<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 2000
[ ] 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 814-00132
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 OCTOBER 10, 2000
-------------------------------------- -----------------------------------
Common Stock, $.001 par value 48,318.58
<PAGE>
VENTURE LENDING & LEASING, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position (Unaudited) 3
September 30, 2000 and June 30, 2000
Statement of Operations (Unaudited) 4
Three Months ended September 30, 2000 and 1999
Statement of Changes in Shareholders Equity (Unaudited) 5
Three Months ended September 30, 2000
and the Year Ended June 30, 2000
Statement of Cash Flows (Unaudited) 6
Three Months ended September 30, 2000 and 1999
Notes to Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial 11 - 12
Condition and Results of Operations
Item 3. Quantitative & Qualitative Disclosure About Market Risk 13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6 Exhibits 14
SIGNATURES 14
</TABLE>
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
------------------------- -----------------------
<S> <C> <C>
ASSETS
Loans and leases, at estimated fair value
(Cost of $17,745,711 and $22,072,985) $ 15,800,711 $ 20,127,985
Investments in securities, at estimated fair value
(Cost of $1,218,770 and $1,271,145) 9,582,022 19,371,525
Cash and cash equivalents 2,397,825 11,121,890
Other assets 752,320 1,561,171
------------------------- -----------------------
Total assets 28,532,878 52,182,571
========================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans 3,948,867 8,292,805
Accrued management & incentive fees 4,970,637 8,934,282
Accounts payable and other accrued liabilities 442,883 533,523
------------------------- -----------------------
Total liabilities 9,362,387 17,760,610
------------------------- -----------------------
Shareholders' equity:
Common stock, $.001 par value:
Authorized - 100,000 shares
Issued and outstanding - 48,318.58 shares 49 49
Capital in excess of par value 46,641,051 46,641,051
Distributions (245,698,752) (236,898,489)
Accumulated earnings 218,228,143 224,679,350
------------------------- -----------------------
Total shareholders' equity 19,170,491 34,421,961
------------------------- -----------------------
Total liabilities and shareholders' equity $ 28,532,878 $ 52,182,571
========================= =======================
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
--------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest on loans and leases $ 718,448 $ 1,817,832
Interest on short-term investments 76,274 36,062
--------------------------------------
Total investment income 794,722 1,853,894
--------------------------------------
EXPENSES:
Management fees 178,057 729,015
Interest expense 92,685 373,565
Other operating expenses 76,476 326,447
--------------------------------------
Total expenses 347,218 1,429,027
--------------------------------------
Net investment income 447,504 424,867
--------------------------------------
Net change in unrealized gain from investment
transactions (9,703,192) 24,109,454
Net realized gain from investment transactions 1,191,680 22,577,530
Incentive management fee 1,612,801 (10,110,957)
--------------------------------------
Income (loss) before cumulative effect of a change in $ (6,451,207) $ 37,000,894
accounting principle
Cumulative effect on prior years (To June 30, 1999) of
change in accounting principle (Note 5) - (9,302,185)
--------------------------------------
Net Income (loss) $ (6,451,207) $ 27,698,709
======================================
Amounts per common share:
Income (loss) before cumulative effect of a change in
accounting principle $ (133.51) $ 765.77
Cumulative effect on prior years (To June 30, 1999) of
change in accounting principle (Note 5) - (192.52)
--------------------------------------
Net income (loss) $ (133.51) $ 573.25
======================================
Weighted average shares outstanding 48,318.58 48,318.58
Pro forma amounts assuming the new method is applied
retroactively (Note 5)
Net income (loss) $ (6,451,206) $ 37,000,894
Net income (loss) per common share $ (133.51) $ 765.77
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 2000 AND
THE PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- CAPITAL IN EXCESS OF ACCUMULATED
SHARES AMOUNT PAR VALUE DISTRIBUTIONS EARNINGS TOTAL
-------------------------- ----------------- ------------------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1999 48,318.58 $ 49 $ 46,641,051 $ (43,050,082) $ 54,462,966 $ 58,053,984
Distributions - - (193,848,407) - (193,848,407)
Net income - - - 170,216,384 170,216,384
-------------------------- ----------------- ------------------- ------------------ --------------
