FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ending December 31, 1996
[_] 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 0-22618
Venture Lending & Leasing, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Maryland 13-3775187
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2010 North First Street, Suite 310, San Jose, CA 95131
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(Address of principal executive offices)
(Zip Code)
(408) 436-8577
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(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 February 14, 1996
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Common Stock, $.001 par value 29,822.91
<PAGE>
VENTURE LENDING & LEASING, INC.
INDEX
Page Number
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position (Unaudited) 3
December 31, 1996 and June 30, 1996
Schedule of Loans and leases (Unaudited) 4 - 5
December 31, 1996
Statement of Operations (Unaudited) 6
Six Months Ended December 31, 1996 and
December 31, 1995
Statement of Operations (Unaudited) 7
Three Months Ended December 31, 1996 and
December 31, 1995
Statement of Changes in Shareholders Equity 8
(Unaudited) Six Months Ended December 31,
1996 and Year Ended June 30, 1996
Statement of Cash Flows (Unaudited) 9
Six Months Ended December 31, 1996 and
December 31, 1995
Notes to Financial Statements 10 - 13
Item 2. Management's Discussion and Analysis of Financial 14 - 16
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits 17
SIGNATURES 18
<PAGE>
VENTURE LENDING & LEASING, INC.
Statement of Financial Position (Unaudited)
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<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
----------------- -------------
<S> <C> <C>
Assets
Loans and leases, net of unearned income, fees $ 42,297,908 $ 28,616,626
and reserve for non-performing loans
Cash and cash equivalents 3,147,928 4,683,671
Investments:
Warrants (cost - $737,685 and $464,685) 3,166,421 1,772,701
Restricted common stock (cost - $45,000) 788,133 --
Deferred organizational expenses 74,997 90,080
Deferred bank loan expenses 15,438 19,808
Accounts receivable 4,728 16,545
Other assets 22,449 5,916
------------ ------------
Total assets 49,518,002 35,205,347
------------ ------------
Liabilities & Shareholders' Equity
Liabilities
Bank loans 16,708,597 14,738,460
Accounts payable 576,494 358,676
Interest payable 289,833 40,113
Commitment fees 115,235 124,735
------------ ------------
Total liabilities 17,690,159 15,261,984
------------ ------------
Shareholders' Equity
Common stock, $.001 par value; 100,000,000
shares authorized; issued and outstanding,
29,822.91 and 20,594.74 shares 30 20
Capital in excess of par value 27,993,514 18,669,745
Distributions (2,518,449) (1,262,256)
Accumulated earnings 6,352,748 2,535,854
------------ ------------
Total shareholders' equity 31,827,843 19,943,363
------------ ------------
Total liabilities & shareholders' equity $ 49,518,002 $ 35,205,347
============ ============
</TABLE>
3
<PAGE>
VENTURE LENDING & LEASING, INC.
