<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, 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)
March 31, 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 $7,314,850 and $7,014,676 in
1998 and 1997, respectively) 5,658,411 5,376,245
---------- ----------
Total investments 8,219,212 7,937,046
Cash and cash equivalents 1,207,203 1,706,059
Restricted cash 536,550 536,150
Due from affiliated partnerships 4,500 4,500
Due from related parties 216,594 98,848
Other assets 84,408 32,662
---------- ----------
Total assets $10,268,467 10,315,265
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 75,730 61,768
---------- ----------
Total liabilities 75,730 61,768
Commitments, contingencies
and subsequent event
(Notes 1, 2 and 7)
Partners' capital:
Limited Partners
(Units outstanding of 399,977
for both 1998 and 1997) 16,096,282 16,138,607
General Partners (155,106) (154,679)
Net unrealized fair value decrease
from cost:
Secured notes receivable (4,092,000) (4,092,000)
Equity investments (1,656,439) (1,638,431)
---------- ----------
Total partners' capital 10,192,737 10,253,497
---------- ----------
Total liabilities and
partners' capital $10,268,467 10,315,265
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Income:
Secured notes receivable interest $ -- 11,497
Short-term investment interest 27,757 83,248
------- -------
Total income 27,757 94,745
Costs and expenses:
Management fees 51,246 53,249
Other investment expenses -- 148,831
Operating expenses:
Lending operations and investment
management 81,720 45,597
Administrative and investor
services 83,639 47,758
Computer services 10,992 14,854
Professional fees 14,564 7,860
Expenses absorbed by General
Partners (171,652) (101,411)
------- -------
Total operating expenses 19,263 14,658
------- -------
Total costs and expenses 70,509 216,738
------- -------
Net operating loss (42,752) (121,993)
------- -------
Net realized loss (42,752) (121,993)
Change in net unrealized
fair value of
equity investments (18,008) (25,330)
------- -------
Net loss $(60,760) (147,323)
======= =======
Net realized loss per Unit $ -- --
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 27,757 94,745
Cash paid to vendors (57,750) (23,352)
Cash paid to related parties (168,289) (83,705)
--------- ---------
Net cash used by operating activities (198,282) (12,312)
--------- ---------
Cash flows from investing activities:
Purchase of equity investments (300,174) --
Secured notes receivable issued -- (33,213)
Repayments of secured notes receivable -- 4,989
--------- ---------
Net cash used by investing
activities (300,174) (28,224)
--------- ---------
Net decrease in cash and cash
equivalents (498,456) (40,536)
Cash and restricted cash at
beginning of year 2,242,209 7,057,233
--------- ---------
Cash and restricted cash
at March 31 $1,743,753 7,016,697
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1998 1997
------ ------
<S> <C> <C>
Reconciliation of net loss
to net cash used by operating
activities:
Net loss $ (60,760) (147,323)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Change in net unrealized fair value of
equity investments 18,008 25,330
Changes in:
Due to/from related parties
and affiliated partnerships (117,746) (29,864)
Accounts payable and accrued expenses 13,962 137,988
Other assets (51,746) 3,906
Other liabilities -- (2,349)
-------- -------
Net cash used by operating
activities $(198,282) (12,312)
======== =======
</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, 1998, and December 31, 1997, and the related Statements of
Operations and Statements of Cash Flows for the three months ended March
31, 1998 and 1997, 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, 1997.
The following notes to financial statements for activity through March 31,
1998, supplement those included in the Annual Report on Form 10-K. Certain
1997 balances have been reclassified to conform with the 1998 financial
statement presentation. 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 Partners extended the Partnership's term for
another 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 three months ended
March 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Management fees $ 51,246 53,249
Reimbursable operating expenses 170,949 102,003
Expenses absorbed by General Partners (171,652) (101,411)
</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 from related parties for such
expenses were $216,594 and $98,848, at March 31, 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 or 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 March 31, 1998 and 1997 and expenses absorbed by the General Partners
totaled $171,652 and $101,411, 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 March 31, 1998, consisted of:
<CAPTION>
January 1 through March 31, 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:
STOCKS:
- ------
Industrial/Business Automation
- ------------------------------
Cyclean of
Long Beach, LLC 01/98 LLC Units 66,667 66,667
Cyclean of
Long Beach, LLC 01/98 LLC Units 133,340 133,340
Cyclean of
Long Beach, LLC 01/98 LLC Units 66,667 66,667
Cyclean of
Long Beach, LLC 03/98 LLC Units 33,500 33,500
--------- ---------
Total significant changes during the three
months ended March 31, 1998 300,174 300,174
Other changes, net -- (18,008)
--------- ---------
Total equity investments at March 31, 1998 $7,314,850 5,658,411
========= =========
</TABLE
Marketable Equity Securities
- ----------------------------
At March 31, 1998, and December 31, 1997, marketable equity securities had
aggregate costs of $42,251 and aggregate market values of $113,605 and
$131,613, respectively. The net unrealized gains at March 31, 1998 and
December 31, 1997, included gross gains of $71,354 and $89,362,
respectively.
