<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, 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)
March 31, 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) 3,568,670 3,568,670
---------- ----------
Total investments 7,237,893 8,045,471
Cash and cash equivalents 154,332 775,977
Restricted cash 33,500 33,500
Due from affiliated partnerships 4,500 4,500
Other assets 131,072 121,952
---------- ----------
Total assets $ 7,561,297 8,981,400
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 74,282 68,155
Due to related parties 527,361 1,753,326
---------- ----------
Total liabilities 601,643 1,821,481
Commitments and contingencies
(Notes 2 and 6)
Partners' capital:
Limited Partners
(399,977 Units outstanding) 11,749,570 11,947,832
General Partners (199,013) (197,010)
Net unrealized fair value decrease
from cost:
Secured notes receivable (2,426,000) (2,426,000)
Equity investments (2,164,903) (2,164,903)
---------- ----------
Total partners' capital 6,959,654 7,159,919
---------- ----------
Total liabilities and
partners' capital $ 7,561,297 8,981,400
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Income:
Short-term investment interest $ 3,905 27,757
------- -------
Total income 3,905 27,757
Costs and expenses:
Management fees 35,778 51,246
Operating expenses:
Lending operations and investment
management 49,964 81,720
Administrative and investor
services 86,960 83,639
Computer services 18,999 10,992
Professional fees 18,813 14,564
Expenses absorbed by General
Partners (6,344) (171,652)
------- -------
Total operating expenses 168,392 19,263
------- -------
Total costs and expenses 204,170 70,509
------- -------
Net realized loss (200,265) (42,752)
Change in net unrealized
fair value of equity investments -- (18,008)
------- -------
Net loss $(200,265) (60,760)
======= =======
Net realized loss per Unit $ (0.50) (0.11)
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1999 1998
------ ------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 3,905 27,757
Cash paid to vendors (62,373) (57,750)
Cash paid to related parties (1,370,755) (168,289)
--------- ---------
Net cash used by operating activities (1,429,223) (198,282)
--------- ---------
Cash flows from investing activities:
Purchase of equity investments -- (300,174)
Repayments of secured notes receivable 807,578 --
--------- ---------
Net cash provided (used) by investing
activities 807,578 (300,174)
--------- ---------
Net decrease in cash and cash
equivalents (621,645) (498,456)
Cash and restricted cash at
beginning of year 809,477 2,242,209
--------- ---------
Cash and restricted cash
at March 31 $ 187,832 1,743,753
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1999 1998
------ ------
<S> <C> <C>
Reconciliation of net loss
to net cash used by operating
activities:
Net loss $ (200,265) (60,760)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Change in net unrealized fair value of
equity investments -- 18,008
Changes in:
Due to related parties (1,225,965) (117,746)
Accounts payable and accrued expenses 6,127 13,962
Other (9,120) (51,746)
--------- -------
Net cash used by operating
activities $(1,429,223) (198,282)
========= =======
</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, 1999, and December 31, 1998, and the related Statements of
Operations and Statements of Cash Flows for the three months ended March
31, 1999 and 1998, 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, 1998.
The following notes to financial statements for activity through March 31,
1999, supplement those included in the Annual Report on Form 10-K.
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. 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, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Management fees $ 35,778 51,246
Reimbursable operating expenses 115,356 170,949
Expenses absorbed by General Partners (6,344) (171,652)
</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 $527,361 and $1,753,326 at March 31, 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 March 31, 1999 and 1998 and expenses absorbed by the General Partners
totaled $6,344 and $171,652, respectively.
3. 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 March 31, 1999, consisted of:
January 1 through March 31, 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, totaling
$13,247,984 (807,578) (807,578)
--------- ---------
Total notes receivable at March 31, 1999 $6,095,223 3,669,223
========= =========
</TABLE>
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 March 31, 1999 was $1,884,186.
4. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December 31,
1998, is included in the 1998 Annual Report on Form 10-K. There was no
investment activity from January 1 through March 31, 1999.
5. Cash and Cash Equivalents
-------------------------
At March 31, 1999, and December 31, 1998, cash and cash equivalents
consisted of:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Demand and brokerage accounts $ 8,087 320,775
Money-market accounts 146,245 455,202
--------- ---------
Total $ 154,332 775,977
========= =========
</TABLE>
6. 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, 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 three months ended March 31, 1999, net cash used by operating
activities totaled $1,429,223. The Partnership paid management fees of
$35,778 to the Managing General Partner and reimbursed related parties for
operating expenses of $1,334,977. Other operating expenses of $62,373 were
paid. Interest income of $3,905 was received.
During the three months ended March 31, 1999, the Partnership received
$807,578 in secured notes receivable repayments.
Cash and restricted cash at March 31, 1999 were $187,832. 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 $200,265 and $60,760 for the quarters ended March 31, 1999
and 1998, respectively. The increase in net loss was substantially due to
an increase in operating expenses of $149,129 and a decrease in total
income of $23,852, partially, offset by an $18,008 increase in the change
in net unrealized fair value of equity investments and a $15,468 decrease
in management fees.
Total operating expenses were $168,392 and $19,263 for the quarters ended
March 31, 1999 and 1998, respectively. As explained in Note 2 to the
financial statements, the General Partners absorbed expenses of $6,344 and
$171,652, respectively, for the three months ended March 31, 1999 and 1998.
The decrease in operating expenses absorbed by the General Partners in the
current quarter 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 the first
quarter of 1999 and 1998 would have been $174,736 and $190,915,
respectively. This decrease is primarily attributable to decreased
investment monitoring activity.
Total income was $3,905 and $27,757 for the quarters ended March 31, 1999
and 1998, respectively. The decrease was primarily due to lower cash and
cash equivalents balances.
Total management fees were $35,778 and $51,246 for the quarters ended March
31, 1999 and 1998, respectively. The decrease was due to a decrease in
assets under management.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
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.
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 is reviewing public Year 2000 statements of those
suppliers and preparing questionnaires to be sent to mission-critical
vendors whose public statements were not adequate for assessment. 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. 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 Year 2000
compliance issues are not resolved by December 31, 1999, 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, until TFI receives and evaluates
responses from a significant number of its suppliers, 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 mission-
critical 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 March 31, 1999.
(b) Financial Data Schedule for the three months ended and as of March 31,
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: May 14, 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 MARCH 31, 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> MAR-31-1999
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 11,828,796
<INVESTMENTS-AT-VALUE> 7,237,893
<RECEIVABLES> 0
<ASSETS-OTHER> 135,572
<OTHER-ITEMS-ASSETS> 187,832
<TOTAL-ASSETS> 7,561,297
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 601,643
<TOTAL-LIABILITIES> 601,643
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,550,557
<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> (4,590,903)
<NET-ASSETS> 6,959,654
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,905
<OTHER-INCOME> 0
<EXPENSES-NET> 204,170
<NET-INVESTMENT-INCOME> (200,265)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> (200,265)
<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> (200,265)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 35,778
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 204,820
<AVERAGE-NET-ASSETS> 7,059,786
<PER-SHARE-NAV-BEGIN> 30
<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> 29
<EXPENSE-RATIO> 2.89
<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.
</FN>
</TABLE>
