4
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
r 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)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated be reference in Part II of this Form 10-K or any amendment to this
Form 10-K: ___
As the registrant's shares are not publicly-traded, the aggregate market value
of the voting stock held by non-affiliates of the registrant cannot be
determined.
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 15, 1999 was 48,318.58.
Documents Incorporated by Reference Document Description 10-K Part None
<PAGE>
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. 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, $.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 June 30, 1999.
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
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, 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 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.
Generally, to be eligible to elect BDC status, a company must engage in
the business of furnishing capital and offering significant managerial
assistance to "eligible portfolio companies," as defined below. More
specifically, in order to qualify as a BDC, a company must (i) be a domestic
company; (ii) have registered as a class of its securities or have filed a
registration statement with the SEC pursuant to Section 12 of the Securities
Exchange Act of 1934; (iii) operate for the purpose of investing in the
securities of certain types of eligible portfolio companies; (iv) offer to
extend significant managerial assistance to such eligible portfolio companies;
(v) have a majority of disinterested directors; and (vi) file (or under certain
circumstances, intend to file) a proper notice of election with the SEC.
"Making available significant managerial assistance" is defined under
the 1940 Act, in relevant part, as (i) an arrangement whereby the business
development company, through its officers, directors, employees or general
partners, offers to provide and, if accepted, does provide, significant guidance
and counsel concerning the management, operations or business objectives of a
portfolio company; or (ii) the exercise by a business development company of a
controlling influence over the management or polices of the portfolio company by
the business development company acting individually or as part of a group
acting together which controls the portfolio company. The officers of the Fund
intend to offer to provide managerial assistance, including advice on equipment
acquisition and financing, cash flow and expense management, general financing
opportunities, acquisition opportunities and opportunities to access the public
securities markets, to the great majority of companies to whom the Fund provides
venture loans or leases. In some instances, officers of the Fund might serve on
the board of directors of borrowers or lessees.
An "eligible portfolio company" generally is a United States company
that is not an investment company and that (i) does not have a class of
securities registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a BDC and has an
affiliate of a BDC on its board of directors; or (iii) meets such other criteria
as may be established by the SEC. Control under the 1940 Act is presumed to
exist where a BDC owns more than 25% of the outstanding voting securities of the
eligible portfolio company.
The 1940 Act prohibits or restricts companies subject to the 1940 Act
from investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms, and investment companies. Moreover, the
1940 Act limits the type of assets that BDCs may acquire to certain prescribed
qualifying assets and certain assets necessary for its operations (such as
office furniture, equipment, and facilities) if, at the time of acquisition,
less than 70% of the value of BDC's assets consist of qualifying assets.
Qualifying assets include: (i) privately acquired securities of companies that
were eligible portfolio companies at the time such BDC acquired their
securities; (ii) securities of bankrupt or insolvent companies; (iii) securities
of eligible portfolio companies controlled by a BDC; (iv) securities received in
exchange for or distributed in or with respect to any of the foregoing; and (v)
cash items, government securities and high-quality short-term debt. The 1940 Act
also places restrictions on the nature of transactions in which, and the persons
from whom, securities can be purchased in order for the securities to be
considered qualifying assets. Such restrictions include limiting purchases to
transactions not involving a public offering and the requirement that securities
be acquired directly from either the portfolio company or its officers,
directors or affiliates.
The Fund, as a BDC, may sell its securities at a price that is below
its net asset value per share, provided that a majority of the Fund's
disinterested directors has determined that such sale would be in the best
interests of the Fund and its shareholders and upon the approval by the holders
of a majority of its outstanding voting securities, including a majority of the
voting securities held by non-affiliated persons, of such policy or practice
within one year of such sale. A majority of the disinterested directors also
must determine in good faith, in consultation with the underwriters of the
offering if the offering is underwritten, that the price of the securities being
sold is not less than a price which closely approximates market value of the
securities, less any distribution discounts or commissions. As defined in the
1940 Act, the term "majority of the outstanding voting securities" of the Fund
means the vote of (i) 67% or more of the Fund's Shares present at a meeting, if
the holders of more than 50% of the outstanding Shares are present or
represented by proxy, or (ii) more than 50% of the Fund's outstanding Shares,
whichever is less.
Many of the transactions involving a company and its affiliates (as
well as affiliates of those affiliates) which were prohibited without the prior
approval of the SEC under the 1940 Act prior to its amendment by the 1980
Provisions are permissible for BDCs, including the Fund, upon the prior approval
of a majority of the Fund's disinterested directors and a majority of the
directors having no financial interest in the transactions. However, certain
transactions involving certain persons related to the Fund, including its
directors, officers, and the Managers, may still require the prior approval of
the SEC. In general, (i) any person who owns, controls, or holds power to vote,
more than 5% of the Fund's outstanding Shares (ii) any director, executive
officer, or general partner of that person; and (iii) any person who directly or
indirectly 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 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 July 5, 1998, the Managers reinvested the proceeds of matured,
repaid or resold investments, net of required distributions to shareholders,
principal payments on borrowings and expenses or other obligations of the Fund,
in new loans or leases. Following that date, the Fund has begun to distribute to
investors all proceeds received from principal payments and sales of
investments, net of reserves and expenses, principal repayments on the Fund's
borrowings, amounts required to fund financing commitments entered into before
such date, and any amounts paid on exercise of warrants. Distributions of such
amounts are likely to cause annual distributions to exceed the earnings and
profits of the Fund available for distribution, in which case such excess will
be considered a tax free return of capital to a shareholder to the extent of the
shareholder's adjusted basis in his shares and then as capital gain. The Fund
may borrow money to fund shareholder distributions, to the extent consistent
with the 1940 Act and a prudent capital structure.