BALANCE, JUNE 30, 2000 48,318.58 49 46,641,051 (236,898,489) 224,679,350 34,421,961
-------------------------- ----------------- ------------------- ------------------ --------------
Distributions - - - (8,800,263) - (8,800,263)
Net income - - - - (6,491,207) (6,451,207)
-------------------------- ----------------- ------------------- ------------------ --------------
BALANCE, September 30, 2000 48,318.58 $ 49 $ 46,641,051 $ (245,698,752) $218,228,143 $ 19,170,491
========================== ===================================== ================== ==============
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (6,451,207) $ 47,111,850
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of deferred assests, net of additions (13,430) 16,787
Net change in unrealized gain from investment transactions 9,737,128 (24,109,454)
Net realized gain on investment transactions (1,191,680) (22,577,529)
Decrease (increase) in other assets 822,282 (10,639,174)
Increase (decrease) in accounts payable and other accrued
liabilities and management fees (4,054,284) 612,782
------------ ------------
Net cash used in operating activities (1,151,191) (9,584,738)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases -- (632,154)
Principal payments on loans and leases 4,327,274 8,880,516
Proceeds from sale of securities 1,352,034 22,886,105
Acquisition of warrants and stock (107,979) (417,556)
------------ ------------
Net cash provided by investing activities 5,571,329 30,716,911
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (8,800,264) (8,100,127)
Loans from bank -- --
Repayment of bank loans (4,343,939) (4,035,767)
------------ ------------
Net cash used in financing activities (13,144,203) (12,135,894)
------------ ------------
Net increase (decrease) in cash and cash equivalents (8,724,065) 8,996,279
CASH AND CASH EQUIVALENTS:
Beginning of period 11,121,890 1,748,410
------------ ------------
End of period $ 2,397,825 $ 10,744,689
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest $ 94,620 $ 375,341
NONCASH TRANSACTIONS:
Unrealized gain on hedging activities $ 33,936 $ --
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
VENTURE LENDING & LEASING, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
The accompanying condensed financial statements in Management's opinion, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of financial position and results of operations for interim
periods. Certain information and note disclosures normally included in audited
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted; 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, 2000 and 1999, are
not necessarily indicative of the 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, 2000.
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 industries shown below. The
percentage of shareholders' equity (net assets) that each industry group
represents is shown with the industry totals below. (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. Also, the sum of the percentages of net
assets is greater than 100 percent due to the Fund's use of leverage (debt) as a
means of financing investments.)
<TABLE>
<S> <C>
BIOTECHNOLOGY
Biosys $10,677
Ceres 825,234
Gene Logic 325,767
Nobex 303,759
Telik 25,626
------
SUBTOTAL: 7.8% $1,491,063
COMMUNICATIONS EQUIPMENT
Brocade Communications $100,179
Cisco Systems [Cerent] 1,051,584
mDiversity 745,842
-------
SUBTOTAL: 9.9% $1,897,605
COMMUNICATIONS SERVICE PROVIDERS
Exodus $881,195
iAsiaWorks 198,586
-------
SUBTOTAL: 5.6% $1,079,781
7
<PAGE>
COMPUTERS & PERIPHERALS
Aptix $182,723
DAS Devices 101,738
Headway Technologies 1,903,760
Quantum3D 32,007
------
SUBTOTAL: 11.6% $2,220,228
INTERNET
Adforce $528,805
Keynote Systems 125,141
NetRatings 101,085
Visual Networks 123,978
-------
SUBTOTAL: 4.6% $879,009
MEDICAL DEVICES
Aerogen $57,078
Encelle 34,388
HeartStent 29,411
Integ 1,733,798
IntraTherapeutics 725,935
Myelotec 118,975
SurVivaLink 242,286
Volumetrics 296,763
-------
SUBTOTAL: 16.9% $3,238,634
OTHER
Larex $155,975
Webvan 928,316
-------
SUBTOTAL: 5.7% $1,084,291
PHOTONICS
Lightwave Microsystems $110,410
-------
SUBTOTAL: 0.6% $110,410
SEMICONDUCTOR EQUIPMENT
Abpac $70,822
-------
SUBTOTAL: 0.4% $70,822
SEMICONDUCTORS
Equator Technologies $310,885
HotRail 262,440
I-Cube 193,469
8
<PAGE>
iCompression 71,498
SiRF Technology 305,923
TeleCruz 246,042
Transmeta 1,456,458
---------
SUBTOTAL: 14.8% $2,846,715
SOFTWARE
Calico Software $15,836
Commerce One 39,830
Documentum 65,462
E.piphany [RightPoint] 73,403
MineShare 180,458
Optivision 60,467
Personic Software 283,074
ReleaseNow.com 11,752
Tenth Planet 56,259
Zero-In Design 95,612
------
SUBTOTAL: 4.6% $882,153
TOTAL: 82.4% $15,800,711
</TABLE>
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, 2000, the
Fund has unfunded commitments to borrowers of $36.8 million.
