<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, 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
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(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
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(Address of principal executive offices) (Zip Code)
(650) 345-2200
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(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
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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,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Notes receivable, net (cost basis of
$6,095,223 in 2000 and 1999) $3,061,223 3,061,223
Equity investments (cost basis
of $5,733,573 in 2000 and 1999) 1,756,563 1,756,563
--------- ---------
Total investments 4,817,786 4,817,786
Cash and cash equivalents 9,228 8,934
Restricted cash 33,500 33,500
Due from affiliated partnerships 6,129 6,129
Other assets 127,098 139,468
--------- ---------
Total assets $4,993,741 5,005,817
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 48,072 70,587
Due to related parties 228,383 610,100
Related party note payable (includes accrued
interest of $45,696 and $19,470 in
2000 and 1999, respectively) 620,696 319,470
--------- ---------
Total liabilities 897,151 1,000,157
Commitments and contingencies
(Notes 2, 3, 4, 8 and 9)
Partners' capital:
Limited Partners (399,977 Units
outstanding) 4,109,324 4,109,324
General Partners (12,734) (103,664)
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Total partners' capital 4,096,590 4,005,660
--------- ---------
Total liabilities and partners'
capital $4,993,741 5,005,817
========= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Short-term investment interest $ 520 693 1,116 4,598
------- ------- ------- -------
Total income 520 693 1,116 4,598
Costs and expenses:
Management fees 19,506 34,776 39,534 70,554
Operating (reimbursements) expenses:
Lending operations and investment management (222,082) 47,084 (208,049) 97,048
Administrative and investor services (21,955) 106,778 19,692 193,738
Computer services 5,380 19,998 21,932 38,997
Professional fees 10,616 37,569 10,812 56,382
Expenses absorbed by General Partners -- (39,049) -- (45,393)
Interest expense 13,721 -- 26,265 --
------- ------- ------- -------
Total operating (reimbursements) expenses (214,320) 172,380 (129,348) 340,772
------- ------- ------- -------
Total (reimbursements) costs
and expenses (194,814) 207,156 (89,814) 411,326
------- ------- ------- -------
Net realized income (loss) 195,334 (206,463) 90,930 (406,728)
Change in net unrealized fair
value of equity investments -- (74,120) -- (74,120)
------- ------- ------- -------
Net income (loss) $195,334 (280,583) 90,930 (480,848)
======= ======= ======= =======
Net income (loss) per Unit $ 0.26 (0.69) 0.00 (1.19)
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
2000 1999
------ ------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 1,116 4,598
Cash paid to vendors (22,797) (155,006)
Cash paid to related parties (253,025) (1,724,452)
------- ---------
Net cash used by operating activities (274,706) (1,874,860)
------- ---------
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 275,000 300,000
------- ---------
Net cash provided by financing
activities 275,000 300,000
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Net increase (decrease) in cash and cash
equivalents 294 (767,282)
Cash and restricted cash at
beginning of year 42,434 809,477
------- ---------
Cash and restricted cash
at June 30 $ 42,728 42,195
======= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
-----------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
2000 1999
------ ------
<S> <C> <C>
Reconciliation of net income (loss)
to net cash used by operating
activities:
Net income (loss) $ 90,930 (480,848)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Change in net unrealized fair value of
equity investments -- 74,120
Changes in:
Due to related parties (381,717) (1,459,384)
Accounts payable and accrued expenses 3,711 4,977
Other 12,370 (13,725)
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Net cash used by operating
activities $(274,706) (1,874,860)
======= =========
</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 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, 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.
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 troubled companies
for which any estimate of fair value is highly subjective. The estimates
made by the Managing General Partner give consideration to each company's
current operating activities, underlying financial condition, prospects for
liquidation events, and other factors. The estimated fair value of
$4,817,786 at June 30, 2000 may differ significantly from a value that
would have been used had the ultimate realization of the investments been
known.
