<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 1994
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)
(415) 345-2200
--------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
No resale market for the units of limited partnership interests
("Units") exists, and therefore the market value of such Units cannot
be determined.
Documents incorporated by reference: Portions of the Prospectus dated
March 16, 1989 forming a part of Registration Statement No. 33-26190
are incorporated by reference in Parts I and III hereof. Portions of
the Prospectus of Technology Funding Medical Partners I, L.P., as
modified by Cumulative Supplement No. 4 dated January 4, 1995, forming
a part of the May 3, 1993 Pre-Effective Amendment No. 3 to the Form N-
2 Registration Statement No. 33-54002 dated October 30, 1992 which is
incorporated by reference in Part III hereof.
<PAGE>
PART I
Item 1. BUSINESS
- ------ --------
Technology Funding Secured Investors III, An Income and
Growth Partnership, L.P. (hereinafter referred to as the
"Partnership" or the "Registrant") was formed as a California
limited partnership on December 9, 1988. The business of the
Partnership is to provide loans secured by equipment and
other assets to new and developing companies and to acquire
equity interests in these companies as described in the
"Summary of the Offering" and "Business of the Partnership"
sections of the Prospectus dated March 16, 1989 that forms a
part of Registrant's Form S-1 Registration Statement No. 33-
26190 (such Prospectus, as supplemented, is hereinafter
referred to as the "Prospectus"), which sections are
incorporated herein by reference. Additional characteristics
of the Partnership's business are discussed in the "Risk
Factors" and "Conflicts of Interest" sections of the
Prospectus, which sections are also incorporated herein by
reference. The Partnership's Amended and Restated Limited
Partnership Agreement ("Partnership Agreement") provides that
the Partnership will continue until December 31, 1998, unless
further extended for up to two additional two-year periods
from such date if the General Partners so determine or the
Partnership may be dissolved sooner.
Item 2. PROPERTIES
- ------ ----------
The Registrant has no material physical properties.
Item 3. LEGAL PROCEEDINGS
- ------ -----------------
There are no material pending legal proceedings to which the
Registrant is party or of which any of its property is the
subject, other than ordinary routine litigation incidental to
the business of the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matter was submitted to a vote of the holders of units of
limited partnership interests ("Units") during 1994.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------ -------------------------------------------------
STOCKHOLDER MATTERS
----------- -------
(a) There is no established public trading market for the
Units.
(b) At December 31, 1994, there were 5,179 record holders of
Units.
(c) The Registrant, being a partnership, does not pay
dividends. Cash distributions, however, may be made to
the partners in the Partnership pursuant to the
Registrant's Partnership Agreement.
Item 6. SELECTED FINANCIAL DATA
- ------ -----------------------
<TABLE>
<CAPTION>
For the Years Ended and as of December 31,
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Total income $ 1,512,194 1,367,023 2,806,215 3,009,081 2,049,130
Net realized (loss) income (3,087,046) (1,112,972) 944,117 1,589,196 (786,051)
Change in net unrealized
fair value:
Equity investments (2,281,481) 209,851 (1,506,486) 987,225 15,268
Secured notes receivable (139,000) (118,000) (2,945,926) (496,887) (110,100)
Net (loss) income (5,507,527) (1,021,121) (3,508,295) 2,079,534 (880,883)
Net realized (loss) income
per Unit (8) (3) 2 4 (2)
Total assets 12,058,547 18,141,077 22,919,883 29,978,859 28,995,386
Distributions declared (574,167) (2,445,411) (3,646,141) (3,377,394) (2,010,319)
</TABLE>
Refer to Notes 1 and 4 of the financial statements entitled
"Summary of Significant Accounting Policies" and "Allocation
of Profits and Losses" for a description of the method of
calculation of net realized (loss) income per Unit.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Liquidity and Capital Resources
-------------------------------
In 1994, net cash used by operations totaled $28,480. The
Partnership paid management fees of $280,286 to the Managing
General Partner, reimbursed related parties for operating
expenses of $408,558 and received $40,179 in net loan
participations to affiliated partnerships in 1994. Other
operating expenses of $504,228 were paid and $920,099 and
$16,873 in interest and other income, respectively, were
received. In addition, the Partnership received a
reimbursement from a portfolio company of $187,441 for
collection expenses.
