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, 1998
[ ] 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 incorporation or (I.R.S. Employer
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, 1998
- -------------------------------------------------------------------------------
Common Stock, $.001 par value 48,318.58
Page 1 of 15; Exhibit Index appears on Page 14
1
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VENTURE LENDING & LEASING, INC.
INDEX
Page Number
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position .......................... 3
September 30, 1998 (Unaudited) and June 30, 1998 (Audited)
Statement of Operations (Unaudited) ...................... 4
Three Months Ended September 30, 1998 and
September 30, 1997
Statement of Changes in Shareholders Equity .............. 5
Three Months Ended September 30, 1998 (Unaudited)
and the Year Ended June 30, 1998 (Audited)
Statement of Cash Flows (Unaudited) ...................... 6
Three Months Ended September 30, 1998 and
September 30, 1997
Notes to Financial Statements ............................ 7 - 10
Item 2. Management's Discussion and Analysis of Financial 11 - 13
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits 14
SIGNATURES 15
2
<PAGE>
VENTURE LENDING & LEASING, INC.
Statements of Financial Position (Unaudited)
- -------------------------------------------------------------------------------
(Unaudited) (Audited)
September 30, June 30,
1998 1998
Assets
Loans and leases, at estimated fair value ........ $74,732,538 $79,821,224
(cost of $75,579,629 and $81,421,224, respectively)
Investments in warrants, at estimated fair value . 1,246,959 1,289,713
(cost of $1,233,350 and $1,208,550)
Investments in stocks, at estimated fair value ... 2,372,145 4,276,393
(cost of $536,772 and $650,263)
Cash and cash equivalents ........................ 2,334,904 2,301,753
Past due loans receivable ........................ 1,384,104 584,577
Other assets ..................................... 192,667 215,423
----------- -----------
Total assets ............................ 82,263,317 88,489,083
----------- -----------
Liabilities & Shareholders' Equity
Liabilities
Bank loans ................................... 34,813,251 36,114,059
Management fees payable ...................... 514,712 560,821
Accounts payable and other accrued liabilities 378,418 750,953
---------- ----------
Total liabilities ................... 35,706,381 37,425,833
---------- ----------
Shareholders' Equity
Common stock, $.001 par value; 100,000,000 shares
authorized; issued and outstanding, 48,318.58 shares 49 49
Capital in excess of par value .....................46,641,051 46,641,051
Distributions ....................................(22,174,039) (16,871,073)
Accumulated earnings .............................. 22,089,875 21,293,223
----------- ------------
Total shareholders' equity ............... 46,556,936 51,063,250
----------- ------------
Total liabilities & shareholders' equity .$82,263,317 $ 88,489,083
=========== ============
3
<PAGE>
VENTURE LENDING & LEASING, INC.
Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
For the Three For the Three
Months Ended Months Ended
September 30, September 30,
1998 1997
-------------- ------------
Investment income:
Interest on loans and leases ..... $ 3,281,955 $ 2,746,914
Interest on short-term investments 45,516 74,993
----------- -----------
Total investment income .... 3,327,471 2,821,907
----------- -----------
Expenses:
Interest expense ................. 633,602 768,158
Management fee ................... 514,712 562,442
Other operating expenses ......... 147,405 87,353
----------- -----------
Total expenses ............. 1,295,719 1,417,953
----------- -----------
Net investment income ................... 2,031,752 1,403,954
Net change in unrealized gain (loss)
from investment transactions ........... (1,105,401) 463,438
Net realized gain (loss) from
investment transactions ............... (129,699) 1,237,920
----------- -----------
Net income .......................... $ 796,652 $ 3,105,312
=========== ===========
Basic earnings per share ................ $ 16.49 $ 69.79
=========== ===========
Weighted average shares outstanding ..... 48,318 44,492
=========== ===========
VENTURE LENDING & LEASING, INC.
