<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, 1999
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,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Notes receivable, net
(cost basis of $6,095,223 and
$6,902,801 in 1999 and 1998,
respectively) $ 3,669,223 4,476,801
Equity investments (cost basis
of $5,733,573 in 1999 and 1998) 3,494,550 3,568,670
---------- ----------
Total investments 7,163,773 8,045,471
Cash and cash equivalents 7,701 775,977
Restricted cash 33,500 33,500
Due from affiliated partnerships 6,129 4,500
Other assets 135,914 121,952
---------- ----------
Total assets $ 7,347,017 8,981,400
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 104,040 68,155
Due to related parties 195,084 1,753,326
Note payable to related party 584,862 --
---------- ----------
Total liabilities 883,986 1,821,481
Commitments, contingencies and
subsequent event
(Notes 3, 7 and 8)
Partners' capital:
Limited Partners
(399,977 Units outstanding) 11,331,292 11,947,832
General Partners (203,238) (197,010)
Net unrealized fair value decrease
from cost:
Notes receivable (2,426,000) (2,426,000)
Equity investments (2,239,023) (2,164,903)
---------- ----------
Total partners' capital 6,463,031 7,159,919
---------- ----------
Total liabilities and
partners' capital $ 7,347,017 8,981,400
========== ==========
</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,
-------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Short-term investment interest $ 408 11,893 5,006 46,319
------- ------- ------- -------
Total income 408 11,893 5,006 46,319
Costs and expenses:
Management fees 33,396 50,797 103,950 152,986
Operating expenses:
Lending operations and investment management 40,230 68,659 137,278 168,689
Administrative and investor services 92,225 175,199 285,963 334,517
Computer services 25,087 17,404 64,084 30,340
Professional fees 15,648 14,484 72,030 39,827
Expenses absorbed by General Partners -- -- (45,393) (210,976)
Interest expense 9,862 -- 9,862 --
------- ------- ------- -------
Total operating expenses 183,052 275,746 523,824 362,397
------- ------- ------- -------
Total costs and expenses 216,448 326,543 627,774 515,383
------- ------- ------- -------
Net operating loss (216,040) (314,650) (622,768) (469,064)
Net realized gain from sales of equity
investments -- 13,734 -- 13,734
------- ------- ------- -------
Net realized loss (216,040) (300,916) (622,768) (455,330)
Change in net unrealized fair
value of equity investments -- (34,150) (74,120) (89,363)
------- ------- ------- -------
Net loss $(216,040) (335,066) (696,888) (544,693)
======= ======= ======= =======
Net realized loss per Unit $ (0.53) (0.74) (1.54) (1.13)
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
1999 1998
------ ------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 5,006 46,319
Cash paid to vendors (202,965) (163,941)
Cash paid to related parties (1,962,757) (314,253)
--------- ---------
Net cash used by operating activities (2,160,716) (431,875)
--------- ---------
Cash flows from investing activities:
Purchase of equity investments -- (901,487)
Repayments of secured notes receivable 807,578 --
Proceeds from sales of equity
investments -- 55,984
--------- ---------
Net cash provided (used) by investing
activities 807,578 (845,503)
--------- ---------
Cash flows from financing activities:
Proceeds from note payable to
related party 584,862 --
--------- ---------
Net cash provided by financing
activities 584,862 --
--------- ---------
Net decrease in cash and cash
equivalents (768,276) (1,277,378)
Cash and restricted cash at
beginning of year 809,477 2,242,209
--------- ---------
Cash and restricted cash
at September 30 $ 41,201 964,831
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
1999 1998
------ ------
<S> <C> <C>
Reconciliation of net loss
to net cash used by operating
activities:
Net loss $ (696,888) (544,693)
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 of
equity investments 74,120 89,363
Changes in:
Due to related parties (1,558,242) 123,494
Accounts payable and accrued expenses 35,885 720
Other (15,591) (87,025)
--------- -------
Net cash used by operating
activities $(2,160,716) (431,875)
========= =======
</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, 1998. 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.
