<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, 2000
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,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Notes receivable, at fair value
(cost basis of $6,095,223 in 2000
and 1999) $ 514,300 3,061,223
Equity investments, at fair value
(cost basis of $5,733,573 in 2000
and 1999) 102,300 1,756,563
--------- ---------
Total investments 616,600 4,817,786
Cash and cash equivalents 10,339 8,934
Restricted cash 33,500 33,500
Due from affiliated partnerships 6,129 6,129
Other assets 9,681 139,468
--------- ---------
Total assets $ 676,249 5,005,817
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 57,851 70,587
Due to related parties 355,221 610,100
Related party note payable (includes accrued
interest of $59,791 and $19,470 in 2000 and
1999, respectively) 634,791 319,470
--------- ---------
Total liabilities 1,047,863 1,000,157
Commitments and contingencies
Partners' capital:
Limited Partners (399,977 Units outstanding) 0 4,109,324
General Partners (371,614) (103,664)
--------- ---------
Total partners' capital (371,614) 4,005,660
--------- ---------
Total liabilities and partners' capital $ 676,249 5,005,817
========= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Short-term investment interest $ 455 408 1,571 5,006
Other income 22,195 -- 22,195 --
--------- ------- --------- -------
Total income 22,650 408 23,766 5,006
Costs and expenses:
Management fees 20,484 33,396 60,018 103,950
Operating expenses (reimbursements):
Lending operations and investment management 167,071 40,230 (40,978) 137,278
Administrative and investor services 52,899 92,225 72,591 285,963
Computer services 15,705 25,087 37,637 64,084
Professional fees 19,414 15,648 30,226 72,030
Expenses absorbed by General Partners -- -- -- (45,393)
Interest expense 14,095 9,862 40,360 9,862
--------- ------- --------- -------
Total operating expenses 269,184 183,052 139,836 523,824
--------- ------- --------- -------
Total costs and expenses 289,668 216,448 199,854 627,774
--------- ------- --------- -------
Net realized loss (267,018) (216,040) (176,088) (622,768)
Change in net unrealized fair value:
Equity investments (1,654,263) -- (1,654,263) (74,120)
Notes receivable (2,546,923) -- (2,546,923) --
--------- ------- --------- -------
Net loss $(4,468,204) (216,040) (4,377,274) (696,888)
========= ======= ========= =======
Net loss per unit $ (10.27) (0.53) (10.27) (1.72)
========= ======= ========= =======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
2000 1999
------ ------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 1,571 5,006
Other income received 22,195 --
Cash paid to vendors (88,593) (202,965)
Cash paid to related parties (208,768) (1,962,757)
------- ---------
Net cash used by operating activities (273,595) (2,160,716)
------- ---------
Cash flows from investing activities:
Repayments of secured notes receivable -- 807,578
------- ---------
Net cash provided by investing
activities -- 807,578
------- ---------
Cash flows from financing activities:
Proceeds from note payable to
related party 275,000 584,862
------- ---------
Net cash provided by financing
activities 275,000 584,862
------- ---------
Net increase (decrease) in cash and
cash equivalents 1,405 (768,276)
Cash and restricted cash at
beginning of year 42,434 809,477
------- ---------
Cash and restricted cash
at September 30 $ 43,839 41,201
======= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
-----------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
2000 1999
------ ------
<S> <C> <C>
Reconciliation of net loss
to net cash used by operating
activities:
Net loss $(4,377,274) (696,888)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Change in net unrealized fair value:
Equity investments 1,654,263 74,120
Notes receivable 2,546,923 --
Changes in:
Due to related parties (254,879) (1,558,242)
Accounts payable and accrued expenses 27,585 35,885
Other 129,787 (15,591)
--------- ---------
Net cash used by operating
activities $ (273,595) (2,160,716)
========= =========
</TABLE>
See accompanying notes to unaudited 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 the 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, 1999. 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.
The Partnership is scheduled to terminate on December 31, 2000. If the
General Partners so determine, the Partnership can be further extended for
an additional two-year period or the Partnership will be liquidated in
accordance with the Partnership Agreement.