Cyclean of Long Beach, LLC
- --------------------------
In the first quarter of 1998, the Partnership purchased 300,174 LLC Units
for $300,174. The Partnership, together with an affiliated partnership,
owns 100% of the company.
Other Equity Investments
- ------------------------
Other changes reflected above relate to market value fluctuations for
publicly traded portfolio companies.
4. Secured Notes Receivable, Net
-----------------------------
There was no secured notes receivable activity from January 1 through March
31, 1998.
The secured notes receivable portfolio was on nonaccrual status at March
31, 1998 and December 31, 1997 due to the uncertainty of the borrowers
financial condition. 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 March
31, 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 $148,831 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 March 31, 1998, and December 31, 1997, cash and cash equivalents
consisted of:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Demand and brokerage accounts $ 5,151 5,282
Money-market accounts 1,202,052 1,700,777
--------- ---------
Total $1,207,203 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. At March 31, 1998, the Partnership had unfunded commitments for
equity investments of $101,313.
At March 31, 1998, restricted cash of $536,550 included the following:
In April, 1997, the Partnership together with an affiliated partnership,
deposited $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.
In December, 1997, the Partnership together with an affiliated partnership,
guaranteed 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 lose the escrowed funds.
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, 1998, net cash used by operating
activities totaled $198,282. The Partnership paid management fees of
$51,246 to the Managing General Partner and reimbursed related parties for
operating expenses of $117,043. Other operating expenses of $57,750 were
paid. Interest income of $27,757 was received.
During the three months ended March 31, 1998 the Partnership funded
$300,174 in equity investments to a portfolio company in the
industrial/business automation industry.
Cash and restricted cash at March 31, 1998, were $1,743,753. 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 $60,760 and $147,323 for the quarters ended March 31, 1998
and 1997, respectively. The decrease in net loss was substantially due to
a $148,831 decrease in other investment expenses partially, offset by a
$66,988 decrease in total income.
Other investment expenses, primarily legal fees, for the quarter ended
March 31, 1997, were $148,831. The decrease was due to the settlement of
the related litigation. There were no such expenses in 1998.
Total income was $27,757 and $94,745 for the quarters ended March 31, 1998
and 1997, respectively. The decrease was primarily due to lower cash and
cash equivalents balances resulting from cash used for equity investments.
Total operating expenses were $19,263 and $14,658 for the quarters ended
March 31, 1998 and 1997, respectively. As explained in Note 2 to the
financial statements, the General Partners absorbed expenses of $171,652
and $101,411, respectively, for the three months ended March 31, 1998 and
1997. Had the limitation not been in effect, total operating expenses for
the first quarter of 1998 and 1997 would have been $190,915 and $116,069,
respectively. The increase is attributable to increased investment
monitoring activities and administrative costs.
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, 1998.
(b) Financial Data Schedule for the three months ended and as of March 31,
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: May 14, 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 MARCH 31, 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> MAR-31-1998
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 13,967,651
<INVESTMENTS-AT-VALUE> 8,219,212
<RECEIVABLES> 0
<ASSETS-OTHER> 305,502
<OTHER-ITEMS-ASSETS> 1,743,753
<TOTAL-ASSETS> 10,268,467
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75,730
<TOTAL-LIABILITIES> 75,730
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,941,176
<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> (5,748,439)
<NET-ASSETS> 10,192,737
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 27,757
<OTHER-INCOME> 0
<EXPENSES-NET> 70,509
<NET-INVESTMENT-INCOME> (42,752)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (18,008)
<NET-CHANGE-FROM-OPS> (60,760)
<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> (60,760)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 51,246
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 71,060
<AVERAGE-NET-ASSETS> 10,223,117
<PER-SHARE-NAV-BEGIN> 40
<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> 40
<EXPENSE-RATIO> 0.7
<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>