Competition.
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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.
In December 1997, an alleged breach of contract case was filled
against the Fund arising out of the Fund's refusal to fund a secured loan in
September 1994 due to the borrower's failure to satisfy conditions precedent in
the agreement, including, but not limited to, providing adequate security for
the loan. The case is in the discovery stage, and trial is set for February
2000. In addition to disputing liability, Fund management also believes that the
lack of funding did not cause the plaintiff to suffer any damages based on the
facts known at this time. Counsel for the fund has advised that losses, if any,
arising out of this matter would probably not be material to the Fund, and Fund
management concurs with that opinion.
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, 1999.
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Fund's Common Stock is not listed on any securities exchange, and
all holders of the Fund's Common Stock are subject to agreements significantly
restricting the transferability of their shares.
The approximate number of holders of record of the Fund's Common Stock
at September 15, 1999 was 52.
The Fund has established a policy of declaring dividends on a quarterly
basis, with the most recent dividend being paid on September 2, 1999 to holders
of record on June 30, 1998, in the amount of $124.18 per share. See "Dividends
and Distributions" under Item 1 for a description of the Fund's dividend
policies.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain financial data and should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere in this Form 10-K. The selected financial data set
forth below has been derived from the audited financial statements.
For the Year Ended For the Year Ended
June 30, 1999 June 30, 1998
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Statement of Operations Data:
Investment Income:
Interest on Loans and Leases $11,545,419 $12,793,441
Interest on Short - Term investments 209,677 381,161
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Total Investment Income 11,755,096 13,174,602
Expenses:
Management Fee to Managers 1,905,721 2,307,014
Interest Expense 2,136,991 2,928,409
Other Expenses 638,121 564,975
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Total Expenses 4,680,833 5,800,398
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Net Investment Income 7,074,263 7,374,204
Net Unrealized Gain From
Investment Transactions 21,910,372 (41,374)
Net Realized Gain From
Investment Transactions 4,185,108 4,993,372
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Net Income $33,169,743 $12,326,202
Net Income Per Share: $686 $260
Average Shares Outstanding 48,319 47,354
Balance Sheet Data: As of June 30, 1999 As of June 30, 1998
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Total Assets $81,705,700 $88,489,083
Bank Loans $22,894,335 $36,114,059
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations -- Years Ended June 30, 1999 and 1998
Total investment income for the years ended June 30, 1999 and 1998 was
$11.8 million and $13.2 million, respectively, of which $11.5 million and $12.8
million, respectively, consisted of interest on venture loans outstanding.
Remaining income consisted of interest on the temporary investment of cash,
pending investment in venture loans and leases, distributions to shareholders or
application to the Fund's expenses. The decrease in investment income primarily
reflects the decrease in loans & leases outstanding from approximately $82.0
million as of June 30, 1998 to approximately $54.1 million as of June 30, 1999.
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, 1999 and 1998 net income was $686 and $260 respectively.
The most significant factor effecting net income for the year ended
June 30, 1999 was the increase of the unrealized gain of the Fund's publicly
traded stock and warrant portfolio of $21.9 million and realized gains from
investment transactions of $4.2 million. The unrealized appreciation of the
Fund's portfolio was primarily attributable to the $14.3 million appreciation of
the Fund's warrants to purchase stock of Juniper Networks and the $12.0 million
appreciation of the investment in stock of Brocade Communications. Included in
the unrealized gain from investment transactions for the year ended June 30,
1999, is an unrealized loss on loans and leases of $2.4 million. This amount
represents a reduction in the estimated fair value of loans and leases
determined by the Fund's managers in accordance with the procedures established
by the Fund's Board of Directors.
Expenses for the years ended June 30, 1999 and 1998 were $4.7 million
and $5.8 million, respectively, resulting in net income of $33.2 million and
$12.3 million respectively. Interest expense declined during the year ended June
30, 1999 primarily reflecting the decrease in bank loans from $36.1 million on
June 30, 1998 to $22.9 million on June 30, 1999. Management fees decreased from
$2.3 million for the year ended June 30, 1998 to $1.9 million for the year ended
June 30, 1999 reflecting a decreased asset base upon which fees are calculated
for the period.
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, 1999 and 1998, the Fund had loan balances
outstanding of $5.6 million and $2.6 million to borrowers that were carried on a
nonaccrual basis. Foregone interest income on nonaccrual loans for the years
ended June 30, 1999 and 1998, was $307,000 and $280,000 respectively.
Liquidity and Capital Resources -- June 30, 1999 and June 30, 1998
Total capital committed to the purchase of Shares pursuant to
subscription agreements was approximately $46.6 million at June 30, 1999 and
1998. As of June 30, 1999 and 1998, 100% of this committed capital was called to
fund investments in venture loans and leases and to meet the Fund's expenses.
The Fund has in place a $30 million securitization debt facility to
finance the acquisition of asset-based loans and leases. The principal balance
is a 47-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. As of
June 30, 1999, $22.9 million was outstanding under this facility, compared with
$34.4 million as of June 30, 1998. The Fund enters into interest rate swap
transactions to hedge its interest rate on the debt facility. At June 30, 1999,
the Fund had interest rate swap transactions outstanding with a total notional
principal amount of $34.4 million. The effect of these swap transactions 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, 1999, 2% of the Fund's assets consisted of cash and cash
equivalents, compared with 3% as of June 30, 1998. The Fund continued to invest
its assets in venture loans and leases during the year. Cumulative amounts
disbursed under the Fund's loan commitments increased by approximately $8.5
million during the year ended June 30, 1999. Net loan amounts outstanding after
amortization decreased by approximately $27.9 million. Unfunded commitments
decreased by approximately $10.9 million.
