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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 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

 

  1. ORGANIZATION AND OPERATIONS OF THE FUND
  2. 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.

     

  3. RESTATEMENT
  4. 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.

  5. SUMMARY OF INVESTMENTS
  6. 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.

     

  7. EARNINGS PER SHARE
  8. 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.

  9. RESTRUCTURE OF DEBT FACILITY AND CAPITAL REDUCTION
  10. 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.

  11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
  12. 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.

  13. FINANCIAL HIGHLIGHTS

Accounting principles generally accepted in the United States of America require disclosure of financial highlights of the Fund for the periods presented, the three months ended March 31, 2004 and 2003. The total rate of return is defined as the return based on the change in value during the period of a theoretical investment made at the beginning of the period. The total rate of return assumes a constant rate of return for the Fund during the period reported and weights each cash flow by the amount of time held in the Fund. This required methodology differs from an internal rate of return.

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.

Overview

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 anniversary will have passed, at which time no further capital can be called.

As of March 31, 2004 and December 31, 2003, the Fund had in place a $160.0 million debt facility to finance the acquisition of asset-based loans. As of March 31, 2004 and December 31, 2003, $44.0 million and $59.2 million was outstanding under this facility, respectively.

At March 31, 2004 and December 31, 2003 the Fund had interest rate swap transactions outstanding with a total notional principal amount of $44.2 million and $53.2 million. The effect of these swap transactions is to convert the floating rate bank debt into a fixed rate on the contract notional value. The amortization schedule for each borrowing under the facility is expected to correspond to the amortization of the loans supporting each borrowing.

As of March 31, 2004 and December 31, 2003, 9% and 9% of the Fund's assets consisted of cash and cash equivalents. The Fund continued to invest its assets in venture loans during the three months ended March 31, 2004. Amounts disbursed under the Fund's loan commitments increased by approximately $17.6 million during the three months ending March 31, 2004. Net loan amounts outstanding after amortization decreased by approximately $13.4 million for the same period. Unexpired, unfunded commitments increased by approximately $12.2 million for the three months ended March 31, 2004.

 

 

Amount Disbursed

Principal Reductions

Balance Outstanding

Unexpired Unfunded Commitments

March 31, 2004

$504.5 million

$395.0 million

$109.5 million

$67.7 million

December 31, 2003

$486.9 million

$364.0 million

$122.9 million

$55.5 million

 

Venture loans are privately negotiated transactions. Investments in these assets are relatively illiquid.

Item 3. Quantitative and Qualitative Disclosures 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 credit risk. The Fund considers the management of risk essential to conducting its business 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 credit 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 and the Fund distributes all equity securities upon receipt.

The Fund enters into interest rate swap 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 investment transactions.

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 $0.1 million. This translates to approximately 1% for the three months ended March 31, 2004. Although management believes that this measure is indicative of the Fund's sensitivity to interest rate changes, it makes estimates to 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 these estimates.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this quarterly report on Form 10-Q, the Fund's chief executive officer and chief financial officer conducted an evaluation of the Fund's disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based upon this evaluation, and due to the matters discussed in the following paragraph with respect to the Fund's internal controls, the Fund's chief executive officer and chief financial officer concluded that the Fund's disclosure controls and procedures were not effective in timely alerting them of any material information relating to the Fund that is required to be disclosed by the Fund in the reports it files or submits under the Securities Exchange Act of 1934.

In connection with the review undertaken concerning the restatements of the Fund's financial statements for the years ended December 31, 2001, 2002, and 2003, and the three months ended March 31, 2003 described in note 2 to the unaudited condensed financial statements, and in the "Restatements" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations, the Fund has re-assessed all its significant accounting policies and procedures and determined that the interest revenue recognition policy is the only policy or practice requiring a modification.

REPORTABLE CONDITION

In addition, as a part of the communications by our independent auditors, Deloitte & Touche LLP (D&T) to the audit committee with respect to D&T's interim audit procedures for the year ending December 31, 2004, D&T informed the audit committee that they had identified the following "reportable condition" which constituted a "material weakness" as each such term is defined under standards established by the American Institute of Certified Public Accountants in the Fund's internal control.

Changes in internal controls

The Fund intends to restate its annual financial statements for the fiscal years ended December 31, 2001, 2002, and 2003 and has restated in this Form 10-Q the financial statements for the three months ended March 31, 2003. Please see note 2 to the unaudited condensed financial statements and "Restatements" in the Management's Discussion and Analysis of Financial Condition and Results of Operations for further information.

In connection with this restatement, senior management performed a review of the circumstances that resulted in the need for restatements, and as a result, the Fund has re-evaluated its processes to ensure its accounting policies are consistent and appropriate under United States generally accepted accounting principles and will continue to evaluate and monitor the effectiveness of internal controls.

The Audit Committee and senior management are currently considering whether additional measures or modifications to the above measures are necessary in order to improve the Fund's internal control over financial reporting.

There were no other significant changes in the Fund's internal controls or in other factors that could significantly affect these controls during the period covered by this quarterly report on form 10-Q.

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

The Fund may become party to certain lawsuits from time to time in the normal course of business. While the outcome of these legal proceedings cannot at this time be predicted with certainty, the Fund does not expect these proceedings will have a material effect upon the Fund's financial condition or results of operation.

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

Not applicable

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

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.

VENTURE LENDING & LEASING III, INC.

(Registrant)

By: /S/ Ronald W. Swenson

By: /S/ Douglas D. Reed

Ronald W. Swenson

Douglas D. Reed

Chairman and Chief Executive Officer

Chief Financial Officer

Date: May 21, 2004

Date: May 21, 2004

 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Douglas D. Reed, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Venture Lending & Leasing III, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 21, 2004

/S/ Douglas D. Reed

Douglas D. Reed

Chief Financial Officer

 

 

 

 

 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ronald W. Swenson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Venture Lending & Leasing III, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 21, 2004

/S/ Ronald W. Swenson

Ronald W. Swenson

Chief Executive Officer

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Venture Lending & Leasing III, Inc. (the "Fund") on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald W. Swenson, Chief Executive Officer of the Fund, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Fund.

 

/S/ Ronald W. Swenson

Ronald W. Swenson
Chief Executive Officer
May 21, 2004

 

 

 

 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Venture Lending & Leasing III, Inc. (the "Fund") on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas D. Reed, Chief Financial Officer of the Fund, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Fund.

 

/S/ Douglas D. Reed


Douglas D. Reed

Chief Financial Officer
May 21, 2004