The Fund's investments in warrants and 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:
<TABLE>
<CAPTION>
INDUSTRY WARRANTS AND STOCK VALUE PERCENTAGE OF
SHAREHOLDERS' EQUITY
(NET ASSETS)
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Biotechnology $517,981 2.70%
Communications equipment 6,733,352 35.12%
Communications service provider 275,121 1.44%
Computer and peripherals 5,000 0.03%
Internet 292,635 1.53%
Medical devices 636,435 3.32%
Photonics 9,600 0.05%
Semiconductor 172,010 0.90%
Semiconductor equipment 43,000 0.22%
Software 687,281 3.59%
Other 209,607 1.08%
--------------------------------------------------
Total warrants and stock value $9,582,022 49.98%
==================================================
</TABLE>
Within the communications equipment segment, the Fund's holdings in ONI Systems
represented $6.7 million or
9
<PAGE>
35% of net assets. No other security represented over 5% of net assets.
3. 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
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.
4. IMPLEMENTATION OF 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.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, and
the Fund has adopted its provisions effective July 1, 2000. Derivatives that are
used to hedge the Company's floating debt rate are now marked to market at the
end of each quarter. The resulting gain or loss is recorded as an increase or
decrease in unrealized gains from other security transactions. The market value
of the instrument is treated either an asset or as a liability depending on if
its value is negative or positive. The effect of adopting SFAS No. 133 was not
material.
5. CHANGE IN ACCOUNTING PRINCIPLE
In the 2nd quarter of Fiscal Year End June 30, 2000, the Company changed its
method of accounting for its incentive management fee. The previous method was
to record the incentive management fee as the Company became legally obligated.
The new method is to record the fee based on the Company's current income.
According to the management of the Company, this change was made to more closely
match the incentive fee to current performance. The new method has been applied
to management incentive fee calculations of prior years. The $9,302,185
cumulative effect of the change on prior years is included in income of the 3
months ended September 30, 1999. The effect of the change on the quarter ended
Sept 30, 1999 was to decrease income before cumulative effect of a change in
accounting principle $10,110,957 ($209.26 per share) to $37,000,894 ($765.77 per
share) and net income $19,413,142 ($401.77 per share) to $27,698,709 ($573.25
per share).
10
<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 1998. Total
committed capital of $46.6 million has been fully funded as of September 30,
2000. The Fund has completed its investment period and will now focus on
efficiently managing the Fund's portfolio. As of September 30, 2000, the Fund
has distributed $245.7 million to its investors.
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 -- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total investment income for the three months ending September 30, 2000
and 1999 was $0.8 million and $1.9 million, respectively, of which $0.7 million
and $1.8 million, consisted of interest on venture loans and leases outstanding
during the period. The remaining income consisted of interest on the temporary
investment of cash. The decrease in investment income reflects the decrease in
loans & leases outstanding from September 30, 1999 to September 30, 2000.
Expenses for the three months ended September 30, 2000 and 1999 were
$0.3 million and $1.4 million, respectively, resulting in net investment income
of $0.4 million and $0.4 million, respectively. Interest expense declined during
the three months ended September 30, 2000 primarily reflecting the decrease in
bank loans from $18.9 million on September 30, 1999 to $3.9 million on September
30, 2000. Management fees decreased from $0.7 million for the three months ended
September 30, 1999 to $0.2 million for the three months ended September 30, 2000
reflecting the decreased asset base throughout the year upon which fees are
calculated. The decrease in the asset base reflected the decreased value of the
Fund's publicly traded securities, the decrease in venture loans outstanding,
and a decrease in cash held.
Other operating expenses were $0.1 million and $0.3 million for the
three months ended September 30, 2000 and 1999 respectively. A decline in legal
expenses represented a majority of this decline in other operating expenses.
11
<PAGE>
The Fund experienced a reduction in unrealized gain from investment
transactions of $9.7 million in the period ended September 30, 2000 as compared
to an increase of $24.1 million in the prior year. Most of the decline in
unrealized gain in 2000 was caused by the decrease in value of restricted
warrants and stocks. The Fund had $1.2 million of realized gains during the
three months ended September 30, 2000 as compared to $22.6 million in the same
period in 1999. These gains were generated by sales and distributions of stock
in several of the Fund's portfolio companies. 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.
Net loss before cumulative effect for the three months ended September
30, 2000 was $6.5 million compared to net income of $37.0 million for the three
months ended September 30, 1999. Net loss the three months ended September 30,
2000 was $6.5 million compared to net income of $27.7 million for the period
ended September 30, 1999. On a per share basis, for the three month period ended
September 30, 2000 and 1999, net income (loss) before cumulative effect of a
change in accounting principle was ($133.51) and $765.77 respectively.
In the 2nd quarter of Fiscal Year End June 30, 2000, the Company
changed its method of accounting for its incentive management fee. The previous
method was to record the incentive management fee as the Company became legally
obligated. The new method is to record the fee based on the Company's current
income. According to the management of the Company, this change was made to more
closely match the incentive fee to current performance. The new method has been
applied to management incentive fee calculations of prior years. The $9,302,185
cumulative effect of the change on prior years is included in income of the 3
months ended September 30, 1999. The effect of the change on the quarter ended
Sept 30, 1999 was to decrease income before cumulative effect of a change in
accounting principle $10,110,957 ($209.26 per share) to $37,000,894 ($765.77 per
share) and net income $19,413,142 ($401.77 per share) to $27,698,709 ($573.25
per share).
