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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, 2000
OR
/ / 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
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(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
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(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 X No
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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, 2000 was 48,318.58.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT DESCRIPTION 10-K PART
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Specifically Identified Portions of the Registrant's Proxy Statement
for the Annual Meeting of Shareholders to be held November 15, 2000 III
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PART I
ITEM 1. BUSINESS.
INTRODUCTION.
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, 2000.
INVESTMENT PROGRAM.
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.
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
2
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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.
3
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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).
4
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DIVIDENDS AND DISTRIBUTIONS.
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.
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.
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 was settled without a material effect on the fund.
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, 2000.
The following are the executive officers of the Fund. All officers serve at
the pleasure of the Board.
EXECUTIVE OFFICERS OF THE FUND
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NAME AND POSITION WITH FUND AGE OCCUPATION DURING PAST FIVE YEARS
<S> <C> <C>
Ronald W. Swenson, Director, 55 President and Director, Westech Investment Advisors since 1994, and
Chairman and Chief Executive President and Director, Western Technology Investments since 1980.
Officer
Salvador O. Gutierrez, Director, 57 Senior Vice President and Director, Westech Investment Advisors
President since 1994, and Senior Vice President, Western Technology Investment
since 1987.
George W. Siguler, Executive Vice 53 Managing Director, Siguler Guff Advisers & affiliates since 1995;
President and Advisory Director Managing Director of Mitchell Hutchins 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 Corporation (financial services holding company)
from 1984 to 1991.
Brian R. Best, Vice President, 34 Vice President, Westech Investment Advisors since 1999; Associate,
CFO, and Secretary Westech Investment Advisors since 1997
Donald P. Spencer, Vice President 45 Managing Director, Siguler Guff Advisers and affiliates since 1995;
and Assistant Secretary Senior Vice President (and other positions), Mitchell Hutchins
Institutional Investors and affiliates from 1989 to 1995.
</TABLE>
5
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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, 2000 was 52.
The Fund has established a policy of declaring dividends on a quarterly
basis, with the most recent dividend being paid on July 28, 2000 to holders of
record on June 30, 2000, in the amount of $182.13 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.
<TABLE>
<CAPTION>
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, June 30, June 30, June 30, June 30,
2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Investment Income:
Interest on Loans and Leases $5,608,289 $11,545,419 $12,793,441 $7,314,618 $3,481,702
Interest on Short - Term investments 531,738 209,677 381,161 268,329 351,093
------------ ------------- ------------- ------------ ------------
Total Investment Income 6,140,027 11,755,096 13,174,602 7,582,947 3,832,795
Expenses:
Management Fee to Managers 2,138,686 1,905,721 2,307,014 1,438,118 1,159,189
Interest Expense 1,123,283 2,136,991 2,928,409 1,701,039 895,269
Other Expenses 728,139 638,121 564,975 341,791 191,417
------------ ------------- ------------- ------------ ------------
Total Expenses 3,990,108 4,680,833 5,800,398 3,480,948 2,245,875
------------ ------------- ------------- ------------ ------------
Net Investment Income 2,149,919 7,074,263 7,374,204 4,101,999 1,586,920
Net Unrealized Gain (Loss) From Investment Transactions (7,861,062) 21,910,372 (41,374) 865,498 1,308,016
Net Realized Gain From Investment Transactions 230,101,137 4,185,108 4,993,372 1,463,670 22,134
Incentive Fee (44,871,425) - - - -
------------ ------------- ------------- ------------ ------------
Income before cumulative effect of change in accounting
principle 179,518,569 33,169,743 12,326,202 6,431,167 2,917,070
Cumulative effect on prior years of change in accounting
principle (9,302,185) - - - -
------------ ------------- ------------- ------------ ------------
Net Income $170,216,384 $33,169,743 $12,326,202 $6,431,167 $2,917,070
============ ============= ============= ============ ============
Amounts Per Common Share:
Income before cumulative effect of change in accounting
principle $3,715.28 $686.47 $260.30 $212.22 $156.77
Cumulative effect on prior years of change in accounting
principle (192.52) - - - -
------------ ------------- ------------- ------------ ------------
Net Income Per Share: $3,522.76 $686.47 $260.30 $212.22 $156.77
============ ============= ============= ============ ============
Average Shares Outstanding 48,319 48,319 47,354 30,304 18,607
============ ============= ============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
As of As of As of As of As of
June 30, June 30, June 30, June 30, June 30,
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets $52,182,571 $81,705,700 $88,489,083 $71,848,759 $35,205,347
Bank Loans $8,292,805 $22,894,335 $36,114,059 $30,000,000 $14,738,460
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS -- YEARS ENDED JUNE 30, 2000 AND 1999
Total investment income for the years ended June 30, 2000 and 1999 was $6.1
million and $11.8 million, respectively, of which $5.6 million and $11.5
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 $50.1
million as of June 30, 1999 to approximately $20.1 million as of June 30, 2000.
