<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 June 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)
June 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 $7,916,163 and $7,014,676 in
1998 and 1997, respectively) 6,222,519 5,376,245
---------- ----------
Total investments 8,783,320 7,937,046
Cash and cash equivalents 1,116,377 1,706,059
Restricted cash 36,960 536,150
Due from affiliated partnerships 4,500 4,500
Due from related parties 60,741 98,848
Other assets 101,889 32,662
---------- ----------
Total assets $10,103,787 10,315,265
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 59,917 61,768
---------- ----------
Total liabilities 59,917 61,768
Commitments and contingencies
(Notes 2 and 7)
Partners' capital:
Limited Partners
(Units outstanding of 399,977
for both 1998 and 1997) 15,985,737 16,138,607
General Partners (156,223) (154,679)
Net unrealized fair value decrease
from cost:
Secured notes receivable (4,092,000) (4,092,000)
Equity investments (1,693,644) (1,638,431)
---------- ----------
Total partners' capital 10,043,870 10,253,497
---------- ----------
Total liabilities and
partners' capital $10,103,787 10,315,265
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Secured notes receivable interest $ -- -- -- 11,497
Short-term investment interest 6,669 35,383 34,426 118,631
------- ------- ------- -------
Total income 6,669 35,383 34,426 130,128
Costs and expenses:
Management fees 50,943 52,513 102,189 105,762
Other investment expenses -- 41,600 -- 190,431
Operating expenses:
Lending operations and investment
management 18,310 43,455 100,030 89,052
Administrative and investor
services 75,679 45,334 159,318 93,092
Computer services 1,944 13,361 12,936 28,215
Professional fees 10,779 11,321 25,343 19,181
Expenses absorbed by General
Partners (39,324) (30,471) (210,976) (131,882)
------- ------- ------- -------
Total operating expenses 67,388 83,000 86,651 97,658
------- ------- ------- -------
Total costs and expenses 118,331 177,113 188,840 393,851
------- ------- ------- -------
Net operating loss (111,662) (141,730) (154,414) (263,723)
Change in net unrealized
fair value:
Secured notes receivable -- (15,000) -- (15,000)
Equity investments (37,205) 39,088 (55,213) 13,758
------- ------- ------- -------
Net loss $(148,867) (117,642) (209,627) (264,965)
======= ======= ======= =======
Net realized loss per Unit $ -- -- -- (1)
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 34,426 130,128
Cash paid to vendors (112,403) (351,398)
Cash paid to related parties (109,408) (163,888)
--------- ---------
Net cash used by operating activities (187,385) (385,158)
--------- ---------
Cash flows from investing activities:
Purchase of equity investments (901,487) (3,685,000)
Secured notes receivable issued -- (301,213)
Repayments of secured notes receivable -- 4,989
--------- ---------
Net cash used by investing
activities (901,487) (3,981,224)
--------- ---------
Net decrease in cash and cash
equivalents (1,088,872) (4,366,382)
Cash and restricted cash at
beginning of year 2,242,209 7,057,233
--------- ---------
Cash and restricted cash
at June 30 $1,153,337 2,690,851
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1998 1997
------ ------
<S> <C> <C>
Reconciliation of net loss
to net cash used by operating
activities:
Net loss $(209,627) (264,965)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Change in net unrealized fair value:
Secured notes receivable -- 15,000
Equity investments 55,213 (13,758)
Changes in:
Due from related parties
and affiliated partnerships 38,107 (8,610)
Accounts payable and accrued expenses (1,851) (81,863)
Other assets (69,227) (28,617)
Other changes, net -- (2,345)
------- -------
Net cash used by operating
activities $(187,385) (385,158)
======= =======
</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 six months ended
June 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Management fees $ 102,189 105,762
Reimbursable operating expenses 256,302 181,398
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 from related parties for such
expenses were $60,741 and $98,848, at June 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 June 30, 1998 and 1997 and expenses absorbed by the General
Partners totaled $210,976 and $131,882, 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 June 30, 1998 consisted of:
<CAPTION>
January 1 through June 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
--------- ---------
Total significant changes during the six
months ended June 30, 1998 901,487 901,487
Other changes, net -- (55,213)
--------- ---------
Total equity investments at June 30, 1998 $7,916,163 6,222,519
========= =========
</TABLE
Marketable Equity Securities
- ----------------------------
At June 30, 1998, and December 31, 1997, marketable equity securities had
aggregate costs of $42,251 and aggregate market values of $76,400 and
$131,613, respectively. The net unrealized gains at June 30, 1998 and
December 31, 1997, included gross gains of $34,149 and $89,362,
respectively.