Schedule of Loans and Leases (Unaudited)
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<TABLE>
<CAPTION>
Outstanding
Amount Principal December 31,
Borrower Commitment Disbursed Amortization 1996
-------- ---------- --------- ------------ ----
<S> <C> <C> <C> <C>
Active Software, Inc. $800,000 $401,217 $35,560 $365,657
Advanced Therapies, Inc. 500,000 503,874 128,539 375,335
Aptix Corporation 1,000,000 -- -- --
Araxsys, Inc. 1,000,000 -- -- --
BigBook, Inc. 2,000,000 1,169,432 172,170 997,262
Biosys, Inc. * 2,500,000 2,180,487 769,024 1,411,463
Brocade Communications, Inc. 2,600,000 1,816,127 210,959 1,605,168
Calico Technology, Inc. 1,500,000 -- -- --
Caps Software, Inc. 1,000,000 839,330 162,748 676,582
Cardia Catheter Company 500,000 -- -- --
Ciphergen Biosystems 740,000 765,144 136,258 628,886
Comps Infosystems, Inc. 3,000,000 1,411,879 151,090 1,260,789
Cortrak Medical, Inc. 500,000 -- -- --
Datamind Corporation 800,000 537,818 66,757 471,061
Desmos, Inc. 1,000,000 261,557 35,512 226,045
Digex, Inc. 3,000,000 1,175,923 363,426 812,497
Distrivision Development Corporation 500,000 227,009 27,649 199,360
Encelle, Inc. 750,000 227,773 26,725 201,048
Equator Technologies, Inc. 3,000,000 526,879 96,891 429,988
Exodus Communications, Inc. 1,800,000 1,107,842 100,810 1,007,032
Exponential Technology, Inc. 3,200,000 3,396,131 1,036,927 2,359,204
Fabrik Communications, Inc. 1,800,000 1,157,862 189,187 968,675
Fluid Propulsion Technologies, Inc 250,000 136,737 34,443 102,294
Gene Logic, Inc. 1,000,000 -- -- --
I-Cube, Inc. 1,000,000 513,320 51,443 461,877
Idec Pharmeceuticals Corp. 5,000,000 5,000,000 1,935,448 3,064,552
Infoseek Corporation 3,500,000 3,534,981 1,406,180 2,128,801
Integ Incorporated 12,500,000 1,352,274 170,233 1,182,041
Inverse Network Technology 350,000 -- -- --
Ipsilon Networks, Inc. 1,000,000 967,590 225,955 741,635
Jetstream Communications, Inc. 495,000 451,790 66,849 384,941
JTS Corporation 4,500,000 4,029,108 4,029,108 --
Juniper Networks, Inc. 5,000,000 536,618 53,573 483,045
Larex, Inc. 2,500,000 1,445,250 210,002 1,235,248
Neomagic Corporation 3,000,000 1,547,399 477,364 1,070,035
Netpower, Inc. 1,500,000 978,544 350,560 627,984
Optimal Networks Corporation 400,000 226,590 90,283 136,307
Optivision, Inc. 2,000,000 2,000,000 234,202 1,765,798
Oratec Interventions, Inc. 500,000 394,391 52,100 342,291
</TABLE>
* Non-performing loan on non-accrual Continued
The accompanying notes are an integral part of these statements.
4
<PAGE>
VENTURE LENDING & LEASING, INC.
Schedule of Loans and Leases (Unaudited)
(Continued)
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<TABLE>
<CAPTION>
Outstanding
Amount Principal December 31,
Borrower Commitment Disbursed Amortization 1996
-------- ---------- --------- ------------ ----
<S> <C> <C> <C> <C>
Persistence Software, Inc. 500,000 504,528 68,222 436,306
Photon Dynamics, Inc. 1,000,000 1,000,000 1,000,000 --
ReGen Biologics 1,500,000 212,273 30,566 181,707
Release Software Corporation 1,000,000 248,201 37,616 210,585
ROI Technology 750,000 471,922 38,599 433,323
Silicon Architects 900,000 290,233 290,233 --
Socket Communications, Inc. 500,000 211,354 52,106 159,248
Solopoint, Inc. 400,000 191,505 25,867 165,638
Spectrum Wireless, Inc. 2,000,000 1,025,641 55,774 969,867
Starlight Networks, Inc. 5,000,000 4,835,100 249,405 4,585,695
Svision Inc. 500,000 -- -- --
Tenth Planet Exploration, Inc. 1,250,000 717,234 300,637 416,597
Terrapin Technologies, Inc. 1,500,000 1,290,426 84,743 1,205,683
Tessera, Inc. 2,500,000 760,803 312,729 448,074
Transmeta Corporation 700,000 668,974 52,531 616,443
Ulsi Systems, Inc. 500,000 487,650 169,789 317,861
Uniax Corporation 2,000,000 493,481 70,082 423,399
Verisign, Inc. 2,000,000 -- -- --
VidaMed, Inc. 3,000,000 3,000,000 1,204,060 1,795,940
Wallop Software, Inc. 1,000,000 181,245 30,435 150,810
Wink Communications, Inc. 1,500,000 1,421,438 24,601 1,396,837
Xatrix Entertainment, Inc. 1,000,000 999,597 448,997 550,600
O - In Design Automation 250,000 -- -- --
ZSP Corporation 2,000,000 263,440 53,046 210,394
------------ ------------ ------------ ------------
Totals $111,235,000 $60,095,921 $17,698,013 $42,397,908
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
VENTURE LENDING & LEASING, INC.