Expenses for the years ended June 30, 2000 and 1999 were $4.0 million and
$4.7 million, respectively, resulting in net income prior to cumulative effect
of change in accounting principle of $179.5 million and $33.2 million
respectively and net income of $170.2 million and $33.2 million respectively.
Interest expense declined during the year ended June 30, 2000 primarily
reflecting the decrease in bank loans from $22.9 million on June 30, 1999 to
$8.3 million on June 30, 2000. Management fees increased from $1.9 million for
the year ended June 30, 1999 to $2.1 million for the year ended June 30, 2000
reflecting an increased 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, 2000 and 1999, the Fund had loan balances
outstanding of $2.6 million and $7.8 million to borrowers that were carried on a
nonaccrual basis. Foregone interest income on nonaccrual loans for the years
ended June 30, 2000 and 1999 was $259,000 and $307,000 respectively.
The most significant factor effecting net income for the year ended June 30,
2000 was realized gain of the Fund's publicly traded stock and warrant portfolio
of $230.1 million. These realized gains were a combination of the realization of
previously unrealized gains from the year ended June 30, 1999 as well as the
realization of additional gains from sales of securities.
The fund had a decrease in unrealized gains from investment transactions of $7.9
million. The decrease in unrealized gains of the Fund's portfolio was primarily
attributable to the realization of previously unrealized gains of the Fund's
warrants to purchase stock in equity securities. Included in the unrealized gain
from investment transactions for the year ended June 30, 2000, is a reduction of
unrealized loss on loans and leases of $2.1 million resulting from the write off
of several loans.
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, 2000 and 1999 net income
before cumualative effect of change in accounting principle was $3,715 and $686
respectively, and net income was $3,523 and $686 respectively.
LIQUIDITY AND CAPITAL RESOURCES -- JUNE 30, 2000 AND JUNE 30, 1999
Total capital committed to the purchase of Shares pursuant to subscription
agreements was approximately $46.6 million at June 30, 2000 and 1999. As of June
30, 2000 and 1999, 100% of this committed capital was called to fund investments
in venture loans and leases and to meet the Fund's expenses.
The Fund had in place a $8.5 million and $30.0 million securitization debt
facility to finance the acquisition of asset-based loans and leases as of June
30, 2000 and 1999 respectively. The principal balance is a 47-month term loan.
As of June 30, 2000, $8.3 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 June 30, 2000,
the Fund had interest rate swap transactions outstanding with a total notional
principal amount of $10.7 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.
7
<PAGE>
As of June 30, 2000, 21% of the Fund's assets consisted of cash and cash
equivalents, compared with 2% as of June 30, 1999. 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 $1.4
million during the year ended June 30, 2000. Net loan amounts outstanding after
amortization decreased by approximately $30.0 million. Unfunded commitments
decreased by approximately $1.3 million.
<TABLE>
<CAPTION>
============================== ==================== ===================== =================== ======================
Year Ending Amount Disbursed Principal Balance Unfunded
Amortization Outstanding Commitments
------------------------------ -------------------- --------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
June 30, 2000 $144.4 million $124.3 million $20.1 million $36.8 million
------------------------------ -------------------- --------------------- ------------------- ----------------------
June 30, 1999 $143.0 million $88.9 million $50.1 million $38.1 million
============================== ==================== ===================== =================== ======================
</TABLE>
Because venture loans and leases are privately negotiated transactions,
investments in these assets are relatively illiquid. It is the company's
experience that not all unfunded commitments will be used by borrowers.
