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, 1997
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 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 incorporation (I.R.S. Employer
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)
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 11, 1997 was 48,318.58.
Documents Incorporated by Reference
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 19, 1997 III
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PART I
ITEM 1. BUSINESS.
Introduction.
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Venture Lending & Leasing, Inc. ("Fund") is a non-diversified closed-end
management investment company electing status as a "business development
company" ("BDC") under the Investment Company Act of 1940 ("1940 Act") whose
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 generally receives warrants to acquire equity securities in connection with
its portfolio investments. There can be no assurance that the Fund will attain
its investment objective. Westech Investment Advisors, Inc. ("Westech Advisors")
is the Fund's Investment Manager and Siguler Guff Advisers, L.L.C. ("Siguler
Guff Advisers") is its Fund Manager. At a meeting held on September 26, 1995,
the Fund's shareholders approved a proposal to substitute Siguler Guff Advisers,
for the previous Fund Manager Mitchell Hutchins Institutional Investors Inc, and
Siguler Guff Advisers assumed responsibility as Fund Manager on December 22,
1995. The Investment Manager and the Fund Manager are referred to collectively
as the "Managers." The Fund was incorporated in Maryland on September 29, 1993
and commenced business on July 5, 1994.
The Fund's shares of Common Stock, 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. As of June 30, 1997 the Fund has made
five capital calls since inception for a total of 80% of committed capital.
Total committed capital as of June 30, 1997 was $46.6 million; a total of $37.3
million had been called. Subsequent to June 30, 1997, the Fund called the final
remaining 20% of capital.
Investment Program.
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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 to be purchased by 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
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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 asset acquisitions by 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 asset
purchases 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).
Investment Policies.
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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,
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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 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 Managers 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
Managers. Such investments might be made if the Managers believe 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
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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.
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.
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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
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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 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.
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The Fund intends to distribute to shareholders substantially all of its
net investment income
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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 the fourth anniversary following the first closing of the Fund's
initial offering of shares, the Managers will seek to 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. Beginning on the fourth anniversary of the
Fund's first closing, the Fund will also 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 fourth anniversary, 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.
Competition.
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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.
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The Fund has no employees; all of its officers are officers and
employees of the Managers, and all of its required services are performed by
officers and employees of the Managers.
ITEM 2. PROPERTIES.
All of the Fund's office space is provided by the Managers.
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, 1997.
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EXECUTIVE OFFICERS OF THE FUND
The following are the executive officers of the Fund. All officers serve
at the pleasure of the Board.
Name and Position With Age Occupation During Past Five Years
Fund
Ronald W. Swenson, 52 President and Director, Westech Investment
Director, Chairman and Advisors since 1994, and President and
Chief Executive Officer Director, Western Technology Investments since
1980.
Salvador O. Gutierrez, 54 Senior Vice President and Director, Westech
Director, President Investment Advisors since 1994, and Senior Vice
and Chief Financial President, Western Technology Investment since
Officer 1987.
George W. Siguler, 50 Managing Director, Siguler Guff Advisers &
Executive Vice Presiden affiliates since 1995; Managing Director of
President and Advisory Mitchell Hutchins Institutional Investors from
Director 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.
Patricia A. Breshears, 61 Vice President, Westech Investment Advisors
Vice President and since 1994; Administrator and Corporate
Secretary Secretary, Western Technology Investment
(venture leasing firm) since 1984.
Donald P. Spencer, 42 Managing Director, Siguler Guff Advisers and
Vice President and affiliates since 1995; Senior Vice
Assistant Secretary President (and other positions),
Mitchell Hutchins Institutional Investors and
affiliates from 1989 to 1995.
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 12, 1997 was 52.
The Fund has established a policy of declaring dividends on a quarterly
basis, with the most recent dividend being paid on July 30, 1997 to holders of
record on June 30, 1997, in the amount of $40.00 per share. See "Dividends and
Distributions" under Item 1 for a description of the Fund's dividend policies.
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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 has been derived from the audited financial statements.
