10-K 1 june01k2.txt VLL2 JUNE 30 2001 10K 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, 2001 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 814-00141 VENTURE LENDING & LEASING II, INC. (Exact name of registrant as specified in its charter) MARYLAND 77-0456589 (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) 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 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: X 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, 2001 was 101,159.12. DOCUMENTS INCORPORATED BY REFERENCE

PART I ITEM 1. BUSINESS. INTRODUCTION. Venture Lending & Leasing II, Inc. ("Fund") is a closed-end, non- diversified management investment company electing status as a business development company ("BDC") under the Investment Company Act of 1940("1940 Act"). The Fund's 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 receives warrants to acquire equity securities in connection with its portfolio investments. The Fund's Investment Manager is Westech Investment Advisors, Inc. ("Westech Advisors" or the "Manager"). Siguler Guff Advisers, LLC ("Adviser to the Manager") will act as adviser to Westech Advisors with respect to its administrative duties to the Fund. The fund was incorporated in Maryland on May 19, 1997. The Fund's shares of Common Stock, $.001 par value ("Shares") were sold to subscribers pursuant to capital calls made through August 18, 2001. Total committed capital as of June 30, 2001 was $110 million; all of which has been called and collected. 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 of 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 assets of 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 assets 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 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 in which the fund has an acquisition of a security, (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 generally 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 Manager will 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 Manager. Such investments might be made if the Manager believes that a failure to conform in one area is offset by exceptional strength in another or is compensated for by a higher yield, favorable warrant issuance or other attractive transaction terms or features. LEVERAGE. The Fund is permitted to borrow money from and issue debt securities to banks, insurance companies and other lenders to obtain additional funds to originate venture loans and leases. Under the 1940 Act, the Fund may not incur borrowings unless, immediately after the borrowing is incurred, such borrowings would have "asset coverage" of at least 200 percent. "Asset coverage" means the ratio which the value of the Fund's total assets, less all liabilities not represented by the borrowings and any other liabilities constituting "senior securities" under the 1940 Act, bears to the aggregate amount of such borrowings and senior securities. The practical effect of this limitation is to limit the Fund's borrowings and other senior securities to 50% of its total assets less its liabilities other than the borrowings and other senior securities. The use of leverage increases investment risk. The Fund's lenders require that the Fund pledge portfolio assets as collateral for loans. If the Fund is unable to service the borrowings, the Fund may risk the loss of such pledged assets. Lenders also require that the Fund agree to loan covenants limiting the Fund's ability to incur additional debt or otherwise limiting the Fund's flexibility, and loan agreements may provide for acceleration of the maturity of the indebtedness if certain financial tests are not met. TEMPORARY INVESTMENTS. Pending investment in asset financing transactions and pending distributions, the Fund invests excess cash in (i) securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, (ii) repurchase agreements fully collateralized by U.S. government securities or (iii) short-term high-quality debt instruments of U.S. corporations. All such investments will mature in one year or less. The U.S. government securities in which the Fund may invest include U.S. government securities backed by the full faith and credit of the U.S. government (such as Treasury bills, notes and bonds) as well as securities backed only by the credit of the issuing agency. Corporate securities in which the Fund may invest include commercial paper, bankers' acceptances and certificates of deposit of domestic or foreign issuers. The Fund also may enter into repurchase agreements that are fully collateralized by U.S. government securities with banks or recognized securities dealers, in which the Fund purchases a U.S. government security from the institution and simultaneously agrees to resell it to the seller at an agreed-upon date and price. The repurchase price is related to an agreed-upon market rate of interest rather than the coupon of the debt security and, in that sense, these agreements are analogous to secured loans from the Fund to the seller. Repurchase agreements carry certain risks not associated with direct investments in securities, including possible declines in the market value of the underlying securities and delays and costs to the Fund if the other party to the transaction defaults. OTHER INVESTMENT POLICIES. The Fund will not sell securities short, purchase securities on margin (except to the extent the Fund's permitted borrowings are deemed to constitute margin purchases), write puts or calls, purchase or sell commodities or commodity contracts or purchase or sell real estate. The Fund will not underwrite the securities of other companies, except to the extent the Fund may be deemed an underwriter upon the disposition of restricted securities acquired in the ordinary course of the Fund's business. THE FUND'S INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND INVESTMENT GUIDELINES (OTHER THAN ITS STATUS AS A BDC) ARE NOT FUNDAMENTAL POLICIES AND MAY BE CHANGED BY THE FUND'S BOARD OF DIRECTORS AT ANY TIME WITHOUT SHAREHOLDER APPROVAL. REGULATION. Generally, to be eligible to elect BDC status, a company must engage in the business of furnishing capital and offering significant managerial assistance to "eligible portfolio companies," as defined below. More specifically, in order to qualify as a BDC, a company must (i) be a domestic company; (ii) have registered as a class of its securities or have filed a registration statement with the SEC pursuant to Section 12 of the Securities Exchange Act of 1934; (iii) operate for the purpose of investing in the securities of certain types of eligible portfolio companies; (iv) offer to extend significant managerial assistance to such eligible portfolio companies; (v) have a majority of disinterested directors; and (vi) file (or under certain circumstances, intend