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?
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, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Investment Income:
Interest on Loans and Leases $1,817,832 $1,544,963 $1,342,571 $902,923
Interest on Short-Term Investments 36,062 202,885 196,397 96,394
------------ ------------ ------------ ------------
Total Investment Income 1,853,894 1,747,848 1,538,968 999,317
------------ ------------ ------------ ------------
Expenses:
Management Fee to the Managers 729,015 777,895 304,252 327,524
Interest Expense 373,565 312,260 262,230 175,228
Other Expense 326,447 137,120 143,927 120,645
------------ ------------ ------------ ------------
Total Expenses 1,429,027 1,227,275 710,409 623,397
------------ ------------ ------------ ------------
Net Investment Income $424,867 $520,573 $828,559 $375,920
Net Unrealized Gain (Loss) From
Investment Transactions 24,109,454 (14,206,453) (23,271,439) 5,507,376
Net Realized Gain From Investment 22,577,529 163,513,630 33,333,757 10,676,221
Transactions
Management Incentive Fee (10,110,957) (29,270,596) (2,177,969) (3,311,903)
------------ ------------ ------------ ------------
Net Income before cumulative effect 37,000,893 120,557,154 8,712,908 13,247,614
ofchange in accounting principle
Cumulative effect of change in (9,302,185) - - -
accounting principle ------------ ------------ ------------ ------------
Net Income 27,698,708 120,557,154 8,712,908 13,247,614
============ ============ ============ ============
Net Income Per Share $573.25 $2,495.05 $180.32 $274.17
============ ============ ============ ============
Average Shares Outstanding 48,318.58 48,318.58 48,318.58 48,318.58
============ ============ ============ ============
</TABLE>
8
<PAGE>
QUARTERLY RESULTS - JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- ------------
Total 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 $16.49 $78.90 $30.15 $560.93
=========== =========== =========== ============
Average Shares Outstanding 48,319 48,319 48,319 48,319
=========== =========== =========== ============
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14
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
The information required by this item is contained in part under the
caption "Executive Officers of the Fund" in Part I hereof, and the remainder is
contained in the Fund's Proxy Statement for the Annual Meeting of Shareholders
to be held November 15, 2000 ("2000 Proxy Statement") under the caption
"Proposal 1 -- To Elect Seven Directors of the Fund" and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Fund's 2000 Proxy
Statement under the caption "Proposal 1 -- To Elect eight Directors of the Fund"
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Fund's 2000 Proxy
Statement under the caption "Annex A -- Beneficial Ownership of Fund Shares" and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Fund's 2000 Proxy
Statement under the captions: "Other Information -- Managers" and is
incorporated herein by reference.
9
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) INDEX TO FINANCIALS STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants 13
Statement of Financial Position as of June 30, 2000 and 1999 14
Statement of Operations for the Years Ended June 30, 2000 and 1999 15
Statement of Changes in Shareholders' Equity for the Years Ended June 30, 2000 and 1999 16
Statement of Cash Flows for the Years Ended June 30, 2000 and 1999 17
Notes to Financial Statements 18
</TABLE>
Financial Statement Schedules for the Years Ended June 30, 2000 and 1999
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, 2000.
10
<PAGE>
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 II, INC.
(Registrant)
By: /S/ Ronald W. Swenson By: /S/ Brian R. Best
------------------------------------ ---------------------------
Ronald W. Swenson Brian R. Best
Chairman and Chief Executive Officer Chief Financial Officer
Date: September 28, 2000 Date: September 28, 2000
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
By: /S/ John F. Cogan Director September 28, 2000
-----------------------------------
John F. Cogan
By: /S/ J. Michael Egan Director September 28, 2000
-----------------------------------
J. Michael Egan
By: /S/ Salvador O. Gutierrez President & Director September 28, 2000
-----------------------------------
Salvador O. Gutierrez
By: /S/ Scott C. Malpass Director September 28, 2000
-----------------------------------
Scott C. Malpass
By: /S/ Roger V. Smith Director September 28, 2000
-----------------------------------
Roger V. Smith
By: /S/ Arthur C. Spinner Director September 28, 2000
-----------------------------------
Arthur C. Spinner
By: /S/ Ronald W. Swenson CEO & Director September 28, 2000
-----------------------------------
Ronald W. Swenson
By: /S/ George H. Von Gehr Director September 28, 2000
-----------------------------------
George H. Von Gehr
</TABLE>
11
<PAGE>
VENTURE LENDING & LEASING, INC.
