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 December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number 0-22618
Venture Lending & Leasing, Inc.
(Exact Name of Registrant as specified in its charter)
Maryland 13-3775187
(State or other jurisdiction of incorporation or (I.R.S. Employer
or organization) Identification No.)
2010 North First Street, Suite 310, San Jose, CA 95131
(Address of principal executive offices)
(Zip Code)
(408) 436-8577
(Registrant 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 No
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date:
Class Outstanding as of January 15, 2000
Common Stock, $.001 par value 48,318.58
Page 1 of 17; Exhibit Index appears on Page 16
VENTURE LENDING & LEASING, INC.
INDEX
Page Number
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Positions 3
December 31, 1999 (Unaudited) and June 30, 1999
Statement of Operations (Unaudited) 4
Six Months ended December 31, 1999 and
December 31, 1998
Satement of Operations (Unaudited) 5
Three Months ended December 31, 1999 and
December 31, 1998
Statement of Changes in Shareholders Equity 6
Six Months ended December 31, 1999 (Unaudited)
and the Year Ended June 30, 1999
Statement of Cash Flows (Unaudited) 7
Six Months ended December 31, 1999 and
December 31, 1998
Notes to Financial Statements 8 - 12
Item 2. Managements Discussion and Analysis of Financial 13 - 15
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits 16
SIGNATURES 19
VENTURE LENDING & LEASING, INC.
Statement of Financial Position (Unaudited)
- --------------------------------------------------------------------------------
December 31, 1999 June 30, 1999
Assets
Loans and leases, at estimated
fair value (cost of $36,543,528
and $54,069,547) $35,443,528 $50,068,324
Investments in securities, at
estimated fair value(cost of
$1,418,893 and $1,749,365) 36,293,336 29,767,030
Cash and cash equivalents 24,081,342 1,748,410
Receivable - Proceeds from sale
of securities 28,870,582 ----
Other assets 438,617 121,936
-------------------- -------------------
Total assets 125,127,405 81,705,700
-------------------- -------------------
Liabilities & Shareholders' Equity
Liabilities
Bank loans 17,247,827 22,894,335
Management and Incentive
fees payable 26,020,905 517,719
Accounts payable and other
accrued liabilities 915,788 239,662
-------------------- -------------------
Total liabilities 44,184,520 23,651,716
-------------------- -------------------
Shareholders' Equity
Common stock, $.001 par value;
100,000,000 shares authorized;
issued and outstanding,48,318.58 shares 49 49
Capital in excess of par value 46,641,051 46,641,051
Distributions (168,417,045) (43,050,082)
Accumulated earnings 202,718,830 54,462,966
-------------------- -------------------
Total shareholders' equity 80,942,885 58,053,984
-------------------- -------------------
Total liabilities &
shareholders' equity $125,127,405 $81,705,700
==================== ===================
VENTURE LENDING & LEASING, INC.
Statement of Operations (Unaudited)
For the Six Months Ended December 31,
1999 1998
------------------------ -------------------------
Investment income:
Interest on loans
and leases $3,362,795 $6,517,485
Interest on short-term
investments 238,947 99,560
------------------------ -------------------------
Total investment income 3,601,742 6,617,045
------------------------ -------------------------
Expenses:
Management fee 1,506,911 975,698
Interest expense 685,825 1,195,434
Other operating expenses 463,567 303,400
------------------------ -------------------------
Total expenses 2,656,303 2,474,532
------------------------ -------------------------
Net investment income 945,439 4,142,513
Net realized gain from
investment transactions 185,690,782 3,773,423
Net change in unrealized
gain from investment
transactions 10,303,379 (1,720,732)
Management incentive fee (39,381,553) ----
------------------------ ------------------------
Net income Before
Cumulative effect of
a change in accounting
Principle $157,558,047 $6,195,204
Cumulative effect
on prior years
(To June 30, 1999)
Of change in accounting ($9,302,185) ------
principle (Note 5)
------------------------ ------------------------
Net Income $148,255,862 $6,195,204
======================== ========================
Amounts per common share:
Income before cumulative
effect of a change in $3,260.86 $95.39
accounting principle
Cumulative effect on
prior years (To June 30, 1999)
of change in accounting ($192.52) ----
principle (Note 5)
------------------------ -----------------------
Net Income $3,068.34 $95.39
======================== =======================
Weighted average shares 48,318 48,318
outstanding
Pro Forma amounts assuming
the new method is applied
retroactively (Note 5)
Net Income $148,255,862 $6,195,204
Net Income per common share $3,068.34 $95.39
VENTURE LENDING & LEASING, INC.