2. Financing of Partnership Operations
-----------------------------------
The General Partners have made loans to the Partnership to finance its
recurring losses from on-going operations. The Partnership has very
limited cash resources and primarily illiquid assets. The General Partners
are under no obligation to continue the financing of the Partnership's
daily operations and may elect to discontinue such support at any time
during the remaining life of the Partnership.
The uncertainties arising from these circumstances raise substantial doubt
about the Partnership's ability to continue as a going concern. The
accompanying interim financial statements do not include any adjustments
that might result from the outcome of these uncertainties. The Partnership
has been advised by its independent public accountants that should the
uncertainties surrounding the Partnership's future operations remain
unresolved at year-end, their report on those financial statements will be
modified for that contingency.
3. Fair Value of Investments
-------------------------
The Partnership's investments are valued at fair value as determined in
good faith by the Managing General Partner in the absence of readily
available market quotations. At this stage of the Partnership's life, the
holdings in the Partnership's portfolio are limited to companies for which
any estimate of fair value is highly subjective. Therefore, in August
2000, the General Partners engaged an independent third party to appraise
the Partnership's remaining portfolio companies. Based upon the final
appraisal report received in October 2000, the Managing General Partner has
determined that the fair value of the Partnership's investments in
portfolio companies totals $616,600 at September 30, 2000. The Managing
General Partner is currently pursuing the sale of these investments. The
fair value at September 30, 2000 may differ significantly from a value that
would have been used had the ultimate proceeds from sale of the investments
been known.
4. 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, 2000 and 1999, were as follows:
2000 1999
------- --------
Management fees $ 60,018 103,950
Reimbursable operating expenses, net (106,129) 344,329
Expenses absorbed by General Partners -- (45,393)
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 $328,583 and $545,390 at September 30, 2000 and December 31,
1999, respectively. In the second quarter of 2000, the Managing General
Partner refunded the Partnership $315,481 for investment management
expenses previously billed by the General Partners in 1998 and 1999.
Amounts payable for management fees were $26,638 and $64,710 at September
30, 2000 and December 31, 1999, respectively. Management fees are equal to
the greater of one-half percent of the Partnership's assets under
management or $2,500 each quarter.
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 expenses absorbed by the General Partners
totaled $45,393. There were no expenses absorbed by the General Partners
at September 30, 2000.
5. Notes Receivable, Net
---------------------
At September 30, 2000 notes receivable consisted of:
Investment Cost Fair
Portfolio Company Date Position Basis Value
----------------- ---------- -------- ----- -----
CLB, LLC 04/97-10/98 Unsecured notes
receivable $ 518,000 166,867
Cyclean, Inc. 09/87-09/94 Secured notes
receivable 933,792 299,633
MARCorp 12/89-02/93 Secured notes
receivable 4,643,431 47,800
--------- -------
Total notes receivable $6,095,223 514,300
========= =======
As discussed in Note 3, the Managing General Partner obtained an appraisal
of the Partnership's remaining assets in the following portfolio companies
from an independent third party. The Managing General Partner is currently
pursuing the sale of these investments. The fair value at September 30,
2000 may differ significantly from a value that would have been used had
the ultimate proceeds from sale of the investments been known.
CLB, LLC
--------
The fair value of the company's assets is estimated to range from $175,666
to $308,000. Assuming that the partnership's notes would be paid on a pro
rata basis from the proceeds of a sale of the company's assets, the
appraised value of the partnership's notes receivable is approximately
$166,867.
Cyclean, Inc.
-------------
The fair value of the company's assets is estimated to range from
$1,751,334 to $2,824,000. However, the company's debt totals over
$22,872,000. Assuming that the partnership's notes would be paid on a pro
rata basis from the proceeds of a sale of the company's assets, the
appraised value of the partnership's notes receivable is approximately
$299,633.
MARCorp
-------
The company is pursuing several options, including debt buy-downs, capital
restructuring and additional financing. After assessing the reasonable
probabilities of the possible scenarios, the appraised value of the
Partnership's interest in the company is approximately $47,800.