============== --------------- ------------- -------------- --------------------
Year Ending Amount Principal
Disbursed Amortization Balance Unfunded Commitments
============== --------------- ------------- -------------- --------------------
June 30, 1999 $143.0 million $88.9 million $54.1 million $38.1 million
============== =============== ============== ============= ====================
June 30, 1998 $134.5 million $52.5 million $82.0 million $49.0 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.
<PAGE>
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. 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, 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.
<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, 1999 (Unaudited)
Three Months Ended
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
---- ---- ---- ----
Investment Income:
Interest on Loans and Leases $3,281,955 $3,235,529 $2,570,686 $2,459,559
Interest on Short -Term Investments 45,516 54,044 60,516 47,291
------ ------ ------ ------
Investment Income 3,327,471 3,289,573 2,631,202 2,506,850
--------- --------- --------- ---------
Expenses:
Management Fee to the Managers 514,712 460,986 412,305 517,719
Interest Expense 633,602 561,833 486,415 455,141
Other Expense 147,405 155,938 154,945 179,775
------- ------- ------- -------
Total Expenses 1,295,719 1,178,757 1,053,665 1,152,635
--------- --------- --------- ---------
Net Investment Income $2,031,752 $2,110,816 $1,577,537 $1,354,215
Net Unrealized Gain (Loss)
From Investment Transactions (1,105,401)(2,201,514) (100,672) 25,317,959
Net Realized Gain (Loss)
From Investment Transactions (129,699) 3,903,122 (20,000) 431,685
---------- ---------- --------- -------
Net Income $796,652 $3,812,424 $1,456,865$27,103,859
======== ========== ========== ==========
Net Income Per Share $17 $79 $30 $561
=== === === ====
Average Shares Outstanding 48,319 48,319 48,319 48,319
====== ====== ====== ======
Quarterly Results - June 30, 1998 (Unaudited)
Three Months Ended
September 30, December 31, March 31, June 30,
1997 1997 1998 1998
----------- ------------- --------- --------
Investment Income:
Interest on Loans and Leases $2,746,914 $3,227,374 $3,395,265 $3,423,889
Interest on Short -Term Investments 74,993 129,705 97,869 78,594
------ ------- ------ ------
Total Investment Income 2,821,907 3,357,079 3,493,134 3,502,483
--------- --------- --------- ---------
Expenses:
Management Fee to the Managers 562,442 605,146 578,605 558,821
Interest Expense 768,158 832,015 694,774 633,462
Other Expense 87,353 88,728 204,753 186,140
------ ------ ------- -------
Total Expenses 1,417,953 1,525,889 1,478,132 1,378,423
--------- --------- --------- ---------
Net Investment Income $1,403,954 $1,831,190 $2,015,002 $2,124,060
Net Unrealized Gain From Investment
Transactions 463,438 (1,331,406) 908,301 (81,707)
Net Realized Gain From Investment
Transactions 1,237,920 1,147,559 1,822,117 785,776
--------- --------- --------- -------
Net Income $3,105,312 $1,647,343 $4,745,420 $2,828,129
========== ========== ========== ==========
Net Income Per Share $70 $34 $98 $59
=== === === ===
Average Shares Outstanding 44,492 48,319 48,319 48,319
====== ====== ====== ======
<PAGE>
VENTURE LENDING & LEASING, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
ITEM 8
FINANCIAL STATEMENTS
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Financial Statements Included in Item 8:
See Item 14(a)
VENTURE LENDING & LEASING,INC.
FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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, 1999 and 1998,and the related statements of operations,
changes in shareholders equity and cash flowsfor the years then ended.
These financial statements are the responsibility of the Funds 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, 1999 and 1998, 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 27, 1999
VENTURE LENDING & LEASING, INC.
STATEMENTS OF FINANCIALPOSITION
AS OF JUNE 30,1999
AND 1998
1999 1998
----------------- ------------------
ASSETS
Loans and leases,
at estimated fair value
(cost of $54,069,547 and $82,007,024 in
1999 and 1998, respectively) $ 50,068,324 $ 80,405,801
Investments in securities,
at estimated fair value
(cost of $1,749,365 and
$1,858,813 in 1999 and 1998, respectively) 29,767,030 5,566,106
Cash and cash equivalents 1,748,410 2,301,753
Other assets 121,936 215,423
================ ==================
Total assets $ 81,705,700 $ 88,489,083
================= ==================
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Bank loans $ 22,894,335 $ 36,114,059
Management fees payable 517,719 560,821
Accounts payable and
other accrued liabilities 239,662 750,953
----------------- ------------------
Total liabilities 23,651,716 37,425,833
----------------- ------------------
Shareholders equity:
Common stock, $.001 par value:
Authorized 100,000,000 shares
Issued and outstanding
48,318.58 shares as of June 30, 1999 and 1998 49 49
Capital in excess of par value 46,641,051 46,641,051
Distributions (43,050,082) (16,871,073)
Accumulated earnings 54,462,966 21,293,223
---------------- ------------------
Total shareholders equity 58,053,984 51,063,250
---------------- ------------------
Total liabilities and shareholders equity $ 81,705,700 $ 88,489,083
=============== ==================
The accompanying notes are an integral part of these statements.
