<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. 0-19221
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)
(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 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)
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $6,652,801 in
1998 and 1997) $ 2,560,801 2,560,801
Equity investments (cost basis
of $7,873,913 and $7,014,676 in
1998 and 1997, respectively) 6,146,119 5,376,245
---------- ----------
Total investments 8,706,920 7,937,046
Cash and cash equivalents 931,331 1,706,059
Restricted cash 33,500 536,150
Due from affiliated partnerships 4,500 4,500
Due from related parties -- 98,848
Other assets 119,687 32,662
---------- ----------
Total assets $ 9,795,938 10,315,265
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 62,488 61,768
Due to related parties 24,646 --
---------- ----------
Total liabilities 87,134 61,768
Commitments and contingencies
(Notes 2 and 7)
Partners' capital:
Limited Partners
(Units outstanding of 399,977
for both 1998 and 1997) 15,687,830 16,138,607
General Partners (159,232) (154,679)
Net unrealized fair value decrease
from cost:
Secured notes receivable (4,092,000) (4,092,000)
Equity investments (1,727,794) (1,638,431)
---------- ----------
Total partners' capital 9,708,804 10,253,497
---------- ----------
Total liabilities and
partners' capital $ 9,795,938 10,315,265
========== ==========
</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:
Secured notes receivable interest $ -- -- -- 11,497
Short-term investment interest 11,893 30,251 46,319 148,882
------- ------- ------- -------
Total income 11,893 30,251 46,319 160,379
Costs and expenses:
Management fees 50,797 52,121 152,986 157,883
Other investment expenses -- -- -- 190,431
Operating expenses:
Lending operations and investment
management 68,659 100,160 168,689 167,875
Administrative and investor
services 175,199 91,600 334,517 206,029
Computer services 17,404 25,924 30,340 54,139
Professional fees 14,484 16,981 39,827 36,162
Expenses absorbed by General
Partners -- -- (210,976) (131,882)
------- ------- ------- -------
Total operating expenses 275,746 234,665 362,397 332,323
------- ------- ------- -------
Total costs and expenses 326,543 286,786 515,383 680,637
------- ------- ------- -------
Net operating loss (314,650) (256,535) (469,064) (520,258)
Net realized gain from sales of
equity investments 13,734 -- 13,734 --
------- ------- ------- -------
Net realized loss (300,916) (256,535) (455,330) (520,258)
Change in net unrealized
fair value:
Secured notes receivable -- -- -- (15,000)
Equity investments (34,150) 223,822 (89,363) 237,580
------- ------- ------- -------
Net loss $(335,066) (32,713) (544,693) (297,678)
======= ======= ======= =======
Net realized loss per Unit $ (1) (1) (1) (1)
======= ======= ======= =======
</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 $ 46,319 160,379
Cash paid to vendors (163,941) (294,901)
Cash paid to related parties (314,253) (484,562)
--------- ---------
Net cash used by operating activities (431,875) (619,084)
--------- ---------
Cash flows from investing activities:
Purchase of equity investments (901,487) (3,685,000)
Proceeds from sales of equity
investments 55,984 --
Secured notes receivable issued -- (325,513)
Repayments of secured notes receivable -- 4,989
--------- ---------
Net cash used by investing
activities (845,503) (4,005,524)
--------- ---------
Net decrease in cash and cash
equivalents (1,277,378) (4,624,608)
Cash and restricted cash at
beginning of year 2,242,209 7,057,233
--------- ---------
Cash and restricted cash
at September 30 $ 964,831 2,432,625
========= =========
</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 $(544,693) (297,678)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Net realized gain from sales of
equity investments (13,734) --
Change in net unrealized fair value:
Secured notes receivable -- 15,000
Equity investments 89,363 (237,580)
Changes in:
Due to/from related parties 123,494 11,866
Accounts payable and accrued expenses 720 (75,204)
Other assets (87,025) (33,144)
Other changes, net -- (2,344)
------- -------
Net cash used by operating
activities $(431,875) (619,084)
======= =======
</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.
Extension of Partnership
------------------------
In April 1998, the General Partner extended the Partnership's term for an
additional two-year period to December 31, 2000.