Statement of Operations (Unaudited)
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<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Investment Income:
Interest on loans and leases $3,285,723 $1,383,699
Interest on short-term investments 137,882 181,355
---------- ----------
Total Investment Income 3,423,605 1,565,054
---------- ----------
Expenses:
Management fee 591,979 581,237
Interest expense 643,430 385,557
Legal fees 31,961 2,925
Bank loan facility fee 28,486 21,494
Directors' fees and expenses 16,000 16,500
Amortization of organizational expenses 15,082 15,082
Regulatory reporting 13,354 4,500
Transfer agency fees 4,127 3,925
Custody and accounting fees 9,075 10,840
Audit fees 5,967 11,083
Other operating expenses 11,104 7,945
---------- ----------
Total Expenses 1,370,565 1,061,088
---------- ----------
Net Investment Gain 2,053,040 503,966
Net Unrealized Gain From Investment Transactions 1,763,856 485,993
---------- ----------
Net Income $3,816,896 $ 989,959
========== ==========
Net Income Per Share $ 140 $ 59
========== ==========
Average Shares Outstanding 27,265 16,652
========== ==========
</TABLE>
6
<PAGE>
VENTURE LENDING & LEASING, INC.
Statement of Operations (Unaudited)
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<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Investment Income:
Interest on loans and leases $1,950,430 $ 789,160
Interest on temporary investments 68,777 97,467
---------- ----------
Total Investment Income 2,019,207 886,627
---------- ----------
Expenses:
Management fee 306,164 293,769
Interest expense 326,540 185,744
Other expenses 86,145 39,396
---------- ----------
Total Expenses 718,849 518,909
---------- ----------
Net Investment Gain 1,300,358 367,718
Net Unrealized Gain From Investment Transactions 186,380 485,993
---------- ----------
Net Income $1,486,738 $ 853,711
========== ==========
Net Income Per Share $ 50 $ 42
========== ==========
Average Shares Outstanding 29,823 20,417
========== ==========
</TABLE>
7
<PAGE>
VENTURE LENDING & LEASING, INC.
Statement of Changes in Shareholders' Equity (Unaudited)
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For the Year ended June 30, 1996 and
the Six Months Ended December 31, 1996
<TABLE>
<CAPTION>
Common Stock Capital in Retained
----------------------- Excess of Earnings
Shares Amount Par Value Distributions (Deficit) Total
--------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 12,379.43 $12 $11,426,921 $ -- ($381,216) $11,045,717
Shares sold 8,215.31 8 7,242,824 -- -- 7,242,832
Distributions -- -- -- (1,262,256) -- (1,262,256)
Net Income -- -- -- -- 2,917,070 2,917,070
--------- ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1996 20,594.74 20 218,669,745 (1,262,256) 2,535,854 19,943,363
Shares sold 9,228.17 10 109,323,769 -- -- 9,323,779
Distributions -- -- -- (1,256,193) -- (1,256,193)
Net Income -- -- -- -- 3,816,894 3,816,894
--------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 29,822.91 $30 $27,993,514 ($2,518,449) $6,352,748 $31,827,843
========= ============ ============ ============ ============ ============
</TABLE>
8
<PAGE>
VENTURE LENDING & LEASING, INC.
