<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 March 31, 1996
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 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 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,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $7,000,497 and
$6,861,823 in 1996 and 1995,
respectively) $ 3,094,497 2,833,823
Equity investments (cost basis
of $3,327,785 and $3,447,006 in
1996 and 1995, respectively) 3,372,302 3,656,184
---------- ----------
Total investments 6,466,799 6,490,007
Cash and cash equivalents 6,660,273 7,046,622
Restricted cash 135,703 50,000
Other assets 24,996 200
---------- ----------
Total $13,287,771 13,586,829
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 331,157 349,663
Due to affiliated partnerships -- 1,930
Due to related parties 51,281 36,737
Distributions payable -- 391,777
Other liabilities 30,873 30,873
---------- ---------
Total liabilities 413,311 810,980
Commitments and subsequent events
(Notes 2, 3 and 6)
Partners' capital:
Limited Partners
(Units outstanding of 399,977
for both 1996 and 1995) 16,743,243 16,743,243
General Partners (7,300) (148,572)
Net unrealized fair value (decrease)
increase from cost:
Secured notes receivable (3,906,000) (4,028,000)
Equity investments 44,517 209,178
---------- ----------
Total partners' capital 12,874,460 12,775,849
---------- ----------
Total $13,287,771 13,586,829
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1996 1995
---- ----
<S> <C> <C>
Income:
Secured notes receivable interest $ 111,472 332,265
Short-term investment interest 93,815 28,970
--------- ---------
Total income 205,287 361,235
Costs and expenses:
Management fees 61,289 53,150
Other investment expenses 30,000 --
Operating expenses:
Lending operations and investment
management 34,096 35,216
Administrative and investor
services 55,020 48,059
Computer services 12,264 16,375
Professional fees 8,445 9,203
Expenses absorbed by General Partners (76,946) (90,048)
--------- ---------
Total operating expenses 32,879 18,805
--------- ---------
Total costs and expenses 124,168 71,955
--------- ---------
Net operating income 81,119 289,280
Net realized gain from sales of
equity investments 71,445 10,744
Recoveries from investments
previously written off 103,807 --
Realized losses from investment
write-downs (115,099) --
--------- ---------
Net realized income 141,272 300,024
Change in net unrealized
fair value:
Secured notes receivable 122,000 (1,252,000)
Equity investments (164,661) 11,966
--------- ---------
Net income (loss) $ 98,611 (940,010)
========= =========
Net realized income per Unit $ -- 1
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 138,478 207,306
Cash paid to vendors (81,605) (21,704)
Cash paid to related parties (70,805) (95,463)
Cash paid to affiliated partnerships (2,446) (1,938)
--------- ---------
Net cash (used) provided by
operating activities (16,378) 88,201
--------- --------
Cash flows from investing activities:
Secured notes receivable issued (183,600) (675,000)
Repayments of secured notes receivable 111,735 76,203
Proceeds from sales of equity
investments 75,567 --
Recoveries from investments previously
written off 103,807 --
--------- ---------
Net cash provided (used) by
investing activities 107,509 (598,797)
--------- ---------
Cash flows from financing activities:
Distributions to General and Limited
Partners (391,777) --
--------- ---------
Net cash used by financing activities (391,777) --
--------- ---------
Net decrease in cash and
restricted cash (300,646) (510,596)
Cash and restricted cash
at beginning of year 7,096,622 1,921,850
--------- ---------
Cash and restricted cash at March 31 $6,795,976 1,411,254
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-------------------------------------
1996 1995
---- ----
<S> <C> <C>
Reconciliation of net income (loss)
to net cash (used) provided
by operating activities:
Net income (loss) $ 98,611 (940,010)
Adjustments to reconcile net income
(loss) to net cash (used) provided
by operating activities:
Net realized gain from sales of
equity investments (71,445) (10,744)
Recoveries from investments previously
written-off (103,807) --
Realized losses from investment
write-downs 115,099 --
Change in net unrealized fair value:
Secured notes receivable (122,000) 1,252,000
Equity investments 164,661 (11,966)
Amortization of discounts on secured
notes receivable (66,809) (859)
Changes in:
Accrued interest on secured and
convertible notes receivable -- (153,070)
Due to/from related parties 14,544 (45,948)
Accounts payable and accrued expenses (18,506) (44,183)
Other assets (24,796) 45,221
Other, net (1,930) (2,240)
--------- ---------
Net cash (used) provided
by operating activities $ (16,378) 88,201
========= =========
</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, 1996 and December 31, 1995, and the related Statements of
Operations and Statements of Cash Flows for the three months ended March
31, 1996 and 1995, 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, 1995. The following notes to financial statements for
activity through March 31, 1996 supplement those included in the Annual
Report on Form 10-K. Certain 1995 balances have been reclassified to
conform with the 1996 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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Management fees $ 61,289 53,150
Reimbursable operating expenses 101,006 86,413
Expenses absorbed by General Partners (76,946) (90,048)
</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, 1996 and December 31, 1995.