Financial Statements
As of June 30, 2000 and 1999
Together with Report of Independent Public Accountants
12
<PAGE>
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, 2000 and 1999,
and the related statements of operations, changes in shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
As explained in Note 11 to the financial statements, effective October 1, 1999,
the Fund changed its method of accounting for incentive management fees.
San Francisco, California,
August 23, 2000
13
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF FINANCIAL POSITION
AS OF JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------- ----------------
<S> <C> <C>
ASSETS
Loans and leases, at estimated fair value (cost of $22,072,985 and $54,069,547 in 2000
and 1999, respectively) $ 20,127,985 $ 50,068,324
Investments in securities, at estimated fair value (cost of $1,271,145 and $1,749,365
in 2000 and 1999, respectively) 19,371,525 29,767,030
Cash and cash equivalents 11,121,890 1,748,410
Other assets 1,561,171 121,936
---------------- ----------------
Total assets $ 52,182,571 $ 81,705,700
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans $ 8,292,805 $ 22,894,335
Accrued management and incentive fees 8,934,282 517,719
Accounts payable and other accrued liabilities 533,523 239,662
---------------- ----------------
Total liabilities 17,760,610 23,651,716
---------------- ----------------
Shareholders' equity:
Common stock, $.001 par value:
Authorized--100,000,000 shares
Issued and outstanding--48,318.58 shares as of June 30, 2000 and 1999 49 49
Capital in excess of par value 46,641,051 46,641,051
Accumulated distributions (236,898,489) (43,050,082)
Accumulated earnings 224,679,350 54,462,966
---------------- ----------------
Total shareholders' equity 34,421,961 58,053,984
---------------- ----------------
Total liabilities and shareholders' equity $ 52,182,571 $ 81,705,700
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
INVESTMENT INCOME:
Interest on loans and leases $ 5,608,289 $ 11,545,419
Interest on short-term investments 531,738 209,677
---------------- ---------------
Total investment income 6,140,027 11,755,096
---------------- ---------------
EXPENSES:
Management fees 2,138,686 1,905,721
Interest expense 1,123,283 2,136,991
Other operating expenses 728,139 638,121
---------------- ---------------
Total expenses 3,990,108 4,680,833
---------------- ---------------
Net investment income 2,149,919 7,074,263
NET CHANGE IN UNREALIZED GAIN (LOSS) FROM INVESTMENTS (7,861,062) 21,910,372
NET REALIZED GAIN FROM INVESTMENTS 230,101,137 4,185,108
INCENTIVE FEE (44,871,425) -
---------------- ---------------
Income before cumulative effect of a change in accounting principle 179,518,569 33,169,743
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE IN ACCOUNTING PRINCIPLE (Note 11) (9,302,185) -
---------------- ---------------
Net income $ 170,216,384 $ 33,169,743
================ ===============
AMOUNTS PER COMMON SHARE:
Income before cumulative effect of a change in accounting principle $3,715.28 $686.47
Cumulative effect on prior years of change in accounting principle (Note 11) (192.52) -
---------------- ---------------
Net income $3,522.76 $686.47
================ ===============
WEIGHTED AVERAGE SHARES OUTSTANDING 48,319 48,319
================ ===============
PRO FORMA AMOUNTS ASSUMING THE NEW METHOD IS APPLIED RETROACTIVELY (Note 11):
Net income $ 179,518,569 $ 23,867,558
Net income per common share $3,715.28 $493.96
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<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, 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 - - - (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
======================= ============== ============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
VENTURE LENDING & LEASING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 170,216,384 $ 33,169,743
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of deferred assets, net of additions 79,643 91,574