2. 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>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Management fees $ 152,986 157,883
Reimbursable operating expenses 495,737 470,426
Expenses absorbed by General Partners (210,976) (131,882)
</TABLE>
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. Amounts due to related parties and amounts
due from related parties for such expenses were $24,646 and $98,848, at
September 30, 1998 and December 31, 1997 respectively.
The Partnership reimburses the Managing General Partner and affiliates for
operating costs incurred in connection with the business of the
Partnership. The Partnership may not pay nor reimburse the General
Partners for operational costs that aggregate more than 1% of total Limited
Partner capital contributions per year. For purposes of this limitation,
the Partnership's operating year begins May 1st. This limitation was in
effect as of September 30, 1998 and 1997 and expenses absorbed by the
General Partners totaled $210,976 and $131,882, 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 operating expenses, 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 $100,937 consisting of $10,199 for the nine months ended
September 30, 1997 and $90,738 for prior years. Had the additional
expenses been recorded in prior years and had the limitation not been in
effect, total operating expenses for the three months ended September 30,
1998 and 1997 would have been $174,809 and $244,864, respectively, and
total operating expenses for the nine months ended September 30, 1998 and
1997 would have been $472,436 and $474,404, respectively.
<PAGE>
3. 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:
<CAPTION>
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 $7,014,676 5,376,245
--------- ---------
Significant changes:
Industrial/Business Automation
- ------------------------------
CLB, LLC 01/98-6/98 LLC Units 901,487 901,487
Microelectronics
- ----------------
Celeritek, Inc. 05/94 6,784 Common
shares (36,086) (94,500)
--------- ---------
Total significant changes during the nine
months ended September 30, 1998 865,401 806,987
Other changes, net (6,164) (37,113)
--------- ---------
Total equity investments at September 30, 1998 $7,873,913 6,146,119
========= =========
</TABLE
Marketable Equity Securities
- ----------------------------
At December 31, 1997, marketable equity securities had aggregate costs of
$42,251 and aggregate market values of $131,613. The net unrealized gains
at December 31, 1997 included gross gains of $89,362.
CLB, LLC
- --------
In the first quarter of 1998, the Partnership purchased 300,174 LLC Units
for $300,174, and in the second quarter purchased an additional 601,313 LLC
Units for $601,313. The Partnership, together with an affiliated
partnership, owns 100% of the company.
Celeritek, Inc.
- ---------------
In September 1998, the Partnership sold its investment in the company for
total proceeds of $21,199 and realized a loss of $14,887.
4. Secured Notes Receivable, Net
-----------------------------
There was no secured notes receivable activity from January 1 through
September 30, 1998.
The secured notes receivable portfolio was on nonaccrual status at
September 30, 1998 and December 31, 1997 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 is based on the Managing General Partner's
estimate of collectibility of these notes. All notes are secured by
specific assets of the borrowing companies.
5. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses, primarily legal fees, of $190,431 in 1997,
reflect the participated cost of litigation which was settled in the same
year. There were no such expenses in 1998.
6. 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 $ 6,377 5,282
Money-market accounts 924,954 1,700,777
------- ---------
Total $931,331 1,706,059
======= =========
</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.
In April, 1997, the Partnership together with an affiliated partnership,
deposited $750,000 into an escrow account as collateral for a $750,000 note
payable of Ecopave. At December 31, 1997, the Partnership's share of the
deposit was $502,500. In June 1998, certain assets of CLB, LLC, a
portfolio company, were pledged as collateral for the Ecopave note payable,
resulting in the release of the Partnership's escrowed funds. The
Partnership, however, remains as a guarantor for the note payable.
In December, 1997, the Partnership together with an affiliated partnership,
guaranteed $50,000 of equipment financing for a portfolio company by
depositing $50,000 collateral in an escrow account with the lending
institution. The Partnership funded $33,500 of this deposit. If the
portfolio company fails to repay the loan, the Partnership may forfeit the
escrowed funds.
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 $431,875. The Partnership paid management fees of
$152,986 to the Managing General Partner and reimbursed related parties for
operating expenses of $161,267. Other operating expenses of $163,941 were
paid. Interest income of $46,319 was received.
