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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 ending September 30, 2000
[ ] 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 0-29591
Venture Lending & Leasing III, Inc.
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(Exact Name of Registrant as specified in its charter)
Maryland 77-0534084
----------------------------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer
or organization) Identification No.)
2010 North First Street, Suite 310, San Jose, CA 95131
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(Address of principal executive offices) (Zip Code)
(408) 436-8577
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (i) filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding as of November 7, 2000
---------------------------- ----------------------------------
Common Stock, $.01 par value 100,000
Page 1 of 10
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VENTURE LENDING & LEASING III, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position (Unaudited) 3
As of September 30, 2000
Statement of Operations (Unaudited) 4
For the Period Ended September 30, 2000
Statement of Changes in Shareholder's Equity (Unaudited) 5
For the Period Ended September 30, 2000 *
Statement of Cash Flows (Unaudited) 6
For the Period Ended September 30, 2000 *
Notes to Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial 11-12
Condition and Results of Operations
Item 3. Quantitative & Qualitative Disclosures About Market Risk 13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
SIGNATURES 15
</TABLE>
* for the period from commencement of operations, May 19, 2000 to September 30,
2000
2
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VENTURE LENDING & LEASING III, INC.
STATEMENT OF FINANCIAL POSITION (UNAUDITED)
<TABLE>
<CAPTION>
As of
September 30, 2000
-----------------------
<S> <C>
ASSETS
Loans and leases, at estimated fair value
(Cost of $27,271,199) $ 27,271,199
Cash and cash equivalents 14,018,672
Other assets 32,265
--------------
Total assets 41,322,136
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Bank loans 15,000,000
Accrued management fees 1,873,159
Accounts payable and other accrued liabilities 1,331,003
--------------
Total liabilities 18,204,162
--------------
Shareholder's equity:
Common stock: $0.01 par value, 200,000 shares authorized;
Issued and outstanding - 100,000 shares 1,000
Additional paid-in Capital 26,521,500
Distributions (895,235)
Accumulated deficit (2,509,291)
--------------
Total shareholder's equity 23,117,974
--------------
Total liabilities and shareholder's equity $ 41,322,136
==============
</TABLE>
The accompanying notes are an integral part of these statements
3
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VENTURE LENDING & LEASING III, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Period Ended
September 30, 2000 September 30, 2000*
------------------------ ------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest on loans and leases $ 187,039 $ 193,927
Interest on short-term investments 196,072 262,428
--------------- ---------------
Total investment income 383,111 456,355
--------------- ---------------
EXPENSES:
Management fees 1,873,159 2,590,979
Interest expense 3,387 3,388
Other operating expenses 90,848 371,279
--------------- ---------------
Total expenses 1,967,394 2,965,646
--------------- ---------------
Net investment loss (1,584,283) (2,509,291)
--------------- ---------------
Net loss $ (1,584,283) $ (2,509,291)
=============== ===============
Net loss Per Share $ (15.84) $ (25.09)
=============== ===============
Weighted average shares outstanding 100,000 100,000
</TABLE>
* From commencement of operations, May 19, 2000 to September 30, 2000
The accompanying notes are an integral part of these statements
4
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VENTURE LENDING & LEASING III, INC.
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
FOR THE PERIOD ENDED SEPTEMBER 30, 2000 *
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
------------------------------ EXCESS OF ACCUMULATED
SHARES PAR VALUE PAR VALUE DISTRIBUTIONS DEFICIT TOTAL
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, May 19, 2000 100,000 $ 1,000 $ 24,000 $ -- $ -- $ 25,000
Contribution of capital -- -- 26,497,500 -- -- 26,497,500
Distributions -- -- -- (895,235) -- (895,235)
Net loss -- -- -- -- (2,509,291) (2,509,291)
------------------------------------------------------------------------------------------------
BALANCE, September 30, 2000 100,000 $ 1,000 $ 26,521,500 $ (895,235) $ (2,509,291) $ 23,117,974
------------------------------------------------------------------------------------------------
</TABLE>
* From commencement of operations, May 19, 2000 to September 30, 2000
The accompanying notes are an integral part of these statements
5
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VENTURE LENDING & LEASING III, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Period Ended
September 30, 2000 *
----------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,509,291)
Adjustments to reconcile net income to net cash used in
operating activities:
Increase in other assets (32,265)
Increase in accounts payable and other accrued liabilities
and management fees 3,204,162
---------------
Net cash provided by operating activities 662,606
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of loans and leases (29,824,988)
Principal payments on loans and leases 2,553,789
Acquisition of warrants (895,235)
---------------
Net cash used in investing activities (28,166,434)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital 26,497,500
Proceeds from bank borrowings 15,000,000
---------------
Net cash provided by financing activities 41,497,500
---------------
Net increase in cash and cash equivalents 13,993,672
CASH AND CASH EQUIVALENTS:
Beginning of period 25,000
---------------
End of period $ 14,018,672
===============
CASH PAID DURING THE PERIOD FOR:
Interest $ -
NON-CASH FINANCING ACTIVITIES:
In-kind distributions to shareholder $ 895,235
</TABLE>
*From commencement of operations, May 19, 2000, to September 30, 2000
The accompanying notes are an integral part of these statements.