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
June 30, 1996 June 30,1997
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<S> <C> <C>
Statement of Operations Data:
Investment Income:
Interest on Loans and Leases ............... $3,481,702 $7,314,618
Interest on Short - Term investments ....... 351,093 268,329
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Total Investment Income ................. 3,832,795 7,582,947
Expenses:
Management Fee to Managers ................. 1,159,189 1,438,118
Interest Expense ........................... 895,269 1,701,039
Other Expenses ............................. 191,417 441,791
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Total Expenses ........................ 2,245,875 3,580,948
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Net Investment Income .............................. 1,586,920 4,001,999
Net Unrealized Gain From Investment Transactions ... 1,308,016 965,498
Net Realized Gain From Investment Transactions ..... 22,134 1,463,670
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Net Income ......................................... $2,917,070 $6,431,167
========== ==========
Net Income Per Share: .............................. $ 157 $ 212
========== ==========
Average Shares Outstanding ......................... 18,607 30,304
========== ==========
Balance Sheet Data: As of As of
June 30, June 30,
1996 1997
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Total Assets ....................... $35,205,347 $71,848,759
Bank Loans ......................... $14,738,460 $30,000,000
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations -- Years Ended June 30, 1997 and 1996
Total investment income for the years ended June 30, 1997 and 1996 was
$7.6 million and $3.8 million, respectively, of which $7.3 million and $3.5
million, respectively, consisted of interest on venture loans outstanding.
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 June 30, 1996 to approximately $37.5 million
as of June 30, 1997, and the investment of that capital (together with amounts
derived from bank borrowings) in venture loans and leases.
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Expenses for the years ended June 30, 1997 and 1996 were $3.6 million
and $2.2 million, respectively, resulting in net income of $6.4 million and $2.9
million respectively. Net income for the year ended June 30, 1997 includes
unrealized gain of $1.0 million and a realized gain of $1.5 million. The
unrealized gain for the period relates to warrants which were received in
connection with loan and lease transactions. 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. On a per share
basis, for the years ended June 30, 1997 and 1996 net income was $212 and $157
respectively.
There were several factors which contributed to the increase in net
income for the year ended June 30, 1997 over the prior year. As of June 30,
1997, total assets invested in venture loans increased as a percentage of
committed capital to 154% from 76% as of June 30, 1996, 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 year. Management fees, and certain other expenses, declined
significantly as a percentage of invested assets for the year as compared with
the previous year. From and after the quarter ended September 30, 1996,
management fees 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 year ended June 30, 1997 was the realized gain from investment
transactions of $1.5 million and the increase in the net unrealized appreciation
of $1.0 million in the quoted market value of the stock underlying the warrants
issued by the publicly traded companies and investments in common stock adjusted
for illiquidity. Also impacting net income was interest expense on the Fund's
borrowings during the year ended June 30, 1997, at $1.7 million.
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, 1997, the Fund had loan balances outstanding of $3.6
million to two borrowers that were carried on a nonaccrual basis. Foregone
interest income on nonaccrual loans for the year ended June 30, 1997, was $0.3
million.
Management fee and interest expense declined as a percentage of
investment income for the year ended June 30, 1997 from the year ended June 30,
1996. Other expenses increased due to the allowance for bad debts of $0.1
million. 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 -- June 30, 1997 and June 30, 1996
Total capital committed to the purchase of Shares pursuant to
subscription agreements was approximately $46.6 million at June 30, 1997 and
1996. As of June 30, 1997 and 1996, 80% and 40%, respectively, of this committed
capital was called to fund investments in venture loans and leases and to meet
the Fund's expenses. Additional capital may be drawn from subscribers upon 15
days' notice.
The Fund has in place a $45 million bank credit facility to finance the
acquisition of asset-based loans and leases. The interest only period of the
revolving credit facility expires September 27, 1997 and then becomes a four
year loan. The facility can be drawn on from time to time during the interest
only portion of the commitment period. During 1997 the Fund entered into an
interest
10
<PAGE>
rate swap agreement on $30 million. The effect of the swap is to
convert the variable LIBOR rate into a fixed rate on the contract notional
value. The amortization schedule for each borrowing under the facility is
expected to correspond to the amortization of the loans or leases acquired with
the proceeds of each borrowing. As of June 30, 1997, $30.0 million was
outstanding under this facility, compared with $14.7 million as of June 30,
1996.