Statement of Operations (Unaudited)
For the Three Months Ended December 31,
1999 1998
--------------------- --------------------
Investment income:
Interest on loans
and leases $1,544,963 $3,235,529
Interest on short-term
investments 202,885 54,044
--------------------- -------------------
Total investment income 1,747,848 3,289,573
--------------------- --------------------
Expenses:
Interest expense 312,260 561,833
Management fee 777,895 460,986
Other operating expenses 137,120 155,938
--------------------- --------------------
Total expenses 1,227,275 1,178,757
--------------------- --------------------
Net investment income 520,573 2,110,816
Net change in unrealized loss
from investment transactions (14,206,453) (2,201,514)
Net realized gain from
investment transactions 163,513,630 3,903,122
Management incentive fee (29,270,596) ----
--------------------- --------------------
Net income $120,557,154 $3,812,424
===================== ====================
--------------------- --------------------
Net Income per share $2,495.05 $78.90
===================== ====================
Weighted average shares 48,318 48,318
outstanding
Pro Forma amounts assuming
the new method is applied
retroactively (Note 5)
Net Income $120,557,154 $2,373,596
Net Income per common share $2,495.08 $124.47
VENTURE LENDING & LEASING, INC.
Statement of Changes in Shareholders' Equity (Unaudited)
For the Year Ended June 30, 1999 and
the Six Months Ended December 31, 1999
Common Stock
---------------- Capital in
Excess of Accumulated
Shares Amount Par Value Distributions Earnings Total
-------- ------ ------------ ------------- ------------ ------------
-------- ------ ------------ ------------- ------------ ------------
Balance,June 30, 1998
48,318.58 $49 $46,641,051 ($16,871,073) $21,293,223 $51,063,250
Distributions
---- ---- ---- (26,179,009) ---- (26,179,009)
Net income
---- ---- ---- ---- 33,169,743 33,169,743
------- ------ ------------ -------------- ------------ ------------
Balance, June 30, 1999
48,318.58 49 46,641,051 (43,050,082) 54,462,966 58,053,984
Distributions
---- ---- ---- (125,366,963) ---- (125,366,963)
Net income
---- ---- ---- ---- 48,255,864 148,255,864
---------- ------- ------- -------------- ------------- -------------
Balance, December 31, 1999
48,318.58 $49 $46,641,051 ($168,417,045) $202,718,830 $80,942,885
=========== ====== =========== ============== ============== =============
VENTURE LENDING & LEASING, INC.
Statement of Cash Flows (Unaudited)
For the Six For the Six
Months Ended Months Ended
December 31, 1999 December 31, 1998
Cash flows from operating activities:
Net income $148,255,862 4,609,021
Adjustments to reconcile
net investment incometo net
cash provided by operating
activities:
Amortization of bank loan expenses 38,314 48,432
Net realized (gain) loss from
investment transactions (186,967,383) (2,187,240)
Increase in unrealized loss (gain)
from investment transactions (9,758,001) 1,720,732
Increase in other assets
and receivable (29,219,349) 571,852
Increase (decrease) in accounts
payable and other
accrued liabilities 26,179,313 (105,425)
----------------------- -------------------
Net cash provided by
(used in) operating activities (51,471,244) 4,657,372
----------------------- ------------------
Cash flows from investing activities:
Acquisition of loansand leases (975,525) (6,150,173)
Principal payments on loans and leases 14,755,959 20,589,657
Net acquisition of warrants
and common stock (1,218,389) (74,809)
Proceeds from sale of securities 192,255,601 4,367,865
----------------------- ----------------------
Cash provided by investing
activities 204,817,647 18,732,540
----------------------- ---------------------
Cash flows from financing activities:
Distributions to shareholders (125,366,963) (12,619,848)
Loan from bank ---- 4,500,000
Repayment of bank loan (5,646,508) (11,049,101)
----------------------- ------------------------
Net cash used in financing
activities (131,013,471) (19,168,949)
----------------------- ------------------------
Net increase in cash and
cash equivalents 22,332,932 4,220,963
----------------------- ------------------------
Cash and cash equivalents-
beginning of period 1,748,410 2,301,753
----------------------- ------------------------
Cash and cash equivalents-
end of period $24,081,342 $6,522,716
======================= ========================
VENTURE LENDING & LEASING, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1999
1. BASIS OF PRESENTATION:
The accompanying condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC) and
in Management's opinion, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of results for such
interim periods. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to SEC rules or regulations;
however, the Fund believes that the disclosures made are adequate to make the
information presented not misleading. The interim results for the six months
ended December 31, 1999 and 1998, are not necessarily indicative of results for
the full year. It is suggested that these financial statements be read in
conjunction with the financial Statements and the notes included in the Funds
Annual Report for the year ended June 30, 1999.
