflip, Inc 744,160
DoDots, Inc. 391,594
Eletter, Inc. 358,414
Google, Inc. 4,134,823
Keynote Systems Incorporated 365,159
NetRatings, Inc. 252,073
Tradec.Com 58,418
Facilitas, Inc. 61,177
--------------------------
Total internet (9.52%) 6,555,380
--------------------------
MEDICAL DEVICES:
Aerogen, Inc. 225,807
Heartstent Corporation 91,528
Intratherapeutics, Inc. 1,433,708
<PAGE>
Myelotec, Inc. 262,442
Spinal Concepts, Inc. 260,343
SurVivaLink Corporation 853,121
Volumetrics Medical Imaging, Inc. 692,448
--------------------------
Total medical devices (5.55%) 3,819,397
--------------------------
SEMICONDUCTOR:
Abrizio, Inc. 1,152,403
Chameleon Systems, Inc. 1,685,104
Dynachip Corporation 473,938
Hotrail (Poseidon Technology, Inc.) 917,009
iCompression, Inc. 1,128,810
Ishoni 803,361
Lightwave Microsystems Corporation 282,079
Newport Microsystems, Inc. 1,295,790
NuCore Technology, Inc. 641,575
Quantum Effect Design, Inc. 1,657,340
Quantum 3D, Inc. 135,001
Sandcraft, Inc. 4,007,258
Silicon Genesis 4,042,886
Telecruz Technology, Inc. 839,767
Transmeta Corporation 1,974,548
Triscend Corporation 849,779
--------------------------
Total semiconductor (31.80%) 21,886,648
--------------------------
SEMICONDUCTOR EQUIPMENT:
Abpac, Inc. 2,606,680
Brooks Automation 1,113,669
Primaxx 390,629
--------------------------
Total semiconductor equipment (5.97%) 4,110,978
--------------------------
SOFTWARE:
Acme Software, Inc. 247,279
CoWare, Inc. 414,904
DiCarta 385,069
EN2Z (Smart DB) 2,041,603
Mineshare, Inc. 409,461
Octane Software, Inc. 523,820
<PAGE>
Open Telephone Network, Inc. 217,188
Optimal Networks, Inc. 229,882
Personics Software, Inc. 1,496,502
Softplus 1,845,000
Sycon Design, Inc. 240,544
0-in Design Automation 207,803
Zoneworx, Inc. 602,747
--------------------------
Total software (12.87%) 8,861,802
--------------------------
OTHER:
Offroad Capital Corporation 635,762
WebVan-Bay Area, Inc. 2,746,626
--------------------------
Total other (4.91%) 3,382,388
--------------------------
--------------------------
Total loans and leases (Cost: $104,265,637) $ 104,165,637
--------------------------
</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 December 31, 1999, the
Fund has unfunded commitments to borrowers of $157.1 million.
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
INDUSTRY WARRANTS AND STOCK SHAREHOLDERS'
VALUE EQUITY (NET ASSETS)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Biotechnology 123,500 0.18%
Communications equipment 4,061,842 5.90%
Communications service provider 459,915 0.67%
Computer and peripherals 61,000 0.09%
Internet 3,779,876 5.49%
Medical devices 92,600 0.13%
Software 211,300 0.30%
Semiconductor 412,900 0.60%
Semiconductor equipment 148,989 0.22%
Other 3,632,197 5.28%
- -----------------------------------------------------------------------------------------------
Total warrants and stock value 12,984,119 18.86%
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
3. EARNINGS PER SHARE:
Basic earnings per share are computed by dividing net income by the weighted
average common shares outstanding. Diluted earnings per share includes the
dilutive effects of potential common shares (e.g., stock options). The Fund has
no outstanding instruments that would be potential common shares; thus, reported
basic and diluted earnings are the same.
4. 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, 2000, and
the Fund plans to adopt its provisions effective July 1, 2000. 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.
<PAGE>
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. 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 three months ended
September 30, 1999. The effect of the change on the three months ended
December 31, 1999 was to decrease income before cumulative effect of a change
in accounting principle $13,671,282 ($252.78 per share). The effect of the
change on the 6 months ended December 31, 1999 was to decrease income before
cumulative effect of a change in accounting principle $15,243,570 ($287.50
per share) and net income $17,418,235 ($328.51 per share). The pro forma
amounts reflect the effect of retroactive application on management incentive
fees and the change in provisions for incentive compensation that would have
been made in 1998 had the provisions for management incentive fees had been
made in 1998. The effect of the change on the quarter ended September 30,
1999 was to decrease income before cumulative effect of a change in
accounting principle $1,572,288 ($30.26 per share) to $7,003,385 ($134.78 per
share) and net income $3,746,953 ($72.11 per share) to $4,828,720 ($92.93 per
share).