Statement of Cash Flows (Unaudited)
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<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 3,816,896 $ 989,959
Adjustments to reconcile net investment income (loss)
to net cash provided by (used in) operating activities:
Amortization of organizational expenses 15,083 15,082
Amortization of bank loan expenses 4,370 4,370
(Increase) Decrease in other assets (16,533) (1,074)
Increase in accounts payable 217,818 67,322
Decrease in accounts receivable 11,817 10,099
Increase in interest payable 249,720 9,039
Increase (Decrease) in refundable commitment fees (9,500) 96,000
Increase in unrealized gain from investment transactions (1,763,856) (463,375)
------------ ------------
Net cash provided by (used in) operating activities 2,525,815 727,422
------------ ------------
Cash flows from investing activities:
Acquisition of loans and leases (13,781,281) (10,297,333)
Principal payments on loans and leases 2,031,630
Proceeds from prepayment of loan --
Acquisition of warrants (273,000) (137,518)
Acquisition of restricted common stock (45,000) --
------------ ------------
Cash used in investing activities (14,099,281) (8,403,221)
------------ ------------
Cash flows from financing activities:
Sales of common stock, net 9,323,779 7,242,842
Distributions to shareholders (1,256,193) (420,975)
Loan from bank 4,500,000 2,300,000
Principal payments on bank loan (2,529,863) (1,438,689)
------------ ------------
Net cash provided by financing activities 10,037,723 7,683,178
------------ ------------
Net Increase (Decrease) in cash and cash equivalents (1,535,743) 7,379
------------ ------------
Cash and Cash Equivalents -- Beginning of period 4,683,671 8,136,350
------------ ------------
Cash and Cash Equivalents -- End of period $ 3,147,928 $ 8,143,729
============ ============
</TABLE>
9
<PAGE>
VENTURE LENDING & LEASING, INC.
Notes to Financial Statements (Unaudited)
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1. Organization and Operations of the Company:
Venture Lending & Leasing, Inc. (the "Fund") was incorporated in Maryland on
September 29, 1993 as a non-diversified, 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 July 5, 1994 the Fund
had no operations other than the sale to Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins"), which is an indirect wholly owned
subsidiary of PaineWebber Group Inc., of one share of Common Stock, $.001 par
value ("common stock"), for $1,000. As of September 30, 1996 the Fund meets the
requirements, to qualify as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986.
Costs incurred in connection with the organization of the Fund were paid
initially by Mitchell Hutchins and Westech Investment Advisors, Inc. ("Westech
Advisors") (collectively, the Managers); however, the Fund reimbursed the
Managers $150,000 of such costs. This amount has been deferred and is being
amortized on the straight-line method over a period of 60 months from the date
the Fund commenced operations. During the prior year, the management contract of
the Fund was assigned from Mitchell Hutchins to Siguler Guff Advisers, L.L.C.
2. Summary of Significant Accounting Policies:
Basis of Accounting --- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Valuation of Investments --- The Fund anticipates that substantially all of its
portfolio investments (other than short-term investments) will consist of
securities that at the time of acquisition are subject to restrictions on sale
and for which no ready market will exist. Venture loans and leases are privately
negotiated transactions, and there is no established trading market in which
such loans or leases can be sold. Substantially all the Fund's investments are
restricted securities that cannot be sold publicly without prior agreement with
the issuer to register the securities under the 1933 Act, or by selling the
securities under Rule 144 or other rules under the 1933 Act which permit only
limited sales under specified conditions.
Investments in loans and leases are valued at their original purchase price less
amortization of principal unless, pursuant to procedures established by the
Fund's Board of Directors, the Fund's Managers determine that amortized cost
does not represent fair value. Short-term debt instruments with 60 days or less
remaining to maturity are valued by the amortized cost method. The Fund does not
hold any short-term debt instruments that have a period of maturity exceeding 60
days.
Warrants that are received in connection with loan and lease transactions
generally are valued at a nominal value assigned at the time of acquisition,
which generally occurs at the first drawdown under the commitment. Thereafter,
warrants with readily ascertainable market values will be assigned a fair value
based on the difference, if any, between the exercise price of the warrant and
the market value of the equity securities for which the warrant may be
exercised, adjusted for illiquidity.
