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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File Number 814-00141
VENTURE LENDING & LEASING II, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 77-0456589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2010 NORTH FIRST STREET, SUITE 310, SAN JOSE, CA 95131
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (408) 436-8577
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock,
$0.001 par value
Indicate by check mark whether the registrant has (i) filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated be reference in Part II of this Form 10-K or any amendment to this
Form 10-K:
---
As the registrant's shares are not publicly-traded, the aggregate market value
of the voting stock held by non-affiliates of the registrant cannot be
determined.
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 15, 2000 was 90,529.88.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT DESCRIPTION 10-K PART
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Specifically Identified Portions of the Registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held November 15, 2000 III
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PART I
ITEM 1. BUSINESS.
INTRODUCTION.
Venture Lending & Leasing II, Inc. ("Fund") is a closed-end,
non-diversified management investment company electing status as a business
development company ("BDC") under the Investment Company Act of 1940 ("1940
Act"). The Fund's investment objective is to achieve a high total return. The
Fund provides asset-based financing to carefully selected venture capital-backed
companies, in the form of secured loans, installment sales contracts or
equipment leases. The Fund receives warrants to acquire equity securities in
connection with its portfolio investments. The Fund's Investment Manager is
Westech Investment Advisors, Inc. ("Westech Advisors" or the "Manager"). Siguler
Guff Advisers, LLC ("Adviser to the Manager") will act as adviser to Westech
Advisors with respect to its administrative duties to the Fund. The fund was
incorporated in Maryland on May 19, 1997.
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 from inception through August 31, 2000 for a total of 100% of
committed capital. Total committed capital as of June 30, 2000 was $110 million;
a total of $99.0 million has been called as of June 30, 2000.
INVESTMENT PROGRAM.
GENERAL. As a BDC, the Fund will invest at least 70% of its total
assets ("qualifying assets") in securities of companies that qualify as
"eligible portfolio companies." An eligible portfolio company generally is a
United States company that is not an investment company and that (i) does not
have a class of securities registered on an exchange or included in the Federal
Reserve Board's over-the-counter margin list; (ii) is actively controlled by a
BDC and has an affiliate of a BDC on its board of directors; or (iii) meets such
other criteria as may be established by the SEC. See "Regulation." The Fund may
invest up to 30% of its total assets in non-qualifying assets, including
companies that are not eligible portfolio companies (for example, because the
company's securities are listed on the National Association of Securities
Dealers' Automated Quotation System) and eligible portfolio companies as to
which the Fund does not offer to make available significant managerial
assistance. The foregoing percentages are determined, in the case of financings
in which the Fund commits to provide financing prior to funding the commitment,
by the amount of the Fund's total assets represented by the value of the maximum
amount of securities to be issued by the borrower or lessee to the Fund pursuant
to such commitment.
VENTURE LOANS AND LEASES. Venture loans generally consist of a
promissory note secured by the equipment or other assets of the borrower. The
Fund generally obtains a security interest in the assets financed and receives
periodic payments of interest and principal, and generally receives a final
payment constituting additional interest at the end of the transaction's term.
Venture leases consist of a lease from the Fund to the lessee of the assets to
be financed, with periodic payments of rent and, in most cases, with a put
option to sell the assets to the borrower at the end of the lease term for a
predetermined or formula price. The interest rate and amortization terms of
venture loans, the rental rate and put provisions of leases and all other
transaction terms are individually negotiated between the Fund and each borrower
or lessee. Because the Fund seeks to qualify as a "regulated investment company"
("RIC") under the Internal Revenue Code of 1986 ("Internal Revenue Code"),
provisions of the Internal Revenue Code restrict the terms upon which the Fund
may enter into venture leases and the extent to which venture leases may be
used, and the Fund anticipates structuring the majority of its transactions as
venture loans.
Typically, loans or leases are structured as commitments by the Fund to
finance assets of the borrower or lessee over a specified period of time. The
commitment of the Fund to finance future asset acquisitions is typically subject
to the absence of any default under the loan or lease and compliance by the
borrower with requirements relating to, among other things, the type of assets
to be acquired. Although the Fund's commitments generally provide that the Fund
is not required to continue to fund additional assets if there is a material
adverse change in the borrower's or lessee's financial condition, it is possible
that a borrower's or lessee's financial condition will not be as strong at the
time the Fund finances an asset acquisition as it was at the time the commitment
was entered into.
WARRANTS AND EQUITY SECURITIES. The Fund generally acquires warrants to
purchase equity securities of the borrower or lessee in connection with asset
financings. The terms of the warrants, including the expiration date, exercise
price and terms of the equity security for which the warrant may be exercised,
are negotiated individually with each borrower or lessee. Substantially all the
warrants and underlying equity securities are restricted securities under the
1933 Act at the time of issuance; the Fund generally negotiates registration
rights with the borrower or lessee that may provide (i) "piggyback" registration
rights, which permit the Fund under certain circumstances to include some or all
of the securities owned by it in a registration statement filed by the borrower
or lessee or (ii) under rare circumstances, "demand" registration rights
permitting the Fund under certain circumstances to require the borrower or
lessee to register the securities under the 1933 Act (in some cases at the
Fund's expense).
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INVESTMENT POLICIES.
For purposes of these investment policies and unless otherwise
specified, references to the percentage of the Fund's total assets "invested" in
securities of a company will be deemed to refer, in the case of financings in
which the Fund commits to provide financing prior to funding the commitment, to
the amount of the Fund's total assets represented by the value of the maximum
amount of securities to be issued by the borrower or lessee to the Fund pursuant
to such commitment; the Fund will not be required to divest securities in its
portfolio or decline to fund an existing commitment because of a subsequent
change in the value of securities the Fund has previously acquired or committed
to purchase.
DIVERSIFICATION STANDARDS. The Fund is classified as a
"non-diversified" closed-end investment company under the 1940 Act. However the
Fund seeks to qualify as a RIC, and therefore must meet diversification
standards under the Internal Revenue Code.
To qualify as a RIC, the Fund must meet the issuer diversification
standards under the Internal Revenue Code that require that, at the close of
each quarter of the Fund's taxable year, (i) not more than 25% of the market
value of its total assets is invested in the securities of a single issuer and
(ii) at least 50% of the market value of its total assets is represented by
cash, cash items, government securities, securities of other RICs and other
securities (with each investment in such other securities limited so that not
more than 5% of the market value of the Fund's total assets is invested in the
securities of a single issuer and the Fund does not own more than 10% of the
outstanding voting securities of a single issuer). For purposes of the
diversification requirements under the Internal Revenue Code, the percentage of
the Fund's total assets "invested" in securities of a company will be deemed to
refer, in the case of financings in which the Fund commits to provide financing
prior to funding the commitment, to the amount of the Fund's total assets
represented by the value of the securities issued by the borrower or lessee to
the Fund at the time each portion of the commitment is funded.
The Fund will generally invest no more than 25% of its total assets in
securities of companies in any single industry. The broad industry categories in
which the Fund anticipates that most of its investments will fall (and within
each of which there may be several "industries" for purposes of the industry
diversification policy) include computer and semiconductor-related,
medical/biotechnology and communications.
INVESTMENT GUIDELINES. In selecting investments for the Fund's
portfolio, the Manager will endeavor to meet the investment guidelines
established by the Fund's Board of Directors. The Fund may, however, make
investments that do not conform to one or more of these guidelines when deemed
appropriate by the Manager. Such investments might be made if the Manager
believes that a failure to conform in one area is offset by exceptional strength
in another or is compensated for by a higher yield, favorable warrant issuance
or other attractive transaction terms or features.
LEVERAGE. The Fund is permitted to borrow money from and issue debt
securities to banks, insurance companies and other lenders to obtain additional
funds to originate venture loans and leases. Under the 1940 Act, the Fund may
not incur borrowings unless, immediately after the borrowing is incurred, such
borrowings would have "asset coverage" of at least 200 percent. "Asset coverage"
means the ratio which the value of the Fund's total assets, less all liabilities
not represented by the borrowings and any other liabilities constituting "senior
securities" under the 1940 Act, bears to the aggregate amount of such borrowings
and senior securities. The practical effect of this limitation is to limit the
Fund's borrowings and other senior securities to 50% of its total assets less
its liabilities other than the borrowings and other senior securities.