2. Financing of Partnership Operations
-----------------------------------
The Managing General Partner expects that cash received from liquidation of
Partnership investments will provide the necessary liquidity to fund
Partnership operations. The Partnership may be dependent upon the financial
support of the Managing General Partner to fund operations if future
proceeds are not received timely. The Managing General Partner has
committed to this support in the form of short-term cash advances.
3. 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, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Management fees $ 103,950 152,986
Reimbursable operating expenses 344,329 495,737
Expenses absorbed by General Partners (45,393) (210,976)
</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 for such
expenses were $162,690 and $1,753,326 at September 30, 1999 and December
31, 1998, 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 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, 1999 and 1998 and expenses absorbed by the General
Partners totaled $45,393 and $210,976, respectively.
At September 30, 1999 and December 31, 1998, management fees payable were
$32,394 and $0, respectively.
In 1999, the Managing General Partner entered into a sublease rental
agreement with a Partnership portfolio company in the computers and
computer equipment industry. The terms of this agreement are similar to
those which would apply to an unrelated party.
4. Notes Receivable, Net
---------------------
<TABLE>
A complete listing of the Partnership's notes receivable at December 31, 1998, is included in the
1998 Annual Report on Form 10-K. Activity from January 1 through September 30, 1999, consisted of:
January 1 through
September 30, 1999
--------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- -------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $6,902,801 4,476,801
1999 activity:
Computers and Computer Equipment
- --------------------------------
MARCorp 12/89- Secured notes
02/93 receivable, plus
interest (807,578) (807,578)
--------- ---------
Total notes receivable at September 30, 1999 $6,095,223 3,669,223
========= =========
MARCorp
- -------
In 1998, the company entered into an agreement to sell the majority of its assets to the management
of one of its subsidiaries. The Partnership has valued its secured notes receivable investment in
the company at its expected share of the proceeds from this sale. In February 1999, the Partnership
received $807,578 of these proceeds. The fair market value of the remaining proceeds receivable at
September 30, 1999 was $1,884,186. (See Note 7.)
During 1999, the company purchased $3,000,000 in senior secured convertible debentures of Sutmyn
Storage Corporation, a company in the computer industry.
</TABLE>
5. Equity Investments
------------------
<TABLE>
A complete listing of the Partnership's equity investments at December 31, 1998, is included in the
1998 Annual Report on Form 10-K. Activity from January 1 through September 30, 1999 consisted of:
January 1 through
September 30, 1999
---------------------
Investment Cost Fair
Industry/Company Date Position Basis Value
- ---------------- ---------- -------- ------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $5,733,573 3,568,670
1999 activity:
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 2,908,450 Series C
Systems Corporation Preferred shares 0 (69,726)
Other changes, net 0 (4,394)
--------- ---------
Total equity investments at September 30, 1999 $5,733,573 3,494,550
========= =========
Wasatch Education Systems Corporation
- -------------------------------------
In June 1999, the Partnership recorded a $69,726 decrease in the fair value of its investment based
upon the Managing General Partners' assessment of the operating status of the company.
</TABLE>
6. Cash and Cash Equivalents
-------------------------
At September 30, 1999, and December 31, 1998, cash and cash equivalents
consisted of:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Demand and brokerage accounts $5,978 320,775
Money-market accounts 1,723 455,202
----- -------
Total $7,701 775,977
===== =======
</TABLE>
7. Note Payable to Related Party
-----------------------------
On June 28, 1999, the Partnership borrowed $300,000 from MARCorp, a
portfolio company of the Partnership, under an unsecured promissory note.
An affiliated partnership owns more than 80% of MARCorp. The note bears
interest at 9% and both principal and interest are payable on June 15,
2000. The terms of the note require that the note be repaid prior to any
distributions to partners. (See Note 4.)
On August 10, 1999, the Partnership borrowed an additional $275,000 from
MARCorp on similar terms. On October 28, 1999, the Partnership repaid this
amount to MARCorp.
8. 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 September 30, 1999, the Partnership had no unfunded
commitments.
The Partnership, together with an affiliated partnership, guaranteed a note
payable of a portfolio company. The Partnership's share of the guarantee
is $502,500.