As set forth in the Partnership Agreement, the Partnership may not pay
or reimburse the General Partners for annual expenses that aggregate
more than 1% of total Limited Partner capital contributions. For
purposes of this limitation, the Partnership's operating year begins
May 1st. This limitation was in effect in February 1996 and expenses
absorbed by the General Partners totaled $76,946 for the quarter ended
March 31, 1996.
Certain reimbursable expenses have been allocated and accrued based upon
interim estimates prepared by the Managing General Partner and are
adjusted to actual cost periodically. At March 31, 1996 and December
31, 1995, due to related parties for such expenses were $51,281 and
$36,737, respectively.
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, 1996, the amount due
from affiliated partnerships on such participations was $516 (included
in "other assets"), compared to $1,930 due to affiliated partnerships at
December 31, 1995. The amounts were received from and paid to such
affiliated partnerships in the respective following quarters.
3. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December
31, 1995 are included in the 1995 Annual Report. Activity from January
1 through March 31, 1996 consisted of
<TABLE>
<CAPTION>
January 1 -
March 31, 1996
------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- ----- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $3,447,006 3,656,184
--------- ---------
Significant changes:
WARRANTS:
- --------
Biotechnology
- -------------
Hybridon, Inc. 03/91 7,142 Common
shares at $3.50;
exercised 01/96 (2,500) (32,139)
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 1,159,546 Common
Systems Corporation shares at $0.50;
exercised 06/00 0 (217,415)
STOCKS:
- ------
Biotechnology
- -------------
Hybridon, Inc. 01/96 2,500 Common
shares 9,628 22,000
Computers and Computer Equipment
- --------------------------------
MTI Technology 04/94 20,927 Common
Corporation shares (115,099) (6,006)
Medical
- -------
Allegiant Physicians 08/94 31,500 Common
Services, Inc. shares (11,250) (52,500)
Microelectronics
- ----------------
Celeritek, Inc. 05/94 6,785 Common
shares 0 10,714
Retail/Consumer Products
- ------------------------
S-TRON 05/93 Subordinated note,
$390,000 principal
amount (0) (0)
S-TRON 05/93 390,000 Common
shares (0) (0)
S-TRON 05/93 3,650,356 Series
1 and 2 Preferred
shares (0) (0)
--------- ---------
Total significant changes (119,221) (275,346)
Other changes, net 0 (8,536)
--------- ---------
Total equity investments at March 31, 1996 $3,327,785 3,372,302
========= =========
</TABLE>
Marketable Equity Securities
- ----------------------------
At March 31, 1996 and December 31, 1995, marketable equity securities
had aggregate costs of $130,134 and $248,130, respectively, and
aggregate market values of $188,771 and $230,994, respectively. The net
unrealized gain/loss at March 31, 1996 and December 31, 1995 included
gross gains of $93,976 and $127,260, respectively.
Allegiant Physicians Services, Inc.
- -----------------------------------
In February 1996, the Partnership exercised its option to sell 31,500 of
its common shares to the company for $52,500 and realized a gain of
$41,250. The Partnership's remaining 17,500 common shares are
unrestricted.
Hybridon, Inc.
