VENTURE LENDING & LEASING III INC - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

[ ] 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 814-00207

Venture Lending & Leasing III, Inc.

(Exact Name of Registrant as specified in its charter)

Maryland

77-0534084

(State or other jurisdiction of incorporation

(I.R.S. Employer

or organization)

Identification No.)

2010 North First Street, Suite 310, San Jose, CA 95131

(Address of principal executive offices) (Zip Code)

(408) 436-8577

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant has (i) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.

Yes Ö 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 November 2, 2003

Common Stock, $.001 par value 100,000

VENTURE LENDING & LEASING III, INC.

INDEX

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

Statements of Financial Position

As of September 30, 2003 and December 31, 2002

Statements of Operations (Unaudited)

For the Three and Nine Months Ended September 30, 2003 and 2002

Statements of Changes in Shareholder's Equity

For the Year ended December 31, 2002 and the Nine Months

Ended September 30, 2003

Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2003 and 2002

Notes to Financial Statements

Item 2. Management's Discussion and Analysis of Financial

Condition and Results of Operations

Item 3. Quantitative & Qualitative Disclosures About Market Risk

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

VENTURE LENDING & LEASING III, INC.

STATEMENTS OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

	September 30, 2003	December 31, 2002
	UNAUDITED
ASSETS
Loans at estimated fair value
(Cost of $139,453,936 and $189,208,933)	$128,863,409		$183,723,840
Cash and cash equivalents	13,991,461		9,863,882
Other assets	772,110		1,738,755
	________________		_______________
Total assets	$143,626,980		$195,326,477
	==============		=============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Borrowings under debt facilty	$43,986,520		$51,884,504
Accrued management fees	1,008,370		1,312,698
Accounts payable and other accrued liabilities	1,473,922		2,359,957
	________________		_______________
Total liabilities	46,468,812		55,557,159
	________________		_______________
Shareholder's equity:
Common stock: $0.001 par value, 200,000 shares authorized;
Issued and outstanding - 100,000 shares	100		100
Capital in excess of par value	155,004,400		155,004,400
Accumulated distributions	(59,917,366)		(11,935,264)
Accumulated earnings (deficit)	2,071,034		(3,299,918)
	________________		_______________
Total shareholder's equity	97,158,168		139,769,318
	________________		_______________
Total liabilities and shareholder's equity	$143,626,980		$195,326,477
	==============		=============

See Notes to Financial Statements

VENTURE LENDING & LEASING III, INC.

STATEMENTS OF OPERATIONS (UNAUDITED)

	For The Three	For The Three	For The Nine	For The Nine
	Months Ended	Months Ended	Months Ended	Months Ended
	September 30, 2003	September 30, 2002	September 30, 2003	September 30, 2002
	_____________	_____________	_____________	_____________
INVESTMENT INCOME:
Interest on loans	$5,613,053	$7,998,118	$18,965,658	$23,389,279
Interest on short-term investments
and other income	62,639	120,312	223,869	734,337
	_____________	_____________	_____________	_____________
Total investment income	5,675,692	8,118,430	19,189,527	24,123,616
	_____________	_____________	_____________	_____________
EXPENSES:
Management fees	897,669	1,268,678	3,075,440	5,327,403
Interest expense	528,748	766,575	1,728,596	2,594,793
Other operating expenses	537,113	730,672	2,126,905	2,102,566
	_____________	_____________	_____________	_____________
Total expenses	1,963,530	2,765,925	6,930,941	10,024,762
	_____________	_____________	_____________	_____________
Net investment income	3,712,162	5,352,505	12,258,586	14,098,854
	_____________	_____________	_____________	_____________
Net change in unrealized loss from investments and hedging activity	(2,494,542)	645,446	(4,755,146)	(7,501,879)
Net realized gain (loss) from investment transactions	82,122	(1,980,266)	(2,132,488)	(3,164,867)
	_____________	_____________	_____________	_____________
Net income	$1,299,742	$4,017,685	$5,370,952	$3,432,108
	============	============	============	============
Net income per share	$13.00	$40.18	$53.71	$34.32
	============	============	============	============
Weighted average shares outstanding	100,000	100,000	100,000	100,000

See Notes to Financial Statements

VENTURE LENDING & LEASING III, INC.

STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2002

AND THE NINE MONTHS ENDED SEPTEMBER 30, 2003

	Common Stock ____________________		Capital in		Accumulated
	Common Stock ____________________		Excess of		Earnings
	Shares	Par Value	Par Value	Distributions	(Deficit)	Total
	_________	_________	_________	_________	_________	_________
BALANCE, December 31, 2001	100,000	$100	$155,004,400	$(6,864,039)	$(7,817,109)	$140,323,352

Distributions				(5,071,225)		(5,071,225)
Net income					4,517,191	4,517,191
	_________	_________	_________	_________	_________	_________
BALANCE, December 31, 2002	100,000	$100	$155,004,400	$(11,935,264)	$(3,299,918)	$139,769,318
	_________	_________	_________	_________	_________	_________
Distributions				(47,982,102)		(47,982,102)
Net income					5,370,952	5,370,952
	_________	_________	_________	_________	_________	_________
BALANCE, September 30, 2003 (UNAUDITED)	100,000	$100	$155,004,400	$(59,917,366)	$2,071,034	$97,158,168
	_________	_________	_________	_________	_________	_________

See Notes to Financial Statements

VENTURE LENDING & LEASING III, INC.

STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

	For the Nine Months Ended September 30, 2003	For the Nine Months Ended September 30, 2002
	______________	_____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$5,370,952	$3,432,108
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized loss from investment transactions	2,132,488	3,164,867

Net change in unrealized loss from investments and hedging activities	4,755,146	7,501,879
Amortization of deferred assets	611,270	246,456
Decrease in other assets	419,834	143,628
Net increase in accounts payable, accrued liabilities, and accrued management fees	(840,074)	(2,129,951)
	______________	_____________
Net cash provided by operating activities	12,449,616	12,358,987
	______________	_____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans	(52,199,683)	(85,098,042)
Principal payments on loans	98,023,085	88,917,387
Acquisition of securities	(1,269,804)	(1,453,793)
	______________	_____________
Net cash provided by investing activities	44,553,598	2,365,552
	______________	_____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distribution to shareholder	(44,550,000)	-
Deemed distribution to shareholder	(363,191)	(156,599)
Payment of deferred bank and bank related fees	(64,460)	(340,700)
Borrowings under debt facility	35,839,518	1,983,865
Repayment of borrowings under debt facility	(43,737,502)	(24,711,663)
	______________	_____________
Net cash used in financing activities	(52,875,635)	(23,225,097)
	______________	_____________
Net increase (decrease) in cash and cash equivalents	4,127,579	(8,500,558)
CASH AND CASH EQUIVALENTS:
Beginning of period	9,863,882	20,175,836
	______________	_____________
End of period	$ 13,991,461	$ 11,675,278
	============	============
CASH PAID DURING THE PERIOD FOR:
Interest	$ 1,726,846	$ 2,687,939
NON-CASH ACTIVITIES:
Distributions of investment securities to shareholder	$ 3,068,911	$ 1,453,793

See Notes to Financial Statements

VENTURE LENDING & LEASING III, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2003

ORGANIZATION AND OPERATIONS OF THE FUND

Venture Lending & Leasing III, Inc., (the "Fund"), was incorporated in Maryland on February 1, 2000 as a nondiversified closed-end management investment company electing status as a business development company ("BDC") under the Investment Company Act of 1940. 100% of the stock of the Fund is held by Venture Lending & Leasing III, LLC (the "Company"). Prior to commencing its operations on May 19, 2000, the Fund had no operations other than the sale to the Company of 100,000 shares of common stock, $0.001 par value for $25,000. This issuance of stock was a requirement in order to apply for a lender's license. In the period between February 1, 2000 and May 19, 2000, the Fund was not subject to SEC reporting requirements. The Fund became subject to SEC reporting requirements on May 19, 2000.

In Management's opinion, the accompanying financial statements 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 accounting principles generally accepted in The United States of America have been omitted; however, the Fund believes that the disclosures made are adequate to make the information presented not misleading. The interim results for the three and nine months ended September 30, 2003 and 2002 are not necessarily indicative of what the results would be for a 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 on Form 10-K for the year ended December 31, 2002.

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. As of September 30, 2003, the Fund's investments in loans are to companies based primarily within the United States and are diversified among borrowers in the industries shown below. The percentage of shareholder's 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. 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.)

Loan balances are summarized by borrower. Typically a borrower's balance will be composed of several loans drawn under a commitment made by the Fund. As each loan drawn under a commitment has a different maturity date and amount, the interest rate for the borrower changes each month. For the three and nine month period ended September 30, 2003, the weighted average interest rate on performing loans was 17.3% and 16.9% respectively. Interest rates for the three and nine month period ended September 30, 2002 were 16.6% and 16.1% respectively. Interest rates earned by the Fund will fluctuate based on many factors including volatility, early payoffs, and recovery of interest from non-performing assets.

