<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 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
- --------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or or organization) Identification No.)
2010 North First Street, Suite 310, San Jose, CA 95131
------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(408) 436-8577
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (i) filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding as of November 15, 1996
- ----------------------------- -----------------------------------
Common Stock, $.001 par value 29,822.91
Page 1 of 18; Exhibit Index appears on Page 16
<PAGE>
VENTURE LENDING & LEASING, INC.
INDEX
PAGE NUMBER
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position (Unaudited) 3
September 30, 1996 and June 30, 1996
Schedule of Loans and leases (Unaudited) 4 - 5
September 30, 1996
Statement of Operations (Unaudited) 6
Three Months Ended September 30, 1996 and
September 30, 1995
Statement of Changes in Shareholders Equity (Unaudited) 7
Three Months Ended September 30, 1996 and
Year Ended June 30, 1996
Statement of Cash Flows (Unaudited) 8
Three Months Ended September 30, 1996 and
September 30, 1995
Notes to Financial Statements 9 - 12
Item 2. Management's Discussion and Analysis of Financial 13 - 15
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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------ -------------
<S> <C> <C>
ASSETS
Loans and leases, net of unearned income and fees $ 37,015,859 $ 28,616,626
Cash and cash equivalents 4,803,940 4,683,671
Investments:
Warrants (cost - $627,185 and $464,685) 2,657,874 1,772,701
Restricted common stock (cost - $45,000) 999,803 ----
Deferred organizational expenses 82,539 90,080
Deferred bank loan expenses 17,623 19,808
Accounts receivable 25,543 16,545
Other assets 5,169 5,916
--------------- ---------------
Total assets 45,608,350 35,205,347
--------------- ---------------
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Bank loans 13,968,850 14,738,460
Accounts payable 391,518 358,676
Interest payable 88,992 40,113
Commitment fees 169,235 124,735
--------------- ---------------
Total liabilities 14,618,595 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 (1,869,801) (1,262,256)
Accumulated earnings 4,866,012 2,535,854
Total shareholders' equity 30,989,755 19,943,363
--------------- ---------------
Total liabilities & shareholders' equity $ 45,608,350 $ 35,205,347
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements. 3
<PAGE>
VENTURE LENDING & LEASING, INC.
SCHEDULE OF LOANS AND LEASES (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OUTSTANDING
AMOUNT PRINCIPAL SEPTEMBER 30,
BORROWER COMMITMENT DISBURSED AMORTIZATION 1996
-------- ---------- --------- ------------ ----
<S> <C> <C> <C> <C>
Active Software, Inc. $ 800,000 $ ---- $ ---- $ ----
Advanced Therapies, Inc. 500,000 503,873 98,662 405,211
BigBook, Inc. 2,000,000 966,044 111,147 854,897
Biosys, Inc. * 2,500,000 2,180,487 769,024 1,411,463
Brocade Communications, Inc. 2,600,000 1,099,222 114,949 984,273
Caps Software, Inc. 1,000,000 839,330 122,660 716,670
CardioGenesis Corporation 1,500,000 ---- ---- ----
Ciphergen Biosystems 740,000 765,144 99,358 665,786
Comps Infosystems, Inc. 3,000,000 1,411,879 110,689 1,301,190
Datamind Corporation 300,000 322,297 32,587 289,710
Desmos, Inc. 1,000,000 141,787 24,649 117,138
Distrivision Development Corporation 500,000 50,000 13,641 36,359
Exodus Communications, Inc. 1,800,000 445,046 56,881 388,165
Exponential Technology, Inc. 3,200,000 3,021,385 773,908 2,247,477
Fabrik Communications, Inc. 800,000 795,217 119,392 675,825
Fluid Propulsion Technologies, Inc 250,000 136,737 26,183 110,554
I-Cube, Inc. 1,000,000 288,158 26,083 262,075
Idec Pharmeceuticals Corp. 5,000,000 5,000,000 1,656,741 3,343,259
Infoseek Corporation 3,500,000 3,534,981 1,180,073 2,354,908
Integ Incorporated 12,500,000 926,418 114,461 811,957
Ipsilon Networks, Inc. 1,000,000 967,590 182,804 784,786
Jetstream Communications, Inc. 300,000 300,922 44,421 256,501
JTS Corporation 4,500,000 4,029,108 873,081 3,156,027
Larex, Inc. 2,500,000 1,143,889 142,267 1,001,622
Neomagic Corporation 3,000,000 1,335,753 365,053 970,700
Netpower, Inc. 500,000 478,544 262,653 215,891
Optimal Networks Corporation 400,000 226,590 75,093 151,497
Optivision, Inc. 2,000,000 2,000,000 172,480 1,827,520
Oratec Interventions, Inc. 500,000 187,942 30,897 157,045
Persistance Software, Inc. 500,000 280,883 41,375 239,508
Photon Dynamics, Inc. 1,000,000 1,000,000 1,000,000 ----
ReGen Biologics 1,500,000 ---- ---- ----
Release Software Corporation 1,000,000 248,201 27,699 220,502
ROI Technology 750,000 237,570 21,857 215,713
Socket Communications, Inc. 500,000 211,354 40,642 170,712