The use of leverage increases investment risk. The Fund's lenders
require that the Fund pledge portfolio assets as collateral for loans. If the
Fund is unable to service the borrowings, the Fund may risk the loss of such
pledged assets. Lenders also require that the Fund agree to loan covenants
limiting the Fund's ability to incur additional debt or otherwise limiting the
Fund's flexibility, and loan agreements may provide for acceleration of the
maturity of the indebtedness if certain financial tests are not met.
TEMPORARY INVESTMENTS. Pending investment in asset financing
transactions and pending distributions, the Fund invests excess cash in (i)
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, (ii) repurchase agreements fully collateralized by U.S.
government securities or (iii) short-term high-quality debt instruments of U.S.
corporations. All such investments will mature in one year or less. The U.S.
government securities in which the Fund may invest include U.S. government
securities backed by the full faith and credit of the U.S. government (such as
Treasury bills, notes and bonds) as well as securities backed only by the credit
of the issuing agency. Corporate securities in which the Fund may invest include
commercial paper, bankers' acceptances and certificates of deposit of domestic
or foreign issuers.
The Fund also may enter into repurchase agreements that are fully
collateralized by U.S. government securities with banks or recognized securities
dealers, in which the Fund purchases a U.S. government security from the
institution and simultaneously agrees to resell it to the seller at an
agreed-upon date and price. The repurchase price is related to an agreed-upon
market rate of interest rather than the coupon of the debt security and, in that
sense, these agreements are analogous to secured loans from the Fund to the
seller. Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
the transaction defaults.
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OTHER INVESTMENT POLICIES. The Fund will not sell securities short,
purchase securities on margin (except to the extent the Fund's permitted
borrowings are deemed to constitute margin purchases), write puts or calls,
purchase or sell commodities or commodity contracts or purchase or sell real
estate. The Fund will not underwrite the securities of other companies, except
to the extent the Fund may be deemed an underwriter upon the disposition of
restricted securities acquired in the ordinary course of the Fund's business.
THE FUND'S INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND INVESTMENT
GUIDELINES (OTHER THAN ITS STATUS AS A BDC) ARE NOT FUNDAMENTAL POLICIES AND MAY
BE CHANGED BY THE FUND'S BOARD OF DIRECTORS AT ANY TIME WITHOUT SHAREHOLDER
APPROVAL.
REGULATION.
Generally, to be eligible to elect BDC status, a company must engage in
the business of furnishing capital and offering significant managerial
assistance to "eligible portfolio companies," as defined below. More
specifically, in order to qualify as a BDC, a company must (i) be a domestic
company; (ii) have registered as a class of its securities or have filed a
registration statement with the SEC pursuant to Section 12 of the Securities
Exchange Act of 1934; (iii) operate for the purpose of investing in the
securities of certain types of eligible portfolio companies; (iv) offer to
extend significant managerial assistance to such eligible portfolio companies;
(v) have a majority of disinterested directors; and (vi) file (or under certain
circumstances, intend to file) a proper notice of election with the SEC.
"Making available significant managerial assistance" is defined under
the 1940 Act, in relevant part, as (i) an arrangement whereby the business
development company, through its officers, directors, employees or general
partners, offers to provide and, if accepted, does provide, significant guidance
and counsel concerning the management, operations or business objectives of a
portfolio company; or (ii) the exercise by a business development company of a
controlling influence over the management or polices of the portfolio company by
the business development company acting individually or as part of a group
acting together which controls the portfolio company. The officers of the Fund
intend to offer to provide managerial assistance, including advice on equipment
acquisition and financing, cash flow and expense management, general financing
opportunities, acquisition opportunities and opportunities to access the public
securities markets, to the great majority of companies to whom the Fund provides
venture loans or leases. In some instances, officers of the Fund might serve on
the board of directors of borrowers or lessees.
An "eligible portfolio company" generally is a United States company
that is not an investment company and that (i) does not have a class of
securities registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a BDC and has an
affiliate of a BDC on its board of directors; or (iii) meets such other criteria
as may be established by the SEC. Control under the 1940 Act is presumed to
exist where a BDC owns more than 25% of the outstanding voting securities of the
eligible portfolio company.
The 1940 Act prohibits or restricts companies subject to the 1940 Act
from investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms, and investment companies. Moreover, the
1940 Act limits the type of assets that BDCs may acquire to certain prescribed
qualifying assets and certain assets necessary for its operations (such as
office furniture, equipment, and facilities) if, at the time of acquisition,
less than 70% of the value of BDC's assets consist of qualifying assets.
Qualifying assets include: (i) privately acquired securities of companies that
were eligible portfolio companies at the time such BDC acquired their
securities; (ii) securities of bankrupt or insolvent companies; (iii) securities
of eligible portfolio companies controlled by a BDC; (iv) securities received in
exchange for or distributed in or with respect to any of the foregoing; and (v)
cash items, government securities and high-quality short-term debt. The 1940 Act
also places restrictions on the nature of transactions in which, and the persons
from whom, securities can be purchased in order for the securities to be
considered qualifying assets. Such restrictions include limiting purchases to
transactions not involving a public offering and the requirement that securities
be acquired directly from either the portfolio company or its officers,
directors or affiliates.
The Fund, as a BDC, may sell its securities at a price that is below
its net asset value per share, provided that a majority of the Fund's
disinterested directors has determined that such sale would be in the best
interests of the Fund and its shareholders and upon the approval by the holders
of a majority of its outstanding voting securities, including a majority of the
voting securities held by non-affiliated persons, of such policy or practice
within one year of such sale. A majority of the disinterested directors also
must determine in good faith, in consultation with the underwriters of the
offering if the offering is underwritten, that the price of the securities being
sold is not less than a price which closely approximates market value of the
securities, less any distribution discounts or commissions. As defined in the
1940 Act, the term "majority of the outstanding voting securities" of the Fund
means the vote of (i) 67% or more of the Fund's Shares present at a meeting, if
the holders of more than 50% of the outstanding Shares are present or
represented by proxy, or (ii) more than 50% of the Fund's outstanding Shares,
whichever is less.
Many of the transactions involving a company and its affiliates (as
well as affiliates of those affiliates) which were prohibited without the prior
approval of the SEC under the 1940 Act prior to its amendment by the 1980
Provisions are permissible for BDCs, including the Fund, upon the prior approval
of a majority of the Fund's disinterested directors and a majority of the
directors having no financial interest in the transactions. However, certain
transactions involving certain persons related to the Fund, including its
directors, officers, and the Managers, may still require the prior approval of
the SEC. In general, (i) any person who owns, controls, or holds power to vote,
more than 5% of the Fund's outstanding Shares (ii) any director, executive
officer, or general partner of that person; and (iii) any person who directly or
indirectly
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controls, is controlled by, or is under common control with, that person, must
obtain the prior approval of a majority of the Fund's disinterested directors,
and, in some situations, the prior approval of the SEC, before engaging in
certain transactions involving the person or any company controlled by the Fund.
The 1940 Act generally does not restrict transactions between the Fund and its
eligible portfolio companies. While a BDC may change the nature of its business
so as to cease being a BDC (and in connection therewith withdraw its election to
be treated as a BDC) only if authorized to do so by a majority vote (as defined
by the 1940 Act) of its outstanding voting securities, shareholder approval of
changes in other fundamental investment policies of a BDC is not required (in
contrast to the general 1940 Act requirement, which requires shareholder
approval for a change in any fundamental investment policy).
DIVIDENDS AND DISTRIBUTIONS.
The Fund intends to distribute to shareholders substantially all of its
net investment income and net realized capital gains, if any, as determined for
income tax purposes. Applicable law, including provisions of the 1940 Act, may
limit the amount of dividends and other distributions payable by the Fund.
Income dividends will generally be paid quarterly to shareholders of record on
the last day of each preceding calendar quarter end. Substantially all of the
Fund's net capital gain (the excess of net long-term capital gain over net
short-term capital loss) and net short-term capital gain, if any, will be
distributed annually with the Fund's final quarterly dividend distribution for
the year.