10
<PAGE>
VENTURE LENDING & LEASING, INC.
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued):
Cash & Cash Equivalents --- Cash & cash equivalents consist of cash on hand,
demand deposits in banks and repurchase agreements with original maturities of
ninety days or less.
Loans & Leases --- Unearned income and commitment fees on loans and leases are
recognized using the effective interest method over the term of the loan or
lease. Commitment fees represent fees received for commitments upon which no
drawdowns have yet been made. The fee is included in unearned income and
recognized as described above.
Reserves for losses on loans --- Reserves for losses on loans are maintained at
levels that, in the opinion of management, are adequate to absorb losses
incurred in the loan portfolio. The Fund has created a reserve for
non-performing loans of $0.1 million. Biosys Inc. has filed a petition for
reorganization under Chapter 11 of the Bankruptcy Code due to a chronic cash
shortage caused by poor operating and market conditions. The Company is
presently seeking additional financing from several sources and the Managers
expect to recover fully on the Fund's loan to the Company. As of December 31,
1996 the Fund has asset-backed secured loans outstanding to the Company in the
amount of $1.4 million.
Federal 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.
3. Summary of Loans and Leases:
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. Commitments, loans and leases outstanding at December 31, 1996 are
summarized on the schedule of loans and leases.
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.
4. Warrants:
At December 31, 1996, the Fund held 3.2 million warrants to purchase shares of
common and preferred stock in 46 companies, of which 7 companies are publicly
traded. The quoted market value of the stock underlying the 0.4 million warrants
issued by the publicly traded companies is $5.6 million. The exercise cost of
these warrants is $1.2 million resulting in a potential gain of $4.4 million.
Because of the illiquid nature of these warrants, the Fund is carrying them at a
discounted value of $2.6 million.
The 2.9 million warrants issued by private companies did not have a readily
ascertainable market value and were assigned a minimal value at the time of
acquisition. These warrants had a value of $0.6 million at December 31, 1996.
11
<PAGE>
VENTURE LENDING & LEASING, INC.
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
5. Restricted Common Stock:
As of December 31, 1996 the Fund held 0.3 million shares of common stock of JTS
Corporation. The shares were received when the Fund exercised its warrants in
the company which cost $45,000. The market value of the shares is $1.1 million,
adjusted for illiquidity, they are valued at $0.8 million and are subject to
restrictions on sale which expire in March 1997.
Restricted equity securities for which a public market exists are valued with
reference to the market price for unrestricted equity securities of the same
issuers, taking into consideration various factors as applicable, including the
nature of the market in which the securities are traded, the amount of the
public float, the existence and terms of any registration rights, the proportion
of the issuer's securities held by the Fund, the price at which the securities
in question were acquired relative to the market price for unrestricted
securities at the time of issuance, changes in the issuer's financial conditions
or prospects, and other factors that may affect their fair value. Restricted
securities for which an established market exists are valued at a discount from
their value determined by the foregoing methods, with the amount of the discount
decreasing as the restriction period decreases.
6. Long - Term Debt Facility:
The Fund has in place a $30 million bank credit facility to finance the
acquisition of asset-based loans and leases. The credit facility expires
September 27, 1997, and can be drawn on from time to time during the commitment
period. The amortization schedule for each borrowing under the facility is
expected to correspond to the amortization of the loans and leases acquired with
the proceeds of each borrowing. The Fund pays a commitment fee of 0.25% annually
on the total average amount of unused commitment with respect to this facility.
Borrowings under the facility are collateralized by the equipment financed by
the Fund under loans and leases with assignment to the financial institution,
plus other assets of the Fund.
As of December 31, 1996 the Fund had $16.7 million outstanding under this credit
facility. The loans accrue interest at the LIBOR rate plus 2.50% per annum. On
October 30, 1996 the Fund entered into an interest rate swap agreement for a
fixed rate payment of 8.55% on $10 million. The effect of the swap is to convert
the variable LIBOR rate into a fixed rate on the contract notional value.