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.
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 June
30, 1998.
The secured notes receivable portfolio was on nonaccrual status at June 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 June
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 June 30, 1998, and December 31, 1997, cash and cash equivalents
consisted of:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Demand accounts $ 41,826 5,282
Money-market accounts 1,074,551 1,700,777
--------- ---------
Total $1,116,377 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 six months ended June 30, 1998, net cash used by operating
activities totaled $187,385. The Partnership paid management fees of
$102,189 to the Managing General Partner and reimbursed related parties for
operating expenses of $7,219. Other operating expenses of $112,403 were
paid. Interest income of $34,426 was received.
During the six months ended June 30, 1998 the Partnership funded $901,487
in equity investments to a portfolio company in the industrial/business
automation industry.
Cash and restricted cash at June 30, 1998, were $1,153,337. 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 $148,867 and $117,642 for the quarters ended June 30, 1998
and 1997, respectively. The increase in net loss was substantially due to
a $61,293 decrease in the change in the net unrealized fair value of
investments and a $28,714 decrease in total income. These changes were
partially offset by a $41,600 decrease in investment expenses and a $15,612
decrease in operating expenses.
The Partnership recorded a decrease in investment fair value of $37,205 for
the three months ended June 30, 1998 compared to an increase of $24,088 for
the same period in 1997. The 1998 decrease was primarily due to decreases
in the microelectronics industry. The 1997 increase was primarily due to
increases in the computers and computer equipment and telecommunications
industries.
Total income was $6,669 and $35,383 for the quarters ended June 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 quarter ended June
30, 1997, were $41,600. The decrease was due to the settlement of the
related litigation. There were no such expenses in 1998.
Total operating expenses were $67,388 and $83,000 for the quarters ended
June 30, 1998 and 1997, respectively. For the three months ended June 30,
1998 and 1997, the General Partner absorbed $39,324 and $30,471,
respectively, as explained in Note 2 to the financial statements. Had the
limitation not been in effect, total operating expenses for the three
months ended June 30, 1998 and 1997 would have been $106,712 and $113,471,
respectively.
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 six months compared to corresponding six months in the preceding
- ------------------------------------------------------------------------
year
- ----
Net losses totaled $209,627 and $264,965 for the six months ended June 30,
1998 and 1997, respectively. The improvement was primarily due to a
$190,431 decrease in other investment expenses and a $11,007 decrease in
total operating expenses. These changes were partially offset by a $95,702
decrease in total income and a $53,971 decrease in the change in net
unrealized fair value of investments.
Other investment expenses, primarily legal fees, for the six months ended
June 30, 1997 were $190,431. The decrease was due to the settlement of the
related litigation. There were no such expenses in 1998.
Total operating expenses were $86,651 and $97,658 for the six months ended
June 30, 1998 and 1997, respectively. As explained in Note 2 to the
financial statements, the General Partners absorbed $210,976 and $131,882,
respectively, for the six months ended June 30, 1998 and 1997. Had the
limitation not been in effect, total operating expenses for 1998 and 1997
would have been $297,627 and $229,540, respectively. The increase is
attributable to increased investment monitoring activities and
administrative costs.
Total income was $34,426 and $130,128 during the six months ended June 30,
1998 and 1997, respectively. The decrease was primarily due to lower cash
and cash equivalents balances resulting from cash used for equity
investments.
The Partnership recorded a decrease in investment fair value of $55,213 for
the six months ended June 30, 1998, compared to a decrease of $1,242 for
the same period in 1997. The 1998 decrease was primarily due to decreases
in the microelectronics industry.
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 June 30, 1998.
b) Financial Data Schedule for the six months ended and as of June 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: August 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 JUNE 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> JUN-30-1998
<PERIOD-TYPE> 6-MOS
<INVESTMENTS-AT-COST> 14,568,964
<INVESTMENTS-AT-VALUE> 8,783,320
<RECEIVABLES> 0
<ASSETS-OTHER> 167,130
<OTHER-ITEMS-ASSETS> 1,153,337
<TOTAL-ASSETS> 10,103,787
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59,917
<TOTAL-LIABILITIES> 59,917
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,829,514
<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> (5,785,644)
<NET-ASSETS> 10,043,870
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 34,426
<OTHER-INCOME> 0
<EXPENSES-NET> 188,840
<NET-INVESTMENT-INCOME> (154,414)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (55,213)
<NET-CHANGE-FROM-OPS> (209,627)
<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> (209,627)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 102,189
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 277,005
<AVERAGE-NET-ASSETS> 10,148,684
<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> 1.9
<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>