In 1994, the Partnership issued $4,075,046 in secured notes
receivable primarily to portfolio companies in the computers
and computer equipment and medical industries. Repayments of
secured notes receivable provided cash of $3,147,801. In
addition, the Partnership purchased equity investments of
$48,206 primarily in the microelectronics and
telecommunications industries and received proceeds totaling
$430,181. As of December 31, 1994, the Partnership was
committed to fund up to an additional $484,000 on accounts
receivable lines of credit to existing borrowing companies.
The Partnership distributed $568,425 to Limited Partners and
$5,742 to General Partners in 1994. Future distributions
will be dependent upon loan repayments from borrowing
companies and available cash.
In February 1994, Alantec completed its initial public
offering. The Partnership simultaneously exercised its
warrants without cash and sold the resulting common shares in
the offering for total cash proceeds of $430,053.
All management fees which are due have been paid through
December 31, 1994. Management fees are paid to the extent
that the aggregate amount of all proceeds (including those
from warrants exercised without cash) received by the
Partnership from the sale or other disposition of borrowing
company equities, plus the aggregate fair market value of any
equity securities distributed to the partners, exceeds the
total management fee payable as defined in the Partnership
Agreement.
Cash and cash equivalents at December 31, 1994 were
$1,921,850. Operating cash reserves combined with 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 and
loan requirements of existing borrowing companies through the
next twelve months.
Results of Operations
- ---------------------
1994 compared to 1993
- ---------------------
Net loss was $5,507,527 and $1,021,121 in 1994 and 1993,
respectively. The increase was primarily due to a $2,491,332
decrease in the change in net unrealized fair value of equity
investments, a $2,179,646 increase in realized losses from
investment write-downs, and a $132,220 increase in other
investment expenses. These changes were partially offset by
a $145,171 increase in total income and a $136,010 decrease
in total operating expenses.
The change in fair value of equity investments reflected a
net decrease in the fair value of the Partnership's holdings.
In 1994, the decrease of $2,281,481 was primarily due to a
portfolio company in the medical industry. In 1993, the
increase was $209,851.
In 1994 and 1993, the Partnership realized losses from
investment write-downs of $4,082,445 and $1,902,799,
respectively. Realized losses in 1994 primarily related to
secured notes receivable to a portfolio company in the
computers and computer equipment industry. Realized losses
in 1993 primarily related to equity investments in a
portfolio company in the retail/consumer products industry as
well as the Partnership's loan portfolio for companies in the
computers and computer equipment, and retail/consumer
products industries.
During 1994, the Partnership recorded other investment
expenses of $132,220 related to legal proceedings with a
third party for a portfolio company in the retail/consumer
products industry. The Managing General Partner is subject to
indemnification for such costs pursuant to the Partnership
Agreement. See Note 9 to the financial statements for
further details. No such expenses were recorded in 1993.
Total income was $1,512,194 and $1,367,023 in 1994 and 1993,
respectively. The increase was primarily due to cash
interest payments on a secured note receivable from a
portfolio company in the computer software and systems
industry which had been on nonaccrual status. This increase
was partially offset by a decrease in interest income due to
the placement of secured notes receivable on nonaccrual
status for portfolio companies in the medical and
industrial/business automation industries.
Total operating expenses were $534,391 in 1994 compared to
$670,401 in 1993. As explained in Note 3 to the financial
statements, the Partnership may not pay or reimburse the
General Partners for annual expenses that aggregate more than
a certain percentage of total limited partner capital
contributions. The limitation is calculated over an
operating year beginning May 1. In 1994 and 1993, the
General Partners absorbed $95,227 and $268,515, respectively.
Had the limitation not been in effect and the 1994 recoveries
discussed in Note 3 to the financial statements not occurred,
total operating expenses in 1994 and 1993 would have been
$781,806 and $938,916, respectively. The decrease in
expenses was primarily due to lower lending operations and
investment management, and administrative and investor
services expenses as a result of lower overall portfolio
activity.
The Partnership's portfolio of secured notes receivable is
with new and developing companies; therefore, there is no
established source of market value information. The value of
the portfolio has been estimated by the Managing General
Partner in the absence of readily ascertainable market
values. Although secured notes receivable are secured by
specific assets of the borrowing company, due to the inherent
uncertainty of valuation, estimated values may differ
significantly from the values that would have been used had a
ready market for the investment existed. The difference
could be material.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
1993 compared to 1992
- ---------------------
Net loss was $1,021,121 and $3,508,295 in 1993 and 1992,
respectively. The change was primarily due to increases of
$2,827,926 and $1,716,337 in the change in net unrealized
fair value of secured notes receivable and equity
investments, respectively, a decrease of $520,711 in total
operating expenses and an increase of $348,378 in net
realized gain from sale of equity investments. These changes
were partially offset by a $1,626,515 increase in realized
losses from investment write-downs and a $1,372,172 decrease
in notes receivable interest income.
