<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, 1997
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,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $6,360,501 and
$6,332,277 in 1997 and 1996,
respectively) $ 2,283,501 2,255,277
Equity investments (cost basis
of $3,301,907 in both
1997 and 1996) 1,650,144 1,675,474
---------- ----------
Total investments 3,933,645 3,930,751
Cash and cash equivalents 6,372,428 6,414,538
Restricted cash 644,269 642,695
Other assets 14,407 18,313
---------- ----------
Total $10,964,749 11,006,297
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 447,798 309,810
Due to related parties 9,073 38,937
Other liabilities 973 3,322
---------- ---------
Total liabilities 457,844 352,069
Commitments, contingencies and
subsequent events
(Notes 2, 5 and 7)
Partners' capital:
Limited Partners
(Units outstanding of 399,977
in both 1997 and 1996) 16,387,830 16,508,603
General Partners (152,162) (150,942)
Net unrealized fair value decrease
from cost:
Secured notes receivable (4,077,000) (4,077,000)
Equity investments (1,651,763) (1,626,433)
---------- ----------
Total partners' capital 10,506,905 10,654,228
---------- ----------
Total $10,964,749 11,006,297
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1997 1996
---- ----
<S> <C> <C>
Income:
Secured notes receivable interest $ 11,497 111,472
Short-term investment interest 83,248 93,815
--------- ---------
Total income 94,745 205,287
Costs and expenses:
Management fees 53,249 61,289
Other investment expenses 148,831 30,000
Operating expenses:
Lending operations and investment
management 45,597 34,096
Administrative and investor
services 47,758 55,020
Computer services 14,854 12,264
Professional fees 7,860 8,445
Expenses absorbed by General Partners (101,411) (76,946)
--------- ---------
Total operating expenses 14,658 32,879
--------- ---------
Total costs and expenses 216,738 124,168
--------- ---------
Net operating (loss) income (121,993) 81,119
Net realized gain from sales of
equity investments -- 71,445
Recoveries from investments
previously written off -- 103,807
Realized losses from investment
write-downs -- (115,099)
--------- ---------
Net realized (loss) income (121,993) 141,272
Change in net unrealized
fair value:
Secured notes receivable -- 122,000
Equity investments (25,330) (164,661)
--------- ---------
Net (loss) income $ (147,323) 98,611
========= =========
Net realized (loss) income per Unit $ -- --
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 94,745 138,478
Cash paid to vendors (23,352) (81,605)
Cash paid to related parties (83,705) (70,805)
Cash paid to affiliated partnerships -- (2,446)
--------- ---------
Net cash used by
operating activities (12,312) (16,378)
--------- --------
Cash flows from investing activities:
Secured notes receivable issued (33,213) (183,600)
Repayments of secured notes receivable 4,989 111,735
Proceeds from sales of equity
investments -- 75,567
Recoveries from investments previously
written off -- 103,807
--------- ---------
Net cash (used) provided by
investing activities (28,224) 107,509
--------- ---------
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 (40,536) (300,646)
Cash and restricted cash
at beginning of year 7,057,233 7,096,622
--------- ---------
Cash and restricted cash at March 31 $7,016,697 6,795,976
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-------------------------------------
1997 1996
---- ----
<S> <C> <C>
Reconciliation of net (loss) income
to net cash used
by operating activities:
Net (loss) income $ (147,323) 98,611
Adjustments to reconcile net (loss)
income to net cash used by operating
activities:
Net realized gain from sales of
equity investments -- (71,445)
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)
Equity investments 25,330 164,661
Amortization of discounts on secured
notes receivable -- (66,809)
Changes in:
Due to/from related parties (29,864) 14,544
Accounts payable and accrued expenses 137,988 (18,506)
Other assets 3,906 (24,280)
Other, net (2,349) (2,446)
--------- ---------
Net cash used by operating
activities $ (12,312) (16,378)
========= =========
</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, 1997, and December 31, 1996, and the related Statements of
Operations and Statements of Cash Flows for the three months ended March
31, 1997 and 1996, 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, 1996. The following notes to financial statements for
activity through March 31, 1997, supplement those included in the Annual
Report on Form 10-K. Certain 1996 balances have been reclassified to
conform with the 1997 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, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Management fees $ 53,249 61,289
Reimbursable operating expenses 102,003 101,006
Expenses absorbed by General Partners (101,411) (76,946)
</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. At March 31, 1997,
a management fee receivable of $7,872 was recorded; this amount was
reimbursed by the General Partners subsequent to quarter end.
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 as of March 31, 1997 and 1996,
and expenses absorbed by the General Partners totaled $101,411 and
$76,946, respectively.
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, 1997, and December
31, 1996, due to related parties for such expenses were $16,945 and
$38,937, respectively.
3. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December
31, 1996, are included in the 1996 Annual Report. Activity from January
1 through March 31, 1997, consisted of
<TABLE>
<CAPTION>
January 1 -
March 31, 1997
------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- ----- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $3,301,907 1,675,474
--------- ---------
1997 activities:
STOCKS:
- ------
Computers and Computer Equipment
- --------------------------------
MTI Technology 04/94 20,927 Common
Corporation shares 0 12,409
Microelectronics
- ----------------
Celeritek, Inc. 05/94 6,784 Common
shares 0 8,141
Telecommunications
- ------------------
3Com Corporation 06/95 1,082 Common
shares 0 (45,880)
--------- ---------
Total equity investments at March 31, 1997 $3,301,907 1,650,144
========= =========
</TABLE>
Marketable Equity Securities
- ----------------------------
At March 31, 1997, and December 31, 1996, marketable equity securities
had an aggregate cost of $115,495, and aggregate market values of
$191,525 and $216,855, respectively. The net unrealized gain at March
31, 1997, and December 31, 1996, included gross gains of $76,030 and
$109,458, respectively.
Celeritek, Inc.
- ---------------
At March 31, 1997, the Partnership recorded an increase in the change in
fair value of $8,141 to reflect the publicly-traded market price of its
investments.
MTI Technology Corporation
- --------------------------
At March 31, 1997, the Partnership recorded an increase in the change in
fair value of $12,409 to reflect the publicly-traded market price of its
investments.
3Com Corporation
- ----------------
At March 31, 1997, the Partnership recorded a decrease in the change in
fair value of $45,880 to reflect the publicly-traded market price of its
investments.
4. Secured Notes Receivable, Net
-----------------------------
Activity from January 1 through March 31, 1997, consisted of:
<TABLE>
<S> <C>
Balance at January 1, 1997 $ 2,255,277
1997 activity:
Secured notes receivable issued 33,213
Repayments of secured notes receivable (4,989)
----------
Total secured notes receivable,
net, at March 31, 1997 $ 2,283,501
==========
</TABLE>
There was no activity in the $4,077,000 allowance for loan losses for
the quarter ended March 31, 1997.
The secured notes receivable portfolio with a total cost basis of
$6,360,501 and $6,332,277 were on nonaccrual status due to uncertainty
of certain borrowers' financial conditions at March 31, 1997, and
December 31, 1996, respectively. The Managing General Partner continues
to monitor the progress of these companies. The fair value at March 31,
1997, recognizes the Managing General Partner's estimate of
collectibility of these notes.
During the first quarter of 1996, 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, 1997, was 18%.
5. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1997 of $148,831 reflect the cost of the
following legal actions.
The case between an affiliated partnership and a portfolio company in
the retail/consumer products industry against Quebecor is currently
pending. The Partnership participated in investments to the portfolio
company with the affiliated partnership. In March of 1997, the
affiliated partnership and the portfolio company obtained a favorable
judgment in its appeal of a prior trial court ruling that declared the
assets of the portfolio company, for a sum not certain, are available to
satisfy certain claims of Quebecor. Quebecor had subsequently filed an
appeal to the North Carolina Supreme Court. The Managing General
Partner believes the Partnership has adequate defenses and no amounts
have been provided in the accompanying financial statements for any
possible negative outcome for this matter.
In March of 1996, an affiliated partnership filed a lawsuit in the
United States District Court, Northern District of California, against
Cyclean, Inc., ("Cyclean"), Ecopave, L.P. ("Ecopave"), Ecopave Corp. and
Stephen M. Vance ("Vance"). The Partnership participated in secured
note investments to Cyclean with the affiliated partnership.
Ecopave was formed by Cyclean, Ecopave Corp. and Vance. Cyclean,
without the consent of the affiliated partnership, transferred certain
equipment worth approximately $488,000 to Ecopave that is subject to the
affiliated partnership's security interest. Cyclean further gave
Ecopave a license to use its patented technology. The equipment and
intellectual property were security interest on a secured loan extended
by the affiliated partnership to Cyclean. The affiliated partnership
thus commenced this legal action for patent infringement, seeking to
collect approximately $3.5 million of indebtedness owed to the
Partnership and affiliated partnerships by Cyclean and the recovery of
the equipment from Ecopave. In January of 1997, a counter suit was
filed by Ecopave Corp. and Vance against the affiliated partnership
which seeks declaration that certain patent rights held by the
Partnership as security for the Cyclean debt are invalid as well as
asserts a fraud claim. In addition, the counter suit seeks compensatory
damages of approximately $5 million and unspecified punitive damages.
As a result of a settlement conference, the above lawsuits have been
resolved effective April 1, 1997. The affiliated partnership has
indirectly purchased Ecopave Corp. and Vance's ownership interest in
Ecopave for $5.5 million and agreed to set up an escrow account for
$750,000(see Note 7 for additional disclosure). The Partnership's
participated purchase was $3,685,000. The settlement of this claim
should not result in any material negative impact to the Partnership as
the Managing General Partner believes that the fair value of this
additional investment is equal to or greater than the purchase price and
improves the Partnership's position to recover its secured notes
receivable. The Managing General Partner believes a settlement is the
most cost effective resolution of this dispute for the Partnership.
