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 March 31, 2004
[ ] 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 or organization) |
(I.R.S. Employer 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 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes __ No Ö
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 May 2, 2004
Common Stock, $.001 par value 100,000
EXPLANATORY NOTE
Venture Lending & Leasing III, Inc. intends to restate its financial statements for the years ended December 31, 2001, 2002, and 2003, to reflect a correction in the amount of interest income recognized each year. The statement of financial position as of December 31, 2003, the statement of operations for the three months ended March 31, 2003, and the statement of cash flows for the three months ended March 31, 2003, contained in this quarterly Report on Form 10-Q have been restated. For a description of the restatement, see "Restatement" in note 2 to the accompanying unaudited condensed financial statements. In addition, at the earliest possible time in the second quarter of 2004, Venture Lending & Leasing III, Inc. expects to file an amended Annual Report on Form 10-K/A for the year ended December 31, 2003.
VENTURE LENDING & LEASING III, INC.
INDEX
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (As restated)
Condensed Statements of Financial Position (Unaudited)
As of March 31, 2004 and December 31, 2003 (As restated)
Condensed Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2004 and 2003 (As restated)
Condensed Statements of Changes in Shareholder's Equity (Unaudited)
For the Three Months Ended March 31, 2004
Condensed Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2004 and 2003 (As restated)
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative & Qualitative Disclosures About Market Risk
Item 4. Disclosure Controls and Procedures
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.
CONDENSED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
|
March 31, 2004 |
December 31, 2003 |
|||
|
As Restated |
||||
|
See Note 2 |
||||
|
ASSETS |
||||
|
Loans at estimated fair value |
||||
|
(Cost of $116,127,861 and $127,030,246) |
$ 109,469,221 |
$ 122,926,428 |
||
|
Cash and cash equivalents |
10,392,419 |
12,102,263 |
||
|
Other assets |
1,877,608 |
2,567,204 |
||
|
_______________ |
________________ |
|||
|
Total assets |
$ 121,739,248 |
$ 137,595,895 |
||
|
============= |
============== |
|||
|
LIABILITIES AND SHAREHOLDER'S EQUITY |
||||
|
Liabilities: |
||||
|
Borrowings under debt facilty |
$ 43,978,140 |
$ 59,155,025 |
||
|
Accrued management fees |
872,809 |
965,323 |
||
|
Accounts payable and other accrued liabilities |
1,653,032 |
1,322,511 |
||
|
_______________ |
________________ |
|||
|
Total liabilities |
46,503,981 |
61,442,859 |
||
|
_______________ |
________________ |
|||
|
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 |
(87,063,549) |
(85,549,717) |
||
|
Accumulated earnings |
7,294,316 |
6,698,253 |
||
|
_______________ |
________________ |
|||
|
Total shareholder's equity |
75,235,267 |
76,153,036 |
||
|
_______________ |
________________ |
|||
|
Total liabilities and shareholder's equity |
$ 121,739,248 |
$ 137,595,895 |
||
|
============= |
============== |
|||
See Notes to Condensed Financial Statements
VENTURE LENDING & LEASING III, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
|
For the Three Months Ended March 31, 2004 |
For the Three Months Ended March 31, 2003 |
|||
|
As Restated |
||||
|
See Note 2 |
||||
|
INVESTMENT INCOME: |
||||
|
Interest on loans |
$ 4,878,630 |
$ 6,472,510 |
||
|
Interest on short-term investments |
||||
|
and other income |
46,629 |
63,881 |
||
|
_______________ |
_______________ |
|||
|
Total investment income |
4,925,259 |
6,536,391 |
||
|
_______________ |
_______________ |
|||
|
EXPENSES: |
||||
|
Management fees |
752,900 |
1,127,795 |
||
|
Interest expense |
443,587 |
535,538 |
||
|
Other operating expenses |
511,414 |
1,078,139 |
||
|
_______________ |
_______________ |
|||
|
Total expenses |
1,707,901 |
2,741,472 |
||
|
_______________ |
_______________ |
|||
|
Net investment income |
3,217,358 |
3,794,919 |
||
|
_______________ |
_______________ |
|||
|
Net change in unrealized loss from investments and hedging activity |
(2,495,264) |
(3,117,748) |
||
|
Net realized loss from investment transactions |
(126,031) |
(1,140,285) |
||
|
_______________ |
_______________ |
|||
|
