<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 period ended March 31, 1995
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. 0-19221
TECHNOLOGY FUNDING SECURED INVESTORS III,
AN INCOME AND GROWTH PARTNERSHIP, L.P.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3081010
- ------------------------------ ---------------------------------
(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)
(415) 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 of 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 resale 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)
March 31, December 31,
1995 1994
-------- -----------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $13,082,928 and
$12,385,060 in 1995 and 1994,
respectively) $ 8,014,928 8,569,060
Equity investments (cost basis
of $4,135,606 and $4,070,004 in
1995 and 1994, respectively) 1,570,092 1,492,524
---------- ----------
Total investments 9,585,020 10,061,584
Cash and cash equivalents 1,411,254 1,921,850
Due from affiliated partnerships 884 --
Due from related parties 38,572 --
Other assets 29,892 75,113
---------- ----------
Total $11,065,622 12,058,547
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 55,822 100,005
Due to affiliated partnerships -- 1,054
Due to related parties -- 7,376
Other liabilities 32,225 32,527
---------- ---------
Total liabilities 88,047 140,962
Commitments and subsequent
event (Notes 2, 3 and 6)
Partners' capital:
Limited Partners
(Units outstanding of 399,997
for both 1995 and 1994) 18,619,206 18,419,721
General Partners (8,117) (108,656)
Net unrealized fair value decrease
from cost:
Secured notes receivable (5,068,000) (3,816,000)
Equity investments (2,565,514) (2,577,480)
---------- ----------
Total partners' capital 10,977,575 11,917,585
---------- ----------
Total $11,065,622 12,058,547
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1995 1994
---- ----
<S> <C> <C>
Income:
Secured notes receivable interest $ 332,265 215,030
Short-term investments interest 28,970 28,309
--------- -------
Total income 361,235 243,339
Costs and expenses:
Management fees 53,150 76,612
Amortization of organizational costs -- 2,250
Other investment expenses -- 18,761
Operating expenses:
Lending operations and investment
management 35,216 172,821
Administrative and investor
services 48,059 86,226
Computer services 16,375 22,045
Professional fees 9,203 27,342
Expenses absorbed by General Partners (90,048) (197,742)
--------- -------
Total operating expenses 18,805 110,692
--------- -------
Total costs and expenses 71,955 208,315
--------- -------
Net operating income 289,280 35,024
Net realized gain from sale of
equity investments 10,744 426,553
--------- -------
Net realized income 300,024 461,577
Change in net unrealized
fair value:
Secured notes receivable (1,252,000) 892,000
Equity investments 11,966 (845,918)
--------- -------
Net (loss) income $ (940,010) 507,659
========= =======
Net realized income per Unit $ 1 1
========= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 207,306 116,075
Cash paid to vendors (21,704) (193,029)
Cash paid to related parties (95,463) (70,087)
Cash paid to affiliated partnerships (1,938) (200,945)
--------- ---------
Net cash provided (used) by
operating activities 88,201 (347,986)
--------- --------
Cash flows from investing activities:
Secured notes receivable issued (675,000) (1,095,874)
Repayments of secured notes receivable 76,203 1,164,041
Proceeds from sale of equity
investments -- 430,053
Purchase of equity investments -- (400)
--------- ---------
Net cash (used) provided by
investing activities (598,797) 497,820
--------- ---------
Cash flows from financing activities:
Distributions to General and Limited
Partners -- (304,512)
--------- ---------
Net cash used by financing activities -- (304,512)
--------- ---------
Net decrease in cash and
cash equivalents (510,596) (154,678)
Cash and cash equivalents at beginning
of year 1,921,850 3,069,767
--------- ---------
Cash and cash equivalents at March 31 $1,411,254 2,915,089
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-------------------------------------
1995 1994
---- ----
<S> <C> <C>
Reconciliation of net (loss) income
to net cash provided (used)
by operating activities:
Net (loss) income $ (940,010) 507,659
Adjustments to reconcile net (loss)
income to net cash provided (used)
by operating activities:
Net realized gain from sale of
equity investments (10,744) (426,553)
Change in net unrealized fair value:
Secured notes receivable 1,252,000 (892,000)
Equity investments (11,966) 845,918
Other, net (859) (2,616)
Changes in:
Accrued interest on secured and
convertible notes receivable (153,070) (124,648)
Due to/from related parties (45,948) 3,795
Accounts payable and accrued expenses (44,183) 20,818
Due to/from affiliated partnerships (1,938) (200,945)
Other assets 45,221 (82,675)
Other, net (302) 3,261
--------- ---------
Net cash provided (used)
by operating activities $ 88,201 (347,986)
========= =========
Non-cash investing activities:
Conversion of secured notes
receivable and interest to
equity investments $ -- 2,082,107
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. General
-------
In the opinion of the Managing General Partner, the Balance Sheets as of
March 31, 1995 and December 31, 1994, and the related Statements of
Operations and Statements of Cash Flows for the three months ended March
31, 1995 and 1994, reflect all adjustments which are necessary for a
fair presentation of the financial position, results of operations and
cash flows for such periods. These statements should be read in
conjunction with the Annual Report on Form 10-K for the year ended
December 31, 1994. The following notes to financial statements for
activity through March 31, 1995 supplement those included in the Annual
Report on Form 10-K. Certain 1994 balances have been reclassified to
conform with the 1995 financial statement presentation.
2. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party costs for the three months
ended March 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Management fees $ 53,150 76,612
Amortization of organizational costs -- 2,250
Reimbursable operating expenses 86,413 195,012
Expenses absorbed by General Partners (90,048) (197,742)
</TABLE>
Currently, management fees are accrued and are only paid to the extent
that the aggregate amount of all proceeds (including those from warrants
exercised without cash) received by the Partnership from the sale or
other disposition of borrowing company equity securities plus the
aggregate fair market value of any equity interest distributed to the
partners exceeds the total management fees payable. All management fees
had been paid at March 31, 1995 and December 31, 1994.
As set forth in the Partnership Agreement, the Partnership may not pay
or reimburse the General Partners for annual expenses that aggregate
more than 2% of total Limited Partner capital contributions in any of
the first five years of Partnership operations, and 1% thereafter. For
purposes of this limitation, the Partnership's operating year begins
May 1st. Beginning May 1, 1994, the limitation was calculated using 1%.
This limitation was in effect and expenses absorbed by the General
Partners totaled $90,048 for the quarter ended March 31, 1995.
Certain reimbursable expenses have been accrued and allocated based upon
interim estimates prepared by the Managing General Partner and are
adjusted to actual cost periodically. At March 31, 1995, $38,572
related to reimbursable expenses was due from related parties, compared
to $7,376 due to related parties at December 31, 1994.
Within the normal course of business, the Partnership participates with
affiliated partnerships in secured notes receivable granted to
nonaffiliated borrowing companies. The Partnership may also
reparticipate such secured notes receivable amongst affiliated
partnerships to meet business needs. At March 31, 1995, due from
affiliated partnerships on such participations were $884 compared to
$1,054 due to related parties at December 31, 1994. The amounts were
paid to and received from such affiliated partnerships in the respective
following quarters.
3. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December
31, 1994 are included in the 1994 Annual Report. Activity from January
1 through March 31, 1995 consisted of
<TABLE>
<CAPTION>
January 1 -
March 31, 1995
------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- ----- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $4,070,004 1,492,524
--------- ---------
Significant changes:
WARRANTS:
- --------
Computers and Computer Equipment
- --------------------------------
Pinnacle Systems, Inc. 05/90 2,083 Common
shares at $8.00;
exercised 02/95 (2,500) (14,164)
STOCKS:
- ------
Computers and Computer Equipment
- --------------------------------
Pinnacle Systems, Inc. 02/95 1,971 Common
shares 13,244 31,713
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 01/95 15,687 Series D
Preferred shares 43,767 43,767
Cyclean of Los Angeles, 03/95 Class A LLC Unit -
LLC 44% ownership 11,091 11,091
--------- ---------
Total significant changes 65,602 72,407
Other changes, net 0 5,161
--------- ---------
Total equity investments at March 31, 1995 $4,135,606 1,570,092
========= =========
</TABLE>
Marketable Equity Securities
- ----------------------------
At March 31, 1995 and December 31, 1994, marketable equity securities
had aggregate costs of $236,587 and $225,843, respectively, and
aggregate market values of $239,390 and $216,680, respectively. The net
unrealized gain/loss at March 31, 1995 and December 31, 1994 included
gross gains of $127,109 and $104,617, respectively.
Cyclean, Inc./Cyclean of Los Angeles, LLC
- -----------------------------------------
In January 1995, the Partnership obtained the right to receive 51,051
Series D Preferred shares with a twelve month vesting schedule in
exchange for a one year maturity date extension of secured notes
receivable. At March 31, 1995, 15,687 shares were fully vested with a
recorded cost basis and fair value of $43,767.