The Partnership recorded decreases in the change in fair
value of secured notes receivable of $118,000 and $2,945,526
in 1993 and 1992, respectively, based upon the level of loan
loss reserves deemed adequate by the Managing General Partner
at the respective year ends.
The change in fair value of equity investments reflected a
net increase in the fair value of the Partnership's holdings.
In 1993, the increase was $209,851. In 1992, the decrease of
$1,506,486 was primarily due to portfolio companies in the
retail/consumer products, telecommunications, and computer
systems and software industries.
Total operating expenses were $670,401 in 1993 compared to
$1,191,112 in 1992. A major portion of the decrease was due
to lower overall portfolio activity. The remaining decrease
was due to the 2% operating expense limitation. As explained
in Note 3 to the financial statements, the Partnership may
not pay or reimburse the General Partners for annual expenses
that aggregate more than 2% of total limited partner capital
contributions; the excess absorbed totaled $268,515 and
$77,452 in 1993 and 1992, respectively. As the limitation is
calculated over an operating year beginning May 1, the
significant increase in expenses absorbed during 1993 was the
result of an increase in Partnership expenses in late 1992.
Had the limitation not been in effect, total operating
expenses in 1993 and 1992 would have been $938,916 and
$1,268,564, respectively.
Net realized gain on sale of equity investments were $476,335
and $127,957 in 1993 and 1992, respectively. The gain in
1993 mainly related to investment sales in Cornerstone
Imaging, Inc. and Software Transformation, Inc. In 1992, the
gain was primarily attributable to the net exercise of
Videoconferencing Systems, Inc. warrants at their initial
public offering.
In 1993 and 1992, the Partnership realized losses from
investment write-downs of $1,902,799 and $276,284,
respectively. Realized losses in 1993 primarily related to
equity investments in a portfolio company in the
retail/consumer products industry as well as the
Partnership's loan losses for portfolio companies in the
computers and computer equipment, and retail/consumer
products industries. Realized losses in 1992 primarily
related to secured notes receivable to portfolio companies in
the retail/consumer products and medical industries.
Secured notes receivable interest income was $1,185,647 and
$2,557,819 in 1993 and 1992, respectively. The decrease was
primarily attributable to an increase in notes receivables on
nonaccrual status in 1993 compared to 1992.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The financial statements of the Registrant are set forth in
Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------ -----------------------------------------------------------
AND FINANCIAL DISCLOSURE
-----------------------
Registrant has reported no disagreements with its accountants
on matters of accounting principles or practices or financial
statement disclosure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
As a partnership, the Registrant has no directors or
executive officers. Technology Funding Ltd., a California
limited partnership ("TFL") and Technology Funding Inc., a
California corporation ("TFI") and wholly-owned subsidiary of
TFL, are the General Partners of the Partnership. TFI is the
Managing General Partner. Information concerning the
ownership of TFL and the business experience of the key
officers of TFI and the partners of TFL is incorporated by
reference from the sections entitled "Management of the
Partnership - The General Partners" and "Management of the
Partnership - Key Personnel of the Managing General Partners"
in the Prospectus, which are incorporated herein by
reference. Changes in this information that have occurred
since the date of the Prospectus are included in the
Technology Funding Medical Partners I, L.P. Prospectus, as
modified by Cumulative Supplement No. 4 dated January 4,
1995, forming a part of the May 3, 1993 Pre-Effective
Amendment No. 3 to the Form N-2 Registration Statement
No. 33-54002 dated October 30, 1992 which is incorporated
herein by reference.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or
directors. In 1994, the Partnership incurred management fees
of $272,615. The management fees are designed to compensate
the General Partners for General Partner Overhead incurred in
performing management duties for the Partnership through
December 31, 1994. General Partner Overhead includes rent,
utilities, and certain salaries and benefits paid by the
General Partners.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
----------
Not applicable. No Limited Partner beneficially holds more
than 5% of the aggregate number of Units held by all Limited
Partners, and neither the General Partners nor any of their
officers, directors or partners own any Units. The General
Partners control the affairs of the Partnership pursuant to
the Partnership Agreement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Registrant has engaged in no transactions with the
General Partners or their officers and partners other than as
described above, in the notes to the financial statements, or
in the Prospectus.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ------- -------------------------------------------------------
FORM 8-K
--------
(a) List of Documents filed as part of this Annual Report
on Form 10-K
(1) Financial Statements - the following financial
statements are filed as a part of this Report:
Independent Auditors' Report
Balance Sheets as of December 31, 1994
and 1993
Statements of Operations for the years ended
December 31, 1994, 1993 and 1992
Statements of Partners' Capital for
the years ended December 31, 1994, 1993
and 1992
Statements of Cash Flows for the years
ended December 31, 1994, 1993 and 1992
Notes to Financial Statements
(2) Financial Statements Schedules
All schedules have been omitted because they are
not applicable or the required information is
included in the financial statements or the notes
thereto.