During the nine months ended September 30, 1998 the Partnership funded
$901,487 in equity investments to a portfolio company in the
industrial/business automation industry. Proceeds from sales of equity
investments totaled $55,984.
Cash and restricted cash at September 30, 1998, were $964,831. Future
distributions will be dependent upon loan repayments from borrowing
companies, future proceeds from equity investment sales and available cash.
Operating cash reserves, future 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
through the next twelve months.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
- -----------------------------------------------------------------------
Net losses were $335,066 and $32,713 for the quarters ended September 30,
1998 and 1997, respectively. The increase in net loss was substantially
due to a $257,972 decrease in the change in the net unrealized fair value
of investments and a $41,081 increase in operating expenses.
The Partnership recorded a decrease in investment fair value of $34,150 for
the three months ended September 30, 1998 compared to an increase of
$223,822 for the same period in 1997. The 1998 decrease was primarily due
to sales of equity investments. The 1997 increase was primarily due to
increases in the computers and computer equipment and telecommunications
industries.
Total operating expenses were $275,746 and $234,665 for the quarters ended
September 30, 1998 and 1997, respectively. As disclosed in Note 2 to the
financial statements, operating expenses for the three months ended
September 30, 1998 include additional expenses of $100,937 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 $174,809 and
$244,864, respectively. The decrease is attributable to decreased
investment operations and computer expenses due to decreased levels of
investment 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.
Current nine months compared to corresponding nine months in the preceding
- ------------------------------------------------------------------------
year
- ----
Net losses totaled $544,693 and $297,678 for the nine months ended
September 30, 1998 and 1997, respectively. The increased loss was
primarily due to a $326,943 decrease in the change in net unrealized fair
value of equity investments and a $114,060 decrease in total income,
partially offset by a $190,431 decrease in other investment expenses.
The Partnership recorded a decrease in equity investment fair value of
$89,363 for the nine months ended September 30, 1998, compared to an
increase of $237,580 for the same period in 1997. The 1998 decrease was
primarily due to the sale of equity investments. The 1997 increase was
primarily due to increases in portfolio companies in the computer and
computer equipment industry.
Total income was $46,319 and $160,379 during the nine months ended
September 30, 1998 and 1997, respectively. The decrease was primarily due
to lower cash and cash equivalents balances resulting from cash used for
equity investments.
Other investment expenses primarily legal fees, for the nine months ended
September 30, 1997, were $190,431. There were no such expenses in 1998.
The decrease was due to the settlement of the related litigation in 1997.
Total operating expenses were $362,397 and $332,323 for the nine months
ended September 30, 1998 and 1997, respectively. As explained in Note 2 to
the financial statements, the General Partners absorbed $210,976 and
$131,882 for the nine months ended September 30, 1998 and 1997,
respectively. Additionally, operating expenses for the nine months ended
September 30, 1998 include additional expenses of $100,937 related to prior
years which were not previously charged to the Partnership. Had the
additional expenses been recorded in prior years and had the limitation not
been in effect, operating expenses for the nine months ended September 30,
1998 and 1997 would have been $472,436 and $474,404, respectively.
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 III,
AN INCOME AND GROWTH PARTNERSHIP, L.P.
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> 14,526,714
<INVESTMENTS-AT-VALUE> 8,706,920
<RECEIVABLES> 0
<ASSETS-OTHER> 124,187
<OTHER-ITEMS-ASSETS> 964,831
<TOTAL-ASSETS> 9,795,938
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 87,134
<TOTAL-LIABILITIES> 87,134
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,528,598
<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> (5,819,794)
<NET-ASSETS> 9,708,804
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 46,319
<OTHER-INCOME> 0
<EXPENSES-NET> 515,383
<NET-INVESTMENT-INCOME> (469,064)
<REALIZED-GAINS-CURRENT> 13,734
<APPREC-INCREASE-CURRENT> (89,363)
<NET-CHANGE-FROM-OPS> (544,693)
<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> (544,693)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 152,986
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 516,683
<AVERAGE-NET-ASSETS> 9,981,150
<PER-SHARE-NAV-BEGIN> 40
<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> 39
<EXPENSE-RATIO> 5.2
<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>