Solopoint, Inc. 400,000 191,505 20,371 171,134
Spectrum Wireless, Inc. 2,000,000 595,799 42,359 553,440
</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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OUTSTANDING
AMOUNT PRINCIPAL SEPTEMBER 30,
BORROWER COMMITMENT DISBURSED AMORTIZATION 1996
-------- ---------- --------- ------------ ----
<S> <C> <C> <C> <C>
Starlight Networks, Inc. 5,000,000 4,476,567 141,113 4,335,454
Tenth Planet Exploration, Inc. 750,000 717,234 259,420 457,814
Terrapin Technologies, Inc. 1,500,000 ---- ---- ----
Tessera, Inc. 2,500,000 760,803 282,990 477,813
Transmeta Corporation 700,000 668,974 29,079 639,895
Ulsi Systems, Inc. 500,000 487,650 141,507 346,143
Uniax Corporation 2,000,000 209,502 49,042 160,460
VidaMed, Inc. 3,000,000 3,000,000 1,001,160 1,998,840
Wink Communications, Inc. 1,500,000 1,031,364 20,643 1,010,721
Xatrix Entertainment, Inc. 1,000,000 999,597 380,393 619,204
O - In Design Automation 250,000 ---- ---- ----
ZSP Corporation 2,000,000 ---- ---- ----
------------ ------------ ------------ ------------
Totals $ 87,540,000 $ 48,215,346 $ 11,099,487 $ 37,115,859
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements. 5
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest on loans and leases $ 1,335,293 $ 594,539
Interest on short-term investments 69,105 83,888
--------------- ---------------
Total Investment Income 1,404,398 678,427
--------------- ---------------
EXPENSES:
Management fee 285,815 287,468
Interest expense 316,890 199,813
Reserve for non-performing loans 100,000 ----
Legal fees 11,180 7,561
Directors' fees and expenses 8,318 6,931
Amortization of organizational expenses 7,541 7,541
Bank loan facility fee 6,500 17,308
Regulatory reporting 3,035 378
Transfer agency fees 2,048 1,512
Custody and accounting fees 1,512 5,420
Audit fees 358 5,041
Other operating expenses 8,519 3,206
--------------- ---------------
Total Expenses 751,716 542,179
--------------- ---------------
Net Investment Gain (Loss) 652,682 136,248
Net Unrealized Gain From Investment Transactions 1,677,476 ----
--------------- ---------------
Net Income (Loss) $ 2,330,158 $ 136,248
--------------- ---------------
--------------- ---------------
Net Gain (Loss) Per Share $ 94 $ 11
--------------- ---------------
--------------- ---------------
Average Shares Outstanding 24,707 12,379
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements. 6
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1996 AND
THE THREE MONTHS ENDED SEPTEMBER 30, 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 18,669,745 (1,262,256) 2,535,854 19,943,363
Shares sold 9,228.17 10 9,323,769 ---- ---- 9,323,779
Distributions ---- ---- ---- (607,545) ---- (607,545)
Net Income ---- ---- ---- ---- 2,330,158 2,330,158
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1996 29,822.91 $30 $27,993,514 ($1,869,801) $4,866,012 $30,989,755
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements. 7
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,330,158 $ 136,248
Adjustments to reconcile net investment income (loss)
to net cash provided by (used in) operating activities:
Amortization of organizational expenses 7,541 7,541
Amortization of bank loan expenses 2,185 2,185
(Increase) Decrease in other assets (8,251) (1,919)
Increase in accounts payable 32,842 52,436
Increase in interest payable 48,879 8,996
Increase in refundable commitment fees 44,500 63,900
Increase in capital call receivable ---- (48,000)
Increase in unrealized gain from investment transactions (1,677,476) ----
--------------- ---------------
Net cash provided by (used in) operating activities 780,378 221,387
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (11,670,917) (5,379,964)
Principal payments on loans and leases 2,545,571 846,180
Proceeds from prepayment of loan 726,113 ----
Acquisition of warrants (162,500) (42,500)
Acquisition of restricted common stock (45,000) ----
--------------- ---------------
Cash used in investing activities (8,606,733) (4,576,284)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net 9,323,779 6,842,833
Distributions to shareholders (607,545) (284,727)
Principal payments on bank loan (769,610) (717,367)
--------------- ---------------
Net cash provided by financing activities 7,946,624 5,840,739
--------------- ---------------
Net Increase (Decrease) in cash and cash equivalents 120,269 1,485,842
--------------- ---------------
Cash and Cash Equivalents -- Beginning of period 4,683,671 8,136,350
--------------- ---------------
Cash and Cash Equivalents -- End of period $ 4,803,940 $ 9,622,192
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements. 8
<PAGE>
VENTURE LENDING & LEASING, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
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.