Net realized gain from investments (230,101,137) (4,185,108)
Net change in unrealized gain from investments 7,861,062 (21,910,372)
Decrease (increase) in other assets (1,512,650) 1,961
Net increase (decrease) in accounts payable and other accrued liabilities 8,710,424 (555,370)
----------------- ----------------
Net cash provided by (used in) operating activities (44,746,274) 6,612,428
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (2,201,681) (9,130,095)
Principal payments on loans and leases 29,565,531 37,067,577
Acquisition of warrants and stock (1,934,538) (72,559)
Proceeds from sale of securities 167,768,855 4,368,039
----------------- ----------------
Net cash provided by investing activities 193,198,167 32,232,962
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to shareholders (124,476,884) (26,179,009)
Loan from bank - 8,500,000
Repayment of bank loan (14,601,529) (21,719,724)
----------------- ----------------
Net cash used in financing activities (139,078,413) (39,398,733)
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 9,373,480 (553,343)
CASH AND CASH EQUIVALENTS:
Beginning of year 1,748,410 2,301,753
----------------- ----------------
End of year $ 11,121,890 $ 1,748,410
================= ================
CASH PAID DURING THE YEAR FOR INTEREST $ 1,140,656 $ 2,028,607
NONCASH TRANSACTIONS: Distributions of investment securities to shareholders 69,371,523 -
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
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
September 29, 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 July
5, 1994, the Fund had no operations other than the sale to Mitchell Hutchins
Institutional Investors, Inc. (Mitchell Hutchins), which is an indirect wholly
owned subsidiary of PaineWebber Group Inc., of one share of common stock, $.001
par value, for $1,000. As of June 30, 2000, the Fund meets the requirements,
including diversification requirements, to qualify as a regulated investment
company (RIC) under the Internal Revenue Code of 1986.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
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
Fund's Board of Directors, the Fund's Managers determine that amortized cost
does not represent fair value.
Substantially all of the Fund's investment securities are warrants and stock.
Most of the Fund's securities are restricted and cannot be sold publicly without
prior agreement with the issuer to register the securities under the Securities
and Exchange Act of 1933 (the 1933 Act) or by selling the securities under Rule
144 or other rules under the 1933 Act, which permit only limited sales under
specified conditions.
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 issuer's 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.
NONACCRUAL LOANS
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
for the quarter in which the loan was placed on nonaccrual status. Any
uncollected interest related to quarters prior to when the loan was placed on
nonaccrual status is added to the principal balance, and the aggregate balance
of the principal and interest is evaluated in accordance with the valuation of
loans and leases.
18
<PAGE>
Loans classified as nonaccrual amounted to $2,589,594 and $7,760,147 at June 30,
2000 and 1999, respectively. If interest on these loans had been accrued, such
income would have been $259,240 and $306,990 in 2000 and 1999, respectively.
COMMITMENT FEES
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
are carried as liabilities when received for commitments upon which no draws
have been made. When the first draw is made, the fee is included in unearned
income and is recognized as described above.
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 the borrower 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, 2000 and 1999, the Fund's investments in loans
and leases are entirely within the United States and are diversified among the
following industries. The percentage of net assets (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.)