Loans as of September 30, 2003 consist of the following:

	Percentage of	Estimated Fair	Final
Borrower	Net Assets	Value 9/30/03	Maturity Date
Application Service Providers
BlueStar Solutions [eOnline]		$677,924	8/1/04
Ultrabridge		353,704	*
Subtotal:	1.1%	$1,031,628
Biotechnology
CancerVax		$3,616,775	11/1/06
Trinity Biosystems		268,216	6/1/06
Zyomyx		686,256	7/1/04
Subtotal:	4.7%	$4,571,247
Communication Service Providers
Everest Broadband Networks		$52,354	*
Subtotal:	0.1%	$52,354
Communications Equipment
Atrica		$3,952,441	1/1/06
Bivio Networks [Network Robots]		934,637	*
Calient Networks		1,262,348	12/1/04
Caymas		1,179,897	6/1/06
Coriolis Networks		2,242,934	3/1/07
General Bandwidth		1,608,805	6/1/05
Gluon Networks		1,611,280	3/1/05
Inkra Networks		2,851,418	4/1/05
Nishan Systems		380,312	7/1/05
Nokia [Amber Networks]		1,917,391	7/1/04
Pedestal Networks		3,269,716	9/1/06
Sandial Systems		1,741,848	6/1/06
Sanera Systems		1,463,122	7/1/05
Santera Systems		772,061	4/1/05
ServGate Technologies		1,130,790	11/1/05
Valo		145,884
Subtotal:	27.2%	$26,464,884
Computers & Peripherals
3PARdata		$3,745,857	2/1/06
MaXXan Systems		4,224,602	11/1/05
Nauticus Networks		4,350,615	2/1/06
Onstor [Claristor]		1,333,019	9/1/06
Spinnaker Networks		1,856,508	4/1/06
Subtotal:	16.0%	$15,510,601
Internet
BridgeSpan [ezClose.com]		$714,588	6/1/04
Coremetrics		1,288,258	*
ECtone		46,792	*
Evergreen Assurance		1,093,959	5/1/06
Postini		1,470,473	8/1/06
QuinStreet [Echo Online Networks]		428,326	11/1/04
Slam Dunk Networks		17,509	*
Subtotal:	5.2%	$5,059,905
Medical Devices
Alere Medical		$3,063,753	6/1/06
CardioNOW		326,368	3/1/05
Coalescent Surgical		4,342,620	2/1/06
Confirma [Merlin Dataworks]		894,283	6/1/04
Evalve		3,542,143	2/1/06
NeoGuide Systems		513,427	*
Neomend		226,415	*
Ntero Surgical		421,685	*
Volcano Therapeutics		4,613,167	9/1/06
Subtotal:	18.5%	$17,943,861
Other
Ion America		$1,313,815	4/1/06
Kiwi Networks		1,263,929	7/1/06
Lumenare [Avulet]		295,589	9/1/04
Nanosolar		248,182	8/1/06
Subtotal:	3.2%	$3,121,515
Photonics
AcceLight Networks		$156,713	*
Cenix		1,330,630	*
Ceyba		1,023,654	*
Covega [Quantum Photonics]		761,908	2/1/05
E2O Communications		1,996,212	3/1/05
Gemfire		534,928	*
Infinera [Zepton Networks]		6,281,852	10/1/05
Inphi		2,373,651	4/1/06
IoLon		1,421,002	2/1/05
Network Elements		1,494,611	6/1/04
NovX Microsystems		296,514	4/1/05
Nufern		2,488,717	2/1/05
Optinel Systems		752,222	9/1/04
Tsunami Optics [Stratos Lightwave]		118,069	5/1/04
Subtotal:	21.6%	$21,030,683
Semiconductor Equipment
Molecular Imprints		$2,262,001	4/1/06
Subtotal:	2.3%	$2,262,001
Semiconductors
Aeluros		$897,843	3/1/06
Ample Communications		1,682,863	2/1/05
Aristos Logic		621,059	9/1/06
Brion Technologies		368,352	7/1/06
Fyre Storm		895,507	2/1/06
Intel [VxTel]		429,690	1/1/04
Ishoni Networks [HiQ Networks]		2,027,577	*
Kineto Wireless [BluZona]		1,313,931	5/1/05
Matrix Semiconductor		3,114,314	3/1/06
Nexsil		807,161	1/1/06
Scintera Networks		1,060,247	7/1/06
Sierra Monolithics		1,346,534	3/1/05
Stretch		2,548,964	7/1/06
T-Ram		1,271,121	7/1/05
TriCN		96,920	8/1/06
Universal Network Machines		1,937,226	9/1/06
Subtotal:	21.0%	$20,419,309
Software
Airgo Networks [Woodside Networks]		$3,689,813	4/1/06
Avamar Technologies		977,054	9/1/06
Bang Networks		226,994	*
Ceon		452,482	4/1/05
Chordiant Software [On Demand]		175,418	9/1/04
CiraNova		540,767	9/1/05
CoWare		604,124	6/1/06
Enkata Technologies		1,391,909	9/1/06
InterSan		1,024,820	4/1/06
Merced Systems		747,780	12/1/05
Net6 [WebUnwired]		772,432	12/1/05
netForensics		244,147	8/1/04
Pivia		316,874	9/1/05
PSS Systems		230,807	6/1/06
Subtotal:	11.7%	$11,395,421
Total: (Cost of $139,453,936)	132.6%	$128,863,409