Net income (loss) |
$ 596,063 |
$ (463,114) |
||
|
============= |
============= |
|||
|
Net income (loss) per share |
$ 5.96 |
$ (4.63) |
||
|
============= |
============= |
|||
|
Weighted average shares outstanding |
100,000 |
100,000 |
||
See Notes to Condensed Financial Statements
VENTURE LENDING & LEASING III, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
|
Capital in |
||||||
|
Common Stock |
Excess of |
Accumulated |
||||
|
Shares |
Par Value |
Par Value |
Distributions |
Earnings |
Total |
|
|
BALANCE, December 31, 2003 - As previously reported |
100,000 |
$ 100 |
$155,004,400 |
$(85,549,717) |
$ 5,279,337 |
$ 74,734,120 |
|
Prior Period Adjustment |
1,418,916 |
1,418,916 |
||||
|
___________________________________________________________________ |
||||||
|
BALANCE, December 31, 2003 - As restated - See Note 2 |
100,000 |
100 |
155,004,400 |
(85,549,717) |
6,698,253 |
76,153,036 |
|
Distributions |
(1,513,832) |
(1,513,832) |
||||
|
Net income |
596,063 |
596,063 |
||||
|
___________________________________________________________________ |
||||||
|
BALANCE, March 31, 2004 |
100,000 |
$ 100 |
$155,004,400 |
$ 87,063,549) |
$ 7,294,316 |
$ 75,235,267 |
|
============================================================ |
||||||
See Notes to Condensed Financial Statements
VENTURE LENDING & LEASING III, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
|
For the Three |
For the Three |
||
|
Months Ended |
Months Ended |
||
|
March 31, 2004 |
March 31, 2003 |
||
|
As Restated |
|||
|
See Note 2 |
|||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||
|
Net income (loss) |
$ 596,063 |
$ (463,114) |
|
|
Adjustments to reconcile net income (loss) |
|||
|
to net cash provided by operating activities: |
|||
|
Net realized loss from investment transactions |
126,031 |
1,140,285 |
|
|
Net change in unrealized loss from investments and hedging activities |
2,495,264 |
3,117,748 |
|
|
Amortization of deferred assets |
83,085 |
445,100 |
|
|
Decrease in other assets |
606,510 |
284,438 |
|
|
Net increase (decrease) in accounts payable, accrued liabilities, and accrued management fees |
297,564 |
(863,455) |
|
|
Acquisition of loans |
(17,552,028) |
(18,393,312) |
|
|
Principal payments on loans |
28,328,384 |
33,400,846 |
|
|
Acquisition of securities |
(1,377,296) |
(137,383) |
|
|
____________ |
____________ |
||
|
Net cash provided by operating activities |
13,603,577 |
18,531,153 |
|
|
____________ |
____________ |
||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||
|
Cash distribution to shareholder |
- |
(41,550,000) |
|
|
Deemed distribution to shareholder |
(136,536) |
(121,411) |
|
|
Payment of deferred bank and bank related fees |
- |
(64,460) |
|
|
Borrowings under debt facility |
- |
35,839,518 |
|
|
Repayment of borrowings under debt facility |
(15,176,885) |
(6,041,228) |
|
|
____________ |
____________ |
||
|
Net cash used in financing activities |
(15,313,421) |
(11,937,581) |
|
|
____________ |
____________ |
||
|
Net increase (decrease) in cash and cash equivalents |
(1,709,844) |
6,593,572 |
|
|
CASH AND CASH EQUIVALENTS: |
|||
|
Beginning of year |
12,102,263 |
9,863,882 |
|
|
____________ |
____________ |
||
|
End of period |
$ 10,392,419 |
$ 16,457,454 |
|
|
=========== |
=========== |
||
|
CASH PAID DURING THE PERIOD FOR: |
|||
|
Interest |
$ 447,866 |
$ 523,548 |
|
|
NON-CASH ACTIVITIES: |
|||
|
Distributions of investment securities to shareholder |
$ 1,377,296 |
$ 1,936,491 |
|
See Notes to Condensed Financial Statements
VENTURE LENDING & LEASING III, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2004
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. One hundred percent 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, except as noted below in note 2) 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 months ended March 31, 2004 and 2003 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, 2003.
Subsequent to the issuance of its financial statements for the year ended December 31, 2003, management of the Fund determined that the Fund's methodology of accruing interest income one month after it had been earned resulted in accruals that were materially different from amounts that would have been accrued in accordance with generally accepted accounting principles in the United States of America. As a result, interest on loans, other assets, and accumulated earnings have been restated from amounts previously reported.
