<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 March 31, 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 (I.R.S. Employer
incorporation ororganization) 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 APRIL 10, 2000
- --------------------------------------- --------------------------------
Common Stock, $.001 par value 79,926
Page 1 of 15
<PAGE>
VENTURE LENDING & LEASING II, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Position (Unaudited) 3
March 31, 2000 and June 30, 1999
Statements of Operations (Unaudited) 4
Three and nine months ended March 31, 2000 and March 31, 1999
Statements of Changes in Shareholders' Equity (Unaudited) 5
For the year ended June 30, 1999 and the period ended March 31, 2000
Statements of Cash Flows (Unaudited) 6
Nine months ended March 31, 2000 and March 31, 1999
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>
2
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
------------------------- -----------------------
<S> <C> <C>
ASSETS
Loans and leases, at estimated fair value
(Cost of $128,614,719 and $80,414,104) $ 127,224,719 $ 78,293,229
Investments in securities, at estimated fair value
(Cost of $3,417,300 and $1,525,015) 13,766,648 14,494,863
Cash and cash equivalents 18,305,995 1,869,908
Other assets 1,523,829 189,182
------------------------- -----------------------
Total assets 160,821,191 94,847,182
========================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans 56,159,957 37,208,210
Accrued management & incentive fees 19,830,576 687,500
Accounts payable and other accrued liabilities 1,921,671 1,487,140
------------------------- -----------------------
Total liabilities 77,912,204 39,382,850
------------------------- -----------------------
Shareholders' equity:
Common stock, $.001 par value:
Authorized - 200,000 shares
Issued and outstanding - 79,926 and 44,000 shares 80 44
Capital in excess of par value 87,999,920 43,999,956
Distributions (85,242,041) (3,047,110)
Accumulated earnings 80,151,028 14,511,442
------------------------- -----------------------
Total shareholders' equity 82,908,987 55,464,332
------------------------- -----------------------
Total liabilities and shareholders' equity $ 160,821,191 $ 94,847,182
========================= =======================
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest on loans and leases $ 4,711,040 $ 2,113,040 $ 11,561,774 $ 4,535,844
Interest on short-term investments 320,365 137,339 606,139 318,530
-------------------------------------------------------------------------
Total investment income 5,031,405 2,250,379 12,167,913 4,854,374
-------------------------------------------------------------------------
EXPENSES:
Management fees 1,016,803 687,500 2,510,977 2,062,500
Interest expense 926,962 466,922 2,272,470 974,268
Other operating expenses 153,486 106,279 647,795 269,623
-------------------------------------------------------------------------
Total expenses 2,097,251 1,260,701 5,431,242 3,306,391
-------------------------------------------------------------------------
Net investment income 2,934,154 989,678 6,736,671 1,547,983
-------------------------------------------------------------------------
Net change in unrealized gain from investment
transactions (1,207,625) 1,636,372 (1,889,625) 992,680
Net realized gain from investment transactions 5,664,263 - 79,606,312 1,662,488
Incentive management fee (1,395,537) - (16,639,107) -
-------------------------------------------------------------------------
Income before cumulative effect of a change in
accounting principle $ 5,995,255 $ 2,626,050 $ 67,814,251 $ 4,203,151
Cumulative effect on prior years (To June 30, 1999)
of change in accounting principle (Note 5) - - (2,174,665) -
-------------------------------------------------------------------------
Net Income $ 5,995,255 $ 2,626,050 $ 65,639,586 $ 4,203,151
=========================================================================
Amounts per common share:
Income before cumulative effect of a change in
accounting principle $ 90.56 $ 67.14 $ 1,181.76 $ 137.58
Cumulative effect on prior years (To June 30, 1999)
of change in accounting principle (Note 5) - - (37.90) -
-------------------------------------------------------------------------
Net Income $ 90.56 $ 67.14 $ 1,143.86 $ 137.58
=========================================================================
Weighted average shares outstanding 66,205.19 39,111.11 57,384.34 30,551.09
Pro Forma amounts assuming the new method is
applied retroactively (Note 5)
Net Income $ 5,995,255 $ 2,446,239 $ 67,814,251 $ 4,023,340
Net Income per common share $ 90.56 $ 62.55 $ 1,181.76 $ 131.69
</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, 1999 AND
THE PERIOD ENDED MARCH 31, 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, 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 35,926 36 43,999,964 - - 44,000,000