to file) a proper notice of election with the SEC. "Making available significant managerial assistance" is defined under the 1940 Act, in relevant part, as (i) an arrangement whereby the business development company, through its officers, directors, employees or general partners, offers to provide and, if accepted, does provide, significant guidance and counsel concerning the management, operations or business objectives of a portfolio company; or (ii) the exercise by a business development company of a controlling influence over the management or polices of the portfolio company by the business development company acting individually or as part of a group acting together which controls the portfolio company. The officers of the Fund intend to offer to provide managerial assistance, including advice on equipment acquisition and financing, cash flow and expense management, general financing opportunities, acquisition opportunities and opportunities to access the public securities markets, to the great majority of companies to whom the Fund provides venture loans or leases. In some instances, officers of the Fund might serve on the board of directors of borrowers or lessees. An "eligible portfolio company" generally is a United States company that is not an investment company and that (i) does not have a class of securities registered on an exchange or included in the Federal Reserve Board's over-the-counter margin list; (ii) is actively controlled by a BDC and has an affiliate of a BDC on its board of directors; or (iii) meets such other criteria as may be established by the SEC. Control under the 1940 Act is presumed to exist where a BDC owns more than 25% of the outstanding voting securities of the eligible portfolio company. The 1940 Act prohibits or restricts companies subject to the 1940 Act from investing in certain types of companies, such as brokerage firms, insurance companies, investment banking firms, and investment companies. Moreover, the 1940 Act limits the type of assets that BDCs may acquire to certain prescribed qualifying assets and certain assets necessary for its operations (such as office furniture, equipment, and facilities) if, at the time of acquisition, less than 70% of the value of BDC's assets consist of qualifying assets. Qualifying assets include: (i) privately acquired securities of companies that were eligible portfolio companies at the time such BDC acquired their securities; (ii) securities of bankrupt or insolvent companies; (iii) securities of eligible portfolio companies controlled by a BDC; (iv) securities received in exchange for or distributed in or with respect to any of the foregoing; and (v) cash items, government securities and high-quality short-term debt. The 1940 Act also places restrictions on the nature of transactions in which, and the persons from whom, securities can be purchased in order for the securities to be considered qualifying assets. Such restrictions include limiting purchases to transactions not involving a public offering and the requirement that securities be acquired directly from either the portfolio company or its officers, directors or affiliates. The Fund, as a BDC, may sell its securities at a price that is below its net asset value per share, provided that a majority of the Fund's disinterested directors has determined that such sale would be in the best interests of the Fund and its shareholders and upon the approval by the holders of a majority of its outstanding voting securities, including a majority of the voting securities held by non-affiliated persons, of such policy or practice within one year of such sale. A majority of the disinterested directors also must determine in good faith, in consultation with the underwriters of the offering if the offering is underwritten, that the price of the securities being sold is not less than a price which closely approximates market value of the securities, less any distribution discounts or commissions. As defined in the 1940 Act, the term "majority of the outstanding voting securities" of the Fund means the vote of (i) 67% or more of the Fund's Shares present at a meeting, if the holders of more than 50% of the outstanding Shares are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding Shares, whichever is less. Many of the transactions involving a company and its affiliates (as well as affiliates of those affiliates) which were prohibited without the prior approval of the SEC under the 1940 Act prior to its amendment by the 1980 Provisions are permissible for BDCs, including the Fund, upon the prior pproval of a majority of the Fund's disinterested directors and a majority of the directors having no financial interest in the transactions. However, certain transactions involving certain persons related to the Fund, including its directors, officers, and the Managers, may still require the prior approval of the SEC. In general, (i) any person who owns, controls, or holds power to vote, more than 5% of the Fund's outstanding Shares (ii) any director, executive officer, or general partner of that person; and (iii) any person who directly or indirectly controls, is controlled by, or is under common control with, that person, must obtain the prior approval of a majority of the Fund's disinterested directors, and, in some situations, the prior approval of the SEC, before engaging in certain transactions involving the person or any company controlled by the Fund. The 1940 Act generally does not restrict transactions between the Fund and its eligible portfolio companies. While a BDC may change the nature of its business so as to cease being a BDC (and in connection therewith withdraw its election to be treated as a BDC) only if authorized to do so by a majority vote (as defined by the 1940 Act) of its outstanding voting securities, shareholder approval of changes in other fundamental investment policies of a BDC is not required (in contrast to the general 1940 Act requirement, which requires shareholder approval for a change in any fundamental investment policy). DIVIDENDS AND DISTRIBUTIONS. 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 September 15, 2002, the Fund shall reinvest 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 will begin 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 Manager or the Adviser to the Manager, and all of its required services are performed by officers and employees of the Manager or the Adviser to the Manager. ITEM 2. PROPERTIES. All of the Fund's office space is provided by the Manager. ITEM 3. LEGAL PROCEEDINGS. The Fund is not a party to any material legal proceedings. 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, 2001. EXECUTIVE OFFICERS OF THE FUND The following are the executive officers of the Fund. All officers serve at the pleasure of the Board.

