<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 0-15766
TECHNOLOGY FUNDING SECURED INVESTORS I
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2944800
------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 Alameda de las Pulgas, Suite 250
San Mateo, California 94403
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(650) 345-2200
--------------------------------------------------
(Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has 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 (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
No active market for the units of limited partnership interests ("Units")
exists, and therefore the market value of such Units cannot be
determined.
<PAGE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $725,224
in 1998 and 1997) $285,224 285,224
Equity investments (cost basis
of $177,907 and $261,196 in
1998 and 1997, respectively) 0 286,237
------- -------
Total investments 285,224 571,461
Cash and cash equivalents 7,534 68,068
Other assets 342 13,991
------- -------
Total assets $293,100 653,520
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 28,000 28,302
Due to related parties 214,886 111,334
Other liabilities 809 1,051
------- ---------
Total liabilities 243,695 140,687
Commitments and contingencies
(Note 3)
Partners' capital:
Limited Partners
(Units outstanding of 106,982 and
106,990 in 1998 and 1997, respectively) 718,532 976,408
General Partners (51,220) (48,616)
Net unrealized fair value (decrease)
increase from cost:
Secured notes receivable (440,000) (440,000)
Equity investments (177,907) 25,041
------- ---------
Total partners' capital 49,405 512,833
------- ---------
Total liabilities and
partners' capital $293,100 653,520
======= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
----------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Short-term investment interest $ 2 91 286 4,706
------- ------- ------- -------
Total income 2 91 286 4,706
Costs and expenses:
Management fees 1,750 3,873 6,400 12,789
Other investment expenses -- -- -- 76,905
Operating expenses:
Lending operations and investment
management 12,816 9,892 31,821 26,446
Administrative and investor services 132,633 64,250 236,547 142,534
Computer services 25,129 19,763 11,775 38,297
Professional fees 7,051 16,351 29,245 33,031
------- ------- ------- -------
Total operating expenses 177,629 110,256 309,388 240,308
------- ------- ------- -------
Total costs and expenses 179,379 114,129 315,788 330,002
------- ------- ------- -------
Net operating loss (179,377) (114,038) (315,502) (325,296)
Net realized gain from sales
of equity investments -- 24,663 55,079 44,466
------- ------- ------- -------
Net realized loss (179,377) (89,375) (260,423) (280,830)
Change in net unrealized
fair value of equity investments (121,206) 66,477 (202,948) 41,754
------- ------- ------- -------
Net loss $(300,583) (22,898) (463,371) (239,076)
======= ======= ======= =======
Net realized loss per Unit $ (2) (1) (2) (3)
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 286 4,706
Cash paid to vendors (38,034) (154,853)
Cash paid to related parties (161,097) (180,725)
------- -------
Net cash used by operating
activities (198,845) (330,872)
------- -------
Cash flows from investing activities:
Secured notes receivable issued -- (4,500)
Proceeds from sales of equity investments 138,368 47,409
------- -------
Net cash provided by investing
activities 138,368 42,909
------- -------
Cash flows from financing activities:
Repurchase of limited partnership
interests (57) --
------- -------
Net cash used by financing activities (57) --
------- -------
Net decrease in cash and cash
equivalents (60,534) (287,963)
Cash and cash equivalents at beginning
of year 68,068 291,452
------- -------
Cash and cash equivalents
at September 30 $ 7,534 3,489
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Reconciliation of net loss
to net cash used by
operating activities:
Net loss $(463,371) (239,076)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Net realized gain from
sales of equity investments (55,079) (44,466)
Change in net unrealized fair
value of equity investments 202,948 (41,754)
Changes in:
Due to related parties 103,552 (7,237)
Other changes, net 13,105 1,661
------- -------
Net cash used by operating activities $(198,845) (330,872)
======= =======
Non-cash financing activities:
Limited Partners unit repurchases $ -- 24,584
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. General
-------
In the opinion of the Managing General Partner, the accompanying interim
financial statements reflect all adjustments necessary for a fair
presentation of the financial position, results of operations, and cash
flows for the interim periods presented. These statements should be read
in conjunction with the Annual Report on Form 10-K for the year ended
December 31, 1997. Allocation of income and loss to Limited and General
Partners is based on cumulative income and loss. Adjustments, if any, are
reflected in the current quarter balances.
2. Financing of Partnership Operations
-----------------------------------
The Managing General Partner expects that the Partnership will be primarily
dependent upon the financial support of the Managing General Partner to
fund operations. The Managing General Partner has committed to this
support in the form of short-term cash advances.
3. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party costs for the nine months ended
September 30, 1998 and 1997, were as follows:
<TABLE>
1998 1997
------ ------
<S> <C> <C>
Management fees $ 6,400 12,789
Reimbursable operating expenses 258,249 160,699
</TABLE>
Certain reimbursable expenses have been allocated and accrued based upon
interim estimates prepared by the Managing General Partner and are adjusted
to actual costs periodically. At September 30, 1998 and December 31, 1997,
due to related parties for such expenses were $198,079 and $100,928,
respectively.
The Managing General Partner allocates operating expenses incurred in
connection with the business of the Partnership based on employee hours
incurred. In the third quarter of 1998, the Managing General Partner
reevaluated allocations to the Partnership and determined that they had not
fully recovered allocable overhead, primarily salary and benefits, as
permitted by the Partnership Agreement. As a result, the Partnership was
charged additional operating expenses in the third quarter of 1998 of
$84,727, consisting of $9,238 for the nine months ended September 30, 1997
and $75,489 for prior years. Had the additional expenses been recorded in
prior years, total operating expenses for the three months ended September
30, 1998 and 1997 would have been $92,902 and $119,494, respectively, and
total operating expenses for the nine months ended September 30, 1998 and
1997 would have been $224,661 and $249,546, respectively.
At September 30, 1998 and December 31, 1997, management fees payable were
$12,467 and $6,066, respectively, and due to affiliated partnerships for
reparticipated secured notes receivable was $4,340, for both September 30,
1998 and December 31, 1997.
4. Net Realized Loss Per Unit
--------------------------
Net realized loss per Unit is calculated by dividing total net realized
loss allocated to the Limited Partners by the weighted average number of
Limited Partner Units outstanding for the nine months ended September 30,
1998 and 1997, of 106,987 and 109,514, respectively.
5. Secured Notes Receivable, Net
-----------------------------
There were no secured notes receivable activities from January 1 through
September 30, 1998.
The Partnership's secured notes receivable portfolio at September 30, 1998
and December 31, 1997 was on nonaccrual status due to the uncertainty of
the borrowers' financial conditions. The Managing General Partner
continues to monitor the progress of these companies and intends to manage
these investments to maximize the Partnership's net realizable value. The
fair value at September 30, 1998, reflects the Managing General Partner's
estimate of collectibility of these notes. All notes are secured by
specific assets of the borrowing companies.
6. Equity Investments
------------------
<TABLE>
A complete listing of the Partnership's equity investments at December 31, 1997 is
included in the 1997 Annual Report. Activity from January 1 through September 30, 1998
consisted of:
January 1 through
September 30, 1998
----------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- -------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $261,196 286,237
Medical
- -------
Hemocleanse, Inc. 01/92 47,526 Common
shares -- (121,206)
Microelectronics
- ----------------
Celeritek, Inc. 05/94- 11,847 Common
12/97 shares (83,289) (165,031)
------- -------
Total equity investments at September 30, 1998 $177,907 0
======= =======
</TABLE
Marketable Equity Securities
- ----------------------------
At December 31, 1997, marketable equity securities had aggregate costs of
$83,287, and aggregate market values of $165,029. The unrealized gains at
December 31, 1997 did not include any gross losses.
Celeritek,Inc.
- --------------
In March 1998, the Partnership sold 1,847 common shares for total proceeds
of $21,472 and realized a loss of $6,695.
In April 1998, the Partnership sold its remaining investment in the company
for total proceeds of $116,896 and realized a gain of $61,774.
Hemocleanse, Inc.
- -----------------
In September 1998, the Partnership wrote off the fair value of its
investment based on the opinion of the Managing General Partner that the
current operating status of the company indicated a decline in value.
7. Other Investment Expenses
-------------------------
Other investment expenses, primarily legal fees, of $76,905 in 1997,
reflect the participated cost of litigation which was settled in the same
year. There were no such expenses in 1998.
8. Cash and Cash Equivalents
-------------------------
At September 30, 1998, and December 31, 1997, cash and cash equivalents
consisted of:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Demand accounts $7,124 9,195
Money market accounts 410 58,873
------ ------
Total $7,534 68,068
====== ======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1998, net cash used by operating
activities totaled $198,845. The Partnership reimbursed related parties
for management fees and operating expenses of $161,097. Other operating
expenses of $38,034 were paid and interest income of $286 was received.
Cash and cash equivalents at September 30, 1998, were $7,534. Future
distributions will be dependent upon loan repayments from borrowing
companies, future proceeds from equity investment sales, and available
cash. The Partnership will be primarily dependent upon the financial
support of the Managing General Partner to fund operations.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
- -----------------------------------------------------------------------
Net losses were $300,583 and $22,898 for the three months ended September
30, 1998 and 1997, respectively. The increase in net loss in the current
period was primarily due to a $187,683 decrease in the change in net
unrealized fair value of equity investments as a result of the write down
of the Hemocleanse, Inc. common shares, a $67,373 increase in total
operating expenses, and a $24,663 decrease in net realized gain resulting
from sales of equity investments.