As of June 30, 1997, 5% 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 year. Amounts disbursed under
the Fund's loan commitments increased by approximately $53.3 million during the
year ended June 30, 1997, and net loan amounts outstanding after amortization
increased approximately $35.9 million. Amounts committed but undrawn increased
by approximately $45.2 million.
============= ============== ================ ============== ==============
Year Ending Amount Principal Net Amount Committed but
Disbursed Amortization Undrawn
============= ============== ================ ============== ==============
June 30, 1997 $90.1 million $25.6 million $64.5 million $68.7 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.
11
<PAGE>
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.
Quarterly Results - June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September December March June
30, 1995 31, 1995 31, 1996 30, 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Investment Income:
Interest on Loans
and Leases...... $ 594,539 $ 789,160 $ 935,083 $1,162,920
Interest on Short -Term ...... 83,888 97,467 94,754 74,984
--------- --------- --------- ---------
Investments
Total Investment Income . 678,427 886,627 1,029,837 1,237,904
--------- --------- --------- ---------
Expenses:
Management Fee .............. 287,468 293,769 287,382 290,570
Interest Expense ............ 199,813 185,744 222,394 287,318
Other Expense ............... 54,898 39,396 52,778 44,345
--------- --------- --------- ---------
Total Expenses .......... 542,179 518,909 562,554 622,233
--------- --------- --------- ---------
Net Investment Income (Loss) $136,248 $367,718 $467,283 $615,671
Net Unrealized Gain From
Investment Transactions....... -- 485,993 333,940 488,083
Net Realized Gain From
Investment Transactions .... -- -- 22,134 --
--------- --------- --------- ---------
Net Income ................. $136,248 $853,711 $823,357 $1,103,754
======== ======== ======== ==========
Net Income Per Share ...... $ 11 $ 42 $ 40 $ 54
======== ======== ======== ==========
Average Shares Outstanding . 12,379 20,417 20,595 20,595
======== ======== ======== ==========
Quarterly Results - June 30, 1997 (Unaudited)
Three Months Ended
September December March June
30, 1996 31, 1996 31, 1997 30, 1997
----------- ----------- ----------- ----------
Investment Income:
Interest on Loans
and Leases .............. $1,335,293 $1,950,430 $1,831,754 $2,197,141
Interest on Short-Term . 69,105 68,777 37,039 93,408
----------- ----------- ----------- ----------
Investments
Total Investment Income ... 1,404,398 2,019,207 1,868,793 2,290,549
----------- ----------- ----------- ---------
Expenses:
Management Fee ......... 285,815 306,164 400,582 445,557
Interest Expense ....... 316,890 326,540 410,738 645,829
Other Expense .......... 149,011 86,145 87,540 120,134
----------- ----------- ----------- ----------
Total Expenses ...... 751,716 718,849 898,860 1,211,520
----------- ----------- ----------- ----------
Net Investment Income...... $652,682 $1,300,358 $969,933 $1,079,029
Net Unrealized Gain From
Investment Transactions...... 1,677,476 186,380 (638,175) (260,183)
Net Realized Gain
From Investment Transactions.. -- -- 958,497 505,171
----------- ----------- ----------- ----------
Net Income ...... $2,330,158 $1,486,738 $1,290,255 $1,324,017
========== ========== ========== ==========
Net Income Per Share ........... $ 94 $ 50 $ 43 $ 36
======= ======= ======= =======
Average Shares Outstanding ..... 24,707 29,823 29,823 36,721
======= ======= ======= =======
</TABLE>
12
<PAGE>
VENTURE LENDING & LEASING, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
ITEM 8
FINANCIAL STATEMENTS
13
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Financial Statements Included in Item 8:
See Item 14(a)
14
<PAGE>
[Letterhead of ARTHUR ANDERSEN LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Venture Lending & Leasing, Inc.:
We have audited the accompanying statements of financial position of Venture
Lending & Leasing, Inc. (a Maryland corporation) as of June 30, 1997 and 1996,
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 generally accepted auditing
standards. 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, Inc.