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, 2001 was 108. The Fund has established a policy of declaring dividends on a quarterly basis, with the most recent dividend being paid on July 3, 2001 to holders of record on May 31, 2001, in the amount of $395.42 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 have been derived from the audited financial statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS -- YEARS ENDED JUNE 30, 2001 AND 2000 Total investment income for the years ended June 30, 2001 and June 30, 2000 was $28.0 million and $17.3 million, respectively, of which $26.9 million and $16.5 million, respectively, consisted of interest on venture loans outstanding. A majority of the remaining income consisted of interest on the temporary investment of cash, pending investment in venture loans, distributions to shareholders or application to the Fund's expenses. The increase in investment income reflects the increase in average performing loans outstanding from fiscal year ended June 30, 2000 to fiscal year end June 30, 2001 of approximately $50 million as well as an additional $3.2 million interest premium paid by several clients in order to pay off their loans earlier than had been scheduled. The average performing loans outstanding is based on a monthly average of performing loans. Expenses for the years ended June 30, 2001 and 2000 were $11.9 million and $8.0 million, respectively. Management fees are calculated based on committed capital for the first two years of the Fund's life and thereafter as a percentage of Fund assets. Management fees increased from $3.7 million to $5.6 million because of the increased asset base from which management fees were calculated. Average assets increased approximately $80 million dollars on a quarterly basis from fiscal year end June 30, 2000 to fiscal year end June 30, 2001. Interest expense increased to $5.7 million in the year ended June 30, 2001 from $3.4 million in the prior year. This increase was due mostly to an increase in the average monthly debt outstanding. Other operating expenses decreased to $0.6 million in the year ended June 30, 2001 from $0.9 million in the prior year. This decrease was due primarily to decreased legal costs. The Fund had unrealized losses from investments of $11.3 million for the year ended June 30, 2001 as opposed to an unrealized gain of $2.6 million in the prior year. This was predominately due to the realization of previously unrealized warrant gains through exercising the warrants and ultimate sale of the securities as well as a decrease in market value of several securities. Included in net change in unrealized gain from investments for the year ended June 30, 2001, is an unrealized loss on loans of $4.2 million. This amount represents a reduction in the estimated fair value of loans determined by the Fund's Managers in accordance with the procedures established by the Fund's Board of Directors. 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 for the quarter but not collected is reversed. As of June 30, 2001 and 2000 the Fund had loan balances outstanding with a cost basis of $11.7 million and $3.5 million and a fair value of $3.2 million and $1.1 million respectively from borrowers that were carried on a nonaccrual basis. Also included in net change in unrealized gain from investments is a loss of $1.0 million due to the decreased value of the company's hedge positions. The Fund experienced a realized gain from investments during the year ended June 30, 2001 of $31.0 million , which was down from the June 30, 2000 realized gain of $83.0 million. This reduction in realized gain was predominately due to decreased activity in the Fund's sale of stock in various companies. The decreased activity reflected a tightening of the IPO market in general. In addition, activity for the year ended June 30, 2000 had been unusually high due to the strength of the IPO market at that time. Included in the realized gain figures was a realized loss on loans for $3.2 million and $2.9 million for the years ended June 30, 2001 and 2000 respectively. Incentive fee decreased from $18.8 million for the year ended June 30, 2000 to $7.1 million for the year ended June 30, 2001. The decrease is almost entirely due to the decreased net income figure from $73.9 million for the year ended June 30, 2000 to $28.6 million for the year ended June 30, 2001. is used to calculate the incentive fee. Net income for the period ended June 30, 2001 decreased to $28.6 million from the year ended June 30, 2000 of $73.9 million. On a per share basis, for the years ended June 30, 2001 and 2000 net income before cumulative effect of change in accounting principle was $287 and $1,183 respectively, and net income was $287 and $1,150 respectively. LIQUIDITY AND CAPITAL RESOURCES -- JUNE 30,2001 AND JUNE 30, 2000 Total capital committed to the purchase of Shares pursuant to subscription agreements was approximately $110 million at June 30, 2001 and 2000. As of June 30, 2000 all of this committed capital had been called to fund investments in venture loans and to meet the Fund's expenses. The Fund has in place a $43 million revolving debt facility ("Warehouse") to finance the acquisition of asset-based loans. As of June 30, 2001, $25.0 million was outstanding under this facility, compared with $15.0 million as of June 30, 2000. The Fund also has in place a $50 million securitzation debt facility. As of June 30, 2001 and June 30, 2000, $39.4 million and $50 million respectively were outstanding on this facility. The Fund entered into interest rate swap transactions to hedge its interest rate on the securitization debt facility. At June 30, 2001 and June 30, 2000 the fund had entered into interest swap and cap transactions with a total notional principal of $50 million. The effect of swap transactions is to convert the variable commercial paper rate into a fixed rate on the contract notional value. The over-hedging of this facility allows the Fund to hedge some of its debt under the Warehouse facility; which otherwise would remain completely unhedged. As of June 30, 2001, 28% of the Fund's assets consisted of cash and cash equivalents, compared with 3% as of June 30, 2000. The Fund continued to invest its assets in venture loans during the year. Amounts disbursed under the Fund's loan commitments increased by approximately $79.3 million during the year ended June 30, 2001. Net loan amounts outstanding after amortization decreased by approximately $25.6 million. Unfunded commitments decreased by approximately $64.8 million.