Statement of Changes in Shareholders' Equity (Unaudited)
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1998 and
the Three Months Ended September 30, 1998
Common Stock
----------------- Capital in Distri-
Excess of butions Accumulated
Shares Amount Par Value Earnings Total
-----------------------------------------------------------------
Balance
June 30
1997 39,054.38 $40 $37,317,282 ($5,828,791) $8,967,021 $40,455,552
Shares sold 9,264.20 9 9,323,769 -- -- 9,323,778
Distributions -- -- -- (11,042,282) -- (11,042,282)
Net income .. -- -- -- -- 12,326,202 12,326,202
------------ --- ---------- ------------ ----------- ------------
Balance,
June 30
1998 48,318.58 49 46,641,051 (16,871,073) 21,293,223 51,063,250
Distributions -- -- -- (5,302,966) -- (5,302,966)
Net income .. -- -- -- -- 796,652 796,652
------------ --- ---------- ------------ ----------- ------------
Balance
September 30
1998 48,318.58 $49 $46,641,051 ($22,174,039) $22,089,875 $46,556,936
=========== === =========== ============= =========== ===========
5
<PAGE>
VENTURE LENDING & LEASING, INC.
Statement of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------
For the Three For the Three
Months Ended Months Ended
September 30, September 30,
1998 1997
Cash flows from operating activities:
Net income ....................................... $796,652 $3,105,312
Adjustments to reconcile net investment income
to net cash provided by operating activities:
Amortization of organizational expenses .......... 7,561 7,561
Amortization of bank loan expenses ............... 16,787 14,307
Loss (gain) on sale of securities ................ 129,699 (1,237,920)
Change in unrealized gain from
investment transactions .......................... 1,105,401 (463,438)
Increase in loans receivable ..................... (799,527) (601,611)
Increase in other assets ......................... (1,592) (57,425)
Decrease in management fees payable .............. (46,109) (15,536)
Decrease in accounts payable and other
accrued liabilities ............................ (372,536) (102,380)
------------ ---------
Net cash provided by operating activities ........ 836,336 648,870
------------ ---------
Cash flows from investing activities:
Acquisition of loans and leases .................. (1,967,596) (18,559,672)
Principal payments on loans and leases ........... 7,056,282 5,202,520
Acquisition of warrants and common stock ......... (43,522) (175,862)
Proceeds from sale of securities ................. 755,425 1,223,457
------------ ---------
Cash provided by (used in) investing activities .. 5,800,589 (12,309,557)
------------ ---------
Cash flows from financing activities:
Sales of common stock, net ....................... -- 9,323,778
Distributions to shareholders .................... (5,302,966) (1,562,176)
Loan from bank ................................... 4,500,000 7,500,000
Principal payments on bank loan .................. (5,800,808) --
------------ ---------
Net cash provided by financing activities ........ (6,603,774) 15,261,602
------------ ----------
Net increase in cash and cash equivalents ........ 33,151 3,600,915
------------ ---------
Cash and cash equivalents
-- beginning of period .......................... 2,301,753 3,946,955
------------ ---------
Cash and cash equivalents -- end of period ....... $2,334,904 $7,547,870
============ ==========
6
<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 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.
The Fund's shares of Common Stock, $.001 par value (`Shares") were sold
to subscribers pursuant to capital calls made through August 8, 1997. Total
committed capital of $46.6 million has been fully funded as of September 30,
1998. The Fund has completed its investment period and will now focus on
efficiently managing the Fund's portfolio towards liquidation. As of September
30, 1998, the Fund has distributed $22.2 million to its investors, including
approximately 5% of committed capital.
In addition to the historical information contained herein, this
Quarterly Report contains certain forward-looking statements. The reader of this
Quarterly Report should understand that all such forward-looking statements are
subject to various uncertainties and risks that could affect their outcome. The
Fund's actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments and competition effects as
well as other factors. This entire Quarterly Report should be read to put such
forward-looking statements in context and to gain a more complete understanding
of the uncertainties and risks involved in the Fund's business.