as of June 30, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/S/ Arthur Andersen LLP
San Francisco, California,
August 8, 1997
15
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF FINANCIAL POSITION
AS OF JUNE 30, 1997 AND 1996
<TABLE>
1997 1996
------------- ------------
ASSETS
<CAPTION>
<S> <C> <C>
Loans and leases, net of unearned income,
fees and allowance for credit losses
of $100,000 and $0 at June 30, 1997 and 1996,
respectively .................................. $64,365,197 $28,616,626
Cash and cash equivalents ....................... 3,946,955 4,683,671
Investments in warrants ......................... 2,282,242 1,772,701
Investments in stocks ........................... 1,171,957 0
Deferred organizational expenses ................ 60,079 90,080
Deferred bank loan expenses ..................... 11,092 19,808
Accounts receivable ............................. 3,174 16,545
Other assets .................................... 8,063 5,916
----------- -----------
Total assets ....................... $71,848,759 $35,205,347
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans ............................... $30,000,000 $14,738,460
Accounts payable ......................... 649,655 358,676
Interest payable ......................... 435,052 40,113
Commitment fees .......................... 260,000 124,735
Deferred gain on securities .............. 48,500 0
----------- -----------
Total liabilities ............. 31,393,207 15,261,984
----------- -----------
Shareholders' equity:
Common stock, $.001 par value:
Authorized--100,000,000 shares
Issued and outstanding--39,054.38
shares and 20,594.74 shares as of
June 30, 1997 and 1996, respectively ..... 40 20
Capital in excess of par value ............. 37,317,282 18,669,745
Distributions .............................. (5,828,791) (1,262,256)
Accumulated earnings ....................... 8,967,021 2,535,854
------------ ------------
Total shareholders' equity ...... 40,455,552 19,943,363
------------ ------------
Total liabilities and
shareholders' equity ............ $ 71,848,759 $ 35,205,347
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest on loans and leases ................ $ 7,314,618 $ 3,481,702
Interest on short-term investments .......... 268,329 351,093
----------- -----------
Total investment income .......... 7,582,947 3,832,795
----------- -----------
EXPENSES:
Management fees to the Managers.............. 1,438,118 1,159,189
Interest expense ............................ 1,701,039 895,269
Legal fees .................................. 122,903 22,129
Custody and accounting fees ................. 15,736 17,305
Bank loan facility fee ...................... 68,535 40,310
Amortization of organizational expenses ..... 30,001 30,001
Directors' fees and expenses ................ 35,396 30,250
Audit fees .................................. 17,000 23,252
Transfer agency fees ........................ 7,126 6,623
Regulatory reporting ........................ 27,461 10,428
Bad debt expense ............................ 100,000 0
Other operating expenses .................... 17,633 9,519
----------- -----------
Total expenses ................... 3,580,948 2,244,275
----------- -----------
Net investment income ............ 4,001,999 1,588,520
NET CHANGE IN UNREALIZED GAIN
FROM INVESTMENT TRANSACTIONS .................. 965,498 1,308,016
NET REALIZED GAIN FROM
INVESTMENT TRANSACTIONS ....................... 1,463,670 22,134
----------- -----------
Net income before
provision for income taxes ....... 6,431,167 2,918,670
PROVISION FOR INCOME TAXES .................... 0 (1,600)
----------- -----------
Net income ....................... $ 6,431,167 $ 2,917,070
=========== ===========
NET INCOME PER SHARE .......................... $ 212.22 $ 156.77
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ........... 30,304 18,607
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Retained
Common Stock Capital in Earnings
--------------- Excess of
Shares Amount Par Value Distribution (Deficit) Total
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------
BALANCE,
JUNE 30, 1995 12,379.43 $12 $11,426,921 $ 0 $(381,216) $11,045,717
Shares sold 8,215.31 8 7,242,824 0 0 7,242,832
Distributions 0 0 0 (1,262,256) 0 (1,262,256)
Net income 0 0 0 0 2,917,070 2,917,070
--------------------------------------------------------------
BALANCE,
JUNE 30, 1996 20,594.74 20 18,669,745 (1,262,256) 2,535,854 19,943,363
Shares sold 18,459.64 20 18,647,537 0 0 18,647,557