Because venture loans 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. Only $27.0 million of the unfunded commitments were unexpired as of June 30, 2001. 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. QUARTERLY RESULTS 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. June 30, 2001 (UNAUDITED)

JUNE 30, 2000 (UNAUDITED)

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Fund's business activities contain elements of risk. The Fund considers the principal types of market risk to be interest rate risk and valuation risk. The Fund considers the management of risk essential to conducting its businesses and to maintaining profitability. Accordingly, the Fund's risk management procedures are designed to identify and analyze the Fund's risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. The Fund manages its market risk by maintaining a portfolio that is diverse by industry, size of investment, stage of development, and borrower. The Fund has limited exposure to public market price fluctuations as the Fund primarily invests in private business enterprises. Since there is typically no public market for the equity interests of the companies in which the Fund invests, the valuation of the equity interests in the Fund's portfolio is subject to the estimate of the Fund's management. In the absence of a readily ascertainable market value, the estimated value of the Fund's portfolio of equity interests may differ significantly from the values that would be placed on the portfolio if a ready market for the equity interests existed. Any changes in estimated value are recorded in the Fund's statement of operations as "Net change in unrealized gain from investments". Each hypothetical 1% increase or decrease in value of the Fund's portfolio of equity interests of $15.6 million at June 30, 2001 would have resulted in unrealized gains or losses and would have increased or decreased net income for year by 0.5%. The Fund's sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the characteristics of assets and liabilities. The Fund utilizes various methods to assess interest rate risk in terms of the potential effect on interest income net of interest expense, the value of net assets and the value at risk in an effort to ensure that the Fund is insulated from any significant adverse effects from changes in interest rates. Based on the model used for the sensitivity of interest income net of interest expense, if the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 100 basis point change in interest rates would have affected net income by less than 1% during the year. 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. 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 14, 2001 ("2001 Proxy Statement") under the caption "Proposal 2 -- 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 2001 Proxy Statement under the caption "Proposal 2 -- To Elect Seven 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 2001 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 2001 Proxy Statement under the captions: "Other Information -- Managers" and is incorporated herein by reference. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Index to Financials Statements and Financial Statement Schedules