Results of Operations -- Three Months Ended September 30, 1998 and
September 30, 1997
Total investment income for the three months ending September 30, 1998
and 1997 were $3.33 million and $2.82 million, respectively, of which $3.28
million and $2.75 million, respectively, consisted of interest on venture loans
outstanding during the period. Remaining income consisted of interest on the
temporary investment of cash, pending investment in venture loans and leases or
application to the Fund's expenses.
Expenses for the three months ending September 30, 1998 and 1997 were
$1.3 million and $1.4 million, respectively. Net income for the three months
ended September 30, 1998 and 1997 was $0.8 million and $3.1 million and includes
net change in realized and unrealized gains (losses) of ($1.2 million) and $1.7
million. On a per share basis, for the three months ending September 30, 1998
and 1997 net income was $16 and $70.
7
<PAGE>
The most significant factor effecting net income for the period was the
net change in realized and unrealized loss of $1.2 million for the three months
ending September 30, 1998 compared to the net gain of $1.7 million for the three
months ending September 30, 1997. Net investment income increased to $2.0
million as of September 30, 1998 from $1.4 million as of September 30, 1997,
reflecting the increase in loans outstanding and lower management fees and
interest expense. As the Fund distributes contributed capital to its investors,
management fees based on the Fund's total asset base are expected to continue to
decrease accordingly.
The Fund's policy is to place a loan on non-accrual status when either
principal or interest has become past due for 90 days or more. As of September
30, 1998 and 1997, the Fund had loan balances outstanding of $2.6 million and
$3.4 million to borrowers that were carried on a non-accrual basis. The amount
that the Fund will ultimately recover on these loans cannot be determined with
certainty. As of September 30, 1998, the Fund has applied a valuation allowance
of $0.8 million to reduce the carrying value of the loans to their estimated
fair market value.
Liquidity and Capital Resources -- September 30, 1998 and 1997
Total capital committed to the purchase of shares pursuant to
subscription agreements was approximately $46.6 million at September 30, 1998
and 1997. As of September 30, 1998 and 1997, 100% of committed capital was
called to fund investments in venture loans and leases and to meet the Fund's
expenses.
The Fund has in place a $45 million securitization debt facility to
finance the acquisition of asset-based loans and leases. The principal balance
is a 39-month term loan. Additional amounts can be drawn on the credit facility
by a minimum of $5 million and in $1 million increments in excess thereof. At
September 30, 1998, there was $28.6 million outstanding under this facility. The
interest rate on the facility is LIBOR plus .50 percent.
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. 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 percent annually based on the average daily unused
portion of the commitment with respect to this facility.
Additionally, the Fund has a $15 million warehouse line of credit with
$6.2 million outstanding on September 30, 1998. The interest rate on the
warehouse line is LIBOR plus 1.15 percent.
The Fund enters into interest rate swap transactions to hedge its
interest rate on the debt facility. The net interest received or paid on the
transactions is included in interest expense. At September 30, 1998, the Fund
had interest swap transactions outstanding with a total notional principal
amount of $40.9 million. The effect of the swap is to convert the variable LIBOR
rate into a fixed rate on the contract notional value.
8
<PAGE>
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.
Year 2000 Issue
The Fund utilizes software and related information technologies that
will be affected by the date change in the year 2000. The year 2000 issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. When the century date change occurs, certain
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may result in a systems
failure or cause systems to process critical financial and operational
information incorrectly. Additionally, many of the Fund's customers and service
providers use software and information technology that could also be affected by
the date change.
Based on ongoing assessments and testing, the Fund believes that there
is no material risk of business interruption as a result of computer errors or
inefficiencies. Consequently, the Fund does not anticipate that the remediation
costs associated with the year 2000 issue will be material. The Fund is also
working with its vendors and customers to obtain reasonable assurances that they
are taking comparable steps with respect to their year 2000 exposures. However,
in the event that significant vendors or customers do not adequately address the
year 2000 issue, it could have a material adverse effect on the Fund's
operations and financial position. The steps the Fund is taking and intends to
take do not guarantee complete success or eliminate the possibility that the
Fund will not be adversely affected by the matters related to the year 2000.