Distributions - - - (82,194,931) - (82,194,931)
Net income - - - - 65,639,586 65,639,586
------------------------- ----------------- ------------------ ----------------- ----------------
BALANCE, MARCH 31, 2000 79,926 $ 80 $87,999,920 $ (85,242,041) $80,151,028 $ 82,908,987
------------------------- ----------------- ------------------ ----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months For the Nine Months
Ended March 31, 1999 Ended March 31, 1999
----------------------- ------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 65,639,586 $ 4,203,151
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred assets, net of additions (76,623) 91,698
Net change in unrealized gain from investment transactions 1,889,625 (992,680)
Net realized gain on investment transactions (79,606,312) (1,662,489)
Increase in other assets (1,258,024) (182,232)
Increase in accounts payable and other accrued
liabilities and management fees 19,577,607 390,771
----------------------- ------------------------
Net cash provided by operating activities 6,165,859 1,848,219
----------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (90,921,770) (56,156,823)
Principal payments on loans and leases 39,809,058 10,093,694
Proceeds from sale of securities 85,591,770 1,991,144
Acquisition of warrants and stock (4,965,646) (952,700)
----------------------- ------------------------
Net cash provided by (used in) investing activities 29,513,412 (45,024,685)
----------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock 44,000,000 22,000,000
Distributions to shareholders (82,194,931) (2,046,990)
Loans from bank 28,000,000 22,700,000
Repayment of bank loans (9,048,253) -
----------------------- ------------------------
Net cash provided by (used in) financing activities (19,243,184) 42,653,010
----------------------- ------------------------
Net increase (decrease) in cash and cash equivalents 16,436,087 (523,456)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,869,908 7,091,890
----------------------- ------------------------
End of period $ 18,305,995 $ 6,568,434
======================= ========================
CASH PAID DURING THE PERIOD FOR:
Interest $ 2,358,473 $ 974,268
Taxes $ 800 $ 1,600
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
VENTURE LENDING & LEASING II, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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. The interim results for the three
months and nine months ended March 31, 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,
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>
OUTSTANDING
INDUSTRY MARCH 31, 2000
- ------------------------------------------------------------------------------------------------------------
<S> <C>
BIOTECH:
Aesgen $ 864,700
Cellgate, Inc. 1,030,158
Ceres, Inc. 2,235,852
Genteric, Inc. 197,408
Protein Delivery Inc. 334,409
Zyomyx, Inc. 1,821,760
--------------------------
Total biotech (7.82%) 6,484,287
--------------------------
COMMUNICATION EQUIPMENT:
Amber Networks 2,160,405
Cisco Systems 2,643,571
Corvis Corporation 6,806,548
Cosine Communications, Inc. 2,204,656
Cyras Systems, Inc. 4,634,796
Jetcell, Inc. 615,923
Longboard 757,717
7
<PAGE>
MetroOptics 2,712,460
Nishan Systems 1,401,673
Optical Solutions 3,250,328
Ramp Networks, Inc. 4,760,555
Taqua Systems 2,940,358
Telera 1,494,141
Vxtel 559,990
--------------------------
Total communications equipment (44.56%) 36,943,121
--------------------------
COMMUNICATIONS SERVICE PROVIDER:
Applicast, Inc. 1,216,329
Colo.Com 310,730
Digital Generation Systems, Inc. 2,776,940
Equinix 6,225,614
Exodus Communications, Inc. 1,948,512
IasiaWorks 410,113
Jamcracker 1,062,336
USInternetworking, Inc. 6,365,016
--------------------------
Total communications service provider (24.50%) 20,315,590
--------------------------
COMPUTERS AND PERIPHERALS:
Das Devices, Inc. (APM) 60,000
Intera Systems, Inc. 226,895
Zayante 80,530
--------------------------
Total computers and peripherals (0.44%) 367,425
--------------------------
INTERNET:
Adforce 167,411
Backflip, Inc. 1,309,186
BeVocal 217,267
Dodots, Inc. 1,086,562
EchoOnline 92,809
Eletter, Inc. 1,401,719
Google, Inc. 5,478,852
Keynote Systems, Inc. 330,113
NetRatings, Inc. 231,417
Private Express 394,342
Tradec.Com 338,994
Vividence 58,753
--------------------------
Total internet (13.40%) 11,107,425
--------------------------
MEDICAL DEVICES:
Aerogen, Inc. 180,904
Heartstent Corporation 84,246
8
<PAGE>
Intratherapeutics, Inc. 1,640,352
Myelotec, Inc. 235,626
Spinal Concepts, Inc. 238,455
SurVivaLink Corporation 760,676
Volumetrics Medical Imaging, Inc. 692,448
--------------------------
Total medical devices (4.62%) 3,832,707
--------------------------
PHOTONICS:
Novalux 1,642,695
New Focus, Inc. 526,115
Lightwave Microsystem Corporation 252,265
Newport Microsystems, Inc. 1,654,088
--------------------------
Total photonics (4.92%) 4,075,163
--------------------------