Total operating expenses were $177,629 and $110,256 for the three months
ended September 30, 1998 and 1997, respectively. As disclosed in Note 3 to
the financial statements, operating expenses for the three months ended
September 30, 1998 include additional expenses of $84,727 related to prior
years which were not previously charged to the Partnership. Had the
additional expenses been recorded in prior years, operating expenses for
the quarters ended September 30, 1998 and 1997 would have been $92,902 and
$119,494, respectively. The decrease is attributable to the decreased
level of investment activity in the Partnership's portfolio.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
Current nine months compared to corresponding nine months in the preceding
- --------------------------------------------------------------------------
year
- ----
Net losses for the nine months ended September 30, 1998 and 1997, were
$463,371 and $239,076, respectively. The increase in net loss was
primarily attributable to a $244,702 decrease in the change in net
unrealized fair value of equity investments and a $69,080 increase in
operating expenses, partially offset by a $76,905 decrease in other
investment expenses.
During the nine months ended September 30, 1998, the decrease in fair value
of equity investments was $202,948 resulting from the writedown of the
Hemocleanse, Inc. common shares and the sale of Celeritek, Inc. common
shares. During the same period in 1997, the $41,754 increase was primarily
due to increases in the microelectronics industry, partially offset by
decreases in the medical and telecommunications industries.
Total operating expenses were $309,388 and $240,308 for the nine months
ended September 30, 1998 and 1997, respectively. As disclosed in Note 3 to
the financial statements, operating expenses for the nine months ended
September 30, 1998 include additional expenses of $84,727 related to prior
years which were not previously charged to the Partnership. Had the
additional expenses been recorded in prior years, operating expenses for
the nine months ended September 30, 1998 and 1997 would have been $224,661
and $249,546, respectively. The decrease is attributable to the decreased
level of investment activity in the Partnership's portfolio.
Other investment expenses, primarily legal fees, for the nine months ended
September 30, 1997 were $76,905. There were no such expenses in 1998. The
decrease was due to the settlement of the related litigation in 1997.
The Year 2000
- -------------
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
computer systems to malfunction in the year 2000 and lead to significant
business delays and disruptions.
The Managing General Partner has completed a preliminary assessment of the
internal financial, information and operating systems which it provides to
the Partnership. Implementation and testing of necessary system
modifications is in progress and will be completed well before December 31,
1999. The Managing General Partner is also monitoring the progress of
software vendors and third-party processors on which it relies, as well as
the progress of portfolio companies in which it has made significant
investments.
The Managing General Partner does not expect the cost of the internal
system modifications to be material to the Partnership's financial
statements.
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) No reports on Form 8-K were filed by the Partnership during the
quarter ended September 30, 1998.
b) Financial Data Schedule for the nine months ended and as of September
30, 1998 (Exhibit 27).
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING SECURED INVESTORS I
By: TECHNOLOGY FUNDING INC.
Managing General Partner
Date: November 12, 1998 By: /s/Michael R. Brenner
-----------------------------------
Michael R. Brenner
Controller
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<PERIOD-TYPE> 9-MOS
<INVESTMENTS-AT-COST> 903,131
<INVESTMENTS-AT-VALUE> 285,224
<RECEIVABLES> 0
<ASSETS-OTHER> 342
<OTHER-ITEMS-ASSETS> 7,534
<TOTAL-ASSETS> 293,100
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 243,695
<TOTAL-LIABILITIES> 243,695
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 667,312
<SHARES-COMMON-STOCK> 106,982
<SHARES-COMMON-PRIOR> 106,990
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (617,907)
<NET-ASSETS> 49,405
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 286
<OTHER-INCOME> 0
<EXPENSES-NET> 315,788
<NET-INVESTMENT-INCOME> (315,502)
<REALIZED-GAINS-CURRENT> 55,079
<APPREC-INCREASE-CURRENT> (202,948)
<NET-CHANGE-FROM-OPS> (463,371)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 8
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (463,428)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,400
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 316,488
<AVERAGE-NET-ASSETS> 281,119
<PER-SHARE-NAV-BEGIN> 9
<PER-SHARE-NII> (2)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7
<EXPENSE-RATIO> 112.3
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
A zero value is used since the change in net unrealized fair value is not
allocated to General Partners and Limited Partners as it is not taxable.
Only taxable gains or losses are allocated in accordance with the
Partnership Agreement.
</FN>
</TABLE>