Changes in the net unrealized fair value of notes receivable were as
follows:
Net unrealized fair value of notes
receivable at January 1, 2000 $ 3,061,223
Net unrealized fair value of notes
receivable at September 30, 2000 514,300
---------
Change in net unrealized fair value of
notes receivable $(2,546,923)
=========
The decrease in unrealized fair value is a result of changes in the
estimated fair value of the investments described above.
6. Equity Investments
------------------
At September 30, 2000 equity investments consisted of:
Investment Cost Fair
Portfolio Company Date Position Basis Value
----------------- ---------- -------- ----- -----
All Post, Inc. 10/94 17,574 Common
shares $ 13,884 0
CLB, LLC 04/97-06/98 4,690,000
LLC Units 4,690,000 0
Cyclean, Inc. 09/94-04/96 225,088 Series D
Preferred shares 242,988 0
Cyclean of 03/95 Class A LLC Unit
Los Angeles, LLC 44% ownership 11,091 0
Wasatch Education 06/95 2,908,450 Series
Systems Corporation C Preferred
shares 775,610 102,300
--------- -------
Total equity investments $5,733,573 102,300
========= =======
As discussed in Note 3, the Managing General Partner obtained an appraisal
of the Partnership's remaining investments in portfolio companies from an
independent third party. The Managing General Partner is currently
pursuing the sale of these investments. The fair value at September 30,
2000 may differ significantly from a value that would have been used had
the ultimate proceeds from sale of the investments been known.
Wasatch Education Systems Corporation
-------------------------------------
The fair value of the company's assets is estimated to range from $300,000
to $525,000 with the assumption that an associated company, which provides
royalty payments to Wasatch Education Systems Corp., will succeed in
achieving and sustaining positive operating cash flow during the next five
to fifteen years. Based on this assumption, the estimated fair value of
the partnership's invested capital is approximately $102,300.
Changes in the net unrealized fair value of equity investments were as
follows:
Net unrealized fair value of equity
investments at January 1, 2000 $ 1,756,563
Net unrealized fair value of equity
investments at September 30, 2000 102,300
---------
Change in net unrealized fair value of
equity investments $(1,654,263)
=========
The decrease in unrealized fair value is a result of changes in the
estimated fair value of the investments described above.
7. Cash and Cash Equivalents
-------------------------
At September 30, 2000, and December 31, 1999, cash and cash equivalents
consisted of:
2000 1999
-------- --------
Demand and brokerage accounts $ 8,541 7,214
Money-market accounts 1,798 1,720
------ -----
Total $10,339 8,934
====== =====
8. Notes Payable to Related Party
-----------------------------
In the first quarter of 2000, the Partnership borrowed $275,000 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 December 31, 2000. The terms of the note require that the note be
repaid prior to any distributions to partners. At September 30, 2000 and
December 31, 1999, notes payable to MARCorp totaled $575,000 and $300,000,
respectively.
9. 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, 2000, the Partnership had no unfunded
commitments for investments.
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, 2000, net cash used by operating
activities totaled $273,595. The Partnership paid management fees of
$98,090, received a refund of previously billed operating expenses of
$315,481 from the Managing General Partner and reimbursed related parties
for operating expenses of $426,159. Other operating expenses of $88,593
were paid and interest income of $1,571 and other income of $22,195 were
received.
During the quarter ended March 31, 2000, the Partnership borrowed $275,000
from a portfolio company in the computer and computer equipment industry.
Cash and restricted cash at September 30, 2000 were $43,839. The
Partnership is scheduled to terminate on December 31, 2000. If the General
Partners so determine, the Partnership can be further extended for an
additional two-year period or the Partnership will be liquidated in
accordance with the Partnership Agreement.
The General Partners have made loans to the Partnership to finance its
recurring losses from on-going operations. The Partnership has very
limited cash resources and primarily illiquid assets. The General Partners
are under no obligation to continue financing the Partnership's daily
operations and may elect to discontinue such support at any time during the
remaining life of the Partnership.