- --------------
In January 1996, Hybridon, Inc. completed its initial public offering.
The Partnership exercised its warrant holdings without cash and received
5,062 shares of common stock with a cost basis of $19,494, which
reflected a realized gain of $16,994 and a warrant cost basis of $2,500.
Subsequently, the Partnership sold 2,562 of these shares for total
proceeds of $23,067 and realized a gain of $13,201. The Partnership
recorded a decrease of $17,267 in the change in fair value to reflect
the above transactions and the market value of the remaining
unrestricted shares at March 31, 1996.
MTI Technology Corporation
- --------------------------
During the first quarter of 1996, the Managing General Partner
determined that there had been an other than temporary decline in value
of the Partnership's investment. As a result, the Partnership realized
a loss of $115,099. The Partnership also recorded a decrease in fair
value of $6,006 to reflect the unrestricted market value at March 31,
1996.
S-TRON
- ------
The company was unsuccessful in its efforts to obtain a major government
contract; as a result, company operations ceased during March 1996.
This investment, which had previously been written off, is no longer
held by the Partnership.
Other Equity Investments
- ------------------------
Other significant changes during the quarter ended March 31, 1996
reflected above relate to market value fluctuations or the elimination
of a discount relating to selling restrictions for publicly-traded
portfolio companies. The Partnership's warrant investment in Wasatch
Education Systems Corporation and 3Com Corporation shares are partially
restricted.
As of May 3, 1996, the fair value for Celeritek, Inc. increased to
$90,092 compared to $63,277 at March 31, 1996. This change reflects
changes in common stock prices which fluctuate daily on stock exchanges.
4. Secured Notes Receivable, Net
-----------------------------
Activity from January 1 through March 31, 1996 consisted of:
<TABLE>
<S> <C>
Balance at January 1, 1996 $ 2,833,823
1996 activity:
Secured notes receivable issued 183,600
Repayments of secured notes receivable (111,735)
Decrease in allowance for loan losses 122,000
Amortization of discounts related to warrants 66,809
---------
Total secured notes receivable,
net, at March 31, 1996 $ 3,094,497
==========
</TABLE>
The Partnership had accrued interest of $4,306 at both March 31, 1996
and December 31, 1995.
Activity in the allowance for loan losses was as follows:
<TABLE>
<S> <C>
Balance at January 1, 1996 $ 4,028,000
Decrease in provision for loan losses (225,807)
Recoveries of previous write-offs:
Medical 103,807
---------
Change in net unrealized fair value of secured
notes receivable (122,000)
---------
Balance at March 31, 1996 $ 3,906,000
=========
</TABLE>
The provision for loan losses is generally comprised of realized loan
losses, net of recognized recoveries, and a change in net unrealized
fair value based upon the level of loan loss reserves deemed adequate by
the Managing General Partner.
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.
Secured notes receivable with a total cost basis of $6,496,191 and
$6,357,717 were on nonaccrual status due to uncertainty of certain
borrowers' financial conditions at March 31, 1996 and December 31, 1995,
respectively. The Managing General Partner continues to monitor the
progress of these companies. The fair value at March 31, 1996
recognizes the Managing General Partner's estimate of collectibility of
these notes.
During the first quarter of 1996, the Partnership received approximately
$35,000 from a portfolio company in the medical industry to pay off its
principal balance. In addition, the Partnership was reimbursed $24,870
for legal, consulting, and other costs incurred in prior periods in the
defense of the Partnership's secured note rights through bankruptcy
court. The reimbursement was recorded as a reduction to lending
operations and investment management expense.
All notes are secured by specific assets of the borrowing companies.
The Interest rate on notes issued during the three months ended March
31, 1996 was 12%.
5. Cash and Cash Equivalents
-------------------------
At March 31, 1996 and December 31, 1995, cash and cash equivalents
consisted of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Demand and brokerage accounts $ -- 2,071
Money-market accounts 6,660,273 7,044,551
--------- ---------
Total $6,660,273 7,046,622
========= =========
</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, 1996, the Partnership had unfunded
commitments of $86,400 related to term note financings to an existing
borrowing company.