SEMICONDUCTOR:
Abrizio, Inc. 1,070,466
Chameleon Systems, Inc. 2,378,947
Hotrail 819,534
iCompression, Inc. 2,724,646
Ishoni 2,355,062
Nucore Technology, Inc. 600,656
Quantum Effect Design, Inc. 1,536,678
Quantum3D, Inc. 111,948
Sandcraft, Inc. 3,671,641
Silicon Genesis 3,920,148
TeleCruz Technology, Inc. 1,222,377
Transmeta Corporation 1,838,021
Triscend Corporation 801,735
--------------------------
Total semiconductor (27.80%) 23,051,859
--------------------------
SEMICONDUCTOR EQUIPMENT:
Abpac, Inc. 1,387,923
Brooks Automation 1,013,155
Primaxx 393,503
--------------------------
Total semiconductor equipment (3.37%) 2,794,581
--------------------------
SOFTWARE:
Broad Daylight 478,851
CoWare, Inc. 394,277
Dicarta 755,542
EN2Z 1,896,904
Mineshare, Inc. 328,987
Octane Software, Inc. 487,167
Open Telephone Network, Inc. 206,732
9
<PAGE>
Optimal Networks 347,295
Personics Software, Inc. 1,713,579
Steeleye Technology 2,892,716
Sycon Design, Inc. 222,425
Xpede 4,609,811
Zero-In Design Automation, Inc. 187,191
Zoneworx 563,572
--------------------------
Total software (18.19%) 15,085,049
--------------------------
OTHER:
Offroad Capital Corporation 606,968
WebVan 2,560,544
--------------------------
Total other (3.82%) 3,167,512
--------------------------
--------------------------
Total loans and leases $ 127,224,719
--------------------------
</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 March 31, 2000, the
Fund has unfunded commitments to borrowers of $188 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
WARRANTS AND STOCK SHAREHOLDERS'
INDUSTRY VALUE EQUITY (NET ASSETS)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Biotechnology $ 153,500 0.18%
Communications equipment 4,470,044 5.39%
Communications service provider 519,247 0.62%
Computer and peripherals 15,000 0.02%
Internet 1,226,224 1.48%
Medical devices 104,600 0.13%
Photonics 130,900 0.16%
Software 515,541 0.62%
Semiconductor 4,133,829 4.98%
Semiconductor equipment 320,499 0.39%
Other 2,177,264 2.63%
-------------------------------------------------
Total warrants and stock value $13,766,648 16.60%
=================================================
</TABLE>
10
<PAGE>
3. 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.
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.
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 3 months ended March 31, 2000 was to decrease income before cumulative
effect of a change in accounting principle $1,395,537 ($21.08 per share). The
effect of the change on the 9 months ended March 31, 2000 was to decrease
income before cumulative effect of a change in accounting principle
$16,639,107 ($289.96 per share) per share and net income $18,813,772 ($327.86
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 Sept 30, 1999 was to decrease income before cumulative
effect of a change in accounting principle $1,572,288 ($30.26 per share) to
$7,003,385 ($134.78 per share) and net income $3,746,953 ($72.11 per share)
to $4,828,720 ($92.93 per share).
11
<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 eight capital calls since inception for a total of 80% of
committed capital. Total committed capital as of December 31, 1998 was $110
million when the Fund stopped accepting new subscriptions; a total of $88.0
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 NINE MONTHS ENDED MARCH 31, 2000
AND 1999
Total investment income for the three months ending March 31, 2000
and 1999 was $5.0 million and $2.3 million, respectively, of which $4.7
million and $2.1 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 March 31, 2000 and 1999 was $12.2 million and
$4.9 million, respectively, of which $11.6 million and $4.5 million,
consisted of interest on venture loans outstanding during the period. The
increase in investment income reflects the increase in loans & leases
outstanding from March 31, 1999 to March 31, 2000.
12
<PAGE>
Expenses for the quarters ended March 31, 2000 and 1999 were $2.1
million and $1.3 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 $0.9 million in the three months ended
March 31, 2000 from $0.5 million in the prior year period. This increase was
largely due to an increase in the average debt outstanding. Other operating
expenses increased to $0.2 million in the three months ended March 31, 2000
from $0.1 million in the prior year. This increase was partly due to
increased legal, audit, and tax preparation expenses incurred. Expenses
declined as a percentage of investment income for the three months ended
March 31, 2000 from the corresponding period ended March 31, 1999 due to the
increase in interest income on loans outstanding. Expenses for the nine
months ended March 31, 2000 increased by $2.1 million compared to the same
period in 1999. This increase was attributed to increased interest expense
and management fees. The reasons for these increases are consistent with the
explanations above.