9
<PAGE>
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits
Ex 27.1 Financial Data Schedule
10
<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 13, 1998
Ronald W. Swenson
Chairman
[Chief Executive Officer]
Date: November 13, 1998
Salvador O. Gutierrez
President & Treasurer
[Chief Financial Officer]
11
<PAGE>
VENTURE LENDING & LEASING, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC) and in
Management's opinion, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of results for such
interim periods. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to SEC rules or regulations;
however, the Fund believes that the disclosures made are adequate to make the
information presented not misleading. The interim results for the three months
ended September 30, 1998 and 1997, are not necessarily indicative of results for
the full year. It is suggested that these financial statements be read in
conjunction with the financial Statements and the notes included in the Fund's
Annual Report for the year ended June 30, 1998.
2. SUMMARY OF INVESTMENTS:
Loans and leases generally are made to borrowers pursuant to commitments whereby
the Fund commits to finance assets up to a specified amount for the term of the
commitments, upon the terms and subject to the conditions specified by such
commitment. The Fund's investments in loans and leases are entirely within the
United States and are diversified among the following industries.
The percentage of net assets that each industry group represents is shown with
the industry totals:
Outstanding
Borrower June 30, 1998
Biotechnology:
Biosys, Inc. $1,411,463
Ceres, Inc.
458,923
Desmos, Inc. 132,825
Advanced Therapies, Inc. 384,033
Gene Logic, Inc. 794,485
Idec Pharmaceuticals Corporation 616,949
Protein Delivery, Inc. 22,635
Regen Biologics, Inc. 875,304
Telek, Inc. 855,104
Therics, Inc. 399,688
-----------------
Total biotechnology (12.8%) 5,951,409
-----------------
12
<PAGE>
Communications:
AUnet Corporation 454,015
Brocade Communications, Inc. 1,378,684
Digital Generation Systems, Inc. 4,066,761
Exodus Communications, Inc. 3,414,940
Fabrik Communications, Inc. 2,135,423
Fiberlane Communications, Inc. 4,189,305
Jetstream Communications, Inc. 923,976
Juniper Networks, Inc. 2,110,819
Optimal Networks Corporation 344,186
Optivision, Inc. 1,421,921
Silicon Wireless, Inc. 1,441,318
Socket Communications, Inc. 57,525
Yago Systems, Inc. 258,671
-----------------
Total communications (47.7%) 22,197,544
-----------------
Computers and peripherals:
Das Devices, Inc. 4,032,320
Headway Technologies, Inc. 5,165,967
Aptix Corporation 677,990
Neomagic Corporation 419,430
SVision, Inc. 719,111
-----------------
Total computers and peripherals (23.7%) 11,014,818
-----------------
Internet:
Active Software, Inc. 235,604
Adforce, Inc. 1,602,524
Infoseek Corporation 187,867
Intermedia Communications 406,975
Inverse Network Technology 288,569
Keynote Systems Incorporated 347,061
Netratings, Inc. 78,455
BigBook, Inc. 769,240
Wallop Software, Inc. 1,230,745
-----------------
Total Internet (11.1%) 5,147,040
-----------------
Medical devices:
Ciphergen Biosystems 306,415
eMed 161,262
Encelle, Inc. 291,891
Heartstent Corporation 105,095
Integ Incorporated 3,965,251
Aerogen, Inc. 315,724
Intratherapeutics, Inc. 911,497
Myelotec, Inc. 191,044
Oratec Interventions, Inc. 252,369
Spinal Concepts, Inc. 216,350
Survivalink Corporation 543,385
-----------------
Total medical devices (15.6%) 7,260,283
-----------------
13
<PAGE>
Other:
Larex, Inc. 1,401,407
Topometrix Corporation 1,704,084
Uniax Corporation 1,110,861
-----------------
Total other (9.1%) 4,216,352
-----------------
Semiconductors and equipment:
Abpac, Inc. 614,845
Apache, Inc. 66,125
Dynachip Corporation 1,166,794
Equator Technologies, Inc. 2,093,951
iCompression, Inc. 92,849
I-Cube, Inc. 903,961
Lightwave Microsystems Corporation 635,784
Poseidon Technology, Inc. 398,641
Quantum3D, Inc. 117,198
SiRF Technology 579,285
Telecruz Technology, Inc. 514,184
Tessera, Inc. 166,572