9
<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 September 30,
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 September 30, 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 September 30, 1996, the Fund held 2,964,291 warrants to purchase shares of
common and preferred stock in 40 companies, of which 7 companies are publicly
traded. The quoted market value of the stock underlying the 382,707 warrants
issued by the publicly traded companies is $5,849,569. The exercise cost of
these warrants is $1,239,009 resulting in a potential gain of $4,610,560.
Because of the illiquid nature of these warrants, the Fund is carrying them at a
discounted value of $2,189,689.
The 2,581,584 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 $468,185 at September 30, 1996.
10
<PAGE>
VENTURE LENDING & LEASING, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
5. RESTRICTED COMMON STOCK:
As of September 30, 1996 the Fund held 346,432 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 $1,666,338,
adjusted for illiquidity, they are valued at $999,803 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 September 30, 1996 the Fund had $13,968,850 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
September 30,1996, 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 September 30, 1996, $18.6 million in unfunded and uncalled
capital commitments remained outstanding.
11
<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.
12
<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 September 30, 1996 was $46.6 million; a total of $27.9 million had been
called.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995
Total investment income for the three months ending September 30, 1996 and
September 30, 1995 was $1.4 million and $0.7 million, respectively, of which
$1.3 million and $0.6 million, respectively, consisted of interest on venture
loans outstanding during the quarter. 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 $18.6 million as of September
30, 1995 to approximately $27.9 million as of September 30, 1996, and the
investment of that capital (together with amounts derived from bank borrowings)
in venture loans and leases.
Expenses for the three months ending September 30, 1996 and September 30,
1995 were $0.8 million and $0.5 million, respectively, resulting in net income
of $2.3 million and $0.1 million for the three months ended September 30, 1996
and September 30, 1995. Net income for the three months ended September 30,
1996 includes unrealized gains of $1.7 million. On a per share basis, for the
three months ending September 30, 1996 and September 30, 1995 net income was $94
and $11.
There were several factors which contributed to the increase in net income
for the three months ending September 30, 1996 over the corresponding prior year
period. As of September 30, 1996, total assets invested in venture loans
increased as a percentage of committed capital to 79% from 37% as of September
30, 1995, reflecting the investment of capital called and additional borrowed
funds, and cash balances as a percentage of total assets were significantly
reduced
13
<PAGE>
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. The most
significant factor effecting net income for the three months ending September
30, 1996 was the increase in the unrealized appreciation of $1.7 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 three months ended
September 30, 1996, at $0.3 million.
The Fund has created a reserve for non-performing loans of $0.1 million.
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
September 30, 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 from $0.055 million for the three months ended September 30,
1995 to $0.049 million for the three months ended September 30, 1996. 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 -- SEPTEMBER 30, 1996 AND JUNE 30, 1996
Total capital committed to the purchase of Shares pursuant to subscription
agreements was approximately $46.6 million at September 30, 1996 and June 30,
1996. As of September 30, 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 September 30, 1996 $13.9 million
was outstanding under this facility, compared with $14.7 million as of
June 30, 1996.
14
<PAGE>
As of September 30, 1996, 11% 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 $11.4
million during the three months ended September 30, 1996, and net loan amounts
outstanding after amortization increased approximately $8.5 million. Amounts
committed but undrawn increased by approximately $17.1 million.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Amount Principal Committed but
Disbursed Amortization Net Amount Undrawn
- --------------------------------------------------------------------------------
September 30, 1996 $48.2 million $11.1 million $37.1 million $40.6 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.
15
<PAGE>
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual meeting of shareholders of the Company was held on
October 16, 1996. The following directors were elected, with the
following number of votes cast in favor of election of each such
director. No votes were withheld for the election of any director:
DIRECTOR VOTES CAST IN FAVOR OF ELECTION
John F. Cogan 24,961.22
J. Michael Egan 24,961.22
Salvador O. Gutierrez 24,961.22
Scott C. Malpass 24,961.22
Roger V. Smith 24,961.22
Arthur Spinner 24,961.22
Ronald W. Swenson 24,961.22
George Von Gehr 24,961.22
Shareholders also ratified the selection of Arthur Anderson LLP as the
Fund's independent auditors at the meeting. Votes were cast in favor
of such proposal, none were opposed, and none abstained.
ITEM 6. EXHIBITS
None.
16
<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: November 14, 1996 /s/ Donald P. Spencer
-------------------------------
Donald P. Spencer
Vice President
[Duly Authorized Officer]
Date: November 14, 1996 /s/ Salvador O. Gutierrez
-------------------------------
Salvador O. Gutierrez
President and Treasurer
[Chief Financial Officer]
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