The Fund experienced reduction in unrealized gain from investment
transactions of $1.2 million in the quarter ended March 31, 2000 as opposed
to an increase of $1.6 million in the prior year. The Fund had $5.7 million
of realized gains during the quarter ended March 31, 2000 whereas there were
no realized gains in the same period in 1999. These gains were generated by
sales and distributions of stock in four 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 March 31, 2000 increased to $6.0
million compared to $2.6 million for the quarter ended March 31, 1999. Income
before the cumulative effect on prior years of a change in accounting
principle for the nine months ended March 31, 2000 was $67.8 million as
compared to $4.2 million in the previous year. On a per share basis, for the
nine months ended March 31, 2000 and 1999 net income before the cumulative
effect on prior years of a change in accounting principle was $1,181.76 and
$137.58 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. 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 3 months ended March 31, 2000 was to
decrease income before cumulative effect of a change in accounting principle
$1.4 million ($21.08 per share). The effect of the change on the 9 months
ended March 31, 2000 was to decrease income before cumulative effect of a
change in accounting principle $16.6 million ($289.96 per share) and net
income $18.8 million ($327.86 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 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).
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES -- MARCH 31, 2000 AND JUNE 30, 1999
Total capital committed to the purchase of shares pursuant to
subscription agreements was approximately $110 million at March 31, 2000 and
June 30, 1999. As of March 31, 2000 and June 30, 1999, 80% 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 $102 million in debt facilities to finance the
acquisition of asset-based loans and leases. As of March 31, 2000 and June
30, 1999, $56.2 million and $37.2 million were outstanding under these
facilities. The Fund enters into interest rate swap transactions to hedge its
interest rate on the debt facility. At March 31, 2000, the Fund had interest
rate swap transactions outstanding with a total notional principal amount of
$26.8 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 March 31, 2000, 11% 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 $90.9
million during the nine month period ended March 31, 2000. Net loan amounts
outstanding after amortization increased by approximately $48.9 million.
Unfunded commitments increased by approximately $84.0 million.
<TABLE>
<CAPTION>
============================== ==================== ===================== =================== ======================
Amount Principal Balance Unfunded
Disbursed Reductions Outstanding Commitments
- ------------------------------ -------------------- --------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
June 30, 1999 $100.2 million $21.9 million $ 78.3 million $104.4 million
- ------------------------------ -------------------- --------------------- ------------------- ----------------------
March 31, 2000 $191.1 million $63.9 million $127.2 million $188.4 million
============================== ==================== ===================== =================== ======================
</TABLE>
Because venture loans and leases are privately negotiated
transactions, investments in these assets are relatively illiquid.
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
14
<PAGE>
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
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: May 15, 2000 Date: May 15, 2000
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001039802
<NAME> VENTURE LENDING & LEASING II, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<INVESTMENTS-AT-COST> 132,032
<INVESTMENTS-AT-VALUE> 140,991
<RECEIVABLES> 0
<ASSETS-OTHER> 19,830
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 160,821
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 56,160
<OTHER-ITEMS-LIABILITIES> 21,752
<TOTAL-LIABILITIES> 77,912
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 88,000
<SHARES-COMMON-STOCK> 80
<SHARES-COMMON-PRIOR> 44
<ACCUMULATED-NII-CURRENT> 4,763
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,959
<NET-ASSETS> 82,909
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,168
<OTHER-INCOME> 0
<EXPENSES-NET> 5,431
<NET-INVESTMENT-INCOME> 6,737
<REALIZED-GAINS-CURRENT> 62,967
<APPREC-INCREASE-CURRENT> (1,890)
<NET-CHANGE-FROM-OPS> 65,640
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,737
<DISTRIBUTIONS-OF-GAINS> 58,184
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 36
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 30,571
<ACCUMULATED-NII-PRIOR> 615
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,511
<INTEREST-EXPENSE> 2,272
<GROSS-EXPENSE> 5,431
<AVERAGE-NET-ASSETS> 69,186
<PER-SHARE-NAV-BEGIN> 1260.55
<PER-SHARE-NII> 117.40
<PER-SHARE-GAIN-APPREC> 1064.37
<PER-SHARE-DIVIDEND> 117.40
<PER-SHARE-DISTRIBUTIONS> 1013.94
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1037.33
<EXPENSE-RATIO> 0.10
</TABLE>