VENTURE LENDING & LEASING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
---------------- ----------------
INVESTMENT INCOME:
Interest on loans and leases $ 11,545,419 $ 12,793,441
Interest on short-term investments 209,677 381,161
---------------- ----------------
Total investment income 11,755,096 13,174,602
---------------- ----------------
EXPENSES:
Management fees to the managers 1,905,721 2,307,014
Interest expense 2,136,991 2,928,409
Bank loan facility fee 316,586 239,967
Other operating expenses 321,535 325,008
---------------- ----------------
Total expenses 4,680,833 5,800,398
---------------- ----------------
Net investment income 7,074,263 7,374,204
NET CHANGE IN UNREALIZED GAIN
FROM INVESTMENT TRANSACTIONS 21,910,372 (41,374)
NET REALIZED GAIN FROM INVESTMENT TRANSACTIONS 4,185,108 4,993,372
---------------- ----------------
Net income $ 33,169,743 $ 12,326,202
================ ================
BASIC EARNINGS PER SHARE $686.47 $260.30
================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING 48,319 47,354
================ ================
The accompanying notes are an integral part of these statements.
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
Capital in
Common Stock Excess of Accumulated
------------------------
Shares Amount Par Value Distributions Earnings Total
---------------------------------------------------------------
BALANCE, 6/30/97 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 0 0 9,323,778
Distributions 0.00 0 0 (11,042,282) 0 (11,042,282)
Net income 0.00 0 0 0 12,326,202 12,326,202
---------------------------------------------------------------
BALANCE, 6/30/98 48,318.58 49 46,641,051 (16,871,073)21,293,223 51,063,250
Distributions 0.00 0 0 (26,179,009) 0 (26,179,009)
Net income 0.00 0 0 0 33,169,743 33,169,743
==============================================================
BALANCE, 6/30/99 48,318.58 $49$ 46,641,051 $(43,050,082)$54,462,966 $58,053,984
===============================================================
The accompanying notes are an integral part of these statements.
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,169,743 $ 12,326,202
Adjustments to reconcile net income
to net cash provided by
operating activities:
Amortization of organizational expenses 30,212 29,910
Amortization of bank loan expenses 61,362 49,922
Net realized gain from
investment transactions (4,185,108) (4,993,372)
Net change in unrealized gain from
investment transactions (21,910,372) 41,374
Decrease (increase) in other assets 1,961 (15,805)
Increase (decrease) in management
fees payable (43,102) 115,264
Decrease in accounts payable and other
accrued liabilities (512,268) (196,697)
----------------- ------------------
Net cash provided by operating activities 6,612,428 7,356,798
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (9,130,095) (43,843,579)
Principal payments on loans and leases 37,067,577 24,174,741
Proceeds from prepayment of loan 0 2,131,408
Acquisition of warrants and stock (72,559) (460,008)
Proceeds from sale of securities 4,368,039 4,799,884
----------------- ------------------
Net cash provided by (used in)
investing activities 32,232,962 (13,197,554)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net 0 9,323,778
Distributions to shareholders (26,179,009) (11,042,283)
Loan from bank 8,500,000 15,000,000
Repayment of bank loan (21,719,724) (8,885,941)
Payment for bank loan expenses 0 (200,000)
----------------- ------------------
Net cash provided by (used in)
financing activities (39,398,733) 4,195,554
----------------- ------------------
Net decrease in cash and cash equivalents (553,343) (1,645,202)
CASH AND CASH EQUIVALENTS:
Beginning of year 2,301,753 3,946,955
----------------- ------------------
End of year $ 1,748,410 $ 2,301,753
================= ==================
CASH PAID DURING THE YEAR FOR:
Taxes $ 1,863 $ 800
Interest 2,028,607 3,205,161
The accompanying notes are an integral part of these statements.
- 9 -
VENTURE LENDING & LEASING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Venture Lending & Leasing, Inc. (the Fund) was incorporated in Maryland on
September29, 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
July5, 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 1share of common stock,
$.001 par value, for $1,000. As of June 30, 1999, 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 has been
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 Loans and Leases and Investments
Venture loans and leases are privately negotiated transactions, and there is no
established trading market in which such loans or leases can be sold.
Investments in loans and leases are valued at their original purchase price less
amortization of principal unless, pursuant to procedures established by the
Funds Board of Directors, the Funds Managers determine that amortized cost
does not represent fair value.
Substantially all of the Funds investment securities are warrants and stock.
Most of the Funds securities are restricted and cannot be sold publicly without
prior agreement with the issuer to register the securities under the 1993 Act,
or by selling the securities under Rule 144 or other rules under the 1933 Act,
which permit only limited sales under specified conditions.
Warrants that are received in connection with loan and lease transactions
generally will be assigned a minimal value at the time of acquisition.
Thereafter, warrants on equity securities with readily ascertainable market
values will be assigned a fair value based on the difference, if any, between
the exercise price of the warrant and the market value of the equity securities
for which the warrant may be exercised, adjusted for illiquidity.
Restricted equity securities for which a public market exists are valued at a
discount with reference to the market price for unrestricted equity securities
of the same issuers. The discount for these equity securities takes into
consideration the following factors: the nature of the market in which the
securities are traded, the existence and terms of any registration rights, the
proportion of the issuers securities held by the Fund, and other factors that
may affect their fair value. As the restriction period and other restrictive
factors decrease, the discount applied to the securities also decreases.