Distributions 0 0 0 (4,566,535) 0 (4,566,535)
Net income 0 0 0 0 6,431,167 6,431,167
--------------------------------------------------------------
BALANCE,
JUNE 30, 1997 39,054.38 $40 $37,317,282 $(5,828,791)$8,967,021 $40,455,552
===============================================================
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................... $ 6,431,167 $ 2,917,070
Adjustments to reconcile net income
to net cash provided by
operating activities:
Amortization of organizational expenses .... 30,001 30,001
Amortization of bank loan expenses ......... 8,716 8,692
Allowance for credit losses ................ 100,000 0
Gain on sale of securities ................. (1,463,670) (22,134)
Increase in unrealized gain
from investment transactions .............. (965,498) (1,308,016)
Decrease in accounts receivable ............ 13,371 0
Increase in other assets ................... (2,147) (8,927)
Increase in accounts payable ............... 290,979 87,121
Increase in interest payable ............... 394,939 6,433
Increase in commitment fees ................ 135,265 57,235
Increase in deferred gain on securities .... 48,500 0
------------ ------------
Net cash provided by operating activities 5,021,623 1,767,475
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases .............. (53,222,857) (22,678,655)
Principal payments on loans and leases ....... 13,284,392 6,586,130
Proceeds from prepayment of loan ............. 4,089,895 0
Acquisition of warrants ...................... (716,000) (291,400)
Proceeds from sale of securities ............. 1,463,670 22,134
------------ ------------
Net cash used in investing activities (35,100,900) (16,361,791)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net ................... 18,647,557 7,242,832
Distributions to shareholders ................ (4,566,535) (1,262,256)
Loan from bank ............................... 17,791,402 13,890,000
Repayment of bank loan and expenses .......... (2,529,863) (8,728,939)
------------ ------------
Net cash provided by financing activities 29,342,561 11,141,637
------------ ------------
Net decrease in cash and cash equivalent (736,716) (3,452,679)
CASH AND CASH EQUIVALENTS:
Beginning of year ............................ 4,683,671 8,136,350
------------ ------------
End of year .................................. $ 3,946,955 $ 4,683,671
============ ============
CASH PAID DURING THE YEAR FOR:
Taxes ........................................ $ 0 $ 800
Interest ..................................... 1,305,058 873,433
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
VENTURE LENDING & LEASING, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Venture Lending & Leasing, Inc. (the Fund) was incorporated in Maryland on
September 29, 1993, as a nondiversified, closed-end management investment
company electing status as a business development company under the Investment
Company Act of 1940. The purpose of the Fund is to provide asset-based financing
to venture-capital-backed companies in the form of secured loans, installment
sales contracts or equipment leases. 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 1 share of common stock, $.001
par value, for $1,000. As of June 30, 1997, the Fund meets the requirements,
including diversification 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 using the straight-line method over a period of 60 months from the
date the Fund commenced operations. During fiscal 1996, 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 of 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.
20
<PAGE>
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 will be assigned a minimal value at the time of acquisition, which
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 fair value
of the equity securities for which the warrant may be exercised, adjusted for
illiquidity.
Allowance for Credit Losses
The allowance for credit losses is based upon management's estimates of
potential loan and lease losses and is maintained at a level considered adequate
for losses that can be reasonably estimated. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. In evaluation of
the adequacy of the allowance balance, the Fund considers its past loan and
lease loss experience, the inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and other relevant factors. The allowance for credit
losses is based on estimates, and ultimate losses may vary from current
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.
