10-Q 1 sep01q.txt SEPT 30, 2001 10Q - VLLI SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ending September 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ______________ Commission file number 814-00132 Venture Lending & Leasing, Inc. (Exact Name of Registrant as specified in its charter) Maryland 13-3775187 ---------- ------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2010 North First Street, Suite 310, San Jose, CA 95131 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) (408) 436-8577 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant has (i) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding as of October 10, 2001 ---------------- ----------------------------------- Common Stock, $.001 par value 48,318.58 Page 1 of 13 VENTURE LENDING & LEASING, INC. INDEX

VENTURE LENDING & LEASING, INC. STATEMENTS OF FINANCIAL POSITION (UNAUDITED)

The accompanying notes are an integral part of these statements VENTURE LENDING & LEASING, INC. STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 2001 2000 ---------------- ---------------- INVESTMENT INCOME: Interest on loans $136,687 $718,448 Interest on short-term investments 15,577 76,274 ---------------- ---------------- Total investment income 152,264 794,722 ---------------- ---------------- EXPENSES: Management fees 44,040 178,057 Interest expense - 92,685 Other operating expenses 31,945 76,476 ---------------- ---------------- Total expenses 75,985 347,218 ---------------- ---------------- Net investment income 76,279 447,504 ---------------- ---------------- Net change in unrealized gain from investment transactions (4,100,384) (9,703,192) Net realized gain (loss) from investment transactions (85,492) 1,191,680 Incentive management fee 821,919 1,612,801 ---------------- ---------------- Net loss $(3,287,678) $(6,451,207) ================ ================ Amounts per common share: ---------------- ---------------- Net loss $(68.04) $(133.51) ================ ================ Weighted average shares outstanding 48,318.58 48,318.58

The accompanying notes are an integral part of these statements VENTURE LENDING & LEASING, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) FOR THE YEAR ENDED JUNE 30, 2001 AND THE THREE MONTHS ENDED SEPTEMBER 30, 2001

The accompanying notes are an integral part of these statements VENTURE LENDING & LEASING, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

The accompanying notes are an integral part of these statements. VENTURE LENDING & LEASING, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2001 1. BASIS OF PRESENTATION The accompanying condensed financial statements in Management's opinion, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations for interim periods. Certain information and note disclosures normally included in audited annual financial statements prepared in accordance with generally accepted accounting principles have been omitted; however, the Fund believes that the disclosures made are adequate to make the information presented not misleading. Certain amounts in the prior year financial statements have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on previously reported net income or shareholders' equity. The interim results for the three months ended September 30, 2001 and 2000, are not necessarily indicative of the results for the full year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Fund's Annual Report for the year ended June 30, 2001. 2. SUMMARY OF INVESTMENTS: Loans generally are made to borrowers pursuant to commitments whereby the Fund commits to finance assets up to a specified amount for the term of the commitments, upon the terms and subject to the conditions specified by such commitment. The Fund's investments in loans are entirely within the United States and are diversified among the industries shown below. The percentage of shareholders' equity (net assets) that each industry group represents is shown with the industry totals below. (The sum of the percentages does not equal 100 percent because the percentages are based on net assets as opposed to total loans and leases).

As of September 30, 2001, loans with a cost basis of $1.1 million dollars and a fair value of $0.3 million have been classified as non-accrual. 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. The Fund has no remaining commitments to borrowers. The Fund's investments in warrants and stock are entirely within the United States and are diversified among the following industries. The percentage of net assets that each industry group represents is shown with the industry totals:

Within the communications equipment segment, the Fund's holdings in ONI Systems represented $0.4 million or 7% of net assets. Within the Medical Devices segment, the Fund's holdings in Oratec Interventions represented $0.3 million or 6% of net assets. No other security represented over 5% of net assets. 3. EARNINGS PER SHARE: Basic earnings per share are computed by dividing net income, less dividends on preferred stock, by the weighted average common shares outstanding. Diluted earnings per share are computed by dividing net income, less dividends on preferred stock, by the weighted average common shares outstanding, including the dilutive effects of potential common shares (e.g., stock options). The Fund has no preferred stock or instruments that would be potential common shares; thus, reported basic and diluted earnings are the same. Item 2. Management's Discussion and Analysis of Financial Condition and ----------------------------------------------------------------------- Results of Operations --------------------- GENERAL Venture Lending & Leasing, Inc. ("Fund") is a non-diversified closed- end management investment company electing status as a "business development company" ("BDC") under the Investment Company Act of 1940 ("1940 Act") whose investment objective is to achieve a high total return. The Fund provides asset-based financing to carefully selected venture capital-backed companies, in the form of secured loans. The Fund generally receives warrants to acquire equity securities in connection with its portfolio investments. The Fund's shares of Common Stock, $.001 par value ('Shares") were sold to subscribers pursuant to capital calls made through August 1998. Total committed capital of $46.6 million has been fully funded as of September 30, 2001. The Fund has completed its investment period and is now focused on efficiently managing the Fund's portfolio. As of September 30, 2001, the Fund has distributed $257.7 million to its investors. In addition to the historical information contained herein, this Quarterly Report contains certain forward-looking statements. The reader of this Quarterly Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Fund's actual results could differ materially from those suggested by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments and competition effects as well as other factors. This entire Quarterly Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Fund's business. RESULTS OF OPERATIONS -- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Total investment income for the three months ending September 30, 2001 and 2000 was $0.2 million and $0.8 million, respectively, of which $0.1 million and $0.7 million, consisted of interest on venture loans outstanding during the period. The remaining income consisted of interest on the temporary investment of cash and late fees collected. The decrease in investment income reflects the decrease in loans outstanding from September 30, 2000 to September 30, 2001. Expenses for the three months ended September 30, 2001 and 2000 were $0.1 million and $0.3 million, respectively, resulting in net investment income of $0.1 million and $0.4 million, respectively. Interest expense was $0.1 million for the three months ended September 30, 2000. Interest expense was eliminated for the three months ended September 30, 2001 as the Fund completely repaid all bank loans prior to the start of the period. Management fees decreased from $0.2 million for the three months ended September 30, 2000 to less than $0.1 million for the three months ended September 30, 2001, reflecting the decreased asset base throughout the year upon which fees are calculated. The decrease in the asset base reflected the decreased value of the Fund's publicly traded securities and the decrease in venture loans outstanding. Other operating expenses were less than $0.1 million and $0.1 million for the three months ended September 30, 2001 and 2000 respectively. A decline in bank facility fees represented a majority of this decline in other operating expenses. The Fund experienced a negative change in unrealized gain from investment transactions of $4.1 million for the three months ended September 30, 2001 as compared to a negative $9.7 million for the three months ended September 30, 2000. Most of the change in unrealized gain for the three months ended September 30, 2001 and 2000 was caused by the decrease in value of public warrants and stocks during these periods. The Fund had a realized loss of $0.1 million during the three months ended September 30, 2001 as opposed to a realized gain from investment transactions of $1.2 million for the three months ended September 30, 2000. The realized loss for the period ended September 30, 2001 was due to writing off a portion of a loan augmented by a small realized loss from transactions stemming from securities held by the Fund. The realized gains in 2000 were due mainly to the larger volume and value of the sales transactions of stock and warrants. The fund had a negative incentive fee of $0.8 million and $1.6 million for the three months ended September 30, 2001 and 2000 respectively. The change in this amount was due to the decreased Net loss for the three months ended September 30, 2001. Net loss for the three months ended September 30, 2001 and 2000 was $3.3 million compared to $6.5 million for the three months ended September 30, 2000. On a per share basis, for the three month period ended September 30, 2001 and 2000, net loss was $68.04 and $133.51 respectively. LIQUIDITY AND CAPITAL RESOURCES -- SEPTEMBER 30, 2001 AND JUNE 30, 2001 Total capital committed to the purchase of shares pursuant to subscription agreements was approximately $46.6 million at September 30, 2001. As of September 30, 2001, 100% of committed capital was called to fund investments in venture loans and leases and to meet the Fund's expenses.

Because venture loans are privately negotiated transactions, investments in these assets are relatively illiquid. Since all unfunded commitments have expired, no capital will be required to fund them. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ------------------------------------------------------------------- The Fund's business activities contain elements of risk. The Fund considers the principal types of market risk to be interest rate risk and valuation risk. The Fund considers the management of risk essential to conducting its businesses and to maintaining profitability. Accordingly, the Fund's risk management procedures are designed to identify and analyze the Fund's risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. The Fund manages its market risk by maintaining a portfolio that is diverse by industry, size of investment, stage of development, and borrower. The Fund primarily invests in private business enterprises. Since there is typically no public market for the equity interests of the companies in which the Fund invests, the valuation of the equity interests in the Fund's portfolio is subject to the estimate of the Fund's management. In the absence of a readily ascertainable market value, the estimated value of the Fund's portfolio of equity interests may differ significantly from the values that would be placed on the portfolio if a ready market for the equity interests existed. Any changes in estimated value are recorded in the Fund's statement of operations as "Net unrealized gains (losses)." The Fund has some exposure to public market price fluctuations for the equity interests that it holds which have a public market. Each hypothetical 1% increase or decrease in value of the Fund's portfolio of equity interests of $1.3 million at September 30, 2001 would have resulted in unrealized gains or losses and would have increased or decreased the net loss for the three months period by less than 1%. Based on the model used for the sensitivity of interest income net of interest expense, if the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 100 basis point change in interest rates would have affected net income by less than 1% during the quarter. Although management believes that this measure is indicative of the Fund's sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the balance sheet and other business developments that could affect net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. PART II -- OTHER INFORMATION Item 1. Legal Proceedings ------- ----------------- The Fund may become party to certain lawsuits from time to time in the normal course of business. While the outcome of these legal proceedings cannot at this time be predicted with certainty, the Fund does not expect these proceedings will have a material effect upon the Fund's financial condition or results of operation. Item 2. Changes in Securities and Use of Proceeds ------- ----------------------------------------- None Item 3. Defaults Upon Senior Securities ------- ------------------------------- Not applicable Item 4. Submission of Matters to a Vote of Security Holders ------- =================================================== None Item 5. Other Information ------- ------------------- None Item 6. Exhibits ------- -------- None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized. VENTURE LENDING & LEASING, INC. (Registrant) By: /S/ Ronald W. Swenson By: /S/ Brian R. Best Ronald W. Swenson Brian Best Chairman and Chief Executive Officer Chief Financial Officer Date: November 9, 2001 Date: November 9, 2001 2 13 31

VENTURE LENDING & LEASING INC 10-Q