Financial Statement Schedules for the Years Ended June 30, 2001 and 2000 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. (a) 2. EXHIBITS

(b) REPORTS ON FORM 8-K The Fund filed no reports on Form 8-K with the Commission during the fiscal quarter ended June 30, 2001. 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, 2001 Date: September 28, 2001 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.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Venture Lending & Leasing II, Inc.: We have audited the accompanying statements of financial position of Venture Lending & Leasing II, Inc. (a Maryland corporation) as of June 30, 2001 and 2000, 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 II, Inc. as of June 30, 2001 and 2000, 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 10 to the financial statements, effective October 1, 1999, the Fund changed its method of accounting for incentive management fees. /S/Arthur Andersen LLP San Francisco, California, August 10, 2001 VENTURE LENDING & LEASING II, INC. STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, 2001 AND 2000

The accompanying notes are an integral part of these statements. VENTURE LENDING & LEASING II, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000

The accompanying notes are an integral part of these statements. VENTURE LENDING & LEASING II, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2001 AND 2000

The accompanying notes are an integral part of these statements. VENTURE LENDING & LEASING II, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000

The accompanying notes are an integral part of these statements. VENTURE LENDING & LEASING II, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND OPERATIONS OF THE COMPANY: Venture Lending & Leasing, II, Inc. (the Fund) was incorporated in Maryland on May 19, 1997, as a nondiversified closed-end management investment company electing status as a business development company under the Investment Company Act of 1940. Prior to commencing its operations on September 15, 1997, the Fund had no operations other than the sale to Westech Investment Advisors, Inc. (Westech Advisors) of 50 shares of common stock, $0.001 par value, for $50,000. As of June 30, 2001, the Fund has met the requirements, including diversification requirements, to qualify as a regulated investment company (RIC) under the Internal Revenue Code of 1986 and filed for such registration. A portion of the costs incurred in connection with the organization of the Fund were paid initially by Westech Advisors; however, the Fund reimbursed Westech Advisors for such costs and paid other organizational costs directly, which totaled $198,202 as of June 30, 1998. This amount was deferred and is being amortized on the straight-line basis over a period of 60 months from the date the Fund commenced operations. 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 and demand deposits in banks with original maturities of 90 days or less. VALUATION OF LOANS AND INVESTMENTS Venture loans are privately negotiated transactions, and there is no established trading market in which such loans can be sold. Investments in loans 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 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. Loans with a fair value of $3,232,126 and $1,100,372 and a cost of $11,710,017 and $3,530,372 have been classified as nonaccrual at June 30, 2001 and 2000, respectively. COMMITMENT FEES Unearned income and commitment fees on loans are recognized using the effective-interest method over the term of the loan. 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 Financial Accounting Standards Board (FASB) Statement of Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. For investment companies such as the Fund, SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings. The Fund adopted SFAS No. 133 effective July 1, 2000. The fund enters into interest rate swap and interest rate cap transactions to hedge its interest rate on its bank loans. The net interest received or paid on the transactions is included in interest expense. The fair value of the swap is recorded in other assets or other liabilities and the change in the fair value is recorded as a change in unrealized gain (loss) from investments. 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 to the current financial statement presentation. These reclassifications had no impact on previously reported net income or shareholders' equity. 3. SUMMARY OF INVESTMENTS: Loans 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, 2001 and 2000, the Fund's investments in loans 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 below. (The sum of the percentages does not equal 100 percent because the percentages are based on net assets as opposed to total loans. Also, the sum of the percentages of net assets is greater than 100 percent due to the Fund's use of leverage (debt) as a means of financing investments.)

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, 2001 and 2000, the Fund has unfunded commitments to borrowers of $106,558,962 and $171,334,762, respectively. At June 30, 2001, $26,957,824 of these commitments remain unexpired. Included in the net change in unrealized gain from investment transactions for the years ended June 30, 2001 and 2000, is an unrealized loss on loans of $6,047,891 and $309,125, respectively. This amount represents a reduction in the estimated fair value of loans 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 industries. The percentage of net assets that each industry group represents is shown with the industry totals:

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:

4. WARRANTS AND STOCK: At June 30, 2001 and 2000, the Fund held warrants to purchase shares of common and preferred stock in 85 and 87 companies, respectively, of which 10 and 5, respectively, were publicly traded. The 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 privat warrants had a value of $2,192,475 and $2,378,400 at June 30, 2001 and 2000, respectively. The following is a summary of the activity for investments in warrants and investments in stocks for the years ended June 30, 2001 and 2000:

5. LONG-TERM DEBT FACILITY: As of June 30, 2001 and 2000, the Fund had in place a revolving credit warehouse facility to finance the acquisition of asset-based loans. The Fund was eligible to borrow up to $43 million and $52 million as of June 30, 2001 and 2000 respectively. Outstanding balances bear interest at either the financial institution's prime rate or 1.75 percent above LIBOR for 2001 and 1.25 percent above LIBOR for 2000, which at June 30, 2001 and 2000, was 5.584 percent and 6.684 percent, respectively. The Fund pays a commitment fee of 0.25 percent annually on the total average amount of unused commitment with respect to this facility. The facility is due to expire on March 23, 2002. Borrowings under the facility are collateralized by the receivables under loans with assignment to the financial institution plus other assets of the Fund. As of June 30, 2001 and 2000, the Fund had $25.0 million and $15.0 million, respectively, outstanding under this facility. The Fund also has in place a $50.0 million securitization debt facility to finance the acquisition of asset-based loans. The principal balance is a 40-month term loan. Additional amounts can be drawn on the credit facility by a minimum of $5 million and in $1 million increments in excess thereof. The balance amortizes on a monthly basis. At June 30, 2001 and 2000, were $39.4 million and $50.0 million, respectively, outstanding under this facility. The interest rate on this facility varies monthly and is calculated as the bank's rate for commercial paper on the date of reconciliation plus .55 percent. At June 30, 2001 and 2000, this rate was 4.3325 percent and 6.7875 percent, respectively. The required aggregate debt principal payments for the remaining four years are as follows:

6. INTEREST RATE SWAPS: At June 30, 2001, the Fund had an interest swap and an interest rate cap transaction outstanding with total notional principal amounts of $45 million and $5 million, respectively, to convert floating rate liabilities to fixed rates as follows: - An interest rate swap with a notional amount of $45 million whereby the Fund pays a fixed rate of 6.38 percent and receives from the counterparty a floating 30-day commercial paper rate. Payments are made monthly and terminate on July 26, 2004. - An interest rate cap with a notional amount of $5 million whereby the Fund pays a fixed rate of 6.38 percent and receives from the counterparty a floating 30-day H5 commercial paper rate. The counterparty is only obligated to pay the Fund when the variable rate exceeds the fixed rate. When interest rates are lower than 6.38 percent, no extra interest is paid by the Fund. Payments are made monthly and terminate on July 26, 2004. 7. CAPITAL STOCK: As of June 30, 2001 and 2000, there are 200,000 shares of $0.001 par value common stock authorized, and 101,159 and 90,530 shares are issued and outstanding, respectively. 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. Based on $110 million of subscriptions received by the final closing during December 1997, all commitments have been funded and no uncalled capital commitments remained outstanding as of June 30, 2001. 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 options, preferred stock or other 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 adviser to Westech Advisors with respect to Westech Advisors' administrative duties to the Fund. As compensation for their services to the Fund, Westech Advisors and the Adviser, together, will receive a management fee (the Management Fee) at an annual rate of 2.5 percent of the Fund's committed capital, computed and paid quarterly for the first two years following the Fund's initial private offering and 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 $5,672,500 and $3,655,548 were recognized for the years ended June 30, 2001 and 2000, 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, 2001 and 2000, was $7,106,854 and $20,953,966, respectively (see Note 10). The amounts paid to the Managers based on the Funds' distribution policies were $889,754 and $0 for the years ended June 30, 2001 and 2000, respectively. Certain officers and directors of the Fund also serve as officers and directors of Westech Advisors and Siguler Guff Advisers, L.L.C. 10. 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 $2,174,665 cumulative effect of the change on prior years is included in net income for the year ended June 30, 2000. The effect of the change on the year ended June 30, 2000, was to decrease income before cumulative effect of a change in accounting principle by $18,779,301 ($291.96 per share). The pro forma amounts presented with the results of operations for the year ended June 30, 2000, reflect the effect of retroactive application of the Incentive Fee had the provision for Incentive Fees been made during prior years. 11. SUBSEQUENT EVENT: On July 23, 2001, the Fund distributed $40,000,339 to shareholders. This distribution represents 36.4 percent of total capital invested in the Fund.

VENTURE LENDING & LEASING II INC 10-K