Transmeta Corporation 2,776,501
O-In Design Automation 318,896
ZSP Corporation 1,024,574
-----------------
Total semiconductors and equipment (24.6%) 11,470,160
-----------------
Software:
Calico Technology, Inc. 527,221
Commerce One, Inc. 304,758
Comps Infosystems, Inc. 1,342,404
Datamind Corporation 500,531
Nokia, IP Inc. 367,597
Persistence Software, Inc. 241,653
Perspecta, Inc. 338,708
Release Software Corporation 361,792
Relevance Technologies, Inc. 264,479
Solopoint, Inc. 98,343
Starlight Networks, Inc. 2,964,975
Tenth Planet Exploration, Inc. 212,263
Wink Communications, Inc. 851,473
Xatrix Entertainment, Inc. 67,831
-----------------
Total software (18.1%) 8,444,028
-----------------
Total $75,701,634
=================
The Fund provides asset-based financing primarily to start-up and emerging
growth venture-capital-backed companies. As a result, the Fund is subject to
general credit risk associated with such companies. At September 30, 1998, the
Fund has unfunded commitments to borrowers of $45.3 million.
14
<PAGE>
The Fund's investments in warrants are entirely within the United States and are
diversified among the following industries. The percentage of net assets that
each industry group represents is shown with the industry totals:
Percentage of Net
Industry Warrant Value Assets
- ----------------------------------------------- -------------- --------------
Biotechnology $105,609 0.2%
Communications 313,000 0.7
Computer and peripherals 141,000 0.3
Internet 80,250 0.2
Medical devices 156,300 0.3
Semiconductor 225,600 0.5
Software 160,200 0.3
Other 65,000 0.1
---------------- -------------
Total warrants $1,246,959 2.7%
================ ==============
The Fund's investment in common stock at September 30, 1998, consists of
investments in four securities within the United States and is diversified among
the software, semiconductor and communications industries. These investments
have a carrying value of $2.4 million and represents 5.1 percent of the Fund's
net assets.
At September 30, 1998, the Fund held 0.3 million warrants to purchase the common
and preferred shares of 7 publicly traded companies. Because of the illiquid
nature of these warrants, the Fund is carrying the public companies at a
discounted value of $188,000. The warrants issued by private companies do not
have a readily ascertainable market value and were assigned a minimal value at
the time of acquisition. These warrants had a value of $1.1 million at September
30, 1998.
3. EARNINGS PER SHARE:
The Fund adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," effective December 31, 1997. SFAS No. 128 replaces primary
and fully diluted earnings per share with basic and diluted earnings per share
calculations. Basic earnings per share are computed by dividing net income, less
dividends on preferred stock, by the weighted average common shares outstanding.
Diluted earnings per share are computed by dividing net income, less dividends
on preferred stock, by the weighted average common shares outstanding, including
the dilutive effects of potential common shares (e.g., stock options). The Fund
has no preferred stock or instruments that would be potential common shares;
thus, reported basic and diluted earnings are the same.
15
<PAGE>
4. FUTURE FINANCIAL ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, and
the Fund plans to adopt its provisions effective July 1, 1999. From time to
time, the Fund enters into interest rate swaps to hedge its interest rate.
Additionally, certain of its investments and long-term borrowings may have
embedded options due to call or put features that would be required to be
accounted for differently under SFAS No. 133 as compared to current accounting
principles. The Fund has not yet quantified the impact of adopting SFAS No. 133
on its financial statements; however, SFAS No. 133 could increase the volatility
of future earnings.
16
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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