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 nine months ended September 30, 1999, net cash used by operating
activities totaled $2,160,716. The Partnership paid management fees of
$71,556 to the Managing General Partner and reimbursed related parties for
operating expenses of $1,891,201. Other operating expenses of $202,965
were paid. Interest income of $5,006 was received.
During the nine months ended September 30, 1999, the Partnership received
$807,578 in secured notes receivable repayments and borrowed $575,000 from
a portfolio company.
Cash and restricted cash at September 30, 1999 were $41,201. Future
distributions will be dependent upon loan repayments from borrowing
companies, future proceeds from equity investment sales and available cash.
Operating cash reserves, repayments of secured notes receivable, and the
Managing General Partners' support 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 $216,040 and $335,066 for the quarters ended September 30,
1999 and 1998, respectively. The improvement was substantially due to a
decrease in operating expenses of $92,694 and a $34,150 increase in net
unrealized fair value of equity investments.
Total operating expenses were $183,052 and $275,746 for the quarters ended
September 30, 1999 and 1998, respectively. This decrease is primarily
attributable to decreased administrative overhead and investment monitoring
activity, partially offset by increased computer service costs.
The $34,150 decrease in the net unrealized fair value of equity investments
in the quarter ended September 30, 1998 primarily related to sales of
investments. There was no change in the fair value of equity investments
in the current period of 1999.
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 $696,888 and $544,693 for the nine months ended
September 30, 1999 and 1998, respectively. The increased loss was
primarily due to a $161,427 increase in operating expenses and a $41,313
decrease in interest income, partially offset by a $49,036 decrease in
management fees.
Total operating expenses were $523,824 and $362,397 for the nine months
ended September 30, 1999 and 1998, respectively. As explained in Note 3 to
the financial statements, the General Partners absorbed $45,393 and
$210,976, respectively, for the nine months ended September 30, 1999 and
1998. The decrease in operating expenses absorbed by the General Partners
is attributable to the re-evaluation of expense limitation provisions of
the Partnership agreement which occurred in the fourth quarter of 1998.
This re-evaluation effectively lowered the total amount of operating
expenses subject to the expense limitation. Had the limitation not been in
effect, total operating expenses for 1999 and 1998 would have been $569,217
and $573,373, respectively.
Interest income was $5,006 and $46,319 for the nine months ended September
30, 1999 and 1998, respectively. The decrease in 1999 was due to the
decrease in cash and cash equivalent balances.
Total management fees were $103,950 and $152,986 for the nine months ended
September 30, 1999 and 1998, respectively. The decrease in 1999 was due to
a decrease in assets under management.
YEAR 2000
- ---------
Widespread use of computer programs that use two digits rather than four to
store, calculate, and display year values in dates may cause computer
systems to malfunction in the year 2000, resulting in significant business
delays and disruptions.
The Partnership's State of Readiness
------------------------------------
Computer services are provided to the Partnership by its Managing General
Partner, Technology Funding Inc. ("TFI"). For several years, TFI has
sought to use Year 2000 compliant storage formats and algorithms in its
internally-developed and maintained systems. TFI has also completed
initial evaluations of computer systems, software, and embedded
technologies. Those evaluations confirmed that certain components of its
network server hardware and operating systems, voice mail system, e-mail
system, and accounting software may have Year 2000 compliance issues.
These resources and several less-critical components of the systems
environment were all scheduled as part of normal maintenance and
replacement cycles to be replaced or upgraded as Year 2000 compatible
components became available from vendors during 1998 and 1999. That
program remains on schedule to provide Year 2000 capable systems timely
without significant expenditures or disruption of Partnership operations.
TFI has implemented and tested Year 2000 capable versions of all its
mission-critical systems. However, the risk remains that TFI may not be
able to verify whether Year 2000 compatibility claims by vendors are
accurate, or whether changes undertaken to achieve Year 2000 compatibility
will create other undetected problems in associated systems. Therefore,
TFI anticipates that Year 2000 compliance testing and maintenance of these
systems will continue as needed into the first quarter of 2000.