7. Capital Stock:
There are 100,000,000 shares of $.001 par value common stock authorized. As of
December 31,1996, 29,822.91 shares are issued and outstanding.
The Fund has subscription agreements in effect with its shareholders under which
shareholders will purchase shares of the Fund, up to their full committed
capital amount, upon capital calls delivered at least fifteen days before
payment is due. As of December 31, 1996, $18.6 million in unfunded and uncalled
capital commitments remained outstanding.
12
<PAGE>
VENTURE LENDING & LEASING, INC.
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
8. Management:
Westech Advisors serves as the Fund's Investment Manager and Siguler Guff
Advisers, L.L.C. serves as its Fund Manager. As compensation for their services
to the Fund, the Managers receive a management fee computed and paid at the end
of each quarter, at an annual rate of 2.5% of the Fund's committed equity
capital for the first two years following the first closing of the Fund's
initial private offering; and at an annual rate of 2.5% of the Fund's total
assets (including amounts derived from borrowed funds) as of the last day of
each fiscal quarter thereafter.
The Managers will also receive an aggregate annual incentive fee equal to 20% of
all amounts available for distribution to investors after investors have
received cash distributions equal to 100% of all amounts paid for the purchase
of shares plus a preferred return calculated at a cumulative non - compounded
annual rate of 8%. To date, the Managers have earned no incentive fee.
13
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Venture Lending & Leasing, 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 July 5, 1998. 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 four capital calls
since inception for a total of 60% of committed capital. Total committed capital
as of December 31, 1996 was $46.6 million; a total of $28.0 million had been
called.
Results of Operations -- Six Months Ended December 31, 1996 and December 31,
1995
Total investment income for the six months ending December 31, 1996 and
December 31, 1995 was $3.4 million and $1.6 million, respectively, of which $3.3
million and $1.4 million, respectively, consisted of interest on venture loans
outstanding during the period. Remaining income consisted of interest on the
temporary investment of the proceeds of the Shares sold in the Fund's capital
calls, pending investment in venture loans and leases or application to the
Fund's expenses. The increase in investment income reflects the increase in
capital called from investors from approximately $18.7 million as of December
31, 1995 to approximately $28.0 million as of December 31, 1996, and the
investment of that capital (together with amounts derived from bank borrowings)
in venture loans and leases.
Expenses for the six months ending December 31, 1996 and December 31, 1995
were $1.4 million and $1.1 million, respectively, resulting in net income of
$3.8 million and $1.0 million for the six months ended December 31, 1996 and
December 31, 1995. Net income for the six months ended December 31, 1996 and
December 31, 1995 includes unrealized gains of $1.8 million and $0.5 million. On
a per share basis, for the six months ending December 31, 1996 and December 31,
1995 net income was $140 and $59.
There were several factors which contributed to the increase in net income
for the six months ending December 31, 1996 over the corresponding prior year
period. As of December 31, 1996, total assets invested in venture loans
increased as a percentage of committed capital to 91% from 45% as of December
31, 1995, reflecting the investment of capital called and additional borrowed
funds, and cash balances as a percentage of total assets were significantly
reduced compared with the corresponding period. Management fees, and certain
other relatively fixed expenses, declined significantly as a percentage of
invested assets for the quarter as compared with the corresponding period. From
and after the quarter ended September 30, 1996, management fees
14
<PAGE>
are computed as a percentage of total assets, rather than as a percentage of
committed capital. The most significant factor effecting net income for the six
months ending December 31, 1996 was the increase in the net unrealized
appreciation of $1.8 million in the quoted market value of the stock underlying
the warrants issued by the publicly traded companies adjusted for illiquidity.
Also impacting net income was interest expense on the Fund's borrowings during
the six months ended December 31, 1996, at $0.6 million.
The Fund has created a reserve for non-performing loans of $0.1 million.