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
Biotechnology:
Biosys, Inc. $ 10,677 $ 1,411,463
Ceres, Inc. 892,999 1,127,006
Desmos, Inc. - 81,893
Gene Logic, Inc. 392,260 634,829
Nobex (Protein Delivery, Inc.) 327,277 174,398
Regen Biologics, Inc. 133,642 577,041
Telik, Inc. 41,522 566,176
--------------- --------------
Total biotechnology (5.2% and 7.9% of net assets) 1,798,377 4,572,806
--------------- --------------
Communications equipment:
Brocade Communications, Inc. 170,697 801,572
Cisco Systems (Cerent) 1,250,683 3,307,806
Juniper Networks, Inc. - 1,722,781
MDiversity (Silicon Wireless, Inc.) 843,829 1,204,082
Socket Communications, Inc. - 12,672
Yago Systems, Inc 58,344 178,653
--------------- --------------
Total communications equipment (6.8% and 12.4%) 2,323,553 7,227,566
--------------- --------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
Communications service providers:
Digital Generation Systems, Inc. $ - $ 2,844,021
Exodus Communications, Inc. 1,310,286 2,555,795
IAsia Works (Aunet Corporation) 237,033 371,196
--------------- --------------
Total communications service providers (4.5% and 9.9%) 1,547,319 5,771,012
--------------- --------------
Computer and peripherals:
Applied Magnetics Corporation (DAS Devices) 101,738 1,608,114
Aptix Corporation 253,647 510,569
Headway Technologies, Inc. 2,450,560 3,940,226
Quantum 3D 43,832 88,865
Svision, Inc. - 240,542
--------------- --------------
Total computer and peripherals (8.3% and 11.0%) 2,849,777 6,388,316
--------------- --------------
Internet:
Active Software, Inc. 59,308 162,257
Adforce, Inc. 668,226 1,234,440
Keynote Systems Incorporated 165,218 361,757
Netratings, Inc. 113,138 151,292
Visual Networks (Inverse Network Technology) 147,632 233,082
--------------- --------------
Total internet (3.4% and 3.7%) 1,153,522 2,142,828
--------------- --------------
Medical devices:
Aerogen, Inc. 89,465 206,987
Ciphergen Biosystems - 136,489
Emed - 84,917
Encelle, Inc. 41,609 190,892
Heartstent Corporation 32,836 118,241
Integ Incorporated 2,044,483 3,477,099
Intratherapeutics, Inc. 839,736 741,494
Myelotec, Inc. 138,433 208,523
Oratec Interventions, Inc. 21,982 133,067
Spinal Concepts, Inc. 143,808 201,122
Survivalink Corporation 284,910 440,648
Volumetrics Medical Imaging Inc. 296,764 338,211
--------------- --------------
Total medical devices (11.4% and 10.8%) 3,934,026 6,277,690
--------------- --------------
Photonics:
Lightwave Microsystems Corporation 164,943 458,785
--------------- --------------
Total photonics (0.5% and 0.8%) 164,943 458,785
--------------- --------------
Semiconductor equipment:
Abpac 145,540 1,093,724
--------------- --------------
Total semiconductor equipment (0.4% and 1.9%) 145,540 1,093,724
--------------- --------------
Semiconductors:
Dynachip Corporation - 1,120,321
Equator Technologies, Inc. 492,218 1,455,978
i-Compression, Inc. 85,830 137,306
I-Cube, Inc. 345,797 684,486
Neomagic Corporation 20,908 236,372
Hot Rail, Inc. (Poseidon Technology, Inc.) 307,732 471,663
Sirf Technology 363,956 575,512
Telecruz Technology, Inc. 285,378 429,215
Transmeta Corporation 1,697,199 2,679,657
--------------- --------------
Total semiconductors (10.5% and 13.4%) 3,599,018 7,790,510
--------------- --------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
Software:
0-In Design Automation, Inc. $ 146,806 $ 281,659
Calico Technology, Inc. 54,360 357,147
Commerce One, Inc. 60,613 213,156
Comps.com, Inc. - 1,567,166
Documentum 88,381 195,142
E.piphany (Rightpoint Software, Inc.) 91,983 341,471
Mineshare Corporation 200,292 309,578
Optimal Networks Corporation 83,410 228,469
Optivision 89,876 285,073
Persistence Software, Inc. - 139,262
Personic Software, Inc. 310,176 339,425
Perspecta, Inc. - 135,041
Releasenow.com (Release Software Corporation) 37,373 215,947
Solopoint, Inc. 6,686 61,818
Tenth Planet Exploration, Inc. 65,284 58,175
Wink Communications, Inc. 140,306 570,299
--------------- --------------
Total software (4.0% and 9.1%) 1,375,546 5,298,828
--------------- --------------
Other:
Larex, Inc. 221,883 915,426
Uniax Corporation - 803,171
WebVan-Bay Area Inc. 1,014,481 1,327,662
--------------- --------------
Total other (3.6% and 5.2%) 1,236,364 3,046,259
--------------- --------------
Total loans and leases (cost: $22,072,985 and $54,069,547) $ 20,127,985 $ 50,068,324
=============== ==============
</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 June 30, 2000 and 1999,
the Fund has unfunded commitments to borrowers of $36,773,351 and $38,098,809,
respectively.