Until September 15, 2002, the Fund shall reinvest the proceeds of
matured, repaid or resold investments, net of required distributions to
shareholders, principal payments on borrowings and expenses or other obligations
of the Fund, in new loans or leases. Following that date, the Fund will begin to
distribute to investors all proceeds received from principal payments and sales
of investments, net of reserves and expenses, principal repayments on the Fund's
borrowings, amounts required to fund financing commitments entered into before
such date, and any amounts paid on exercise of warrants. Distributions of such
amounts are likely to cause annual distributions to exceed the earnings and
profits of the Fund available for distribution, in which case such excess will
be considered a tax free return of capital to a shareholder to the extent of the
shareholder's adjusted basis in his shares and then as capital gain. The Fund
may borrow money to fund shareholder distributions, to the extent consistent
with the 1940 Act and a prudent capital structure.
COMPETITION.
Other entities and individuals compete for investments similar to those
proposed to be made by the Fund, some of whom may have greater resources than
the Fund. Furthermore, the Fund's need to comply with provisions of the 1940 Act
pertaining to BDCs and provisions of the Internal Revenue Code pertaining to
RICs might restrict the Fund's flexibility as compared with its competitors. The
need to compete for investment opportunities may make it necessary for the Fund
to offer borrowers or lessees more attractive transaction terms than otherwise
might be the case.
EMPLOYEES.
The Fund has no employees; all of its officers are officers and
employees of the Manager or the Adviser to the Manager, and all of its required
services are performed by officers and employees of the Manager or the Adviser
to the Manager.
ITEM 2. PROPERTIES.
All of the Fund's office space is provided by the Manager.
ITEM 3. LEGAL PROCEEDINGS.
The Fund is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Fund's security holders
during the last quarter of the fiscal year ended June 30, 2000.
EXECUTIVE OFFICERS OF THE FUND
The following are the executive officers of the Fund. All officers
serve at the pleasure of the Board.
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NAME AND POSITION WITH FUND AGE OCCUPATION DURING PAST FIVE YEARS
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Ronald W. Swenson, Director, 55 President and Director, Westech Investment Advisors since 1994, and
Chairman and Chief Executive President and Director, Western Technology Investments since 1980.
Officer
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NAME AND POSITION WITH FUND AGE OCCUPATION DURING PAST FIVE YEARS
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Salvador O. Gutierrez, Director, 57 Senior Vice President and Director, Westech Investment Advisors
President since 1994, and Senior Vice President, Western Technology Investment
since 1987.
George W. Siguler, Executive Vice 53 Managing Director, Siguler Guff Advisers & affiliates since 1995;
President and Advisory Director Managing Director of Mitchell Hutchins Institutional Investors from
1991 to 1995. Director and President, Associated Capital Advisers, Inc.
(investment management firm) from 1990 to 1991, Vice Chairman and a
director of Monarch Capital Corporation (financial services holding
company) from 1984 to 1991.
Brian R. Best 34 Vice President, Westech Investment Advisors since 1999; Associate,
Vice President, CFO, and Secretary Westech Investment Advisors since 1997
Donald P. Spencer, Vice President 45 Managing Director, Siguler Guff Advisers and affiliates since 1995;
and Assistant Secretary Senior Vice President (and other positions), Mitchell Hutchins
Institutional Investors and affiliates from 1989 to 1995.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Fund's Common Stock is not listed on any securities exchange, and
all holders of the Fund's Common Stock are subject to agreements significantly
restricting the transferability of their shares.
The approximate number of holders of record of the Fund's Common Stock
at September 15, 2000 was 108.
The Fund has established a policy of declaring dividends on a quarterly
basis, with the most recent dividend being paid on July 28, 2000 to holders of
record on June 30, 2000, in the amount of $67.39 per share. See "Dividends and
Distributions" under Item 1 for a description of the Fund's dividend policies.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain financial data and should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere in this Form 10-K. The selected financial data set
forth below have been derived from the audited financial statements.
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For the Year Ended For the Year Ended From Inception,
June 30, 2000 June 30, 1999 September 15, 1997 To
June 30, 1998
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Statement of Operations Data:
Investment Income:
Interest on Loans and Leases $16,526,496 $7,412,772 $ 945,610
Interest on Short-Term investments 810,453 384,656 270,369
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Total Investment Income 17,336,949 7,797,428 1,215,979
Expenses:
Management Fee to Managers 3,655,548 2,750,000 2,183,048
Interest Expense 3,358,265 1,469,923 195,143
Other Expenses 944,296 409,764 245,173
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Total Expenses 7,958,109 4,629,687 2,623,364
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Net Investment Income (Loss) 9,378,840 3,167,741 (1,407,385)
Net Change in Unrealized Gain From Investment Transactions 2,559,583 10,205,281 643,692
Net Realized Gain From Investment Transactions 82,956,596 1,623,458 278,655
Incentive Fee (18,779,301) -- --
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Income (Loss) before cumulative effect of change in
accounting principle 76,115,718 14,996,480 (485,038)
================ ================ ================
Cumulative effect of change in accounting principle (2,174,665) -- --
---------------- --------------- -----------------
Net Income (Loss) $73,941,053 $14,996,480 (485,038)
================ =============== =================
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AMOUNTS PER COMMON SHARE:
Income (Loss) before cumulative effect of change in
accounting principle $1,183.35 $442.32 ($38.70)
Cumulative effect of change in accounting principle (33.81) - -
================ ================ =================
Net Income (Loss) $1,149.54 $442.32 ($38.70)
================ ================ ================
Weighted Average Shares Outstanding 64,322 33,904 12,534
================ ================ =================
Balance Sheet Data: AS OF JUNE 30, 2000 AS OF JUNE 30, 1999 AS OF JUNE 30, 1998
------------------- ------------------- -------------------
Total Assets $183,131,473 $94,847,182 $31,603,724
Bank Loans $65,024,316 $37,208,210 9,008,210
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS -- YEARS ENDED JUNE 30, 2000 AND 1999
Total investment income for the periods ended June 30, 2000 and June
30, 1999 was $17.3 million and $7.8 million, respectively, of which $16.5
million and $7.4 million, respectively, consisted of interest on venture loans
outstanding. Remaining income consisted of interest on the temporary investment
of cash, pending investment in venture loans and leases, distributions to
shareholders or application to the Fund's expenses. The increase in investment
income reflects the increase in loans & leases outstanding from June 30, 1999 to
June 30, 2000 of $78.0 million and a slight increase in the average yield on
loans funded during the period ended June 30, due to an increase in general
interest rates.
Expenses for the years ended June 30, 2000 and 1999 were $8.0 million
and $4.6 million, respectively. Management fees are calculated based on
committed capital for the first two years of the Fund's life and thereafter as a
percentage of Fund assets. Management fees increased from $2.8 million to $3.7
million because of the different methodology for calculating fees as the Fund
passed its second anniversary. Interest Expense increased to $3.4 million in the
year ended June 30, 2000 from $1.5 million in the prior year. This increase was
due mostly to an increase in the average debt outstanding as well as, to a
lesser extent, rising interest rates. Other operating expenses increased to $0.9
million in the year ended June 30, 2000 from $0.4 million in the prior year.
This increase was due to increased legal, auditing and tax services as well as
an increase in bank related costs. Expenses declined as a percentage of
investment income for the year ended June 30, 2000 from the year ended June 30,
1999 due to the increase in interest income on loans outstanding.
The Fund experienced a decrease in unrealized gains from investment
transactions of $2.6 million in the year ended June 30, 2000 as opposed to an
increase of $10.2 million in the prior year. This decrease was predominately due
to the realization of previously unrealized warrant gains through exercising the
warrants and ultimate sale of the securities. 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.
Included in unrealized gain from investment transactions for the year
ended June 30, 2000, is an unrealized loss on loans and leases of $0.3 million.
This amount represents a reduction in the estimated fair value of loans and
leases determined by the Fund's Managers in accordance with the procedures
established by the Fund's Board of Directors. The Fund's policy is to place a
loan on nonaccrual status when either principal or interest has become past due
for 90 days or more. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed. As of June 30, 2000 and 1999
the Fund had loan balances outstanding of $3.5 million and $3.6 million
respectively to borrowers that were carried on a nonaccrual basis. Foregone
interest income on nonaccrual loans for the years ended June 30, 2000 and 1999
was $209,000 and $131,000 respectively.