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 Funds investments in loans and leases are entirely within
the United States and are diversified among the following industries. 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 may be greater than 100 percent due to the Funds use of leverage (debt)
as a means of financing investments.)
The percentage of shareholders equity that each industry group represents
is shown below with the industry totals:
Outstanding
Borrower December 31, 1999
Biotechnology:
Biosys, Inc. $511,463
Ceres, Inc. 1,021,001
Desmos, Inc. 29,963
Gene Logic, Inc. 518,054
Protien Delivery, Inc. 154,215
Regen Biologics, Inc. 362,247
Telek, Inc. 355,747
----------------------
Total biotechnology (3.6%) 2,952,690
----------------------
Communications Equipment:
Brocade Communications, Inc. 441,037
Cerent Corporation 2,400,207
Optivision, Inc. 145,269
Silicon Wireless, Inc. 1,030,081
Yago Systems, Inc. 118,373
----------------------
Total communications equipment (5.1%) 4,134,967
----------------------
Communications Service Provider:
AUnet Corporation 307,825
Digital Generation Systems, Inc. 1,924,379
Exodus Communications, Inc. 1,975,148
Optimal Networks Corporation 167,131
Wink Communications, Inc. 363,693
----------------------
Total communications service provider (5.6%) 4,571,045
----------------------
Computers and peripherals:
Headway Technologies, Inc. 3,487,850
Aptix Corporation 387,250
Das Devices 101,738
Neomagic Corporation 117,698
----------------------
Total computers and peripherals (5.1%) 4,094,536
----------------------
Internet:
Active Software, Inc. 107,709
Adforce, Inc. 962,864
Inverse Network Technology 192,112
Keynote Systems Incorporated 272,264
Netratings, Inc. 135,863
----------------------
Total Internet (2.1%) 1,670,812
----------------------
Medical devices:
Ciphergen Biosystems 28,636
Encelle, Inc. 94,876
Heartstent Corporation 39,226
Integ Incorporated 2,809,240
Aerogen, Inc. 150,538
Intratherapeutics, Inc. 907,926
Myelotec, Inc. 174,961
Oratec Interventions, Inc. 42,758
Spinal Concepts, Inc. 173,562
Survivalink Corporation 365,623
----------------------
Total medical devices (5.9%) 4,787,346
----------------------
Semiconductors and equipment:
Abpac, Inc. 1,117,149
Dynachip Corporation 807,549
Equator Technologies, Inc. 992,854
iCompression, Inc. 112,688
I-Cube, Inc. 521,236
Lightwave Microsystems Corporation 328,049
Poseidon Technology, Inc. 393,004
Quantum3D, Inc. 67,500
SiRF Technology 473,693
Telecruz Technology, Inc. 359,900
Transmeta Corporation 2,248,945
O-In Design Automation 217,074
----------------------
Total semiconductors and equipment (9.6%) 7,757,339
----------------------
Software:
Calico Technology, Inc. 232,069
Commerce One, Inc. 146,328
Comps Infosystems, Inc. 1,187,606
Documentum 143,950
Mineshare Corpration 272,974
Personic Software Inc. 361,709
Persistence Software, Inc. 69,321
Release Software Corporation 101,570
Rightpoint Software, Inc. 222,331
Solopoint, Inc. 37,171
Tenth Planet Exploration, Inc. 81,956
----------------------
Total software (3.5%) 2,856,985
----------------------
Other:
Larex, Inc. 520,069
Uniax Corporation 574,417
Volumetrics Medical Imaging Inc. 296,763
Webvan-Bay Area, Inc. 1,177,126
----------------------
Total other (3.2%) 2,568,375
----------------------
Total $35,443,528
======================
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 December 31, 1999, the
Fund has unfunded commitments to borrowers of $37.1 million.