The reserve is included in the net unrealized gain section of the statement of
operations. Biosys, Inc. has filed for reorganization under Chapter 11 of the
Bankruptcy Code due to a chronic cash shortage caused by poor operating and
market conditions. The Company is presently seeking additional financing and the
Managers expect to fully recover on the Fund's loans to the Company. As of
December 31, 1996 the Fund has asset-backed secured loans outstanding to the
Company in the amount of $1.4 million.
Expenses other than the management fee, bad debt expense and interest
expense declined as a percentage of investment income for the six months ended
December 31, 1996 from the six months ended December 31, 1995. Because many of
these expenses are relatively fixed and do not increase significantly as total
assets increase, these other expenses, like the management fee, can be expected
to continue to decrease as a percentage of investment income as the Fund draws
and invests additional capital.
Liquidity and Capital Resources -- December 31, 1996 and June 30, 1996
Total capital committed to the purchase of Shares pursuant to subscription
agreements was approximately $46.6 million at December 31, 1996 and June 30,
1996. As of December 31, 1996 and June 30, 1996, 60% and 40%, respectively, of
this committed capital was called to fund investments in venture loans and
leases and to meet the Fund's expenses. Additional capital may be drawn from
subscribers upon 15 days' notice.
The Fund has in place a $30 million bank credit facility to finance the
acquisition of asset-based loans and leases. The credit facility expires
September 27, 1997, and can be drawn on from time to time during the commitment
period. The amortization schedule for each borrowing under the facility is
expected to correspond to the amortization of the loans or leases acquired with
the proceeds of each borrowing. As of December 31, 1996, $16.7 million was
outstanding under this facility, compared with $14.7 million as of June 30,
1996.
15
<PAGE>
As of December 31, 1996, 6% of the Fund's assets consisted of cash and cash
equivalents, compared with 13% as of June 30, 1996. The Fund continued to invest
its assets in venture loans and leases during the quarter. Amounts disbursed
under the Fund's loan commitments increased by approximately $23.3 million
during the six months ended December 31, 1996, and net loan amounts outstanding
after amortization increased approximately $13.8 million. Amounts committed but
undrawn increased by approximately $27.6 million.
================================================================================
Amount Principal Committed
Disbursed Amortization Net Amount but Undrawn
- --------------------------------------------------------------------------------
December 31, 1996 $60.1 million $17.7 million $42.4 million $51.1 million
- --------------------------------------------------------------------------------
June 30, 1996 $36.8 million $8.2 million $28.6 million $23.5 million
================================================================================
Because venture loans and leases are privately negotiated transactions,
investments in these assets are relatively illiquid.
The Fund seeks to meet the requirements to qualify for the special
pass-through status available to "regulated investment companies" ("RICs") under
the Internal Revenue Code, and thus to be relieved of federal income tax on that
part of its net investment income and realized capital gains that it distributes
to shareholders. To qualify as a RIC, the Fund must distribute to its
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income and net short-term
capital gain) ("Distribution Requirement"). To the extent that the terms of the
Fund's venture loans provide for the receipt by the Fund of additional interest
at the end of the loan term or the terms of venture leases provide for the
receipt by the Fund of a purchase price for the asset at the end of the lease
term ("residual income"), the Fund would be required to accrue such residual
income over the life of the loan or lease, and to include such accrued income in
its gross income for each taxable year even if it receives no portion of such
residual income in that year. Thus, in order to meet the Distribution
Requirement and avoid payment of income taxes or an excise tax on undistributed
income, the Fund may be required in a particular year to distribute as a
dividend an amount in excess of the total amount of income it actually receives.
Those distributions will be made from the Fund's cash assets, from amounts
received through amortization of loans or leases or from borrowed funds.
16
<PAGE>
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits
None.
<PAGE>
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, INC.
Registrant
Date: February __, 1997 ____________________________________
Donald P. Spencer
Vice President [Duly Authorized
Officer]
Date: February __, 1997 ____________________________________
Ronald W. Swenson
Chairman
[Chief Executive Officer]
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