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.
The Funds 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.
Loans classified as nonaccrual amounted to approximately $5,572,740 and
$2,593,552 at June 30, 1999 and 1998, respectively. If interest on these loans
had been accrued, such income would have been approximately $306,990 and
$280,436 in 1999 and 1998, respectively.
Interest Rate Swaps
The Fund enters into interest rate swap transactions to manage interest rate
exposures on its debt. Net interest receivable or payable on the swap
transactions is included in interest expense. Gains or losses that result from
the early termination of swap agreements are deferred and amortized over the
remaining term of the associated debt as additional interest expense. Interest
rate swaps that do not qualify as hedges are marked-to-market.
Tax Status
As long as the Fund qualifies as a RIC, it will not pay any federal or state
corporate income tax on income that is distributed to shareholders (pass-through
status). Should the Fund lose its qualification as a RIC, it could be taxed as
an ordinary corporation on its taxable income for that year (even if that income
is distributed to its shareholders), and all distributions out of its earnings
and profits will be taxable to shareholders as ordinary income.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to
conform with the current financial statement presentation. These
reclassifications had no impact on previously reported net income or
shareholders equity.
3. SUMMARY OF INVESTMENTS:
Loans and leases generally are made to borrowers pursuant to commitments whereby
the Fund commits to finance assets up to a specified amount for the term of the
commitments, upon the terms and subject to the conditions specified by such
commitment. As of June 30, 1999, the Funds investments in loans and leases are
entirely within the United States and are diversified among the following
industries. The percentage of net assets (shareholders equity) that each
industry group represents is shown with the industry totals. (The sum of the
percentages does not equal 100 percent because the percentages are based on net
assets as opposed to total loans and leases.)
Value
---------------
Biotechnology:
Biosys, Inc. $ 1,411,463
Ceres, Inc. 1,127,006
Desmos, Inc. 81,893
Gene Logic, Inc. 634,829
Protein Delivery, Inc. 174,398
Regen Biologics, Inc. 577,041
Telek, Inc. 566,176
---------------
Total biotechnology (7.9% of net assets) 4,572,806
---------------
Communications equipment:
Brocade Communications, Inc. 801,572
Cerent 3,307,806
Juniper Networks, Inc. 1,722,781
Optivision, Inc. 285,073
Silicon Wireless, Inc. 1,204,082
Socket Communications, Inc. 12,672
Yago Systems, Inc 178,653
---------------
Total communications equipment (12.9%) 7,512,639
---------------
Communications service provider:
Aunet Corporation 371,196
Digital Generation Systems, Inc. 2,844,021
Exodus Communications, Inc. 2,555,795
---------------
Total communications service provider (9.9%) 5,771,012
---------------
Computer and peripherals:
Applied Magnetics Corporation 1,608,114
Aptix Corporation 510,569
Headway Technologies, Inc. 3,940,226
SVision, Inc. 240,542
---------------
Total computer and peripherals (10.6%) 6,299,451
---------------
Internet:
Active Software, Inc. $ 162,257
Adforce, Inc. 1,234,440
Inverse Network Technology 233,082
Keynote Systems Incorporated 361,757
Netratings, Inc. 151,292
---------------
Total internet (3.7%) 2,142,828
---------------
Medical devices:
Ciphergen Biosystems 136,489
Emed 84,917
Encelle, Inc. 190,892
Heartstent Corporation 118,241
Integ Incorporated 3,477,099
Aerogen, Inc. 206,987
Intratherapeutics, Inc. 741,494
Myelotec, Inc. 208,523
Oratec Interventions, Inc. 133,067
Spinal Concepts, Inc. 201,122
Survivalink Corporation 440,648
Volumetrics Medical Imaging Inc. 338,211
---------------
Total medical devices (10.8%) 6,277,690
---------------
Other:
WebVan-Bay Area Inc. 1,327,662
Larex, Inc. 915,426
Uniax Corporation 803,171
---------------
Total other (5.2%) 3,046,259
---------------
Semiconductors and equipment:
Abpac, Inc. 1,093,724
Dynachip Corporation 1,120,321
Equator Technologies, Inc. 1,455,978
i-Compression, Inc. 137,306
I-Cube, Inc. 684,486
Lightwave Microsystems Corporation 458,785
Neomagic Corporation 236,372
Poseidon Technology, Inc. 471,663
Quantum3D, Inc. 88,865
Sirf Technology 575,512
Telecruz Technology, Inc. 429,215
Transmeta Corporation 2,679,657
Zero-In Design Automation, Inc. 281,659
---------------
Total semiconductors and equipment (16.7%) 9,713,543
---------------
Software:
Calico Technology, Inc. $ 357,147
Commerce One, Inc. 213,156
Comps.com, Inc. 1,567,166
Documentum 195,142
Mineshare Corporation 309,578
Optimal Networks Corporation 228,469
Persistence Software, Inc. 139,262
Personic Software, Inc. 339,425
Perspecta, Inc. 135,041
Release Software Corporation 215,947
Rightpoint Software, Inc. 341,471
Solopoint, Inc. 61,818
Tenth Planet Exploration, Inc. 58,175
Wink Communications, Inc. 570,299
---------------
Total software (8.2%) 4,732,096
---------------
Total loans and leases (cost: $54,069,547) $ 50,068,324
===============
The Fund provides asset-based financing primarily to start-up and emerging
growth venture-capital-backed companies. As a result, the Fund is subject to
general credit risk associated with such companies. At June 30, 1999, the Fund
has unfunded commitments to borrowers of $38,098,809.