The Fund experienced an increase in realized gains during the year
ended June 30, 2000 of $81.3 million from June 30, 1999 of $1.6 million which
was predominately due to the Fund's sale of stock in various companies.
Net income for the period ended June 30, 2000 increased to $73.9
million from the year ended June 30, 1999 of $15.0 million. On a per share
basis, for the years ended June 30, 2000 and 1999 net income before cumulative
effect was $1,183 and $442 respectively, and net income was $1,150 and $442
respectively.
LIQUIDITY AND CAPITAL RESOURCES -- JUNE 30, 2000 AND JUNE 30, 1999
Total capital committed to the purchase of Shares pursuant to
subscription agreements was approximately $110 million at June 30, 2000 and
1999. As of June 30, 2000 and 1999, 90% and 40% 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 $52 million revolving debt facility to finance
the acquisition of asset-based loans and leases. As of June 30, 2000, $15.0
million was outstanding under this facility, compared with $37.2 million as of
June 30, 1999. During the year ended June 30, 2000 the Fund also put in place a
$50 million securitzation debt facility. As of June 30, 2000, $50 million was
outstanding on this facility. The Fund entered into interest rate swap
transactions to hedge its interest rate on the securitization debt facility. At
June 30, 2000, the fund had entered into an interest swap transaction with a
total notional principal of $50 million. At June 30, 1999, the Fund had no
interest rate swap transactions outstanding. The effect of swap transactions is
to convert the variable commercial paper rate into a fixed rate on the contract
notional value.
8
<PAGE>
As of June 30, 2000, 3% 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 year. Amounts disbursed under
the Fund's loan commitments increased by approximately $135.0 million during the
year ended June 30, 2000. Net loan amounts outstanding after amortization
increased by approximately $78.0 million. Unfunded commitments increased by
approximately $59.5 million.
<TABLE>
<CAPTION>
============================== ==================== ===================== =================== ======================
Principal Balance
Year Ending Amount Disbursed Amortization Outstanding Unfunded Commitments
------------------------------ -------------------- --------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
June 30, 2000 $235.2 million $78.9 million $156.3 million $171.3 million
------------------------------ -------------------- --------------------- ------------------- ----------------------
June 30, 1999 $100.2 million $21.9 million $78.3 million $111.8 million
============================== ==================== ===================== =================== ======================
</TABLE>
Because venture loans and leases are privately negotiated transactions,
investments in these assets are relatively illiquid. It is the company's
experience that not all unfunded commitments will be used by borrowers.
The Fund seeks to meet the requirements to qualify for the special
pass-through status available to "regulated investment companies" ("RICs") under
the Internal Revenue Code, and thus to be relieved of federal income tax on that
part of its net investment income and realized capital gains that it distributes
to shareholders. To qualify as a RIC, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gain) ("Distribution Requirement"). To the extent that the terms of the
Fund's venture loans provide for the receipt by the Fund of additional interest
at the end of the loan term or the terms of venture leases provide for the
receipt by the Fund of a purchase price for the asset at the end of the lease
term ("residual income"), the Fund would be required to accrue such residual
income over the life of the loan or lease, and to include such accrued income in
its gross income for each taxable year even if it receives no portion of such
residual income in that year. Thus, in order to meet the Distribution
Requirement and avoid payment of income taxes or an excise tax on undistributed
income, the Fund may be required in a particular year to distribute as a
dividend an amount in excess of the total amount of income it actually receives.
Those distributions will be made from the Fund's cash assets, from amounts
received through amortization of loans or leases or from borrowed funds.
QUARTERLY RESULTS
This information has been derived from unaudited financial statements
that, in the opinion of management, include all normal recurring adjustments
necessary for a fair presentation of such information. The operating results for
any quarter are not necessarily indicative of results for any future period.
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------- ---------------- ----------------- -----------------
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income:
Interest on Loans and Leases $2,996,175 $3,854,559 $4,711,040 $4,964,722
Interest on Short-Term Investments 92,464 193,310 320,365 204,314
------ ------- ------- -------
Total Investment Income 3,088,639 4,047,869 5,031,405 5,169,036
--------- --------- --------- ---------
Expenses:
Management Fee to the Managers 693,151 801,022 1,016,803 1,144,572
Interest Expense 635,281 710,227 926,962 1,085,795
Other Expense 239,002 255,308 153,486 296,500
------- ------- ------- -------
Total Expenses 1,567,434 1,766,557 2,097,251 2,526,867
--------- --------- --------- ---------
Net Investment Income $1,521,205 $2,281,312 $2,934,154 $2,642,169
Net Unrealized Gain (Loss) From Investment
Transactions 873,427 (1,555,427) (1,207,625) 4,449,208
Net Realized Gain From Investment
Transactions 6,181,041 67,761,009 5,664,263 3,350,283
Incentive Fee (1,572,288) (13,671,282) (1,395,537) (2,140,194)
----------- ------------ ----------- -----------
Income before cumulative effect of change
in accounting principle 7,003,385 54,815,612 5,995,255 8,301,466
9
<PAGE>
Cumulative Effect of change in accounting
principle (2,174,665) -- -- --
----------- ------------ ----------- -----------
Net Income $4,828,720 $54,815,612 $5,995,255 $8,301,466
========== =========== ========== ==========
Amount per common share:
Income before cumulative effect of change
in accounting principle $165.04 $1,013.54 $90.56 $97.34
Cumulative Effect of change in accounting
principle (41.85) -- -- --
----------- ------------ ----------- -----------
Net Income Per Share $123.19 $1,013.54 $90.56 $97.34
======= ========= ====== ======
Weighted Average Shares Outstanding 51,960 54,083 66,205 85,286
====== ====== ====== ======
</TABLE>
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------- ----------------- -----------------
September 30, December 31, March 31, 1999 June 30,
1998 1998 1999
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income:
Interest on Loans and Leases $1,013,442 $1,409,361 $2,113,040 $2,876,929
Interest on Short-Term Investments 72,807 108,384 137,339 66,126
------ ------- ------- ------
Total Investment Income 1,086,249 1,517,745 2,250,379 2,943,055
--------- --------- --------- ---------
Expenses:
Management Fee to the Managers 687,500 687,500 687,500 687,500
Interest Expense 159,861 347,484 466,922 495,655
Other Expense 66,732 96,613 106,279 140,141
------ ------ ------- -------
Total Expenses 914,093 1,131,597 1,260,701 1,323,296
------- --------- --------- ---------
Net Investment Income $172,156 $386,148 $989,678 $1,619,759
Net Unrealized Gain (Loss) From Investment
Transactions (336,692) (307,000) 1,636,372 9,212,601
Net Realized Gain (Loss) From Investment
Transactions - 1,662,489 - (39,031)
---------- ---------- ---------- -----------
Net Income (Loss) $(164,536) $1,741,637 $2,626,050 $10,793,329
========== ========== ========== ===========
Net Income (Loss) Per Share $(7.48) $56.68 $67.14 $245.30
======= ====== ====== =======
Average Shares Outstanding 22,000 30,728 39,111 44,000
====== ====== ====== ======
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the
caption "Executive Officers of the Fund" in Part I hereof, and the remainder is
contained in the Fund's Proxy Statement for the Annual Meeting of Shareholders
to be held November 15, 2000 ("2000 Proxy Statement") under the caption
"Proposal 1 -- To Elect Seven Directors of the Fund" and is incorporated herein
by reference.
10
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Fund's 2000
Proxy Statement under the caption "Proposal 2 -- To Elect Seven Directors of the
Fund" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Fund's 2000
Proxy Statement under the caption "Annex A -- Beneficial Ownership of Fund
Shares" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Fund's 2000
Proxy Statement under the captions: "Other Information -- Managers" and is
incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO FINANCIALS STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F2
Statements of Financial Position as of June 30, 2000 and 1999 F3
Statements of Operations for the Years ended June 30, 2000 and 1999 F4
Statements of Changes in Shareholders' Equity for the Years ended June 30, 2000
and 1999 F5
Statements of Cash Flows for the Years ended June 30, 2000 and 1999 F6
Notes to Financial Statements F7
</TABLE>
Financial Statement Schedules for the Years Ended June 30, 2000 and 1999
included in Item 14(d):
No schedules are required because the required information is not present or not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the financial statements and the notes
thereto.