6
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VENTURE LENDING & LEASING III, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
1. ORGANIZATION AND OPERATIONS OF THE FUND
Venture Lending & Leasing III, Inc., (the "Fund"), was incorporated in Maryland
on February 1, 2000 as a nondiversified closed-end management investment company
electing status as a business development company ("BDC") under the Investment
Company Act of 1940. 100% of the stock of the Fund is held by Venture Lending &
Leasing III, LLC (the "Company"). Prior to commencing its operations on May 19,
2000, the Fund had no operations other than the sale to the Company of 100,000
shares of common stock, $0.01 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.
Westech Investment Advisors, Inc. (Westech Advisors) serves as the Fund's
investment manager. Westech Advisors (the "Investment Manager") was formed in
1993 by the principals of Western Technology Investment ("Western Technology").
Westech Advisors also serves as investment manager to Venture Lending & Leasing,
Inc. ("VLLI"), a BDC formed in 1994, and Venture Lending & Leasing II, Inc.
("VLLI II"), a BDC formed in 1997, each organized and administered by Westech
Advisors and Siguler Guff Advisers, Inc. (the "Advisor to the Investment
Manager), and engaged in the same business as the Fund. VLLI and VLLI II are
referred to collectively as the "Prior Funds." Western Technology, an
independent asset-based financing organization headquartered in San Jose,
California, was founded in 1980. Westech Advisors and Western Technology have
originated more than $750 million in asset-based financing for venture
capital-backed companies.
As compensation for their services to the Fund, the Investment Manager and the
Adviser to the Investment Manager, together, will receive an investment
management fee (the "Investment Management Fee") from the Fund, whether before
or after dissolution of the Fund. The Investment Management Fee will be computed
and paid quarterly for the first two years following commencement of operations,
at an annual rate of 2.5% of the amount of the Committed Equity Capital
(committed capital to the Company, regardless of when or if such committed
capital is called) as of the last day of each such fiscal quarter. Thereafter,
the Investment Management Fee will be computed and paid quarterly, at an annual
rate of 2.5% of the value of the total assets of the Fund (including amounts
derived from borrowed funds) as of the last day of each such fiscal quarter. For
purposes of calculating the management fee, any capital committed to the Company
at a closing subsequent to the first closing (regardless of when or if such
committed capital is called) shall be deemed to have been committed as of the
first closing. Committed capital to the Company at September 30, 2000 was $281.8
million.
The accompanying financial statements in Management's opinion, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of financial position and results of operations for interim
periods. Certain information and note disclosures normally included in audited
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted; however, the Fund believes that the
disclosures made are adequate to make the information presented not misleading.
The interim results for the period from commencement of
7
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operations, May 19, 2000, through September 30, 2000, are not necessarily
indicative of what the results would be for the full year.
2. BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
VALUATION OF LOANS AND LEASES AND INVESTMENTS
Loans and leases are carried at estimated fair value. Venture loans and leases
are privately negotiated transactions, and there is no established trading
market in which such loans or leases can be sold. Investments in loans and
leases are valued at their original purchase price less amortization of
principal unless amortized cost does not represent fair value.
Unearned income and commitment fees on loans and leases are recognized using the
effective interest method over the term of the loan or lease. Commitment fees
represent fees received for commitments upon which no drawdowns have yet been
made. When the first draw is made, the fee is included in unearned income and
recognized as described above.
The Fund's policy is to place a loan on nonaccrual status when either principal
or interest has become past due for 90 days or more. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is
reversed.