Included in the net change in unrealized gain from investment transactions for
the year ended June 30, 1999, is an unrealized loss on loans and leases of
$2,400,000. This amount represents a reduction in the estimated fair value of
loans and leases determined by the Funds Managers in accordance with the
procedures established by the Funds Board of Directors. The Funds investments
in warrants are entirely within the United States and are diversified among the
following industry groups. The percentage of net assets that each industry group
represents is shown with the industry totals:
Percentage of
Value Net Assets
---------------- ----------------
Communications equipment:
Juniper Networks, Inc. $14,355,229 24.7%
Other communications equipment 157,500 .3
---------------- ----------------
Total communications equipment 14,512,729 25.0
Other warrants 1,327,223 2.3
================ ================
Total warrants (cost: $1,022,350) $15,839,952 27.3%
================ ================
The Funds investments in stock are entirely within the United States and are
diversified among the following industries. The percentage of net assets that
each industry group represents is shown with the industry totals:
Percentage of
Shares Value Net Assets
------------- ---------------- -----------------
Communications equipment:
Brocade Communications, Inc. 236,847 $12,174,218 21.0%
Other communications 56,671 589,379 1.0
------------- ---------------- -----------------
Total communications equipment 293,518 12,763,597 22.0
Other common stock 108,418 1,163,481 2.0
============= ================ =================
Total common stock (cost:$727,015) 401,936 $13,927,078 24.0%
============= ================ =================
4. WARRANTS AND STOCK:
At June 30, 1999, the Fund held warrants to purchase shares of common and
preferred stock in 63 companies, of which 10 companies are publicly traded. The
following is a summary of the activity for investments in warrants and
investments in stocks for the year ended June 30, 1999:
Investments in warrants:
Balance, June 30, 1998 $ 1,289,713
Acquisition of warrants 3,800
Write-off of private warrants (137,500)
Conversion of warrants to stock (52,500)
Net change in unrealized gain 14,736,439
----------------
================
Balance, June 30, 1999 $ 15,839,952
================
================
Investments in stocks:
Balance, June 30, 1998 $ 4,276,393
Cash exercises and purchases of stock 77,802
Conversion of warrants to stock 534,685
Write-off of private stock (45,000)
Cost basis of stock sold (490,735)
Net change in unrealized gain 9,573,933
----------------
Balance, June 30, 1999 $ 13,927,078
================
Warrants issued by private companies whose equity securities do not have a
readily ascertainable market value are carried at a minimal value assigned at
the time of acquisition. These warrants had a value of $744,350 at June 30,
1999. During the year, the Fund realized a gain of $3,877,304 on the sale of
141,542 shares of common stock, which had a cost basis of $490,735.
5. LONG-TERM DEBT FACILITY:
The Fund has in place a $30 million securitization debt facility to finance the
acquisition of asset-based loans and leases. The principal balance is a 47-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 June 30, 1999,
there was $22.9 million outstanding under this facility. The interest rate on
the facility is LIBOR plus .50 percent, which at June 30, 1999, was
5.73625 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 0.15 percent monthly based on the
total commitment related to the facility. Expenses of $200,000 were incurred in
connection with procuring the facility. These expenses have been capitalized and
are being amortized over the period of the term loan. The required aggregate
debt principal payments for the remaining four years are as follows:
Year Principal Payments
-----------------------
- -----------------------
2000 $ 12,394,914
- -----------------------
2001 8,374,690
- -----------------------
2002 1,815,766
- -----------------------
2003 308,965
- -----------------------
=======================
$ 22,894,335
=======================
6. Interest rate swaps:
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 June 30, 1999, the Fund had interest swap
transactions outstanding with a total notional principal amount of $34.4 million
to convert floating rate liabilities to fixed rates as follows: Notional
amount of $22.1 million whereby the Fund pays a fixed interest rate of
6.04 percent, while the financial institution pays the floating 90-day LIBOR
rate. Payments are made monthly and terminate on January 27, 2003. Notional
amount of $2.3 million whereby the Fund pays a fixed interest rate of
6.04 percent, while the financial institution pays the floating 90-day LIBOR
rate. Payments are made monthly and terminate on January 27, 2003. Notional
amount of $10 million 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. At
June 30, 1999, the fair market value of these swap transactions in excess of
that which qualifies as a hedge resulted in an unrealized loss position of
$283,000 based upon market quotes. The fair value of interest swaps is the
estimated amount that the Company would pay to terminate the swap transactions
at June 30, 1999, taking into account interest rates at that date. The Fund is
exposed to credit loss in the event of nonperformance by the counterparties to
the interest swap transactions; however, these counterparties are creditworthy
financial institutions, and the Fund does not anticipate nonperformance. The
amount of such credit loss is generally limited to the fair market value on the
swap agreements, if any.
7. CAPITAL STOCK: There are 100,000,000 shares of $.001 par value common stock
authorized. As of June 30, 1999, 48,318.58 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, 1999, all capital commitments have been received.
8. EARNINGS PER SHARE: 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 nonconvertible 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.
9. 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 Funds
total assets (including amounts derived from borrowed funds) as of the last day
of each fiscal quarter thereafter. Fees of $1,905,721 and $2,307,014 were
recognized for the years ended June 30, 1999 and 1998, 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. Certain officers and directors of the Fund also serve as officers
and directors of Westech Advisors and Siguler Guff Advisers, LLC.