A summary of the significant effects of the restatement is as follows:
|
Impact on Statement of Operations: |
||
|
Three Months ended March 31, 2003 |
Three Months ended March 31, 2003 |
|
|
As Previously Reported |
As Restated |
|
|
Interest on loans |
$ 6,666,578 |
$ 6,472,510 |
|
=============== |
=============== |
|
|
Net investment income |
$ 3,988,987 |
$ 3,794,919 |
|
=============== |
=============== |
|
|
Net loss |
$ (269,046) |
$ (463,114) |
|
=============== |
=============== |
|
|
Net loss per share |
$ (2.69) |
$ (4.63) |
|
=============== |
=============== |
|
|
Impact on Statement of Financial Position: |
||
|
As of December 31, 2003 |
As of December 31, 2003 |
|
|
As Previously Reported |
As Restated |
|
|
Other assets |
$ 1,148,288 |
$ 2,567,204 |
|
=============== |
=============== |
|
|
Shareholder's equity |
$ 74,734,120 |
$ 76,153,036 |
|
=============== |
=============== |
|
Impact on Financial Highlights: |
||
|
Three Months Ended |
Three Months Ended |
|
|
March 31, 2003 |
March 31, 2003 |
|
|
As Previously reported |
As Restated |
|
|
Total Return * |
(0.8%) |
(1.3%) |
|
Ratios to Average Net Assets: |
||
|
Expenses * |
8% |
8% |
|
Net Investment Income * |
12% |
11% |
|
* Annualized |
||
As a result of this restatement, the Fund reported a $1,418,916 adjustment to accumulated earnings as of December 31, 2003.
Loans generally are made to borrowers pursuant to commitments whereby the Fund agrees to finance assets and provide working capital 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 March 31, 2004, 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 month periods ended March 31, 2004 and 2003, the weighted average interest rate on performing loans was 17.7% and 15.2%, 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 March 31, 2004 consist of the following:
|
|
Percentage of |
Estimated Fair |
Final |
|
Borrower |
Net Assets |
Value 3/31/04 |
Maturity Date |
|
|
|
|
|
|
Application Service Providers |
|
|
|
|
BlueStar Solutions [eOnline] |
|
$340,649 |
8/1/04 |
|
Subtotal: |
0.5% |
$340,649 |
|
|
Biotechnology |
|
|
|
|
CancerVax |
|
$2,708,154 |
11/1/06 |
|
Trinity Biosystems |
|
$229,425 |
6/1/06 |
|
Zyomyx |
|
$146,866 |
7/1/04 |
|
Subtotal: |
4.1% |
$3,084,445 |
|
|
Communication Service Providers |
|
|
|
|
Everest Broadband Networks |
|
$34,931 |
* |
|
Masergy Communications |
|
$5,205,230 |
9/1/06 |
|
Subtotal: |
7.0% |
$5,240,161 |
|
|
Communications Equipment |
|
|
|
|
Atrica |
|
$2,963,888 |
1/1/06 |
|
Bivio Networks [Network Robots] |
|
$634,637 |
* |
|
Caymas Systems |
|
$966,110 |
6/1/06 |
|
Coriolis Networks |
|
$359,769 |
* |
|
General Bandwidth |
|
$1,112,562 |
6/1/05 |
|
Inkra Networks |
|
$1,310,631 |
4/1/05 |
|
Nishan Systems |
|
$235,646 |
7/1/05 |
|
Nokia [Amber Networks] |
|
$733,817 |
7/1/04 |
|
Pedestal Networks |
|
$2,594,061 |
9/1/06 |
|
Sandial Systems |
|
$1,349,031 |
6/1/06 |
|
Sanera Systems |
|
$609,155 |
7/1/05 |
|
Santera Systems |
|
$522,741 |
4/1/05 |
|
Valo |
|
$73,285 |
* |
|
Subtotal: |
17.9% |
$13,465,333 |
|
|
Computers & Peripherals |
|
|
|
|
3PARdata |
|
$2,792,353 |
2/1/06 |
|
MaXXan Systems |
|
$2,958,937 |
11/1/05 |
|
ONStor [Claristor] |
|
$1,107,169 |
9/1/06 |
|
Subtotal: |
9.1% |
$6,858,459 |
|
|
Internet |
|
|
|
|
Coremetrics |
|
$1,044,533 |
* |
|
Evergreen Assurance |
|
$879,729 |
5/1/06 |
|
Postini |
|
$1,077,473 |
11/1/06 |
|