Warrants that are received in connection with loan and lease transactions
generally will be assigned a minimal value at the time of acquisition. The
carrying value of the first loan made under the related commitment is reduced by
the amount assigned to the warrants. This discount is accreted using the
effective interest method over the life of the loan. These warrants are
distributed to the Company on the same day they are received, as an in-kind
distribution, at the same valuation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, demand deposits in banks and
repurchase agreements with original maturities of 90 days or less.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income, less dividends on
preferred stock, by the weighted average common shares outstanding. Diluted
earnings per share are computed by dividing net income, less dividends on
preferred stock, by the weighted average common shares outstanding, including
the dilutive effects of potential common shares (e.g., stock options). The Fund
has no preferred stock or instruments that would be potential common shares;
thus, reported basic and diluted earnings are the same.
START-UP COSTS
All start-up costs have been charged to expense in accordance with AICPA
Statement of Position 98-5.
8
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3. LONG-TERM DEBT FACILITY:
As of September 30, 2000, the Fund had in place a revolving credit warehouse
facility to finance the acquisition of asset-based loans and leases. The Fund
was eligible to borrow up to $22.5 million. Outstanding balances bear interest
at either the financial institution's prime rate or 1.50 percent above LIBOR,
which at September 30, 2000 was 6.63 percent. The fund pays a commitment fee of
.50 percent annually on the total average amount of unused commitment with
respect to this facility.
Borrowings under the facility are collateralized by the assets financed by the
Fund under loans and leases with assignment to the financial institution plus
other assets of the Fund.
As of September 30, 2000, the fund had $15.0 million outstanding under this
facility.
4. SUMMARY OF INVESTMENTS:
Loans and leases generally are made to borrowers pursuant to commitments whereby
the Fund commits to finance assets up to a specified amount for the term of the
commitments, upon the terms and subject to the conditions specified by such
commitment. The Fund's investments in loans and leases are entirely within the
United States and are diversified among 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 and leases).
<TABLE>
<S> <C>
COMMUNICATION SERVICE PROVIDERS
Everest Broadband Networks $2,480,677
UM Communications 5,558,755
----------
SUBTOTAL: 34.8% $8,039,432
COMPUTERS & PERIPHERALS
BeeLine Networks $296,186
----------
SUBTOTAL: 1.3% $296,186
INTERNET
Coremetrics $2,444,426
ECtone 792,254
Postini 1,019,919
QuinStreet 6,487,932
Viquity 490,263
----------
SUBTOTAL: 48.6% $11,234,794
OTHER
AtomicTangerine $1,916,656
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SUBTOTAL: 8.3% $1,916,656
9
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PHOTONICS
Tsunami Optics $1,235,164
----------
SUBTOTAL: 5.3% $1,235,164
SEMICONDUCTORS
Ishoni Networks $2,305,080
----------
SUBTOTAL: 10.0% $2,305,080
SOFTWARE
Believe $439,041
North Systems 1,804,846
SUBTOTAL: 9.7% $2,243,887
TOTAL: 118.0% $27,271,199
</TABLE>
The Fund provides asset-based financing primarily to start-up and emerging
growth venture-capital-backed companies. As a result, the Fund is subject to
general credit risk associated with such companies. At September 30, 2000, the
Fund has unfunded commitments to borrowers of $220.3 million.
10
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Venture Lending & Leasing III, Inc. ("Fund") is a closed-end,
non-diversified management investment company electing status as a business
development company under the Investment Company Act of 1940 ("1940 Act"). The
Fund's investment objective is to achieve a high total return. The Fund will
provide asset-based financing to carefully selected venture capital-backed
companies, in the form of secured loans, installment sales contracts or
equipment leases. The Fund generally will receive warrants to acquire equity
securities in connection with its portfolio investments. The Fund generally
distributes these warrants to its shareholder upon receipt.
The Fund's shares of Common Stock, $.01 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 contains certain forward-looking statements. The reader of this
Quarterly Report should understand that all such forward-looking statements are
subject to various uncertainties and risks that could affect their outcome. The
Fund's actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments and competition effects as
well as other factors. This entire Quarterly Report should be read to put such
forward-looking statements in context and to gain a more complete understanding
of the uncertainties and risks involved in the Fund's business.
RESULTS OF OPERATIONS -FOR THE 3 MONTHS ENDED SEPTEMBER 30, 2000 AND FOR THE
PERIOD FROM COMMENCEMENT OF OPERATIONS, MAY 19, 2000, TO SEPTEMBER 30, 2000
Total investment income for the 3 months ending September 30, 2000 was $383
thousand, of which $187 thousand consisted of interest on venture loans
outstanding during the period. The remaining income consisted of interest on the
temporary investment of cash. The cash is held pending investment in venture
loans and leases. For the period from commencement of operations, May 19, 2000
to September 30, 2000, investment income was $456 thousand, of which $194
thousand consisted of interest on venture loans outstanding during the period.