10. COMMITMENTS AND CONTINGENCIES: In December 1997, an alleged breach of
contract case was filed against the Fund arising out of the Funds refusal to
fund a secured loan in September 1994 due to the borrowers failure to satisfy
conditions precedent in the agreement, including, but not limited to, providing
adequate security for the loan. The case is in the discovery stage, and trial is
set for February2000. In addition to disputing liability, Fund management also
believes that the lack of funding did not cause the plaintiff to suffer any
damages based on the facts known at this time. Counsel for the Fund does not
believe that losses, if any, would materially affect the financial condition of
the Fund, and Fund management concurs with that opinion.
11. FUTURE FINANCIALACCOUNTING STANDARDS: In June1998, 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 derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivatives gains and losses to
offset related results on the hedged item in the income statement and requires
that a company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No.133 is effective for fiscal
years beginning after June 15, 2000, and the Fund plans to adopt its provisions
effective July 1, 2000. From time to time, the Fund enters into interest rate
swaps to hedge its interest rate. Additionally, certain of its investments and
long-term borrowings may have embedded options due to call or put features that
would be required to be accounted for differently under SFAS No.133 as compared
to current accounting principles. 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.No. 133 on its financial statements;
however, SFAS No. 133 could increase the volatility of future earnings.
<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
DIRECTORS
The following are the directors of the Fund, all of whom serve until
the next annual meeting of shareholders or until their resignation or removal.
Directors who are "interested persons" are indicated by an asterisk.
Name and Position Age Director Occupation During Past Five Years
With Fund Since
John F. Cogan, 51 1995 Senior Fellow, The Hoover Institution, Stanford
Director University, since 1983; Professor, Public Policy,
Stanford University (by courtesy).
J. Michael Egan 45 1995 President, Chief Executive Officer, Bluebird
Development, L.L.C. since 1996;Partner,Sanderling
Ventures (venture capital firm)1992-1996; prior
positions as CEO, board member and senior
management in several medical device companies.
Sal Gutierrez, 55 1995 Senior Vice President, Westech Investment Advisor
Director,President and since 1994, and Senior Vice President, Western
Chief Financial Officer Technology Investment since 1987.
Scott C. Malpass, 36 1994 Associate Vice President for Finance and Chief
Director Investment Officer, and other positions, with
University of Notre Dame since 1988. Concurrent
appointment as an Assistant Professor of Finance
Business Economics to the University's College of
Business Administration.
Roger V. Smith, 56 1994 Founder and President, Smith Venture Group
Director (advisory services for venture
capital companies) since 1994. Various
positions with Silicon Valley Bank,including
President and Vice Chairman,from 1983 to 1994.
Arthur Spinner, 48 1996 Managing Partner, Hambro-Spinner Asset Management
Director since 1993;General partner of HambroInternational
Equity Partners since 1981; Director,TylonGeneral
(semiconductors) since 1989
Ronald W. Swenson, 53 1994 President and Director,WestechInvestmentAdvisors
Director, Chairman since 1994, and President and Director, Western
and CEO* Technology since 1980.
<PAGE>
Name and Position Age Director Occupation During Past Five Years
With Fund Since
George Von Gehr, 57 1994 President, Von Gehr International(advisory
Director services for venture capital companies) since
1990.
EXECUTIVE OFFICERS
The following are the executive officers of the Fund. All officers
serve at the pleasure of the Board.
Name and Position
With Fund Age Occupation During Past Five Years
Ronald W. Swenson, 54 President and Director,Westech Investment Advisors
Director Chairman since 1994, and President and Director, Western
and CEO Technology investments since 1980.
Sal Gutierrez, 56 Senior Vice President and Director, Westech Investment
Director,President Advisors since 1994, and Senior Vice President,Western
and CFO Technology Investment since 1987.
George W. Siguler, 52 Managing Director, Siguler Guff Advisers & affiliates
Executive Vice President since 1995; Managing Director of Mitchell Hutchins
Advisory Director Institutional Investors from 1991 to 1995.Director and
President, Associated Capital Advisers, Inc.
(investment management firm)from 1990 to 1991, Vice
Chairman and a director of Monarch Capital Corp.
(financial services holding company) from 1984 to 1991.
Pat Breshears, 63 Vice President, Westech Investment Advisors since 1994;
Vice President Administrator and Corporate Secretary,Western
and Secretary Technology Investment (venture leasing firm)since 1984.
Donald P. Spencer, 44 Managing Director,Siguler Guff Advisers and affiliates
Vice President, since 1995; Senior Vice President (and other positions)
assistant secretary Mitchell Hutchins Institutional Investors and
affiliates from 1989 to 1995.
The Independent Directors of the Fund constitute its Audit Committee.
The Audit Committee reviews the scope and results of the Fund's annual audit
with the Fund's independent auditors and recommends the engagement of auditors.