QuinStreet [Echo Online Networks] |
|
$268,242 |
11/1/04 |
|
Subtotal: |
4.3% |
$3,269,977 |
|
|
Medical Devices |
|
|
|
|
Alere Medical |
|
$4,240,424 |
12/1/06 |
|
Coalescent Surgical |
|
$4,407,351 |
12/1/06 |
|
Confirma |
|
$233,185 |
6/1/04 |
|
Evalve |
|
$2,854,046 |
2/1/06 |
|
NeoGuide Systems |
|
$188,340 |
2/1/05 |
|
Neomend |
|
$124,415 |
* |
|
Ntero Surgical |
|
$394,593 |
* |
|
Volcano Therapeutics |
|
$4,103,872 |
9/1/06 |
|
Subtotal: |
22.0% |
$16,546,226 |
|
|
Other |
|
|
|
|
Ion America |
|
$1,070,976 |
4/1/06 |
|
Kiwi Networks |
|
$1,070,492 |
12/1/06 |
|
Lumenare [Avulet] |
|
$156,035 |
9/1/04 |
|
Nanosolar |
|
$217,504 |
8/1/06 |
|
Subtotal: |
3.3% |
$2,515,007 |
|
|
Photonics |
|
|
|
|
Cenix |
|
$1,330,630 |
* |
|
Covega [Quantum Photonics] |
|
$587,608 |
2/1/05 |
|
E2O Communications |
|
$1,325,146 |
3/1/05 |
|
Infinera [Zepton Networks] |
|
$4,732,245 |
10/1/05 |
|
Inphi |
|
$1,831,190 |
12/1/06 |
|
iolon |
|
$809,019 |
2/1/05 |
|
Network Elements |
|
$88,091 |
6/1/04 |
|
NovX Microsystems |
|
$208,024 |
4/1/05 |
|
Nufern |
|
$1,621,661 |
2/1/05 |
|
Optinel Systems |
|
$245,668 |
9/1/04 |
|
Tsunami Optics [Stratos Lightwave] |
|
$24,349 |
5/1/04 |
|
Subtotal: |
17.0% |
$12,803,631 |
|
|
Semiconductor Equipment |
|
|
|
|
Molecular Imprints |
|
$1,831,705 |
4/1/06 |
|
Subtotal: |
2.4% |
$1,831,705 |
|
|
Semiconductors |
|
|
|
|
Aeluros |
|
$701,723 |
3/1/06 |
|
Ample Communications |
|
$468,477 |
2/1/05 |
|
Analogix Semiconductor |
|
$3,180,363 |
3/1/07 |
|
Aristos Logic |
|
$954,371 |
2/1/07 |
|
Brion Technologies |
|
$584,777 |
11/1/06 |
|
Fyre Storm |
|
$671,777 |
2/1/06 |
|
Ishoni Networks [HiQ Networks] |
|
$584,701 |
* |
|
Matrix Semiconductor |
|
$3,310,004 |
12/1/06 |
|
Nexsil |
|
$621,137 |
1/1/06 |
|
Scintera Networks |
|
$1,381,115 |
10/1/06 |
|
Sierra Logic |
|
$249,623 |
2/1/07 |
|
Sierra Monolithics |
|
$473,174 |
3/1/05 |
|
Stretch |
|
$2,513,675 |
12/1/06 |
|
T-Ram |
|
$747,186 |
7/1/05 |
|
Universal Network Machines |
|
$1,818,975 |
11/1/06 |
|
Subtotal: |
24.4% |
$18,375,082 |
3/1/07 |
|
Software |
|
|
|
|
Accruent |
|
$1,465,876 |
1/1/07 |
|
Adaptive Planning |
|
$451,931 |
2/1/07 |
|
Adaptive Planning |
|
$451,931 |
2/1/07 |
|
Airgo Networks [Woodside Networks] |
|
$2,693,025 |
4/1/06 |
|
Andale |
|
$2,088,147 |
11/1/06 |
|
Avamar Technologies |
|
$3,244,709 |
3/1/07 |
|
Bang Networks |
|
$82,739 |
* |
|
Ceon |
|
$318,203 |
4/1/05 |
|
CiraNova |
|
$415,139 |
9/1/05 |
|
CoWare |
|
$867,688 |
12/1/06 |
|
Enkata Technologies |
|
$1,144,989 |
9/1/06 |
|
Friendster |
|
$2,361,566 |
5/1/07 |
|
InterSan |
|
$879,269 |
12/1/06 |
|
IXI Mobile |
|
$3,980,931 |
7/1/06 |
|
KonaWare |
|
$240,044 |
4/1/06 |
|
MAE Software |
|
$410,176 |
11/1/06 |
|
Merced Systems |
|
$509,655 |
12/1/05 |
|
Net6 [WebUnwired] |
|
$1,302,018 |
4/1/06 |
|
NetForensics |
|
$89,571 |
8/1/04 |
|
Nlayers |
|
$1,005,384 |
8/1/06 |
|
Pivia |
|
$231,138 |
9/1/05 |
|
Platform Solutions |
|
$470,833 |
12/1/06 |
|
Plaxo |
|
$159,507 |
11/1/06 |
|
PSS Systems |
|
$196,351 |
6/1/06 |
|
Rome Corporation, Inc. |
|
$529,657 |
1/1/07 |
|
Subtotal: |
33.4% |
$25,138,546 |
|
|
|
|
|
|
|
Total: (Cost of $116,127,861) |
145.5% |
$109,469,221 |
|
* As of March 31, 2004, loans with a cost basis of $11.3 million and a fair value of $4.7 million, have been classified as non-accrual. These loans have been accelerated from original maturity and are due in their entirety.