Included in the net change in unrealized gain from investment transactions for
the year ended June 30, 2000 and 1999, is an unrealized loss on loans and leases
of $2,056,223 and $2,400,000, respectively. 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.
The Fund's 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:
<TABLE>
<CAPTION>
2000
---------------------------------
PERCENTAGE OF
VALUE NET ASSETS
--------------- -----------------
<S> <C> <C>
Medical devices $ 1,147,890 3.33%
Other warrants 1,460,457 4.25
--------------- -----------------
Total warrants (cost: $572,600) $ 2,608,347 7.58%
=============== =================
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
1999
---------------------------------
PERCENTAGE OF
VALUE NET ASSETS
--------------- -----------------
<S> <C> <C>
Communications equipment:
Juniper Networks, Inc. $14,355,229 24.7%
Other communications equipment 157,500 0.3
--------------- -----------------
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%
=============== =================
</TABLE>
The Fund's 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, as follows:
<TABLE>
<CAPTION>
2000
--------------------------------------------
PERCENTAGE OF
SHARES VALUE NET ASSETS
----------- -------------- -----------------
<S> <C> <C> <C>
Communications equipment:
ONI Systems 233,468 $ 14,217,068 41.30%
----------- -------------- -----------------
Total communications equipment 233,468 14,217,068 41.30
Software 101,057 1,488,741 4.33
Other common stock 31,965 1,057,369 3.07
----------- -------------- -----------------
Total common stock (cost: $698,545) 366,490 $ 16,763,178 48.70%
=========== ============== =================
<CAPTION>
1999
--------------------------------------------
PERCENTAGE OF
SHARES VALUE NET ASSETS
----------- -------------- -----------------
<S> <C> <C> <C>
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%
=========== ============== =================
</TABLE>
22
<PAGE>
4. WARRANTS AND STOCK:
At June 30, 2000 and 1999, the Fund held warrants to purchase shares of common
and preferred stock in 39 and 63 companies, respectively, of which 5 and 10
companies, respectively, are publicly traded. 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 $438,600 and $744,350 at June 30, 2000 and 1999,
respectively. The following is a summary of the activity for investments in
warrants and investments in stocks for the years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
Investments in warrants:
Balance, beginning of year $ 15,839,952 $ 1,289,713
Acquisition (disposition) of warrants (20,000) 3,800
Write-off of public warrants (80,000) -
Write-off of private warrants (33,000) (137,500)
Conversion of warrants to stock (316,750) (52,500)
Net change in unrealized gain (12,781,855) 14,736,439
-------------- -------------
Balance, end of year $ 2,608,347 $ 15,839,952
============== =============
Investments in stocks:
Balance, beginning of year $ 13,927,078 $ 4,276,393
Cash exercises and purchases of stock 1,954,538 77,802
Conversion of warrants to stock 316,750 534,685
Write-off of private stock (72,327) (45,000)
Cost basis of stock sold (2,227,431) (490,735)
Net change in unrealized gain 2,864,570 9,573,933
-------------- -------------
Balance, end of year $ 16,763,178 $ 13,927,078
============== =============
</TABLE>
5. LONG-TERM DEBT FACILITY:
As of June 30, 2000 and 1999, the Fund had 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, and the amount available under the
facility was $8.5 million and $30 million as of June 30, 2000 and 1999,
respectively. 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, 2000 and 1999, there was $8.3 million and $22.9 million, respectively,
outstanding under this facility. The interest rate on the facility is LIBOR plus
.50 percent, which at June 30, 2000 and 1999, was 6.684 percent and 5.736
percent, respectively.
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.
Management anticipates that this facility will be completely repaid by the end
of fiscal year 2001.
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, 2000, the Fund had interest swap transactions outstanding with a
total notional principal amount of $11.8 million to convert floating-rate
liabilities to fixed rates as follows:
- Notional amount of $10.7 million whereby the Fund pays a fixed interest
rate of 6.04 percent, while the financial institution pays the floating
30-day LIBOR rate. Payments are made monthly and terminate on January
27, 2003.