The Funds investments in stocks and warrants are entirely within the
United States. The percentage of shareholders equity that each industry group
represents is shown below with the industry totals:
Industry Stock and Percentage of
Warrant Value Shareholders Equity
- ----------------------------- ---------------- --------------------------
Biotechnology $627,469 .78%
Communications 18,722,158 23.13%
Communications equipment 793,172 .98%
Computer and peripherals 80,000 .10%
Internet 5,773,475 7.13%
Medical devices 152,800 .19%
Semiconductor 168,600 .21%
Software 8,377,419 10.35%
Other 1,598,243 1.97%
--------------------- -------------------
Total stock and warrants $36,293,336 44.84%
===================== =====================
3. EARNINGS PER SHARE:
Basic earnings per share are computed by dividing net income, by the
weighted average common shares outstanding. Diluted earnings per share includes
the dilutive effects of potential common shares (e.g., stock options). The Fund
has no instruments that would be potential common shares; thus, reported basic
and diluted earnings are the same.
4. FUTURE FINANCIAL ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No.133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No.133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No.133 requires that changes in the
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.
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 Companys current
income. 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 three months ended September 30, 1999.
The effect of the change on the three months ended December 31, 1999 was to
decrease income before cumulative effect of a change in accounting principle
$822,579 ($17.02 per share). The effect of the change on the six months ended
December 31, 1999 was to decrease income before cumulative effect of a change in
accounting principle $10,933,536 ($226.28) per share and net income $20,235,721
($418.80 per share). The pro forma amounts reflect the effect of retroactive
application on management incentive fees and the change in provisions for
incentive compensation that would have been made in 1998 had the provisions for
management incentive fees had been made in 1998. 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
($765.78 per share) and net income $19,413,142 ($401.77 per share) to
$27,698,709 ($573.26 per share).
PART I -- FINANCIAL INFORMATION
Item 2. Managements 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 Funds 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 December 31, 1999. The Fund
has completed its investment period and will now focus on efficiently managing
the Funds portfolio. As of December 31, 1999, the Fund has distributed $168.4
million to its investors, including approximately $14.4 million of contributed
capital.
In addition to the historical information contained herein, this Quarterly
Report contains certain forward-looking statements. The reader of this Quarterly
Report should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Fund's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments and competition effects as
well as other factors. This entire Quarterly Report should be read to put such
forward-looking statements in context and to gain a more complete understanding
of the uncertainties and risks involved in the Fund's business.
Results of Operations -- For the three and six months ended December 31,
1999 and 1998
Total investment income for the three months ending December 31, 1999 and
1998 was $1.7 million and $3.3 million, respectively, of which $1.5 million and
$3.2 million, consisted of interest on venture loans outstanding during the
period. The remaining income consisted of interest on the temporary investment
of cash, pending investment in venture loans and leases or application to the
Funds expenses. Total investment income for the fiscal year to date periods
ending December 31, 1999 and 1998 was $3.6 million and $6.6 million,
respectively, of which $3.4 million and $6.5 million, consisted of interest on
venture loans outstanding during the period. The decrease in investment income
reflects the decrease in loans & leases outstanding from December 31, 1998 to
December 31, 1999.
Expenses for the six months ended December 31, 1999 and 1998 were $2.7
million and $2.5 million, respectively, resulting in net investment income of
$0.9 million and $4.1 million, respectively. Interest expense declined during
the six months ended December 31, 1999 primarily reflecting the decrease in bank
loans from $29.6 million on December 31, 1998 to $17.2 million on December 31,
1999. Management fees increased from $1.0 million for the six months ended
December 31, 1998 to $1.5 million for the six months ended December 31, 1999
reflecting the increased asset base upon which fees are calculated for the
period. The increase in the asset base reflected the increased value of the
Funds publicly traded securities.
The Fund experienced an unrealized gain from investment transactions of
$10.3 million in the six months ended December 31, 1999 as opposed to a loss of
$1.7 million in the prior year. The Fund had $185.7 million of realized gains
during the six months ended December 31, 1999 as compared to $3.8 million in the
same period in 1998. These gains were generated by sales and distributions of
stock in several of the Funds 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 income for the period ended December 31, 1999 increased to $148.3
million compared to $4.6 million for the six months ended December 31, 1998.
Year to date income before the cumulative effect on prior years of a change in
accounting principle was $157.6 million as compared to $4.6 million in the
previous year. On a per share basis, for the year to date period ended December
31, 1999 and 1998 net income was $3,260.86 before cumulative effect of a change
in accounting principle and $95.39 respectively.