Loans as of December 31, 2003, consisted of the following
|
|
Percentage of |
Estimated Fair |
Final |
|
Borrower |
Net Assets |
Value 12/31/03 |
Maturity Date |
|
Application Service Providers |
|
|
|
|
BlueStar Solutions [eOnline] |
|
$489,346 |
8/1/04 |
|
Ultrabridge |
|
353,704 |
* |
|
Subtotal: |
1.1% |
$843,050 |
|
|
Biotechnology |
|
|
|
|
CancerVax |
|
$3,173,681 |
11/1/06 |
|
Trinity Biosystems |
|
249,153 |
6/1/06 |
|
Zyomyx |
|
425,431 |
7/1/04 |
|
Subtotal: |
5.1% |
$3,848,265 |
|
|
Communication Service Providers |
|
|
|
|
Everest Broadband Networks |
|
$49,047 |
* |
|
Masergy Communications |
|
2,627,113 |
4/1/06 |
|
Subtotal: |
3.5% |
$2,676,160 |
|
|
Communications Equipment |
|
|
|
|
Atrica |
|
$3,467,988 |
1/1/06 |
|
Bivio Networks [Network Robots] |
|
784,637 |
* |
|
Caymas Systems |
|
1,074,723 |
6/1/06 |
|
Coriolis Networks |
|
2,255,489 |
3/1/07 |
|
General Bandwidth |
|
1,366,659 |
6/1/05 |
|
Gluon Networks |
|
1,005,427 |
* |
|
Inkra Networks |
|
1,993,572 |
4/1/05 |
|
Nishan Systems |
|
309,829 |
7/1/05 |
|
Nokia [Amber Networks] |
|
1,247,252 |
7/1/04 |
|
Pedestal Networks |
|
2,947,306 |
9/1/06 |
|
Sandial Systems |
|
1,548,977 |
6/1/06 |
|
Sanera Systems |
|
921,480 |
7/1/05 |
|
Santera Systems |
|
650,187 |
4/1/05 |
|
ServGate Technologies |
|
1,005,580 |
11/1/05 |
|
Valo |
|
145,884 |
* |
|
Subtotal: |
27.2% |
$20,724,990 |
|
|
Computers & Peripherals |
|
|
|
|
3PARdata |
|
$3,278,596 |
2/1/06 |
|
MaXXan Systems |
|
3,536,414 |
11/1/05 |
|
Nauticus Networks |
|
3,841,522 |
2/1/06 |
|
ONStor [Claristor] |
|
1,223,086 |
9/1/06 |
|
Spinnaker Networks |
|
1,689,057 |
4/1/06 |
|
Subtotal: |
17.8% |
$13,568,675 |
|
|
Internet |
|
|
|
|
BridgeSpan [ezClose.com] |
|
$459,806 |
6/1/04 |
|
Coremetrics |
|
1,148,987 |
* |
|
Evergreen Assurance |
|
988,775 |
5/1/06 |
|
Postini |
|
1,184,434 |
11/1/06 |
|
QuinStreet [Echo Online Networks] |
|
349,679 |
11/1/04 |
|
Slam Dunk Networks |
|
6,268 |
* |
|
Subtotal: |
5.4% |
$4,137,949 |
|
|
Medical Devices |
|
|
|
|
Alere Medical |
|
$4,839,782 |
12/1/06 |
|
CardioNOW |
|
258,306 |
3/1/05 |
|
Coalescent Surgical |
|
4,940,092 |
12/1/06 |
|
Confirma |
|
570,775 |
6/1/04 |
|
Evalve |
|
3,204,493 |
2/1/06 |
|
NeoGuide Systems |
|
238,974 |
2/1/05 |
|
Neomend |
|
193,415 |
* |
|
Ntero Surgical |
|
394,593 |
* |
|
Volcano Therapeutics |
|
4,413,968 |
9/1/06 |
|
Subtotal: |
25.0% |
$19,054,398 |
|
|
Other |
|
|
|
|
Ion America |
|
$1,194,520 |
4/1/06 |
|
Kiwi Networks |
|
1,194,621 |
12/1/06 |
|
Lumenare [Avulet] |
|
227,124 |
9/1/04 |
|
Nanosolar |
|
233,208 |
8/1/06 |
|
Subtotal: |
3.7% |
$2,849,473 |
|
|
Photonics |
|
|
|
|
Cenix |
|
$1,330,630 |
* |
|
Covega [Quantum Photonics] |
|
688,897 |
2/1/05 |
|
E2O Communications |
|
1,606,802 |
3/1/05 |
|
Infinera [Zepton Networks] |
|
5,524,246 |
10/1/05 |
|
Inphi |
|
2,205,514 |
12/1/06 |
|
iolon |
|
1,112,851 |
2/1/05 |
|
Network Elements |
|
526,387 |
6/1/04 |
|
NovX Microsystems |
|
253,395 |
4/1/05 |
|
Nufern |
|
2,063,973 |
2/1/05 |
|
Optinel Systems |
|
513,371 |
9/1/04 |
|
Tsunami Optics [Stratos Lightwave] |
|
46,282 |
5/1/04 |
|
Subtotal: |
20.8% |
$15,872,348 |
|
|
Semiconductor Equipment |
|
|
|
|
Molecular Imprints |
|
$2,050,833 |
4/1/06 |
|
Subtotal: |
2.7% |
2,050,833 |