(3) Exhibits
Registrant's Amended and Restated Limited
Partnership Agreement (incorporated by reference
to Exhibit A to Registrant's Prospectus dated
March 16, 1989 included in Registration Statement
No. 33-26190 filed pursuant to Rule 424(b) of the
General Rules and Regulations under the Securities
Act of 1933).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant
during the year ended December 31, 1994.
(c) Financial Data Schedule for the year ended and as of
December 31, 1994 (Exhibit 27).
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Partners
Technology Funding Secured Investors III,
An Income And Growth Partnership, L.P.:
We have audited the accompanying balance sheets of Technology Funding
Secured Investors III, An Income And Growth Partnership, L.P. (a
California limited partnership) as of December 31, 1994 and 1993, and
the related statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended
December 31, 1994. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of loans
by correspondence with the individual borrowing companies and a
physical examination of securities held as of December 31, 1994 and
1993. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Technology
Funding Secured Investors III, An Income And Growth Partnership, L.P.,
as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for each of the years in the three-year period
ended December 31, 1994 in conformity with generally accepted
accounting principles.
As explained in Notes 1, 5 and 6, the financial statements include
investments of $10,061,584 and $14,368,587 (84% and 80% of partners'
capital) as of December 31, 1994 and 1993, respectively, whose values,
in certain circumstances, have been estimated by the Managing General
Partner in the absence of readily ascertainable market values. We
have reviewed the procedures used by the Managing General Partner in
arriving at its estimate of value of such investments and have
inspected underlying documentation, and, in the circumstances, we
believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the
values that would have been used had a ready market for the
investments existed, and the difference could be material.
San Francisco, California KPMG Peat Marwick LLP
March 17, 1995
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
December 31,
-------------------------------
1994 1993
---- ----
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $12,385,060 and
$16,262,392 in 1994 and 1993,
respectively) $ 8,569,060 12,585,392
Equity investments (cost basis
of $4,070,004 and $2,079,194 in
1994 and 1993, respectively) 1,492,524 1,783,195
Other (cost basis of $650,000
in 1993) -- 650,000
---------- ----------
Total investments 10,061,584 15,018,587
Cash and cash equivalents 1,921,850 3,069,767
Due from affiliated partnerships -- 39,125
Due from related parties -- 8,768
Other assets 75,113 4,830
---------- ----------
Total $12,058,547 18,141,077
========== ==========
LIABILITIES AND PARTNER'S CAPITAL
Accounts payable and accrued expenses $ 100,005 121,139
Due to affiliated partnerships 1,054 --
Due to related parties 7,376 --
Other liabilities 32,527 20,659
---------- ----------
Total liabilities 140,962 141,798
Commitments (Notes 3 and 8)
Partners' capital:
Limited Partners
(Units outstanding of 399,977
in both 1994 and 1993) 18,419,721 22,044,323
General Partners (108,656) (72,045)
Net unrealized fair value decrease
from cost:
Secured notes receivable (3,816,000) (3,677,000)
Equity investments (2,577,480) (295,999)
---------- ----------
Total partners' capital 11,917,585 17,999,279
---------- ----------
Total $12,058,547 18,141,077
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ 1,376,736 1,185,647 2,557,819
Short-term investment interest 118,585 147,704 200,857
Other income 16,873 33,672 47,539
--------- --------- ---------
Total income 1,512,194 1,367,023 2,806,215
Costs and expenses:
Management fees 272,615 374,130 513,659
Amortization of organizational
costs 3,000 9,000 9,000
Other investment expenses 132,220 -- --
Operating expenses:
Lending operations and
investment management 220,552 428,277 563,516
Administrative and investor
services 280,705 326,591 472,210
Computer services 77,113 94,518 150,404
Professional fees 51,248 89,530 82,434
Expenses absorbed by
General Partners (95,227) (268,515) (77,452)
--------- --------- ---------
Total operating expenses 534,391 670,401 1,191,112