ITEM 11. EXECUTIVE COMPENSATION
The Fund's Independent Directors each receive an annual fee from the
Fund of $5,000. Such directors also are reimbursed by the Fund for their
expenses in attending meetings of the Board of Directors or any committee
thereof and receive a fee for attendance in person at any meeting at a per diem
rate of $500. The Fund's directors who are "interested persons" of the Fund, as
defined in the 1940 Act, receive no compensation from the Fund for their
services as directors, other than reimbursement of their expenses in attending
meetings. The Independent Directors received the following amounts of
compensation during the year ended June 30, 1999: Mr. Cogan -- $3,750; Mr. Egan
- -- $4,250; Mr. Malpass (paid by his direction to the University of Notre Dame)
- -- $4,250; Mr. Smith -- $3,750; Mr. Spinner -- $3,750; and Mr. Von Gehr --
$3,750.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Owners of More Than 5% of the Fund's Shares as of the Record Date
====================================== =========================================
Name and Address of Shareholder* Number and Percentage of
Shares Beneficially Owned
====================================== =========================================
Carpenter Company Profit Sharing Plan 2,591.095; 5.36%
====================================== =========================================
Orix USA 3,627.532; 7.51%
====================================== =========================================
Northern Trust, as Custodian for
San Antonio Fire and
Police Pension Plan 5,182.189; 10.72%
====================================== =========================================
University of Notre Dame 5,182.189; 10.72%
====================================== =========================================
University of Richmond 5,182,189; 10.72%
====================================== =========================================
MBTA Retirement Fund 3,109.314; 6.43%
====================================== =========================================
Constellation Investment 4,728.116; 9.79%
====================================== =========================================
Leland Stanford University 10,364.379; 21.45%
====================================== =========================================
* Each of the shareholders listed in this Annex may be contacted c/o Westech
Investment Advisors, Inc., 2010 North First Street, Suite 310, San Jose, CA
95131.
Beneficial Ownership of Fund Shares by Fund Directors and Executive Officers on
September 30, 1998
No director or executive officer of the Fund owns in excess of 1% of the Shares
outstanding. Westech Investment Advisors, all the stock of which is owned by
Messrs. Ronald W. Swenson and Salvador O. Gutierrez, directors of the Fund,
owned 51.821 Shares. Mr. Roger Smith, a director of the Fund, owned 51.821
Shares through a retirement account and 103.644 Shares personally. Mr. Michael
Egan, a director of the Fund, owned 103.64 Shares. Mr. George W. Siguler, an
executive officer and Advisory Director of the Fund, owned 155.464 Shares
through a retirement account and 51.821 Shares jointly with his wife. Trusts for
the benefit of Mr. Siguler's minor children held 103.646 Shares in the
aggregate. Mr. Donald Spencer, an executive officer of the Fund, owned 10.363
Shares jointly with his wife.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Fund is a party to a Management Agreement, dated as of December 22, 1995
("Management Agreement") between the Fund on the one hand, and Westech
Investment Advisors and Siguler Guff Advisers on the other hand. The Management
Agreement was last approved by the Fund's Board of Directors at a meeting held
on October 3, 1997, and by the Fund's shareholders at a meeting held on
September 26, 1995. Further renewal of the Management Agreement will be
considered by the board at a meeting to be held in November 1999. During the
Fund's fiscal year ending June 30, 1999, the Fund paid aggregate investment
management fees totaling $1,905,721 to Westech Investment Advisors and Siguler
Guff Advisers pursuant to the terms of the Management Agreement.
Westech Investment Advisors, the Investment Manager, is a corporation
that is a registered investment adviser under the Investment Advisers Act of
1940 ("Advisers Act"). Messrs. Swenson and Gutierrez, the sole executive
officers of Westech Investment Advisors, each own 50% of its voting securities.
Westech Investment Advisor's principal business address, and the principal
business address of Messrs. Swenson and Gutierrez, is 2010 North First Street,
Suite 310, San Jose, CA 95131.
Siguler Guff Advisers, the Fund Manager, is a limited liability company
that is a registered investment adviser under the Advisers Act. 100% of the
voting securities of Siguler Guff Advisers are beneficially owned, through
holding companies, as follows: 45% by George W. Siguler, 45% by Drew J. Guff and
10% by Donald P. Spencer. A portion of the holdings of Messrs. Siguler, Guff and
Spencer listed above are held in trust for their minor children. The principal
business address of Siguler Guff Advisers, and the principal business address of
Messrs. Siguler, Guff and Spencer, is Rockefeller Center, 630 Fifth Avenue, 16th
Floor, New York, NY 10111.
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 16
Statement of Financial Position as of June 30, 1999 and 1998 17
Statement of Operations for the Years Ended June 30, 1999 and 1998 18
Statement of Changes in Shareholders' Equity for the Years Ended
June 30, 1999 and 1998 19
Statement of Cash Flows for the Years Ended June 30, 1999 and 1998 20
Notes to Financial Statements 21
Financial Statement Schedules for the Years Ended June 30, 1999 and 1998
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, 1984.
3.2 By-Laws, as amended to date - incorporated by reference to the Fund's 1998
Form 10K.
3.3 Bank Loan Agreement - incorporated by reference to the Fund's December 31,
1997 Form 10Q
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 1998 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, 1999.
o "Interested person" (as defined in the 1940 Act) of the Fund.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VENTURE LENDING & LEASING, 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 29, 1999 Date:September 29, 1999
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 F. Cogan Director September 29, 1999
John F. Cogan
By: /S/ J. Michael Egan Director September 29, 1999
J. Michael Egan
By: /S/ Salvador O. Gutierrez President & Director September 29, 1999
Salvador O. Gutierrez
By: /S/ Scott Malpass Director September 29, 1999
S. Scott Malpass
By: /S/ Roger Smith Director September 29, 1999
Roger Smith
By: /S/ Arthur Spinner Director September 29, 1999
Arthur Spinner
By: /S/ Ronald W. Swenson CEO & Director September 29, 1999
Ronald W. Swenson
By: /S/ George Von Gehr Director September 29, 1999
George Von Gehr
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