In March 1995, Cyclean, Inc. ("Cyclean") formed Cyclean of Los Angeles,
LLC ("Cyclean LLC") and contributed certain assets and contracts to the
new entity. Cyclean LLC is completing a new round of financing through
the offering of Class A LLC Units. As a result of this transaction, one
of the Partnership's secured notes receivable was transferred from
Cyclean to Cyclean LLC with modified terms; Cyclean has guaranteed note
repayments. The Partnership received a participated percentage of one
Class A LLC Unit in exchange for certain interest payments and late
charges totaling $11,091. The Partnership is also entitled to royalty
payments and additional Series D Preferred shares based on the total
proceeds raised from the Cyclean LLC offering, which is expected to be
completed by mid-1995.
Pinnacle Systems, Inc.
- ----------------------
In February 1995, the Partnership exercised its warrant without cash and
received 1,971 common shares. The recorded cost basis of $13,244
included a realized gain of $10,744 and the warrant cost basis of
$2,500. The Partnership recorded an increase in the change in fair
value of $6,805 to reflect this transaction and the market value at
March 31, 1995.
Other Equity Investments
- ------------------------
In March 1995, 3Com Corporation ("3Com"), a public company, announced
its intention to acquire Primary Access Corporation ("Primary Access"),
a Partnership portfolio company. The acquisition is subject to various
conditions customary for transactions of this nature and is expected to
be completed mid-1995. Upon consummation of the acquisition, the
Partnership will receive 3Com common shares in exchange for its Primary
Access warrant holdings, which will indicate future liquidity in excess
of the current fair value of $6,000 for this investment.
4. Secured Notes Receivable, Net
-----------------------------
Activity from January 1 through March 31, 1995 consisted of:
<TABLE>
<S> <C>
Balance at January 1, 1995 $ 8,569,060
1995 activity:
Secured notes receivable issued 675,000
Repayments of secured notes receivable (76,203)
Change in accrued interest 93,687
Increase in allowance for loan losses (1,252,000)
Other, net 5,384
---------
Total secured notes receivable,
net at March 31, 1995 $ 8,014,928
==========
</TABLE>
The Partnership had accrued interest of $608,319 and $514,632 at March
31, 1995 and December 31, 1994, respectively.
Activity in the allowance for loan losses was as follows:
<TABLE>
<S> <C>
Balance at January 1, 1995 $ 3,816,000
Change in net unrealized fair value of secured
notes receivable 1,252,000
---------
Balance at March 31, 1995 $ 5,068,000
=========
</TABLE>
The allowance for loan losses is adjusted quarterly based upon changes
to the portfolio size and risk profile. Although the allowance is
established by evaluating individual debtor repayment ability, the
allowance represents the Managing General Partner's assessment of the
portfolio as a whole.
Notes aggregating $7,539,891 and $6,867,764 were on nonaccrual status at
March 31, 1995 and December 31, 1994, respectively, due to uncertainties
in the financial condition of certain portfolio companies. The Managing
General Partner continues to monitor the progress of companies with
nonaccrual notes. The fair value at March 31, 1995 recognizes the
Managing General Partner's estimate of collectibility of these notes.
All notes are secured by specific assets of the borrowing companies.
Interest rates on notes issued during the three months ended March 31,
1995 ranged from 12% to 13%.
5. Cash and Cash Equivalents
-------------------------
At March 31, 1995 and December 31, 1994, cash and cash equivalents
consisted of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Demand and brokerage accounts $ 6,503 7,802
Money-market accounts 1,404,751 1,914,048
--------- ---------
Total $1,411,254 1,921,850
========= =========
</TABLE>
6. Commitments
-----------
The Partnership is a party to financial instruments with off-balance-
sheet risk in the normal course of its business. Generally, these
instruments are equipment financing commitments or accounts receivable
lines of credit that are outstanding but not currently fully utilized by
a borrowing company. As they do not represent current outstanding
balances, these unfunded commitments are properly not recognized in the
financial statements. At March 31, 1995, the Partnership had unfunded
commitments of $349,471 mostly related to accounts receivable lines of
credit.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
During the three months ended March 31, 1995, net cash provided by
operations totaled $88,201. The Partnership paid management fees of
$53,150 to the Managing General Partner, reimbursed related parties for
operating expenses of $42,313 and paid $1,938 to affiliated partnerships
for net loan participations. In addition, other operating expenses of
$21,704 were paid. The Partnership received $207,306 in interest
income.
During the quarter ended March 31, 1995, the partnership issued $675,000
in secured notes receivable primarily to a portfolio company in the
computers and computer industry. Repayments of notes receivable
provided cash of $76,203. As of March 31, 1995, the Partnership was
committed to fund up to $349,471 to existing borrowing companies mostly
related to accounts receivable lines of credit.