|
|
Semiconductors |
|
|
|
|
Aeluros |
|
$801,654 |
3/1/06 |
|
Ample Communications |
|
1,010,218 |
2/1/05 |
|
Aristos Logic |
|
593,957 |
9/1/06 |
|
Brion Technologies |
|
629,878 |
11/1/06 |
|
Fyre Storm |
|
785,928 |
2/1/06 |
|
Intel [VxTel] |
|
188,295 |
1/1/04 |
|
Ishoni Networks [HiQ Networks] |
|
2,027,577 |
* |
|
Kineto Wireless [BluZona] |
|
1,014,109 |
5/1/05 |
|
Matrix Semiconductor |
|
3,715,743 |
12/1/06 |
|
Nexsil |
|
715,996 |
1/1/06 |
|
Scintera Networks |
|
1,520,668 |
10/1/06 |
|
Sierra Monolithics |
|
919,381 |
3/1/05 |
|
Stretch |
|
2,780,161 |
12/1/06 |
|
T-Ram |
|
1,014,255 |
7/1/05 |
|
TriCN |
|
122,612 |
11/1/06 |
|
Universal Network Machines |
|
1,765,879 |
9/1/06 |
|
Subtotal: |
25.7% |
$19,606,311 |
|
|
Software |
|
|
|
|
Accruent |
|
$1,458,449 |
10/1/06 |
|
Airgo Networks [Woodside Networks] |
|
3,200,765 |
4/1/06 |
|
Andale |
|
2,178,747 |
11/1/06 |
|
Avamar Technologies |
|
2,940,150 |
9/1/06 |
|
Bang Networks |
|
107,030 |
* |
|
Ceon |
|
386,507 |
4/1/05 |
|
Chordiant Software [On Demand] |
|
119,647 |
9/1/04 |
|
CiraNova |
|
479,198 |
9/1/05 |
|
CoWare |
|
942,628 |
12/1/06 |
|
Enkata Technologies |
|
1,273,066 |
9/1/06 |
|
InterSan |
|
934,282 |
12/1/06 |
|
KonaWare |
|
265,632 |
4/1/06 |
|
MAE Software |
|
448,999 |
11/1/06 |
|
Merced Systems |
|
630,979 |
12/1/05 |
|
Net6 [WebUnwired] |
|
1,525,398 |
4/1/06 |
|
NetForensics |
|
149,126 |
8/1/04 |
|
Pivia |
|
274,909 |
9/1/05 |
|
Plaxo |
|
164,535 |
11/1/06 |
|
PSS Systems |
|
213,929 |
6/1/06 |
|
Subtotal: |
23.2% |
$17,693,976 |
|
|
|
|
|
|
|
Total: (Cost of $127,030,246) |
161.4% |
$122,926,428 |
|
|
|
|
|
|
* As of December 31, 2003 loans with a cost basis of $11.7 million and a fair value of $7.5 million had been classified as non-accrual. These loans had been accelerated from original maturity and were due in their entirety.
The Fund provides asset-based financing primarily to start-up and emerging growth venture-capital-backed companies. These loans are generally secured by assets of the borrowers. As a result, the Fund is subject to general credit risk associated with such companies. At March 31, 2004, the Fund had unfunded commitments to borrowers of $328.0 million. Of these commitments $67.7 million remain unexpired at March 31, 2004.
Basic earnings per share are computed by dividing net income (loss) by the weighted average common shares outstanding. Diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average common shares outstanding, including the dilutive effects of potential common shares (e.g., stock options). The Fund has no instruments that would be potential common shares; thus, reported basic and diluted earnings (loss) per share are the same.
In March 2003, the Fund restructured its debt facility lowering its borrowing capacity from $250 million to $160 million. On April 2, 2003, the Managing Member of the Company reduced the committed capital of the Company from $361,880,000 to $217,128,000.
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46R). The effective date of FIN 46R for non-registered investment companies (such as the Company) has been deferred pending a decision by the FASB concerning whether to exempt such entities from applying the provisions of FIN 46R.