Loans and 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. When the first draw is made, the fee is included in unearned income and
recognized as described above.
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.
21
<PAGE>
3. 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.
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.
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, 1997, the Fund had loan balances outstanding of
$3,602,098 to two borrowers that were carried on a nonaccrual basis. Foregone
interest income on nonaccrual loans for the year ended June 30, 1997, was
$298,141.
4. WARRANTS AND STOCK:
At June 30, 1997, the Fund held 4,854,933 warrants to purchase shares of common
and preferred stock in 65 companies, of which 9 companies are publicly traded.
The quoted market value of the stock underlying the warrants issued by the
publicly traded companies, adjusted for illiquidity, was $1,395,557. The
following is a summary of the activity for investments in warrants and
investments in stocks for the year ended June 30, 1997:
Investments in warrants:
Balance, June 30, 1996 $1,772,701
Acquisition of warrants 716,000
Conversion of warrants to stock (956,965)
Net change in unrealized gain 750,506
------------
Balance, June 30, 1997 $2,282,242
============
Investments in stocks:
Balance, June 30, 1996 $ 0
Conversion of warrants to stock 956,965
Net change in unrealized gain 214,992
------------
Balance, June 30, 1997 $1,171,957
============
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.
22
<PAGE>
The remainder of the 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 $886,685 at June 30, 1997.
At June 30, 1997, the Fund held 409,998 shares of common stock of companies,
which were received when the Fund exercised its warrants in the companies, which
had a cost basis of $103,429. The quoted market value of the stock, adjusted for
illiquidity, was $1,171,957.
During the year, the Fund realized a gain of $1,463,670 on the sale of 35,000
shares of common stock, which had a cost basis of $20,646 and an unrealized gain
of $974,017.
5. LONG-TERM DEBT FACILITY:
The Fund has in place a $45 million bank revolving credit facility to finance
the acquisition of asset-based loans and leases. The interest-only period of the
revolving credit facility expires September 27, 1997, and then the principal
balance becomes a four-year term loan. The facility can be drawn on from time to
time during the interest-only portion of the commitment period. However, the
commitment period can be terminated earlier by the Fund through the prepayment
of outstanding principal balances, provided that the lenders are given notice.
The credit facility can be reduced by a minimum of $5,000,000 and in $1,000,000
increments in excess thereof. Any termination or commitment reduction is
permanent and irrevocable. Principal payments for each borrowing are not due
until the end of the commitment period. Afterwards, principal payments are to be
made according to an amortization schedule set forth by each lender. 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. Interest rates are determined by the type of note
given to the Fund. The Fund can choose between prime rate loans, internal rate
loans and LIBOR loans. An applicable margin is added to the base rate that is
determined by each type of loan. Currently, all of the Fund's loans are LIBOR
loans. The Fund pays a commitment fee of 0.25 percent annually with respect to
this facility and is required to maintain compensating balances with the bank of
$250,000 or, in lieu thereof, pay a fee at the rate of prime plus 1 percent on
any deficiencies therein. The Fund also pays an agency fee of $6,250 every
quarter.
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.
Debt outstanding under the facility at June 30, 1997, was as follows:
90-day LIBOR at 7.81 percent interest, due July 7, 1997 $16,708,597
90-day LIBOR at 7.85 percent interest, due July 28, 1997 7,291,403
60-day LIBOR at 7.75 percent interest, due August 15, 1997 6,000,000
=============
$30,000,000
=============
Expenses of $35,052 were incurred in connection with procuring the loan and
credit facility. These expenses have been capitalized and are being amortized
over a period of four years, the term of the bank loan described above.
23
<PAGE>
During the year, the Fund entered into three interest rate swap agreements with
two financial institutions to hedge its interest rate. The terms of the
agreements are as follows:
Notional amount of $10,000,000 whereby the Fund pays a fixed interest
rate of 6.05 percent, while the financial institution pays the 90-day
LIBOR rate. Payments are made quarterly and terminate on December 31,
1999.