The Funds policy is to place a loan on non-accrual status when either
principal or interest has become past due for 90 days or more. As of December
31, 1999 and 1998, the Fund had loan balances outstanding of $2.67 million and
$1.6 million to borrowers that were carried on a non-accrual basis.
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 Companys current
income. 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 three months ended September 30, 1999.
The effect of the change on the three months ended December 31, 1999 was to
decrease income before cumulative effect of a change in accounting principle
$822,579 ($17.02 per share). The effect of the change on the six months ended
December 31, 1999 was to decrease income before cumulative effect of a change in
accounting principle $10,933,536 ($226.28) per share and net income $20,235,721
($418.80 per share). The pro forma amounts reflect the effect of retroactive
application on management incentive fees and the change in provisions for
incentive compensation that would have been made in 1998 had the provisions for
management incentive fees had been made in 1998. 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
($765.78 per share) and net income $19,413,142 ($401.77 per share) to
$27,698,709 ($573.26 per share).
Liquidity and Capital Resources -- December 31, 1999 and June 30, 1999
Total capital committed to the purchase of shares pursuant to subscription
agreements was approximately $46.6 million at December 31, 1999. As of December
31, 1999, 100% of committed capital was called to fund investments in venture
loans and leases and to meet the Funds 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
December 31, 1999, $17.2 million was outstanding under this facility, compared
with $22.9 million as of June 30, 1999. The Fund enters into interest rate swap
transactions to hedge its interest rate on the debt facility. At December 31,
1999, the Fund had interest rate swap transactions outstanding with a total
notional principal amount of $31.2 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 December 31, 1999, 19.25% of the Funds assets consisted of cash and cash
equivalents, compared with 2% as of June 30, 1999. Cumulative amounts disbursed
under the Funds loan commitments increased by approximately $1.0 million as of
December 31, 1999 compared to June 30, 1999. Net loan amounts outstanding after
amortization decreased by approximately $15.4 million. Unfunded commitments
decreased by approximately $1.0 million.
================== ============== == =================== ======================
As of: Amount Principal Balance Unfunded
Disbursed Amortization Outstanding Commitments
- ------------------ -------------------- -------- ------------- -----------------
December 31, 1999 $144.0 mil $107.5 mil $36.5 mil $37.1 million
- ------------------ -------------------- -------- ------------------- -----------
June 30, 1999 $143.0 mil $90.1 mil $51.9 mil $38.1 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
Funds 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
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 Funds customers and service
providers use software and information technology that could also be affected by
the date change.
Although we have not, as yet, suffered material adverse consequences, we
cannot assure you we are fully year 2000 compliant. Effects of the year 2000
problem may not yet have surfaced and could result in material adverse
consequences in the future. We depend on third-party equipment and services that
may not be year 2000 compliant. If year 2000 issues prevent transaction
processing, our operations may be adversely affected by unanticipated expenses
and exposure to litigation risks. Further, the spending and purchasing patterns
of customers or potential customers may be affected by the year 2000 issue as
individuals, corporations and government agencies expend significant resources
to correct or update their current system for year 2000 compliance. We currently
have no formal year 2000 contingency plan. Accordingly, our failure to provide
year 2000 compliant solutions could result in financial loss, harm to our
reputation and legal liability. The Funds contingency plan includes switching
to vendors that are year 2000 compliant and utilizing backup systems that do not
rely on computers. 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.
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits
Ex 18.0 Letter regarding change in accounting principle
Ex 271 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
Date: February 14, 2000
Ronald W. Swenson
Chairman
[Chief Executive Officer]
Date: February 14, 2000
Salvador O. Gutierrez
President
Exhibit 18.0
February 11, 2000
Venture Lending & Leasing, Inc.
Re: Form 10-Q Report for the quarter ended December 31, 1999
Gentlemen/Ladies:
This letter is written to meet the requirements of Regulation S-K calling
for a letter from a registrant's independent accountants whenever there has been
a change in accounting principle or practice.
We have been informed that, as of July 1, 1999 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 Companys current income. According to
the management of the Company, this change was made to more closely match the
incentive fee to current performance.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial statements
of any period subsequent to June 30, 1999. Further, we have not examined and do
not express any opinion with respect to your financial statements for the six
months ended December 30, 1999.
Very truly yours,
ARTHUR ANDERSEN LLP
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