In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-4 which provided guidance on the application of certain provisions of the AICPA Audit and Accounting Guide, Audits of Investment Companies, and SOP 95-2, Financial Reporting by Nonpublic Investment Partnerships. SOP 03-4 requires non-registered investment companies that meet certain criteria to disclose, as a financial highlight, an annual Internal Rate of Return (IRR) in place of the Total Return disclosure previously required. SOP 03-4 requires the IRR disclosure in annual financial statements issued for fiscal years beginning after December 15, 2003. The Fund will adopt the IRR provisions of SOP 03-4 as of December 31, 2004.
The ratios of expenses and net investment income to average net assets, calculated below, are annualized and are computed based upon the aggregate weighted average net assets of the Fund for the periods presented. Net investment income is inclusive of all investment income net of expenses, and excludes realized or unrealized gains and losses.
Beginning and ending net asset values per share are based on the beginning and ending number of shares outstanding. Other per share information is calculated based upon the aggregate weighted average net assets of the Fund for the periods presented.
The following per share data and ratios have been derived from the information provided in the financial statements:
|
Three Months Ended |
|||
|
3/31/04 |
3/31/03 |
||
|
____________ |
______________ |
||
|
Total Return * |
3.1% |
(1.3%) |
|
|
========== |
============ |
||
|
Per Share Amounts: |
|||
|
Net Asset Value, Beginning of Period |
$761.53 |
$1,420.05 |
|
|
____________ |
______________ |
||
|
Net Investment Income |
$32.17 |
$37.95 |
|
|
Net Realized Loss & Change in Unrealized Loss |
$(26.21) |
$(42.58) |
|
|
____________ |
______________ |
||
|
Total Income |
$5.96 |
$(4.63) |
|
|
Capital Contributions |
$0.00 |
$0.00 |
|
|
Capital Distributions |
$(15.14) |
$(436.08) |
|
|
____________ |
______________ |
||
|
Net Asset Value, End of period |
$752.35 |
$979.34 |
|
|
========== |
============ |
||
|
Net Assets, End of period |
$75,235,267 |
$97,933,679 |
|
|
========== |
============ |
||
|
Ratios to Average Net Assets: |
|||
|
Expenses * |
9% |
8% |
|
|
Net Investment Income * |
17% |
11% |
|
|
* Annualized |
|||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
The Fund is 100% owned by Venture Lending & Leasing III, LLC (the "Company"). The Fund's shares of Common Stock, $.001 par value are sold to its shareholder under a stock purchase agreement. The Fund has issued 100,000 of the 200,000 shares that were authorized. The Fund's shareholder may make additional capital contributions to the Fund.
In addition to the historical information contained herein, this Quarterly Report on Form 10-Q 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. 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.
Restatement
Subsequent to the issuance of its financial statements for the year ended December 31, 2003, management of the Fund determined that the Fund's methodology of accruing interest income one month after it had been earned resulted in accruals that were materially different from amounts that would have been accrued in accordance with generally accepted accounting principles in the United States of America. As a result, interest on loans, other assets, and accumulated earnings have been restated from amounts previously reported.
Filing of Restated Financial Statements
At the earliest possible time in the second quarter of 2004, Venture Lending & Leasing III, Inc. expects to file an amended Annual Report on Form 10-K/A for the year ended December 31, 2003.
For further information of the impact of the restatement on the condensed statement of operations for the three months ended March 31, 2003 and the statement of financial position as of December 31, 2003, see note 2 to the condensed financial statements.
Venture Lending & Leasing III, Inc. (the "Fund") is a financial services company providing financing and advisory services to a variety of carefully selected venture-backed companies throughout the United States with a focus on growth oriented companies. Our portfolio is well diversified and consists of companies in the communications, information services, media, and technology, including software and technology-enabled business services, bio-technology, and medical devices industry sectors, among others. Our capital is generally used by our portfolio companies to finance acquisitions of fixed assets and working capital. On May 19, 2000, we completed our first closing of capital, made our first investment, and became a non-diversified, closed-end investment company that elected to be treated as a business development company under the Investment Company Act of 1940. The Fund elected to be treated for federal income tax purposes as a regulated investment company under the Internal Revenue Code wit h the filing of its federal corporate income tax return for 2000. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability.
The Fund's investment objective is to achieve a high total return. The Fund seeks to achieve its investment objective by providing debt financing to portfolio companies. Historically, the Fund's investing activities have focused primarily on private debt securities. The Fund generally receives warrants to acquire equity securities in connection with its portfolio investments. The Fund generally distributes these warrants to its shareholder upon receipt. The Fund also has guidelines for the percentages of total assets which will be invested in different types of assets.