<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, 1996, net cash used by operating
activities totaled $16,378. The Partnership paid management fees of
$61,289 to the Managing General Partner and reimbursed related parties
for net operating expenses of $9,516. Payments to affiliated
partnerships for net loan participations totaled $2,446. In addition,
other operating expenses of $81,605 were paid and $138,478 in interest
income was received. Distributions of $391,777 were paid to Limited and
General Partners.
During the quarter ended March 31, 1996, the Partnership issued $183,600
in secured notes receivable primarily to a portfolio company in the
computers and computer equipment industry. Repayments of secured notes
receivable provided cash of $111,735. Proceeds from sales of equity
investments totaled $75,567, and recoveries of $103,807 from investments
previously written off were received. As of March 31, 1996, the
Partnership was committed to fund up to $86,400 related to term note
financings to an existing borrowing company.
Cash and restricted cash at March 31, 1996 were $6,795,976. 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 income was $98,611 for the quarter ended March 31, 1996 compared to
a net loss of $940,010 for the same period in 1995. The change was
primarily due to a $1,374,000 increase in the change in net unrealized
fair value of secured notes receivable and a $103,807 increase in
recoveries from investments previously written off. These changes were
partially offset by a $176,627 decrease in the change in net unrealized
fair value of equity investments, a $155,948 decrease in total income,
and a $115,099 increase in realized losses from investment write-downs.
The Partnership recorded a fair value increase in secured notes
receivable of $122,000 for the three months ended March 31, 1996
compared to a decrease of $1,252,000 for the same period in 1995, based
upon the level of loan loss reserves deemed adequate by the Managing
General Partner at the respective quarter ends.
During the quarter ended March 31, 1996, the $103,807 recovery related
to a portfolio company in the medical industry. No such recovery was
recorded for the same period in 1995.
In 1996, the $164,661 decrease in fair value of equity investments
primarily related to a decrease in a portfolio company in the computer
software and systems industry, partially offset by an increase in the
computers and computer equipment industry due to realized write-downs of
$115,099. No investment write-downs were recorded in 1995. During the
quarter ended March 31 1995, a fair value increase of $11,966 was
recorded.
Total income were $205,287 and $361,235 during the three months ended
March 31, 1996 and 1995, respectively. The decrease primarily related
to lower secured notes receivable interest income as a result of lower
principal balances in 1996. This decrease was partially offset by an
increase in short-term investment interest due to higher cash and
restricted cash. In addition, the 1995 income was higher due to cash
interest payments received on a secured note receivable from a portfolio
company in the computer software and systems industry; the note had
previously been on nonaccrual status.
The Partnership recorded a net realized gain from sales of equity
investments of $71,445 for the three months ended March 31, 1996 mostly
related to Allegiant Physicians Services, Inc. and Hybridon, Inc.
During the same period in 1995, $10,744 was realized from a Pinnacle
Systems, Inc. warrant net exercise.
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, 1996.
(b) Financial Data Schedule for the quarter ended and as of March 31,
1996 (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 10, 1996 By: /s/Debbie A. Wong
------------------------------------
Debbie A. Wong
Controller
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 10,328,282
<INVESTMENTS-AT-VALUE> 6,466,799
<RECEIVABLES> 0
<ASSETS-OTHER> 24,996
<OTHER-ITEMS-ASSETS> 6,795,976
<TOTAL-ASSETS> 13,287,771
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 413,311
<TOTAL-LIABILITIES> 413,311
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,735,943
<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> (3,861,483)
<NET-ASSETS> 12,874,460
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 205,287
<OTHER-INCOME> 0
<EXPENSES-NET> 124,168
<NET-INVESTMENT-INCOME> 81,119
<REALIZED-GAINS-CURRENT> 60,153
<APPREC-INCREASE-CURRENT> (42,661)
<NET-CHANGE-FROM-OPS> 98,611
<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> 98,611
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 61,289
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 248,568
<AVERAGE-NET-ASSETS> 12,825,155
<PER-SHARE-NAV-BEGIN> 42
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 42
<EXPENSE-RATIO> 1
<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>