<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 six capital calls since inception for a total of 60% of
committed capital. Total committed capital as of December 31, 1998 was $110
million when the Fund stopped accepting new subscriptions; a total of $66.0
million has been called.
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 AND SIX MONTHS ENDED DECEMBER 31, 1999
AND 1998
Total investment income for the three months ending December 31,
1999 and 1998 was $4.0 million and $1.5 million, respectively, of which $3.9
million and $1.4 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. Total investment income for the fiscal
year to date periods ending December 31, 1999 and 1998 was $7.1 million and
$2.6 million, respectively, of which $6.9 million and $2.4 million, consisted
of interest on venture loans outstanding during the period. The increase in
investment income reflects the increase in loans & leases outstanding
<PAGE>
from December 31, 1998 to December 31, 1999.
Expenses for the quarters ended December 31, 1999 and 1998 were $1.8
million and $1.1 million, respectively. Management fees were calculated based
on committed capital for the first two years of the Fund's life and increased
from the prior year as management fees are now calculated based on the Fund's
assets, which exceed the $110 million that was used as a basis in the prior
year. Interest expense increased to $0.7 million in the period ended December
31, 1999 from $0.3 million in the prior period. This increase was due to an
increase in the average debt outstanding. Other operating expenses increased
to $0.3 million in the period ended December 31, 1999 from $0.1 million in
the prior year. This increase was partly due to increased legal expenses
incurred. Expenses declined as a percentage of investment income for the
period ended December 31, 1999 from the period ended December 31, 1998 due to
the increase in interest income on loans outstanding.
The Fund experienced an unrealized loss from investment transactions
of $1.6 million in the period ended December 31, 1999 as opposed to a loss of
$0.3 million in the prior year. The Fund had $67.8 million of realized gains
during the quarter ended December 31, 1999 as compared to $1.7 million in the
same period in 1998. 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 for the quarter ended December 31, 1999 increased to
$54.8 million compared to $1.7 million for the quarter ended December 31,
1998. Year to date income before the cumulative effect on prior years of a
change in accounting principle was $61.8 million as compared to $1.6 million
in the previous year. On a per share basis, for the year to date period ended
December 31, 1999 and 1998 net income was $1,165.92 and $59.82 respectively.
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. 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
three months ended September 30, 1999. The effect of the change on the three
months ended December 31, 1999 was to decrease income before cumulative
effect of a change in accounting principle $13.7 million ($252.78 per share).
The effect of the change on the 6 months ended December 31, 1999 was to
decrease income before cumulative effect of a change in accounting principle
$15.2 million($287.50 per share) and net income $17.4 million ($328.51 per
share). The pro forma amounts reflect the effect of retroactive application
on management incentive fees and the change in provisions for incentive
compensation that would have been
<PAGE>
made in 1998 had the provisions for management incentive fees had been made
in 1998. The effect of the change on the quarter ended September 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).
LIQUIDITY AND CAPITAL RESOURCES -- DECEMBER 31, 1999 AND JUNE 30, 1999
Total capital committed to the purchase of shares pursuant to
subscription agreements was approximately $110 million at December 31, 1999
and June 30, 1999. As of December 31, 1999 and June 30, 1999, 60% and 40%
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 a $102 million in debt facilities to finance
the acquisition of asset-based loans and leases. As of December 31, 1999 and
June 30, 1999, $41.4 million and $37.2 million were outstanding under this
facility. The Fund enters into interest rate swap transactions to hedge its
interest rate on the debt facility. At December 31, 1999, the Fund had
interest rate swap transactions outstanding with a total notional principal
amount of $29.9 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 December 31, 1999, 5% of the Fund's assets consisted of cash
and cash equivalents, compared with 2% as of June 30, 1999. 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 $53.6 million during the period ended December 31, 1999. Net
loan amounts outstanding after amortization increased by approximately $25.9
million. Unfunded commitments increased by approximately $52.7 million.