The portfolio investments of the Fund consist of debt financing to early and late stage venture capital backed technology companies. The borrower's ability to repay their loans may be adversely impacted by a number of factors, and as a result the loan may not fully be repaid. Furthermore, the Fund's security interest in any collateral over the borrower's assets may be insufficient to make up any shortfall in payments.
Critical Accounting Policies
We identified the most critical accounting principles upon which our financial statements depend. We determined the critical accounting principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our only critical accounting policy to be that related to the valuation of loans.
Loans are held at estimated fair value as determined by management, in accordance with the valuation methods described in the valuation of loans section of footnote 2 of the Fund's Annual Report on Form 10-K for the year ended December 31, 2003 (Summary of Significant Accounting Policies). Critical factors in determining the fair value of a loan include payment history, collateral position, financial strength of the borrower, prospects for the borrower's raising future equity rounds, likelihood of sale or acquisition of the borrower, and length of expected holding period of the loan. The actual value of the loans may differ from management's estimates, which would affect net income as well as net assets.
Results of Operations -For the Three Months ended March 31, 2004 and 2003
Total investment income for the three months ending March 31, 2004 and 2003 was $4.9 million and $6.5 million, respectively, of which $4.9 million and $6.5 million, respectively, consisted of interest on venture loans outstanding during the period. The remaining income consisted of payment of late fees from customers, income from expiration of commitments for which the Fund had received a commitment fee, and interest on the temporary investment of cash. The cash is held pending investment in venture loans. The decrease in investment income is due primarily to the decline in outstanding performing loans, which averaged $170.6 million for the three months ended March 31, 2003 and $110.1 million for the three months ended March 31, 2004. This impact was partially offset by the increase in average interest yield on loans from 15.2% for the three months ended March 31, 2003 to 17.7% for the three months ended March 31, 2004. The increase in interest yield was due primarily to borrowers who paid a premi um in order to pay off their loans early.
Total expenses were $1.7 million and $2.7 million for the three months ending March 31, 2004 and 2003, respectively. Management fees were the largest expense. Management fees for the three months ended March 31, 2004 and 2003 were $0.8 million and $1.1 million respectively. Management fees were lower for the three months ended March 31, 2004 because the asset base declined from $182.5 million as of March 31, 2003 to $121.7 million as of March 31, 2004.
Interest expense was $0.4 million and $0.5 million for the three months ended March 31, 2004 and 2003, respectively. Included in these amounts are the settled portion of the Fund's interest hedge transactions of $0.2 million and $0.2 million for the three months ended March 31, 2004 and 2003, respectively. While average outstanding bank debt rose from $49.9 million for the three months ended March 31, 2003 to $53.3 million for the three months ended March 31, 2004, interest expense declined during the period because rates dropped from 4.3% to 3.3% during the same period. This was primarily due to interest rate declines in general.
Total other operating expenses for the three months ending March 31, 2004 and 2003 were $0.5 million and $1.1 million, respectively. Legal and banking related fees comprised a majority of the other operating expenses for the three months ended March 31, 2004 and 2003. The expense for the three months ended March 31, 2003 included a $0.3 million charge for unamortized bank facility fees due to the reduction in the debt facility. The majority of the remaining decrease in total other operating expenses was the result of the decrease in banking and legal fees.
Net investment income for the three months ending March 31, 2004 and 2003 was $3.2 million and $3.8 million, respectively.
The Fund incurred an unrealized gain (loss) from investments and hedging activity of $(2.5) million and $(3.1) million for the three months ended March 31, 2004 and 2003, respectively. The change in unrealized gain (loss) from investments and hedging activity was due primarily to an adjustment to fair value of loans from borrowers of $(2.6) million and $(3.0) million for the three months ended March 31, 2004 and 2003, respectively. Included in the unrealized gain (loss) for the three months ended March 31, 2004 and 2003 is a $0.1 million unrealized gain and a $(0.1) million unrealized loss, respectively resulting from interest rate hedging transactions.
The Fund incurred a realized loss from investment transactions of $(0.1) million and $(1.1) million for the three months ended March 31, 2004 and 2003, respectively. These realized losses were the result of writing off certain loans deemed to be uncollectible less small recoveries of previously written off loans.
Net income (loss) for the three months March 31, 2004 and 2003 was $0.6 million and $(0.5) million, respectively. On a per share basis, the net income (loss) was $5.96 and $(4.63) for the three months ended March 31, 2004 and 2003, respectively.
Liquidity and Capital Resources -- March 31, 2004 and December 31, 2003
Total capital contributed to the Fund was approximately $155.0 million at March 31, 2004. Committed capital to the Company at March 31, 2004 was $217.1 million, of which $162.8 million has been called and received. The remaining $54.3 million in committed capital is due to expire in May, 2004 as the four year an