(a) 2. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<S> <C>
3(i) Articles of Incorporation of the Company filed with the Maryland
Secretary of State on May 19, 1997, Incorporated by reference to the
Funds Registration Statement on Form 10 filed with the Securities and
Exchange Commission on July 2, 1997.
3(ii) Bylaws of the Company, Incorporated by reference to the Funds
Registration Statement on Form 10 filed with the Securities and
Exchange Commission on July 2, 1997.
4.1 Form of Subscription Agreement between the Company and Individual
Investors, Incorporated by reference to the Funds Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on July 2, 1997.
4.2 Form of Subscription Agreement between the Company and Institutional
Investors, Incorporated by reference to the Funds Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on July 2, 1997.
11
<PAGE>
4.3 Form of Subscriptions Agreement between the Company and Individual
Investors Purchasing Through the Placement Agent (including Investor
Questionnaire), Incorporated by reference to the Funds Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on July 2, 1997.
4.4 Form of Subscription Agreement between the Company and Institutional
Investors Purchasing Through the Placement Agent (including Investor
Questionnaire), Incorporated by reference to the Funds Registration
Statement on Form 10 filed with the Securities and Exchange
Commission on July 2, 1997.
10.1 Form of Custodian Agreement between the Company and BankBoston, N.A.,
Incorporated by reference to the Funds Registration Statement on Form
10 filed with the Securities and Exchange Commission on July 2, 1997.
10.2 Form of Stock Transfer Agent Fee Services Agreement between the
Company and BankBoston, N.A., Incorporated by reference to the Funds
Registration Statement on Form 10 filed with the Securities and
Exchange Commission on July 2, 1997.
10.3 Form of Intercreditor Agreement between the Company and Venture
Lending & Leasing, Inc., Incorporated by reference to the Funds
Registration Statement on Form 10 filed with the Securities and
Exchange Commission on July 2, 1997.
10.4 Form of Management Agreement between the Company, Westech Investment
Advisors, Inc. and Siguler Guff Advisers, LLC., Incorporated by
reference to the Funds Registration Statement on Form 10 filed with
the Securities and Exchange Commission on July 2, 1997.
10.5 Form of Engagement Letter between Robertson, Stephens & Company LLC
and Westech Investment Advisors, Inc., Incorporated by reference to
the Funds Registration Statement on Form 10 filed with the Securities
and Exchange Commission on July 2, 1997.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
</TABLE>
The Fund filed no reports on Form 8-K with the Commission during the fiscal
quarter ended June 30, 2000.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VENTURE LENDING & LEASING II, INC.
(Registrant)
By: /s/ Ronald W. Swenson By: /s/ Brian R. Best
------------------------- -------------------------
Ronald W. Swenson Brian R. Best
Chairman and Chief Executive Officer Chief Financial Officer
Date: September 28, 2000 Date: September 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
By: /s/ Arthur Aeder Director September 28, 2000
-----------------------------------
Arthur Aeder
By: /s/ John F. Cogan Director September 28, 2000
-----------------------------------
John F. Cogan
By: /s/ Salvador O. Gutierrez President & Director September 28, 2000
-----------------------------------
Salvador O. Gutierrez
By: /s/ S. Allan Johnson Director September 28, 2000
-----------------------------------
S. Allan Johnson
By: /s/ Louis Moelchert Director September 28, 2000
-----------------------------------
Louis Moelchert
By: /s/ Ronald W. Swenson CEO & Director September 28, 2000
-----------------------------------
Ronald W. Swenson
By: /s/ George H. Von Gehr Director September 28, 2000
-----------------------------------
George H. Von Gehr
</TABLE>
13
<PAGE>
VENTURE LENDING & LEASING II, INC.
INDEX TO FINANCIALS STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants 15
Statements of Financial Position as of June 30, 2000 and 1999 16
Statements of Operations for the Year ended June 30, 2000 and 1999 17
Statements of Changes in Shareholders' Equity for the Year ended June 30, 2000 and 1999 18
Statements of Cash Flows for the Year ended June 30, 2000 and 1999 19
Notes to Financial Statements 20
</TABLE>
14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Venture Lending & Leasing II, Inc.:
We have audited the accompanying statements of financial position of Venture
Lending & Leasing II, Inc. (a Maryland corporation) as of June 30, 2000 and
1999, and the related statements of operations, changes in shareholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Venture Lending & Leasing II,
Inc. as of June 30, 2000 and 1999, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
As explained in Note 11 to the financial statements, effective October 1, 1999,
the Fund changed its method of accounting for incentive management fees.
San Francisco, California,
August 23, 2000
15
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF FINANCIAL POSITION
AS OF JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
ASSETS
Loans and leases, at estimated fair value (cost: $158,723,975 and $80,414,104 in
2000 and 1999, respectively) $ 156,293,975 $ 78,293,229
Investments in securities, at estimated fair value (cost: $4,080,486 and $1,525,015
in 2000 and 1999, respectively) 19,919,042 14,494,863
Cash and cash equivalents 6,226,455 1,869,908
Other assets 692,001 189,182
---------------- ---------------
Total assets $ 183,131,473 $ 94,847,182
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans $ 65,024,316 $ 37,208,210
Accrued management and incentive fees 22,107,359 687,500
Accounts payable and other accrued liabilities 2,312,625 1,487,140
---------------- ---------------
Total liabilities 89,444,300 39,382,850
---------------- ---------------
Shareholders' equity:
Common stock, $0.001 par value:
Authorized--200,000 shares
Issued and outstanding--90,530 and 44,000 shares in 2000 and 1999, respectively 91 44
Capital in excess of par value 98,999,909 43,999,956
Accumulated distributions (93,765,322) (3,047,110)
Accumulated earnings 88,452,495 14,511,442
---------------- ---------------
Total shareholders' equity 93,687,173 55,464,332
---------------- ---------------
Total liabilities and shareholders' equity $ 183,131,473 $ 94,847,182
================ ===============
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
INVESTMENT INCOME:
Interest on loans and leases $ 16,526,496 $ 7,412,772
Interest on short-term investments 810,453 384,656
---------------- ---------------
Total investment income 17,336,949 7,797,428
---------------- ---------------
EXPENSES:
Management fees 3,655,548 2,750,000
Interest expense 3,358,265 1,469,923
Other operating expenses 944,296 409,764
---------------- ---------------
Total expenses 7,958,109 4,629,687
---------------- ---------------
Net investment income 9,378,840 3,167,741
NET CHANGE IN UNREALIZED GAIN FROM INVESTMENTS 2,559,583 10,205,281
NET REALIZED GAIN FROM INVESTMENTS 82,956,596 1,623,458
INCENTIVE FEE (18,779,301) --
---------------- ---------------
Income before cumulative effect of a change in accounting principle 76,115,718 14,996,480
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE IN ACCOUNTING
PRINCIPLE (Note 11) (2,174,665) --
---------------- ---------------
Net income $ 73,941,053 $ 14,996,480
================ ===============
AMOUNTS PER COMMON SHARE:
Income before cumulative effect of a change in accounting principle $1,183.35 $442.32
Cumulative effect on prior years of change in accounting principle (Note 11) (33.81) --
================ ===============
Net income $1,149.54 $442.32
================ ===============
WEIGHTED AVERAGE SHARES OUTSTANDING 64,322 33,904
PRO FORMA AMOUNTS ASSUMING THE NEW METHOD IS APPLIED RETROACTIVELY (Note 11):
Net income $ 76,115,718 $ 12,821,815
Net income per common share $1,183.35 $378.18
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN ACCUMULATED
---------- ---------- EXCESS OF EARNINGS
SHARES AMOUNT PAR VALUE DISTRIBUTION (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
Net income - - - - 14,996,480 14,996,480
Distribution - - - (3,047,110) - (3,047,110)
---------- ---------- --------------- --------------- ---------------- ----------------
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
Net income - - - - 73,941,053 (90,718,212)
Distribution - - - (90,718,212) - 73,941,053
---------- ---------- --------------- --------------- ---------------- ----------------
BALANCE, JUNE 30, 2000 90,530 $ 91 $ 98,999,909 $ (93,765,322) $ 88,452,495 $ 93,687,173
========== ========== =============== =============== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
VENTURE LENDING & LEASING II, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 73,941,053 $ 14,996,480
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred assets, net of additions (40,302) 54,639
Net realized gain from investments (82,956,596) (1,623,458)
Net change in unrealized gain from investments (2,559,583) (10,205,281)
Decrease (increase) in other assets (462,519) 39,371
Net increase in accounts payable, other accrued liabilities, and management fees 22,245,345 1,094,088
----------------- ----------------
Net cash provided by operating activities 10,167,398 4,355,839
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (134,976,136) (74,843,966)
Principal payments on loans and leases 53,754,169 17,198,306
Acquisition of warrants and stocks (5,731,754) (1,104,200)
Proceeds from sale of securities 49,623,594 2,019,149
----------------- ----------------
Net cash used in investing activities (37,330,127) (56,730,711)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock 55,000,000 22,000,000
Cash distribution to shareholders (51,296,830) (3,047,110)
Loan from bank 39,946,234 28,200,000
Repayment of bank loans (12,130,128) -
----------------- ----------------
Net cash provided by financing activities 31,519,276 47,152,890
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 4,356,547 (5,221,982)
CASH AND CASH EQUIVALENTS:
Beginning of year 1,869,908 7,091,890
----------------- ----------------
End of year $ 6,226,455 $ 1,869,908
================= ================
CASH PAID DURING THE YEAR FOR INTEREST $ 3,348,938 $ 1,449,102
NONCASH TRANSACTIONS: Distributions of investment securities to shareholders 39,421,382 -
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
VENTURE LENDING & LEASING II, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Venture Lending & Leasing, II, Inc. (the Fund) was incorporated in Maryland on
May 19, 1997, as a nondiversified closed-end management investment company
electing status as a business development company under the Investment Company
Act of 1940. Prior to commencing its operations on September 15, 1997, the Fund
had no operations other than the sale to Westech Investment Advisors, Inc.