<TABLE>
<CAPTION>
====================================================================================================================
Amount Disbursed Principal Balance Unfunded Commitments
Amortization Outstanding
- ------------------------------ -------------------- --------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
June 30, 1999 $100.2 million $21.9 million $78.3 million $104.4 million
- ------------------------------ -------------------- --------------------- ------------------- ----------------------
December 31, 1999 $153.8 million $49.6 million $104.2 million $157.1 million
====================================================================================================================
</TABLE>
Because venture loans and leases are privately negotiated transactions,
investments in these assets are relatively illiquid.
<PAGE>
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.
Although we have not, as yet, suffered material adverse
consequences, we cannot assure you we are fully year 2000 compliant. Effects
of the year 2000 problem may not yet have surfaced and could result in
material adverse consequences in the future. We depend on third-party
equipment and services that may not be year 2000 compliant. If year 2000
issues prevent transaction processing, our operations may be adversely
affected by unanticipated expenses and exposure to litigation risks. Further,
the spending and purchasing patterns of customers or potential customers may
be affected by the year 2000 issue as individuals, corporations and
government agencies expend significant resources to correct or update their
current system for year 2000 compliance. We currently have no formal year
2000 contingency plan. Accordingly, our failure to provide year 2000
compliant solutions could result in financial loss, harm to our reputation
and legal liability. The Fund's contingency plan includes switching to
vendors that are year 2000 compliant and utilizing backup systems that do not
rely on computers. 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.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS
18. Letter re change in accounting principles
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/ Salvador O. Gutierrez
---------------------------------- -------------------------------
Ronald W. Swenson Salvador O. Gutierrez
Chairman and Chief Executive Officer President
Date: February 14, 1999 Date: February 14, 1999
<PAGE>
Exhibit 18. Letter re change in accounting principles
February 11, 2000
Venture Lending & Leasing II, Inc.
Re: Form 10-Q Report for the quarter ended December 31, 1999
Gentlemen/Ladies:
This letter is written to meet the requirements of Regulation S-K
calling for a letter from a registrant's independent accountants
whenever there has been a change in accounting principle or practice.
We have been informed that, as of July 1, 1999 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.
A complete coordinated set of financial and reporting standards for
determining the preferability of accounting principles among acceptable
alternative principles has not been established by the accounting
profession. Thus, we cannot make an objective determination of whether
the change in accounting described in the preceding paragraph is to a
preferable method. However, we have reviewed the pertinent factors,
including those related to financial reporting, in this particular case
on a subjective basis, and our opinion stated below is based on our
determination made in this manner.
We are of the opinion that the Company's change in method of accounting
is to an acceptable alternative method of accounting, which, based upon
the reasons stated for the change and our discussions with you, is also
preferable under the circumstances in this particular case. In arriving
at this opinion, we have relied on the business judgment and business
planning of your management.
We have not audited the application of this change to the financial
statements of any period subsequent to June 30, 1999. Further, we have
not examined and do not express any opinion with respect to your
financial statements for the six months ended December 30, 1999.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 106,982
<INVESTMENTS-AT-VALUE> 117,150
<RECEIVABLES> 0
<ASSETS-OTHER> 13,100
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 130,250
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 41,416
<OTHER-ITEMS-LIABILITIES> 19,998
<TOTAL-LIABILITIES> 61,414
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 66,000
<SHARES-COMMON-STOCK> 61
<SHARES-COMMON-PRIOR> 44
<ACCUMULATED-NII-CURRENT> 10,089
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,167
<NET-ASSETS> 68,836
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,137
<OTHER-INCOME> 0
<EXPENSES-NET> 3,334
<NET-INVESTMENT-INCOME> 3,803
<REALIZED-GAINS-CURRENT> 58,698
<APPREC-INCREASE-CURRENT> (682)
<NET-CHANGE-FROM-OPS> 59,644
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,803
<DISTRIBUTIONS-OF-GAINS> 55,842
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 35,403
<ACCUMULATED-NII-PRIOR> 615
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,494
<INTEREST-EXPENSE> 1,346
<GROSS-EXPENSE> 3,334
<AVERAGE-NET-ASSETS> 62,150
<PER-SHARE-NAV-BEGIN> 1,260.55
<PER-SHARE-NII> 71.73
<PER-SHARE-GAIN-APPREC> 1,091.19
<PER-SHARE-DIVIDEND> 71.73
<PER-SHARE-DISTRIBUTIONS> 1,053.19
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1,136.51
<EXPENSE-RATIO> .10
</TABLE>