Loans as of December 31, 2002 were comprised of the following:

Estimated Fair Value

Final Maturity

December 31, 2002

Date

Borrower

Application Service Providers:

Asera

373,890

BlueStar Solutions [eOnline]

2,148,849

8/1/04

Ultrabridge

353,704

3/1/04

Total (2.1% and 10.9% of net assets)

2,876,443

Biotechnology:

Acusphere [Polymers for Medicine]

1,650,416

4/1/04

CancerVax

4,358,904

2/1/06

Zyomyx

1,561,646

7/1/04

Total (5.4% of net assets)

7,570,966

Communication Service Providers:

Appgenesys

Everest Broadband Networks

138,309

Total (0.1% of net assets)

138,309

Communications Equipment:

Atrica

5,133,655

1/1/06

Bivio Networks [Network Robots]

2,179,008

3/1/05

Calient Networks

2,035,441

12/1/04

Calix Networks

1,470,588

Caymas

660,594

12/1/05

Coriolis Networks

2,207,647

3/1/07

General Bandwidth

2,269,290

6/1/05

Gluon Networks

3,015,432

1/1/05

Inkra Networks

5,723,945

4/1/05

Network Photonics

2,654,510

9/1/05

Nishan Systems

571,809

7/1/05

Nokia [Amber Networks]

3,793,666

7/1/04

Polaris Networks

2,852,759

8/1/05

Rapid 5 Networks

1,859,077

Sandial Systems

1,052,675

10/1/05

Sanera Systems

3,657,139

7/1/05

Santera Systems

1,106,681

4/1/05

Valo

1,452,402

12/1/05

Total (31.3% of net assets)

43,696,318

Computers & Peripherals:

3PARdata

4,850,600

9/1/05

Andes Networks [BeeLine Networks]

169,675

11/1/03

Claristor [Agile Storage, Inc.]

1,053,940

12/1/05

InfiniSwitch

3,037,666

7/1/05

Intruvert Networks

989,059

8/1/05

IronPort Systems

1,100,252

12/1/05

Kuokoa Networks

1,144,488

9/1/05

MaXXan Systems

6,127,989

11/1/05

Nauticus Networks

1,763,560

6/1/05

Spinnaker Networks

1,529,023

12/1/05

Total (15.6% of net assets)

21,766,252

Internet:

BridgeSpan [ezClose.com]

1,820,833

6/1/04

Coremetrics

1,601,618

ECtone

46,792

Evergreen Assurance

605,155

12/1/05

Postini

819,877

6/1/04

QuinStreet [Echo Online Networks]

1,448,602

11/1/04

RivalWatch

23,669

4/1/03

Slam Dunk Networks

18,777

Total (4.6% of net assets)

6,385,323

Medical Devices:

Alere Medical

2,758,080

12/1/05

Cameron Health

916,026

11/1/04

Cardica [Vascular Innovations]

7,052,761

6/1/05

CardioNOW

509,948

3/1/05

Confirma [Merlin Dataworks]

1,786,068

6/1/04

NeoGuide Systems

642,795

3/1/05

Neomend [Advanced Closure Systems]

340,671

6/1/04

Ntero Surgical

917,446

5/1/04

Total (10.7% of net assets)

14,923,795

Other:

Maryland	77-0534084
(State or other jurisdiction of incorporation	(I.R.S. Employer
or organization)	Identification No.)