All management fees which are due have been paid through March 31, 1995.
Management fees are paid to the extent that the aggregate amount of all
proceeds (including those from warrants exercised without cash) received
by the Partnership from the sale or other disposition of borrowing
company equities, plus the aggregate fair market value of any equity
securities distributed to the partners, exceeds the total management fee
payable as defined in the Partnership Agreement.
Cash and cash equivalents at March 31, 1995 were $1,411,254. Future
distributions will be dependent upon loan repayments from borrowing
companies and available cash. Operating cash reserves combined with
investment sale proceeds, interest income received on short-term
investments and repayments of secured notes receivable are expected to
be sufficient to fund Partnership operations and loan requirements of
existing borrowing companies through the next twelve months.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
- -----------------------------------------------------------------------
Net loss was $940,010 for the quarter ended March 31, 1995 compared to a
net income of $507,659 for the same period in 1994. The change was
primarily due to a $2,144,000 decrease in the change in net unrealized
fair value of secured notes receivable and a $415,809 decrease in net
realized gain from sale of equity investments. These changes were
partially offset by a $857,884 increase in the change in net unrealized
fair value of equity investments, a $117,896 increase in total income,
and a $91,887 decrease in total operating expenses.
The Partnership recorded a fair value decrease in secured notes
receivable of $1,252,000 for the three months ended March 31, 1995
compared to an increase of $892,000 for the same period in 1994, based
upon the level of loan loss reserves deemed adequate by the Managing
General Partner at the respective quarter ends. The increase in 1994 was
primarily due to the conversion of notes receivable at fair values lower
than cost to equity investments for a portfolio company in the medical
industry.
The Partnership recorded a net realized gain from sale of equity
investments of $10,744 for the three months ended March 31, 1995 related
to the net exercise of Pinnacle warrants. During the same period in
1994, a net gain of $426,553 was realized related to the sale of
Alantec.
In 1995, the fair value of equity investments reflected a net increase
in the Partnership's holdings. During the quarter ended March 31 1995,
the increase was $11,966, compared to a decrease of $845,918 in 1994
primarily due to the conversion of notes receivable to equity
investments as discussed above.
Total income was $361,235 and $243,339 during the three months ended
March 31, 1995 and 1994, respectively. The increase was primarily
attributable to cash interest payments on a secured note receivable from
a portfolio company in the computer software and systems industry which
had been on nonaccrual status.
Operating expenses were $18,805 and $110,692 for the three months ended
March 31, 1995 and 1994, respectively. As explained in Note 2 to the
financial statements, the Partnership may not reimburse the general
partners for annual expenses that aggregate more than a certain
percentage of total limited partner capital contributions. The
limitation is calculated over an operating year beginning May 1. The
General Partners absorbed $90,048 and $197,742 for the three months
ended March 31, 1995 and 1994, respectively. Had the limitation not
been in effect, total operating expenses during the three months ended
March 31, 1995 and 1994 would have been $108,853 and $308,434,
respectively. The decrease was mainly due to lower lending operations
and investment management expense resulting from reduced collection
costs and lower overall portfolio activity.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
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 March 31, 1995.
(b) Financial Data Schedule for the quarter ended and as of March 31,
1995 (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 III,
AN INCOME AND GROWTH PARTNERSHIP, L.P.
By: TECHNOLOGY FUNDING INC.
Managing General Partner
Date: May 12, 1995 By: /s/Frank R. Pope
------------------------------------
Frank R. Pope
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 17,218,534
<INVESTMENTS-AT-VALUE> 9,585,020
<RECEIVABLES> 0
<ASSETS-OTHER> 69,348
<OTHER-ITEMS-ASSETS> 1,411,254
<TOTAL-ASSETS> 11,065,622
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 88,047
<TOTAL-LIABILITIES> 88,047
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,611,089
<SHARES-COMMON-STOCK> 399,977
<SHARES-COMMON-PRIOR> 399,977
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,633,514)
<NET-ASSETS> 10,977,575
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 361,235
<OTHER-INCOME> 0
<EXPENSES-NET> 71,955
<NET-INVESTMENT-INCOME> 289,280
<REALIZED-GAINS-CURRENT> 10,744
<APPREC-INCREASE-CURRENT> (1,240,034)
<NET-CHANGE-FROM-OPS> (940,010)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (940,010)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53,150
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 176,205
<AVERAGE-NET-ASSETS> 11,447,580
<PER-SHARE-NAV-BEGIN> 46
<PER-SHARE-NII> 1
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 47
<EXPENSE-RATIO> .01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>
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>