Notional amount of $5,000,000 whereby the Fund pays a fixed interest rate
of 6.44 percent, while the financial institution pays the 90-day LIBOR
rate. Payments are made quarterly and terminate on December 29, 2000.
Notional amount of $10,000,000 whereby the Fund pays a fixed interest
rate of 7.025 percent, while the financial institution pays the floating
90-day LIBOR rate. Payments are made quarterly and terminate on December
31, 2001.
6. CAPITAL STOCK:
There are 100,000,000 shares of $.001 par value common stock authorized. As of
June 30, 1997, 39,054.38 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 15 days before payment is
due. As of June 30, 1997, $9,323,778 in unfunded and uncalled capital
commitments remained outstanding.
7. 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 percent 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 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 $1,438,118 and $1,159,189 were
recognized for the years ended June 30, 1997 and 1996, respectively.
The Managers will also receive an aggregate annual incentive fee equal to 20
percent of all amounts available for distribution to investors after investors
have received cash distributions equal to 100 percent of all amounts paid for
the purchase of shares plus a preferred return calculated at a cumulative
noncompounded annual rate of 8 percent. To date, the Managers have earned no
incentive fee.
24
<PAGE>
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 October xx, 1997 ("1997 Proxy Statement") under the caption "Proposal
1 -- To Elect Eight Directors of the Fund" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Fund's 1997
Proxy Statement under the caption "Proposal 1 -- To Elect Eight 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 1997
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 1997
Proxy Statement under the captions: "Other Information -- Management" and is
incorporated herein by reference.
25
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financials Statements and Financial Statement Schedules
Page
Report of Independent Public Accountants 15
Statement of Financial Position as of June 30, 1997 and 1996 16
Statement of Operations for the Years Ended June 30, 1997 and 1996 17
Statement of Changes in Shareholders' Equity for the Years Ended
June 30, 1997 and 1996 18
Statement of Cash Flows for the Years Ended June 30, 1997 and 1996 19
Notes to Financial Statements 20
Financial Statement Schedules for the Years Ended June 30, 1997 and 1996
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.
Listing of Exhibits
3.1 Articles of Incorporation -- incorporated by reference to the Fund's
Registration Statement on Form 10 filed with the Securities and
Exchange Commission ("Commission") on October 13, 1994.
3.2 By-Laws, as amended to date - incorporated by reference to the Fund's 1996
Form 10K
10.1 Management Agreement, dated as of December 22, 1995, between the Fund on
the one hand, and Westech Advisors and Siguler Guff Advisers, on the other
hand -- incorporated by reference to the Fund's 1996 Form 10K.
Reports on Form 8-K
The Fund filed no reports on Form 8-K with the Commission during the
fiscal quarter ended June 30, 1997.
26
<PAGE>
Sigunatures
Pursuant to the requirements of Section 13 or 15(d) of the Security
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, INC.
(Registrant)
By: /S/ Ronald W. Swenson By: /S/ Salvador O. Gutierrez
- -------------------------- -----------------------------------
Ronald W. Swenson Salvador O. Gutierrez
Chairman and Chief Executive Officer President, Chief Financial Officer
and Chief Accounting Officer
Date: September _, 1997 Date: September _, 1997
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.
NAME TITLE DATE
By: /S/ John J. Cogan Director September 22,1997
- -------------------------------
John J. Cogan
By: /S/ J. Michael Egan Director September 22,1997
- -------------------------------
J. Michael Egan
By: /S/ Salvador O. Gutierrez President and Director September 22,1997
- -------------------------------
Salvador O. Gutierrez
By: /S/ Scott Malpass Director September 22,1997
- -------------------------------
Scott Malpass
By: /S/ Roger V. Smith Director September 22,1997
- -------------------------------
Roger V. Smith
By: /S/ Arthur Spinner Director September 22,1997
- -------------------------------
Arthur Spinner
By: /S/ Ronald W. Swenson Director September 22,1997
- -------------------------------
Ronald W. Swenson
By: /S/ George Von Gehr Director September 22,1997
- -------------------------------
George Von Gehr
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<FISCAL-YEAR-END> JUN-30-1997
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