LIQUIDITY AND CAPITAL RESOURCES -- SEPTEMBER 30, 2000 AND JUNE 30, 2000
Total capital committed to the purchase of shares pursuant to
subscription agreements was approximately $46.6 million at September 30, 2000.
As of September 30, 2000, 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 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 September
30, 2000, $3.9 million was outstanding under this facility, compared with $8.3
million as of June 30, 2000. The Fund enters into interest rate swap
transactions to hedge its interest rate on the debt facility. At September 30,
2000, the Fund had interest rate swap transactions outstanding with a total
notional principal amount of $9.2 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 September 30, 2000, 8% of the Fund's
assets consisted of cash and cash equivalents, compared with 21% as of June 30,
2000. Cumulative amounts disbursed under the Fund's loan commitments remained
the same as of September 30, 2000 compared to June 30, 2000. Net loan amounts
outstanding after amortization decreased by approximately $4.4 million. Unfunded
commitments remained the same.
12
<PAGE>
<TABLE>
<CAPTION>
============================== ==================== ===================== =================== ======================
As of: Amount Disbursed Principal Reduction Balance Unfunded Commitments
Outstanding
------------------------------ -------------------- --------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
September 30, 2000 $144.4 million $126.7 million $17.7 million $37.0 million
------------------------------ -------------------- --------------------- ------------------- ----------------------
June 30, 2000 $144.4 million $122.3 million $22.1 million $36.8 million
============================== ==================== ===================== =================== ======================
</TABLE>
Because venture loans and leases are privately negotiated transactions,
investments in these assets are relatively illiquid.
Since all unfunded commitments have expired, no capital will be
required to fund them.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Fund's business activities contain elements of risk. The Fund
considers the principal types of market risk to be interest rate risk and
valuation risk. The Fund considers the management of risk essential to
conducting its businesses and to maintaining profitability. Accordingly, the
Fund's risk management procedures are designed to identify and analyze the
Fund's risks, to set appropriate policies and limits and to continually monitor
these risks and limits by means of reliable administrative and information
systems and other policies and programs.
The Fund manages its market risk by maintaining a portfolio that is
diverse by industry, size of investment, stage of development, and borrower. The
Fund has limited exposure to public market price fluctuations as the Fund
primarily invests in private business enterprises. Since there is typically no
public market for the equity interests of the companies in which the Fund
invests, the valuation of the equity interests in the Fund's portfolio is
subject to the estimate of the Fund's management. In the absence of a readily
ascertainable market value, the estimated value of the Fund's portfolio of
equity interests may differ significantly from the values that would be placed
on the portfolio if a ready market for the equity interests existed. Any changes
in estimated value are recorded in the Fund's statement of operations as "Net
unrealized gains (losses)." Each hypothetical 1% increase or decrease in value
of the Fund's portfolio of equity interests of $9.6 million at September 30,
2000 would have resulted in unrealized gains or losses and would have increased
or decreased net income for the quarter by approximately 1.5%.
The Fund's sensitivity to changes in interest rates is regularly
monitored and analyzed by measuring the characteristics of assets and
liabilities. The Fund utilizes various methods to assess interest rate risk in
terms of the potential effect on interest income net of interest expense, the
value of net assets and the value at risk in an effort to ensure that the Fund
is insulated from any significant adverse effects from changes in interest
rates. Based on the model used for the sensitivity of interest income net of
interest expense, if the balance sheet were to remain constant and no actions
were taken to alter the existing interest rate sensitivity, a hypothetical
immediate 100 basis point change in interest rates would have affected net
income by less than 1% during the quarter. Although management believes that
this measure is indicative of the Fund's sensitivity to interest rate changes,
it does not adjust for potential changes in credit quality, size and composition
of the balance sheet and other business developments that could affect net
income. Accordingly, no assurances can be given that actual results would not
differ materially from the potential outcome simulated by this estimate.
13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Fund will become party to certain lawsuits from time to
time in the normal course of business. While the outcome of these legal
proceedings cannot at this time be predicted with certainty, the Fund does not
expect these proceedings will have a material effect upon the Fund's financial
condition or results of operation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
27. Financial Data Schedule
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)
By: /S/ Ronald W. Swenson By: /S/ Brian R. Best
--------------------------------- -------------------------------
Ronald W. Swenson Brian Best
Chairman and Chief Executive Officer Chief Financial Officer
Date: November 14, 2000 Date: November 14, 2000
14