At March 31, 1997, restricted cash of $644,269 represented amounts held
in escrow accounts pending the outcome of certain litigation.
6. Cash and Cash Equivalents
-------------------------
At March 31, 1997, and December 31, 1996, cash and cash equivalents
consisted of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Demand and brokerage accounts $ 3,976 11,163
Money-market accounts 6,368,452 6,403,375
--------- ---------
Total $6,372,428 6,414,538
========= =========
</TABLE>
7. Commitments and Contingencies
-----------------------------
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, 1997, the Partnership had unfunded
commitments as follows:
<TABLE>
<CAPTION>
<S> <C>
Term notes $ 116,087
Equity investments 3,800,603
---------
Total $3,916,690
=========
</TABLE>
In March, 1997, the Partnership, together with an affiliated
partnership, were committed to deposit $750,000 into an escrow account
as collateral for a note payable of Ecopave. The Partnership's share of
the deposit is $502,500. While the Partnership expects Ecopave to repay
the note, if the company fails to do so, the note holder may assume the
escrow account.
<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, 1997, net cash used by operating
activities totaled $12,312. The Partnership paid management fees of
$61,121 to the Managing General Partner and reimbursed related parties
for net operating expenses of $22,584. In addition, other operating
expenses of $23,352 were paid and $94,745 in interest income was
received.
During the quarter ended March 31, 1997, the Partnership issued $33,213
in secured notes receivable to a portfolio company in the
industrial/business automation industry. Repayments of secured notes
receivable provided cash of $4,989. As of March 31, 1997, the
Partnership was committed to fund additional investments totaling
$3,916,690 and to fund $502,500 into an escrow account as disclosed in
Note 7 to the financial statements.
Cash and restricted cash at March 31, 1997, were $7,016,697. 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 $147,323 for the quarter ended March 31, 1997, compared to
a net income of $98,611 for the same period in 1996. The change was
mainly due to a $122,000 decrease in the change in net unrealized fair
value of secured notes receivable, a $118,831 increase in other
investment expenses, a $110,542 decrease in total income, and a $103,807
decrease in recoveries from investments previously written off. These
changes were partially offset by a $139,331 improvement in the change in
net unrealized fair value of equity investments and a $115,099 decrease
in realized losses from investment write-downs.
During the quarter ended March 31, 1997, there was no change in fair
value for secured notes receivable compared to a $122,000 increase for
the quarter ended March 31, 1996, based upon the level of loan losses
reserves deemed adequate by the Managing General Partner.
Other investments expenses were $148,831 and $30,000 for the quarters
ended March 31, 1997 and 1996, respectively. The increase was due to
higher legal expenses related to the lawsuits as discussed in Note 5 to
the financial statements.
Total income was $94,745 and $205,287 for the quarters ended March 31,
1997 and 1996, respectively. The decrease was primarily due to lower
secured notes receivable interest income as a result of notes being on
nonaccrual status in 1997.
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 1997.
During the quarter ended March 1997, the $25,330 decrease in fair value
of equity investments primarily related to a portfolio company in the
telecommunications industry, partially offset by an increase in a
portfolio company in the computers and computer equipment industry.
During the quarter ended March 31, 1996, the $164,661 decrease primarily
related to 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 during the quarter ended March 31,
1997.
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 1. Legal Proceedings
The lawsuit an affiliated partnership filed in the United States
District Court, Northern District of California, against Cyclean, Inc.,
et al, and the related counter claims, which were previously reported in
the 1996 Form 10-K have been resolved effective April 1, 1997. The
Partnership participated in notes to Cyclean, Inc., with the affiliated
partnership. See Note 5 to the financial statements for additional
disclosure.
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, 1997.
(b) Financial Data Schedule for the quarter ended and as of March 31,
1997 (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 9, 1997 By: /s/Debbie A. Wong
------------------------------------
Debbie A. Wong
Vice President
and Controller
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF MARCH 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 9,662,408
<INVESTMENTS-AT-VALUE> 3,933,645
<RECEIVABLES> 0
<ASSETS-OTHER> 14,407
<OTHER-ITEMS-ASSETS> 7,016,697
<TOTAL-ASSETS> 10,964,749
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 457,844
<TOTAL-LIABILITIES> 457,844
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,235,668
<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> (5,728,763)
<NET-ASSETS> 10,506,905
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 94,745
<OTHER-INCOME> 0
<EXPENSES-NET> 216,738
<NET-INVESTMENT-INCOME> (121,993)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (25,330)
<NET-CHANGE-FROM-OPS> (147,323)
<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> (147,323)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53,249
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 220,880
<AVERAGE-NET-ASSETS> 10,580,567
<PER-SHARE-NAV-BEGIN> 41
<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> 41
<EXPENSE-RATIO> 2.05
<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>