(Westech Advisors) of 50 shares of common stock, $0.001 par value, for $50,000.
As of June 30, 2000, the Fund has met the requirements, including
diversification requirements, to qualify as a regulated investment company (RIC)
under the Internal Revenue Code of 1986 and filed for such registration.
A portion of the costs incurred in connection with the organization of the Fund
were paid initially by Westech Advisors; however, the Fund reimbursed Westech
Advisors for such costs and paid other organizational costs directly, which
totaled $198,202 as of June 30, 1998. This amount was deferred and is being
amortized on the straight-line basis over a period of 60 months from the date
the Fund commenced operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, demand deposits in banks, and
repurchase agreements with original maturities of 90 days or less.
VALUATION OF LOANS AND LEASES AND INVESTMENTS
Venture loans and leases are privately negotiated transactions, and there is no
established trading market in which such loans or leases can be sold.
Investments in loans and leases are valued at their original purchase price less
amortization of principal unless, pursuant to procedures established by the
Fund's Board of Directors, the Fund's managers determine that amortized cost
does not represent fair value.
Substantially all of the Fund's investment securities are warrants and stock.
Most of the Fund's securities are restricted and cannot be sold publicly without
prior agreement with the issuer to register the securities under the Securities
and Exchange Act of 1933 (the 1933 Act), or by selling the securities under Rule
144 or other rules under the 1933 Act, which permit only limited sales under
specified conditions.
Warrants that are received in connection with loan and lease transactions
generally will be assigned a minimal value at the time of acquisition.
Thereafter, warrants on equity securities with readily ascertainable market
values will be assigned a fair value based on the difference, if any, between
the exercise price of the warrant and the market value of the equity securities
for which the warrant may be exercised, adjusted for illiquidity.
Restricted equity securities for which a public market exists are valued at a
discount with reference to the market price for unrestricted equity securities
of the same issuers. The discount for these equity securities takes into
consideration the following factors: the nature of the market in which the
securities are traded, the existence and terms of any registration rights, the
proportion of the issuer's securities held by the Fund, and other factors that
may affect their fair value. As the restriction period and other restrictive
factors decrease, the discount applied to the securities also decreases.
NONACCRUAL LOANS
The Fund's policy is to place a loan on nonaccrual status when either principal
or interest has become past due for 90 days or more. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is reversed
for the quarter in which the loan was placed on nonaccrual status. Any
uncollected interest related to quarters
20
<PAGE>
prior to when the loan was placed on nonaccrual status is added to the principal
balance, and the aggregate balance of the principal and interest is evaluated in
accordance with the valuation of loans and leases.
Loans classified as nonaccrual amounted to $3,530,372 and $3,577,327 at June 30,
2000 and 1999, respectively. If interest on these loans had been accrued, such
income would have been $208,587 and $131,489 during the years ended June 30,
2000 and 1999, respectively.
COMMITMENT FEES
Unearned income and commitment fees on loans and leases are recognized using the
effective-interest method over the term of the loan or lease. Commitment fees
are carried as liabilities when received for commitments upon which no draws
have been made. When the first draw is made, the fee is included in unearned
income and is recognized as described above.
INTEREST RATE SWAPS
The Fund enters into interest rate swap transactions to manage interest rate
exposures on its debt. Net interest receivable or payable on the swap
transactions is included in interest expense. Gains or losses that result from
the early termination of swap agreements are deferred and amortized over the
remaining term of the associated debt as additional interest expense. Interest
rate swaps that do not qualify as hedges are marked to market.
TAX STATUS
As long as the Fund qualifies as a RIC, it will not pay any federal or state
corporate income tax on income that is distributed to shareholders (pass-through
status). Should the Fund lose its qualification as a RIC, it could be taxed as
an ordinary corporation on its taxable income for that year (even if that income
is distributed to its shareholders), and all distributions out of its earnings
and profits will be taxable to shareholders as ordinary income.
RECLASSIFICATIONS
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.