Revenues are expected to increase as additional investments are made during
future periods.
Total expenses were $2.0 million for the 3 months ending September 30, 2000
and were $3.0 million for the period from commencement of operations, May 19,
2000 to September 30, 2000 . Management fees were the largest expense and are
based on committed capital to the Company for the first two years of the Fund's
life, thereafter they will be charged based upon the Fund's total assets.
Total other operating expenses for the 3 months ending September 30,
2000 were $0.1 million. For the period from commencement of operations, May
19, 2000 to September 30, 2000, other operating expenses were $0.4 million.
Other operating expenses were lower in the 3 months ending September 30,
2000, because start-up costs
11
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were included in the prior period. For the period from commencement of
operations, May 19, 2000 to September 30, 2000, approximately $0.3 million of
other operating expenses relate to start-up costs that were charged to expense
in accordance with AICPA Statement of Position 98-5.
The Fund incurred no realized or unrealized gains or losses during the period.
Net loss for the 3 months ended September 30, 2000 was $1.6 million and loss for
the period from commencement of operations, May 19, 2000 to September 30, 2000
was $2.5 million. On a per share basis, the net loss was $15.84 for the 3 months
ended September 30, 2000 and $25.09 for the period from commencement of
operations, May 19, 2000 to September 30, 2000.
12
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LIQUIDITY AND CAPITAL RESOURCES -- SEPETEMBER 30, 2000
Total capital contributed to the Fund was approximately $26.5 million at
September 30, 2000. Committed capital to the Company at September 30, 2000 was
$281.8 million.
The Fund has secured a $50 million revolving debt facility to finance the
acquisition of asset-based loans and leases. As of September 30, 2000, lenders
had committed $22.5 million toward this line, while the remaining amount of this
facility is expected to be committed shortly. At September 30, 2000 the Fund has
a loan balance on this facility of $15.0 million.
As of September 30, 2000, 34% of the Fund's assets consisted of cash and
cash equivalents. The Fund continued to invest its assets in venture loans and
leases during the period. Amounts disbursed under the Fund's loan commitments
were approximately $29.8 million during the period ended Sepetember 30, 2000.
Net loan amounts outstanding after amortization were approximately $27.3
million. Unfunded commitments were approximately $220.3 million.
<TABLE>
<CAPTION>
============================== ==================== ===================== =================== ======================
Amount Principal Balance Unfunded
Disbursed Reductions Outstanding Commitments
------------------------------ -------------------- --------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
September 30, 2000 $29.8 million $2.5 million $27.3 million $219.8 million
============================== ==================== ===================== =================== ======================
</TABLE>
Because venture loans and leases 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 valuation risk. The
Fund considers the management of risk essential to conducting its businesses and
to maintaining profitability. Accordingly, the Fund's risk management procedures
are designed to identify and analyze the Fund's risks, to set appropriate
policies and limits and to continually monitor these risks and limits by means
of reliable administrative and information systems and other policies and
programs.
The Fund manages its market risk by maintaining a portfolio that is diverse by
industry, size of investment, stage of development, and borrower. The Fund has
limited exposure to public market price fluctuations as the Fund primarily
invests in private business enterprises and the Fund distributes all equity upon
receipt.
The Fund's sensitivity to changes in interest rates is regularly monitored and
analyzed by measuring the characteristics of assets and liabilities. The Fund
utilizes various methods to assess interest rate risk in terms of the potential
effect on interest income net of interest expense, the value of net assets and
the value at risk in an effort to ensure that the Fund is insulated from any
significant adverse effects from changes in interest rates. Based on the model
used for the sensitivity of interest income net of interest expense, if the
balance sheet were to remain constant and no actions were taken to alter the
existing interest rate sensitivity, a hypothetical immediate 100 basis point
change in interest rates would have affected net income by less than 1% for the
period in which debt existed. Although management
13
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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.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Fund will 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
27. Financial Data Schedule
14
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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/ Brian R. Best
-------------------------------- -------------------------
Ronald W. Swenson Brian R. Best
Chairman and Chief Executive Officer Chief Financial Officer
Date: November 14, 2000 Date: November 14, 2000
15