The uncertainties arising from these circumstances raise substantial doubt
about the Partnership's ability to continue as a going concern. The
accompanying interim financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
The Partnership's investments are valued at fair value as determined in
good faith by the Managing General Partner in the absence of readily
available market quotations. At this stage of the Partnership's life, the
holdings in the Partnership's portfolio are limited to troubled companies
for which any estimate of fair value is highly subjective. Therefore, in
August 2000, the General Partners engaged an independent third party to
appraise the Partnership's remaining portfolio companies. Based upon the
final appraisal report received in October 2000, the Managing General
Partner has determined that the fair value of the Partnership's investments
in portfolio companies totals $616,600 at September 30, 2000. The Managing
General Partner is currently pursuing the sale of these investments. The
fair value at September 30, 2000 may differ significantly from a value that
would have been used had the ultimate proceeds from sale of the investments
been known.
Results of Operations
---------------------
Current quarter compared to corresponding quarter in the preceding year
-----------------------------------------------------------------------
Net losses were $4,468,204 and $216,040 for the quarters ended September
30, 2000 and 1999, respectively. The increase in net loss was
substantially due to a $2,546,923 decrease in the change in net unrealized
fair value of notes receivable, a $1,654,263 decrease in the change in net
unrealized fair value of equity investments and an increase in operating
expenses of $86,132.
The fair value of notes receivable decreased $2,546,923 in the quarter
ended September 30, 2000 as a result of a decline in estimated fair value.
There was no change in the fair value of notes receivable during the
quarter ended September 30, 1999.
The fair value of equity investments decreased $1,654,263 in the three
months ended September 30, 2000 as a result of a decline in estimated fair
value. There was no change in the fair value of equity investments during
the quarter ended September 30, 1999.
Total operating expenses were $269,184 and $183,052 for the quarters ended
September 30, 2000 and 1999, respectively. In the second quarter of 2000,
the Managing General Partner refunded the Partnership $315,481 for
investment management expenses previously billed by the General Partners in
1998 and 1999. If these expenses had not been billed in prior years,
operating expenses for the three months ended September 30, 2000 and 1999
would have been $269,184 and $154,579, respectively. The increase is
attributable to the writeoff of a receivable for operating costs previously
billed to a portfolio company.
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 $4,377,274 and $696,888 for the nine months ended
September 30, 2000 and 1999, respectively. The increased loss was
primarily due to a $2,546,923 decrease in the change in net unrealized fair
value of notes receivable and a $1,580,143 decrease in the change in net
unrealized fair value of equity investments, partially offset by a $383,988
decrease in operating expenses.
The fair value of notes receivable decreased $2,546,923 in the nine months
ended September 30, 2000 as a result of a decline in estimated fair value.
There was no change in the fair value of notes receivable in the
corresponding period in 1999.
During the nine months ended September 30, 2000, the decrease in fair value
of equity investments of $1,654,263 was a result of a decline in estimated
fair value. The $74,120 decrease in the net unrealized fair value of
investments in the nine months ended September 30, 1999 was primarily due
to a decrease in the computer systems and software industry.
Total operating expenses were $139,836 and $523,824 for the nine months
ended September 30, 2000 and 1999, respectively. As explained in Note 4 to
the financial statements, the General Partners absorbed $0 and $45,393,
respectively, for the nine months ended September 30, 2000 and 1999. In
the second quarter of 2000, the Managing General Partner refunded the
Partnership $315,481 for investment management expenses previously billed
by the General Partners in 1998 and 1999. If these expenses had not been
billed in prior years and had the expense limitation not been in effect,
operating expenses for the nine months ended September 30, 2000 and 1999
would have been $455,317 and $456,519, respectively.
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Form 8-K was filed by the Partnership on September 12, 2000 to report
the resignation of KPMG LLP as the Partnership's independent
accountants. A Form 8-K/A was filed by the Fund on September 25, 2000
with KPMG LLP's letter in response to the Form 8-K.
A Form 8-K was filed by the Partnership on November 13, 2000 to
report the appointment of Arthur Andersen LLP as the Partnership's
independent public accountants.
(b) Financial Data Schedule for the nine months ended and as of September
30, 2000 (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 14, 2000 By: /s/Charles R. Kokesh
------------------------------------
Charles R. Kokesh
President, Chief Executive
Officer, Chief Financial
Officer and Chairman of
Technology Funding Inc.