3. SUMMARY OF INVESTMENTS:
Loans and leases generally are made to borrowers pursuant to commitments whereby
the Fund commits to finance the borrower up to a specified amount for the term
of the commitments, upon the terms and subject to the conditions specified by
such commitment. As of June 30, 2000 and 1999, the Fund's investments in loans
and leases are entirely within the United States and are diversified among the
following industries. The percentage of net assets (shareholders' equity) 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>
2000 1999
-------------- ---------------
<S> <C> <C>
Biotech:
Aesgen, Inc. $ 1,737,299 $ -
Cellgate, Inc. 941,617 985,670
Ceres, Inc. 2,083,664 2,629,681
Genteric, Inc. 178,709 247,806
Metamorphix, Inc. - 461,124
Nobex Corporation (Protein Delivery, Inc.) 769,012 406,090
Origen Therapeutics, Inc. 443,226 -
Zyomyx, Inc. 1,690,040 -
-------------- ---------------
Total biotech (8.4% and 8.5% of net assets) 7,843,567 4,730,371
-------------- ---------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
2000 1999
-------------- ---------------
<S> <C> <C>
Communications equipment:
Amber Networks, Inc. $ 2,031,887 $ -
Cisco Systems (Cerent Corporation) 2,337,260 3,485,087
Cisco Systems (Jetcell, Inc.) 603,647 141,711
Corvis Corporation 6,329,606 4,946,667
Cosine Communications, Inc. 1,963,665 2,877,889
Cyras Systems, Inc. 4,237,707 3,109,424
Juniper Networks, Inc. - 2,013,991
Longboard (Magellan Network Systems, Inc.) 680,940 970,463
Metro-Optix, Inc. 3,148,898 -
Nishan Systems, Inc. 2,722,886 -
Optical Solutions, Inc. 3,320,862 -
Ramp Networks, Inc. 4,301,897 5,734,230
Taqua Systems, Inc. 2,913,934 -
Vx Tel, Inc. 515,232 -
-------------- ---------------
Total communications equipment (37.5%
and 42.0%) 35,108,421 23,279,462
-------------- ---------------
Communications service providers:
Applicast, Inc. (Plenan Systems, Inc.) 1,125,574 340,859
Colo.com 296,126 -
Digital Generation Systems, Inc. - 3,844,383
Equinix, Inc. 5,891,032 -
Exodus Communications, Inc. 1,688,299 2,666,032
IASIA Works, Inc. (Aunet, Inc.) 355,549 556,793
Jamcracker, Inc. 3,090,862 -
NewEdge Networks Corp. 3,752,776 -
Telera, Inc. 2,308,729 -
UM Communications, Inc. 9,278,082 -
USInternetworking, Inc. 5,723,121 8,142,353
-------------- ---------------
Total communications service providers
(35.8% and 28.0%) 33,510,150 15,550,420
-------------- ---------------
Computers and peripherals:
Applied Magnetics Corporation (DAS Devices, Inc.) 60,000 1,523,657
Intera Systems, Inc. 208,403 269,820
New Focus, Inc. - 672,601
Quantum 3D 87,664 177,732
Svision, Inc. - 432,469
Zayante, Inc. 74,999 -
-------------- ---------------
Total computers and peripherals (0.5%
and 5.5%) 431,066 3,076,279
-------------- ---------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
2000 1999
-------------- ---------------
<S> <C> <C>
Internet:
Adforce $ 144,336 $ 231,236
Backflip, Inc. 1,267,541 -
Be Vocal, Inc. 2,773,904 -
Do Dots, Inc. 1,108,656 -
Eletter, Inc. 1,325,289 -
Google 5,144,393 -
Keynote Systems Incorporated 293,690 427,026
Netratings 209,928 280,669
Private Express.com 375,600 -
Quin Street, Inc. 475,824 -
Tradec.com 317,966 -
Vividence Corporation 195,575 -
-------------- ---------------
Total Internet (14.6% and 1.7%) 13,632,702 938,931
-------------- ---------------
Medical devices:
Aerogen, Inc. 134,198 310,481
Heartstent Corporation 76,618 275,896
Intratherapeutics, Inc. 1,500,437 1,041,318
Myelotec, Inc. 207,650 312,785
Pi Medical, Inc. 23,894 -
Spinal Concepts, Inc. 215,712 301,684
Survivalink Corporation 664,789 1,028,178
Vascular Innovations, Inc. 338,373 -
Volumetrics Medical Imaging, Inc. 692,449 789,158
-------------- ---------------
Total medical devices (4.1% and 7.3%) 3,854,120 4,059,500
-------------- ---------------
Photonics:
LightLogic, Inc. 4,917,608 -
Lightwave Microsystems Corporation 221,240 338,263
New Focus, Inc. 472,949 -
Newport Communications, Inc. 1,902,753 -
Novalux, Inc. 1,583,761 -
-------------- ---------------
Total photonics (9.7% and 0.6%) 9,098,311 338,263
-------------- ---------------
Semiconductors:
Abrizio 985,688 1,171,064
Chameleon Systems, Inc. 2,554,727 970,419
Dynachip Corporation - 586,543
Hot Rail, Inc. (Poseidon Technology, Inc.) 718,041 1,100,547
Icompression, Inc. 2,615,481 809,689
Ishoni Networks 4,344,341 -
Matrix Semiconductor, Inc. 875,548 -
nDSP Corporation 959,454 -
Nucore Technology, Inc. 1,094,617 639,961
Quantum Effect Design, Inc. 1,410,938 1,903,126
Sandcraft, Inc. 3,322,575 -
Telecruz Technology, Inc. 1,741,824 1,001,503
Transmeta Corporation 1,692,610 1,979,639
Triscend Corporation 751,839 722,150
-------------- ---------------
Total semiconductors (24.6% and 19.6%) 23,067,683 10,884,641
-------------- ---------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
2000 1999
-------------- ---------------
<S> <C> <C>
Semiconductor equipment:
Abpac, Inc. $ 347,924 $ 2,567,231
Brooks Automations, Inc. (Smart Machines, Inc.) 908,780 1,303,689
Obsidian, Inc. - 4,736,824
Primaxx Corporation 394,324 -
Silicon Genesis Corporation 6,100,001 -
Torrex Equipment Corporation 857,334 -
-------------- ---------------
Total semiconductor equipment (9.2% and 15.5%) 8,608,363 8,607,744
-------------- ---------------
Software:
Broad Daylight, Inc. (Acme Software, Inc.) 872,943 278,273
CoWare, Inc. 368,971 240,630
di Carta, Inc. 716,756 -
E.piphany 448,865 -
Mineshare, Inc. 300,439 464,367
On Demand, Inc. 1,108,301 -
Open Telephone Networks, Inc. 195,741 -
Optimal Networks 321,883 -
Personic Software, Inc. 1,607,782 791,991
Steeleye Technology, Inc. 2,784,051 -
Sycon Design, Inc. 203,616 274,814
Taviz Technology, Inc. (EN2Z Corporation, Smart DB) 1,746,226 882,167
Ten North, Inc. 793,913 -
0-in Design Automation Inc. 249,318 246,625
Xpede, Inc. 4,984,918 -
Zoneworks, Inc. (Zone Automation, Inc.) 1,009,130 201,560
-------------- -------------
Total software (18.9% and 6.1%) 17,712,853 3,380,427
-------------- -------------
Other:
Lumenare 489,455 -
Offroad Capital 570,162 349,315
WebVan-Bay Area, Inc. 2,367,122 3,097,876
-------------- -------------
Total other (3.7% and 6.2%) 3,426,739 3,447,191
-------------- -------------
Total loans and leases (cost: $158,723,975
and $80,414,104) $ 156,293,975 $ 78,293,229
============== =============
</TABLE>
The Fund provides asset-based financing primarily to start-up and emerging
growth venture-capital-backed companies. As a result, the Fund is subject to
general credit risk associated with such companies. At June 30, 2000 and 1999,
the Fund has unfunded commitments to borrowers of $171,334,762 and $111,791,987,
respectively.
Included in the net change in unrealized gain from investment transactions for
the years ended June 30, 2000 and 1999, is an unrealized loss on loans and
leases of $309,125 and $2,120,875, respectively. This amount represents a
reduction in the estimated fair value of loans and leases determined by the
Fund's Managers in accordance with the procedures established by the Fund's
Board of Directors.
24
<PAGE>
The Fund's investments in warrants are entirely within the United States and are
diversified among the following industries. The percentage of net assets that
each industry group represents is shown with the industry totals:
<TABLE>
<CAPTION>
2000
---------------------------------
PERCENTAGE OF
VALUE NET ASSETS
---------------- ----------------
<S> <C> <C>
Photonics:
New Focus $ 5,988,168 6.4%
Other photonics 160,900 0.2
---------------- ----------------
Total photonics 6,149,068 6.6
Communications service providers 633,919 0.7
Other warrants 4,249,484 4.5
---------------- ----------------
Total warrants (cost: $2,531,400) $ 11,032,471 11.8%
================ ================
</TABLE>
<TABLE>
<CAPTION>
1999
---------------------------------
PERCENTAGE OF
VALUE NET ASSETS
---------------- ----------------
<S> <C> <C>
Communications service providers:
USInternetworking, Inc. $ 6,630,414 11.9%
Other communications service providers 96,000 0.2
---------------- ----------------
Total communications service providers 6,726,414 12.1
---------------- ----------------
Communications equipment:
Ciena 3,200,974 5.8
Juniper Networks, Inc. 3,253,767 5.9
Other communications equipment 290,000 0.5
---------------- ----------------
Total communications equipment 6,744,741 12.2
---------------- ----------------
Other warrants 919,050 1.7
---------------- ----------------
Total warrants (cost: $1,501,500) $ 14,390,205 26.0%
================ ================
</TABLE>
The Fund's investments in 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, as follows:
<TABLE>
<CAPTION>
2000
----------------------------------------------
PERCENTAGE OF
SHARES VALUE NET ASSETS
------------ ---------------- ----------------
<S> <C> <C> <C>
Semiconductors 115,303 $ 5,763,508 6.2%
Other common stock 166,064 3,123,063 3.3
------------ ---------------- ----------------
Total common stock (cost:
$1,549,086) 281,367 $ 8,886,571 9.5%
============ ================ ================
</TABLE>
25
<PAGE>
4. WARRANTS AND STOCK:
At June 30, 2000 and 1999, the Fund held warrants to purchase shares of common
and preferred stock in 87 and 59 companies, respectively, of which 5 and 7,
respectively, were publicly traded. The warrants issued by private companies
whose equity securities do not have a readily ascertainable market value are
carried at a minimal value assigned at the time of acquisition. These warrants
had a value of $2,378,400 and $1,077,050 at June 30, 2000 and 1999,
respectively. The following is a summary of the activity for investments in
warrants and investments in stocks for the years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---------------- -----------------
<S> <C> <C>
Investments in warrants:
Balance, beginning of year $ 14,390,205 $ 487,850
Net acquisition of warrants 1,835,100 1,016,700
Conversion of warrants to stock (680,750) (3,500)
Write-off of warrants (124,000) -
Net change in unrealized gain (4,388,084) 12,889,155
---------------- -----------------
Balance, end of year $ 11,032,471 $ 14,390,205
================ =================
Investments in stocks:
Balance, beginning of year $ 104,658 $ 972,347
Net acquisition of stock 3,896,657 -
Conversion of warrants to stock 680,750 23,965
Cost basis of stock sold (3,052,286) (328,655)
Net change in unrealized gain 7,256,792 (562,999)
---------------- -----------------
Balance, end of year $ 8,886,571 $ 104,658
================ =================
</TABLE>
5. LONG-TERM DEBT FACILITY:
As of June 30, 2000 and 1999, the Fund had in place a revolving credit warehouse
facility to finance the acquisition of asset-based loans and leases. The Fund
was eligible to borrow up to $52 million as of June 30, 2000 and 1999.