23
<PAGE>
- Notional amount of $1.1 million whereby the Fund pays a fixed interest
rate of 6.04 percent, while the financial institution pays the floating
30-day LIBOR rate. This portion of the swap agreement is an interest cap
and is only paid from the bank to the Fund when the floating rate
exceeds the fixed rate. When interest rates are lower than 6.04 percent,
no extra interest must be paid. Payments are made monthly and terminate
on January 27, 2003.
At June 30, 2000, the estimated fair value of these swap transactions in excess
of that which qualifies as a hedge was not material to the financial condition
of the Fund. The fair value of interest swaps is the estimated amount that the
Company would receive from the financial institutions to terminate the swap
transactions at June 30, 2000, taking into account interest rates at that date.
The Fund is exposed to the risk of credit loss in the event of nonperformance by
the counterparty 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 estimated fair value on the swap agreements, if any.
7. CAPITAL STOCK:
As of June 30, 2000 and 1999, there are 100,000,000 shares of $.001 par value
common stock authorized, and 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, 2000, all capital commitments have been received.
8. EARNINGS PER SHARE:
Basic earnings per share are computed by dividing net income by the
weighted-average common shares outstanding. Diluted earnings per share are
computed by dividing net income 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. (the Adviser) serves as its fund manager. As compensation for
their services to the Fund, the Managers receive a management fee (the
Management Fee) computed and paid at the end of each quarter at an annual rate
of 2.5 percent of the Fund's total assets (including amounts derived from
borrowed funds) as of the last day of each fiscal quarter thereafter. Fees of
$2,138,686 and $1,905,721 were recognized for the years ended June 30, 2000 and
1999, respectively.
In addition to the Management Fee, Westech Advisors and the Adviser (the
Managers) will together receive a monthly incentive fee (the Incentive Fee)
after shareholders have received a return of funds (Payout) equal to the
following: (a) cumulative dividends and distributions equal to 100 percent of
all amounts paid, as of the date of calculation, by shareholders to the Fund
(and not including placement fees paid to the placement agent by certain of the
shareholders) for the purchase of shares plus (b) a preferred return on all
amounts contributed, as of the date of calculation, equal to an 8 percent
cumulative noncompounded annual return on such amounts. After Payout has been
achieved, all amounts available to be paid as dividends and distributions to
shareholders in accordance with the Fund's distribution policies will be
distributed as follows: 80 percent as dividends to the Fund's shareholders and
20 percent to the Managers as the Incentive Fee. The Incentive Fee shall not be
paid until the Fund is no longer permitted to make capital calls under the
subscription agreements or irrevocably waives any right to do so.
The Incentive Fee expense for the years ended June 30, 2000 and 1999, was
$54,173,610 and $0, respectively (see Note 11). The amounts paid to the Managers
based on the Fund's distribution policies was $45,568,120 and $0 for the years
ended June 30, 2000 and 1999, respectively.
Certain officers and directors of the Fund also serve as officers and directors
of Westech Advisors and the Adviser.
10. FUTURE FINANCIAL ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (FASB) Statement of
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 137, established accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results
24
<PAGE>
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.
11. CHANGE IN ACCOUNTING PRINCIPLE:
In the second quarter of the fiscal year ended June 30, 2000, the Fund changed
its method of accounting for its Incentive Fee. The previous method was to
record the Incentive Fee as the Fund became legally obligated. The new method is
to record the Incentive Fee based on the Fund's current income. According to the
management of the Fund, this change was made to more closely match the Incentive
Fee to current performance. The new method has been applied to Incentive Fee
calculations of prior years. The $9,302,185 cumulative effect of the change on
prior years is included in income of the year ended June 30, 2000. The effect of
the change on the year ended June 30, 2000, was to increase income before
cumulative effect of a change in accounting principle by $696,695 ($14.42 per
share).
The pro forma amounts presented with the results of operations for the years
ended June 30, 2000 and 1999, reflect the effect of retroactive application of
the Incentive Fee had the provision for Incentive Fee been made during these
periods.
25