As part of Year 2000 evaluation, TFI has also assembled a database listing
its significant suppliers to assess the extent to which it needs to prepare
for any of those parties' potential failure to remediate their Year 2000
compliance issues. TFI reviewed public Year 2000 statements of those
suppliers and sent questionnaires to vendors whose public statements were
not adequate for assessment. All mission-critical vendors have responded
that they expect to be Year 2000 compliant barring any unforeseen
circumstances. TFI will continue to monitor its significant suppliers as
part of its Year 2000 evaluation. However, there can be no guarantee that
the systems of other companies on which TFI relies will be timely
converted, or that failure to convert will not have a material adverse
effect on the Partnership and its operations. TFI is also working with the
Partnership's portfolio companies to determine the extent to which their
operations are vulnerable to Year 2000 issues, and maintaining their
responses in the vendor database. There can be no guarantee that the
systems of portfolio companies in which the Partnership has invested will
be timely converted, or that their failure to convert will not have a
material adverse effect on the Partnership.
The Cost to Address Year 2000 Issues
------------------------------------
Expenditures in 1999 to date related to Year 2000 issues were not material
to the Partnership's financial statements. TFI expects that additional
expenditures for Year 2000 compliance will not be material to the
Partnership.
The Risks Associated with Year 2000 Issues
------------------------------------------
Any failure by the portfolio companies in which the Partnership has
invested, or by those portfolio companies' key suppliers or customers, to
anticipate and avoid Year 2000 related problems at reasonable cost could
have a material adverse effect on the value of and/or the timing of
realization of value from the Partnership's investments. If TFI's Year
2000 compliance issues have not been resolved correctly, internal system
failures or miscalculations could cause a temporary inability to process
transactions, loss of ability to send or receive e-mail and voice mail
messages, or disruptions in other normal business activities.
Additionally, failure of third parties on whom TFI relies to remediate
their Year 2000 issues timely could result in disruptions in the
Partnership's relationship with its financial institutions, temporary
disruptions in processing transactions, unanticipated costs, and problems
related to the Partnership's daily operations. While TFI continues to
address its internal Year 2000 issues, the overall risks associated with
the Year 2000 issue remain difficult to describe and quantify. There can
be no guarantee that the Year 2000 issue will not have a material adverse
effect on the Partnership and its operations.
TFI's Contingency Plan
----------------------
As part of its normal efforts to assure business continuation in the event
of natural disasters, systems failures, or other disruptions, TFI has
prepared contingency plans including an extensive Year 2000 contingency
plan. Taken together with TFI's Year 2000 remediation plan, it identifies
potential points of failure, approaches to correcting known Year 2000
problems, dates by which the preferred corrections are anticipated to be
made and tested, and alternative approaches if the corrections are not
completed timely or are later found to be inadequate. Although backup
systems and contingency approaches have been identified for most systems
and vendor dependencies, there remain some systems for which no good
alternative exists, and there may be some problems that prove more
intractable than currently anticipated.
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, 1999.
(b) Financial Data Schedule for the nine months ended and as of September
30, 1999 (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, 1999 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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 9-MOS
<INVESTMENTS-AT-COST> 11,828,796
<INVESTMENTS-AT-VALUE> 7,163,773
<RECEIVABLES> 0
<ASSETS-OTHER> 142,043
<OTHER-ITEMS-ASSETS> 41,201
<TOTAL-ASSETS> 7,347,017
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 883,986
<TOTAL-LIABILITIES> 883,986
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,128,054
<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> (4,665,023)
<NET-ASSETS> 6,463,031
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,006
<OTHER-INCOME> 0
<EXPENSES-NET> 627,774
<NET-INVESTMENT-INCOME> (622,768)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (74,120)
<NET-CHANGE-FROM-OPS> (696,888)
<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> (696,888)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 103,950
<INTEREST-EXPENSE> 9,862
<GROSS-EXPENSE> 629,724
<AVERAGE-NET-ASSETS> 6,811,475
<PER-SHARE-NAV-BEGIN> 30
<PER-SHARE-NII> (2)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 28
<EXPENSE-RATIO> 9.22
<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.
</FN>
</TABLE>