Outstanding balances bear interest at either the financial institution's prime
rate or 1.25 percent above LIBOR, which at June 30, 2000 and 1999, was 6.684
percent and 6.486 percent, respectively. The Fund pays a commitment fee of 0.25
percent annually on the total average amount of unused commitment with respect
to this facility.
Borrowings under the facility are collateralized by the assets financed by the
Fund under loans and leases with assignment to the financial institution plus
other assets of the Fund.
As of June 30, 2000 and 1999, the fund had $15.0 million and $37.2 million
outstanding, under this facility.
The Fund also has in place a $50 million securitization debt facility to finance
the acquisition of asset-based loans and leases. The principal balance is a
42-month term loan. Additional amounts can be drawn on the credit facility by a
minimum of $5 million and in $1 million increments in excess thereof. The
balance amortizes on a monthly basis. At June 30, 2000, there was $50 million
outstanding under this facility. The interest rate on this facility varies
monthly and is calculated as the bank's rate for commercial paper on the date of
reconciliation plus .55 percent. At June 30, 2000, this rate was 6.7875 percent.
The required aggregate debt principal payments for the remaining four years are
as follows:
<TABLE>
<CAPTION>
PRINCIPAL
YEAR PAYMENTS
--------------- -------------------
<S> <C>
2001 $ 16,257,794
2002 20,814,736
2003 11,615,886
2004 1,311,584
-------------------
$ 50,000,000
===================
</TABLE>
26
<PAGE>
6. INTEREST RATE SWAPS:
The fund enters into interest rate swap transactions to hedge its interest rate
on the securitization debt facility. The net interest received or paid on the
transactions is included in interest expense.
At June 30, 2000, the Fund had interest swap transactions outstanding with a
total notional principal amount of $50 million to convert floating rate
liabilities to fixed rates as follows:
- Notional amount of $45 million whereby the Fund pays a fixed rate of 6.78
percent, while the financial institution pays a floating 30-day commercial
paper rate. Payments are made monthly and terminate on July 25, 2003.
- Notional amount of $5 million whereby the Fund pays a fixed rate of 6.78
percent, while the financial institution pays a floating 30-day commercial
paper rate. This portion of the swap agreement is an interest rate cap and is
only paid from the bank to the Fund when the variable rate exceeds the fixed
rate. When interest rates are lower than 6.78 percent, no extra interest is
paid by the Fund. Payments are made monthly and terminate on July 25, 2003.
7. CAPITAL STOCK:
As of June 30, 2000 and 1999, there are 200,000 shares of $0.001 par value
common stock authorized, and 90,530 and 44,000 shares are issued and
outstanding, respectively.
The Fund has subscription agreements in effect with its shareholders under which
shareholders will purchase shares of the Fund, up to their full committed
capital amount, upon capital calls delivered at least 15 days before payment is
due. Based on $110 million of subscriptions received by the final closing during
December 1997, $11 million in unfunded and uncalled capital commitments remained
outstanding as of June 30, 2000.
8. EARNINGS PER SHARE:
Basic earnings per share are computed by dividing net income by the
weighted-average common shares outstanding. Diluted earnings per share are
computed by dividing net income 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.
9. MANAGEMENT:
Westech Advisors serves as the Fund's investment manager, and Siguler Guff
Advisers, L.L.C. (the Adviser) serves as adviser to Westech Advisors with
respect to Westech Advisors' administrative duties to the Fund. As compensation
for their services to the Fund, Westech Advisors and the Adviser, together, will
receive a management fee (the Management Fee) at an annual rate of 2.5 percent
of the Fund's committed capital, computed and paid quarterly for the first two
years following the Fund's initial private offering and at an annual rate of 2.5
percent of the Fund's total assets (including amounts derived from borrowed
funds) as of the last day of each fiscal quarter thereafter. Fees of $3,655,548
and $2,750,000 were recognized for the years ended June 30, 2000 and 1999,
respectively.
In addition to the Management Fee, Westech Advisors and the Adviser (the
Managers) will together receive a monthly incentive fee (the Incentive Fee)
after shareholders have received a return of funds (Payout) equal to the
following: (a) cumulative dividends and distributions equal to 100 percent of
all amounts paid, as of the date of calculation, by shareholders to the Fund
(and not including placement fees paid to the placement agent by certain of the
shareholders) for the purchase of shares plus (b) a preferred return on all
amounts contributed, as of the date of calculation, equal to an 8 percent
cumulative noncompounded annual return on such amounts. After Payout has been
achieved, all amounts available to be paid as dividends and distributions to
shareholders in accordance with the Fund's distribution policies will be
distributed as follows: 80 percent as dividends to the Fund's shareholders and
20 percent to the Managers as the Incentive Fee. The Incentive Fee shall not be
paid until the Fund is no longer permitted to make capital calls under the
subscription agreements or irrevocably waives any right to do so. The Incentive
Fee expense for the years ended June 30, 2000 and 1999, was $20,953,966 and $0,
respectively (see Note 11). There were no payments to the Managers based on the
Fund's distribution policies for the years ended June 30, 2000 and 1999.
Certain officers and directors of the Fund also serve as officers and directors
of Westech Advisors and Siguler Guff Advisers, L.L.C.
27
<PAGE>
10. FUTURE FINANCIAL ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, established
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.
11. CHANGE IN ACCOUNTING PRINCIPLE:
In the second quarter of the fiscal year ended June 30, 2000, the Fund changed
its method of accounting for its Incentive Fee. The previous method was to
record the Incentive Fee as the Fund became legally obligated. The new method is
to record the Incentive Fee based on the Fund's current income. According to the
management of the Fund, this change was made to more closely match the Incentive
Fee to current performance. The new method has been applied to Incentive Fee
calculations of prior years. The $2,174,665 cumulative effect of the change on
prior years is included in net income for the year ended June 30, 2000. The
effect of the change on the year ended June 30, 2000, was to decrease income
before cumulative effect of a change in accounting principle by $18,779,301
($291.96 per share).
The pro forma amounts presented with the results of operations for the years
ended June 30, 2000 and 1999, reflect the effect of retroactive application of
the Incentive Fee had the provision for Incentive Fees been made during these
periods.
12. SUBSEQUENT EVENT:
In August 2000, the Fund called an additional $11 million, or 10 percent, of
committed capital from its shareholders, bringing the total commitments called
to $110 million. After collection of the $11 million called in August, no
capital commitments will remain.
28