In August 2000, the General Partners engaged an independent third party to
appraise the Partnership's three remaining portfolio companies. It is
possible that the resulting appraised values will differ significantly from
the investment fair values reported in these financial statements. Any
adjustments based on the independent third party appraisal will be recorded
in the period the appraisal is received.
4. 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, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
2000 1999
------- --------
<S> <C> <C>
Management fees $ 39,534 70,554
Reimbursable operating expenses, net (168,226) 239,907
Expenses absorbed by General Partners -- (45,393)
</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 $222,229 and $545,390 at June 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 $6,154 and $64,710 at June 30,
2000 and December 31, 1999, 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 June 30, 1999 and expenses absorbed by the General Partners totaled
$45,393. There were no expenses absorbed by the General Partners at June
30, 2000.
5. Notes Receivable, Net
---------------------
A complete listing of the Partnership's notes receivable at December 31,
1999, is included in the 1999 Annual Report on Form 10-K. There was no
notes receivable activity from January 1 through June 30, 2000.
6. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December 31,
1999, is included in the 1999 Annual Report on Form 10-K. There was no
investment activity from January 1 through June 30, 2000.
7. Cash and Cash Equivalents
-------------------------
At June 30, 2000, and December 31, 1999, cash and cash equivalents
consisted of:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Demand and brokerage accounts $7,458 7,214
Money-market accounts 1,770 1,720
----- -----
Total $9,228 8,934
===== =====
</TABLE>
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 June 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 June 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 six months ended June 30, 2000, net cash used by operating
activities totaled $274,706. 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 $470,416. Other operating expenses of $22,797
were paid and interest income of $1,116 was 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 June 30, 2000 were $42,728. 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 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. The estimates
made by the Managing General Partner give consideration to each company's
current operating activities, underlying financial condition, prospects for
liquidation events, and other factors. The estimated fair value of
$4,817,786 at June 30, 2000 may differ significantly from a value that
would have been used had the ultimate realization of the investments been
known.
In August 2000, the General Partners engaged an independent third party to
appraise the Partnership's three remaining portfolio companies. It is
possible that the resulting appraised values will differ significantly from
the investment fair values reported in these financial statements. Any
adjustments based on the independent third party appraisal will be recorded
in the period the appraisal is received.
Results of Operations
---------------------
Current quarter compared to corresponding quarter in the preceding year
-----------------------------------------------------------------------
Net income was $195,334 for the quarter ended June 30, 2000, compared to a
net loss of $280,583 for the corresponding period in 1999. The increase in
net income was substantially due to a refund of investment management
expenses discussed below.
Total operating expense reimbursements were $214,320 in the quarter ended
June 30, 2000, compared to operating expenses of $172,380 in the
corresponding period in 1999. As explained in Note 4 to the financial
statements, the General Partners absorbed expenses of $0 and $39,049,
respectively, for the quarters ended June 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, operating expenses for the three months ended June 30, 2000
and 1999 would have been $101,161 and $126,425, respectively. The decrease
is attributable to decreased investment activity and the related
administrative costs.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
Current six months compared to corresponding six months in the
--------------------------------------------------------------
preceding year
--------------
Net income was $90,930 for the six months ended June 30, 2000, compared to
a net loss of $480,848 for the six months ended June 30, 1999. The
increase in net income was primarily due to a refund of investment
management expenses discussed below.
Total operating expense reimbursements were $129,348 for the six months
ended June 30, 2000, compared to operating expenses of $340,772 in the
corresponding period in 1999. As explained in Note 4 to the financial
statements, the General Partners absorbed expenses of $0 and $45,393,
respectively, for the six months ended June 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, operating expenses for the six months ended June 30,
2000 and 1999 would have been $186,133 and $256,547, respectively. The
decrease is attributable to decreased investment activity and the related
administrative costs.
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, 2000.
(b) Financial Data Schedule for the six months ended and as of June 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: August 14, 2000 By: /s/Charles R. Kokesh
------------------------------------
Charles R. Kokesh
President, Chief Executive
Officer, Chief Financial
Officer and Chairman of
Technology Funding Inc. and
Managing General Partner of
Technology Funding Limited