--------- --------- ---------
Total costs and expenses 942,226 1,053,531 1,713,771
--------- --------- ---------
Net operating income 569,968 313,492 1,092,444
Net realized gain from sale of
equity investments 425,431 476,335 127,957
Realized losses from
investment write-downs (4,082,445) (1,902,799) (276,284)
--------- --------- ---------
Net realized (loss) income (3,087,046) (1,112,972) 944,117
Change in net unrealized
fair value:
Secured notes receivable (139,000) (118,000) (2,945,926)
Equity investments (2,281,481) 209,851 (1,506,486)
--------- --------- ---------
Net loss $(5,507,527) (1,021,121) (3,508,295)
========= ========= =========
Net realized (loss) income
per Unit $ (8) (3) 2
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- ------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1994, 1993 and 1992:
Net Unrealized Fair Value
Increase (Decrease) From Cost
-----------------------------
Limited General Equity Secured Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C>
Partners' capital,
December 31, 1991 $28,232,685 -- 1,000,636 (613,074) 28,620,247
Distributions (3,609,680) (36,461) -- -- (3,646,141)
Net realized income 944,117 -- -- -- 944,117
Change in net unrealized fair
value:
Equity investments -- -- (1,506,486) -- (1,506,486)
Secured notes receivable -- -- -- (2,945,926) (2,945,926)
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1992 25,567,122 (36,461) (505,850) (3,559,000) 21,465,811
Distributions (2,420,957) (24,454) -- -- (2,445,411)
Net realized loss (1,101,842) (11,130) -- -- (1,112,972)
Change in net unrealized fair
value:
Equity investments -- -- 209,851 -- 209,851
Secured notes receivable -- -- -- (118,000) (118,000)
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1993 22,044,323 (72,045) (295,999) (3,677,000) 17,999,279
Distributions (568,425) (5,742) -- -- (574,167)
Net realized loss (3,056,177) (30,869) -- -- (3,087,046)
Change in net unrealized fair
value:
Equity investments -- -- (2,281,481) -- (2,281,481)
Secured notes receivable -- -- -- (139,000) (139,000)
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1994 $18,419,721 (108,656) (2,577,480) (3,816,000) 11,917,585
========== ======= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operations:
Interest received $ 920,099 1,048,331 2,487,752
Other income received 16,873 33,672 47,539
Cash paid to vendors (504,228) (404,293) (340,907)
Cash paid to related parties (688,844) (1,115,010) (1,293,639)
Cash received from/(paid to)
affiliated partnerships 40,179 (55,985) 457,634
Reimbursement of collection
expenses received from a
portfolio company 187,441 -- --
--------- --------- ---------
Net cash (used) provided
by operations (28,480) (493,285) 1,358,379
--------- --------- ----------
Cash flows from investing
activities:
Secured notes receivable issued (4,075,046) (9,089,745) (19,545,596)
Repayments of secured notes
receivable 3,147,801 8,133,335 15,044,254
Proceeds from sale of
equity investments 430,181 1,852,576 296,011
Purchase of equity investments (48,206) (21,101) (200,000)
Purchase of other investments -- (650,000) --
--------- --------- ----------
Net cash (used) provided by
investing activities (545,270) 225,065 (4,405,331)
--------- --------- ----------
Cash flows from financing
activities:
Distributions to Limited and
General Partners (574,167) (3,265,499) (3,645,600)
--------- --------- ----------
Net cash used by financing
activities (574,167) (3,265,499) (3,645,600)
--------- --------- ----------
Net decrease in cash and
cash equivalents (1,147,917) (3,533,719) (6,692,552)
Cash and cash equivalents at
beginning of year 3,069,767 6,603,486 13,296,038
--------- --------- ----------
Cash and cash equivalents at
end of year $ 1,921,850 3,069,767 6,603,486
========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net loss
to net cash (used) provided by
operations:
Net loss $(5,507,527) (1,021,121) (3,508,295)
Adjustments to reconcile net
loss to net cash (used)
provided by operations:
Amortization of organizational
costs 3,000 9,000 9,000
Amortization of discount
on secured notes receivable (12,110) (72,082) (182,294)
Net realized gain from sale of
equity investments (425,431) (476,335) (127,957)
Realized losses from investment
write-downs 4,082,445 1,902,799 276,284
Change in net unrealized
fair value:
Equity investments 2,281,481 (209,851) 1,506,486
Secured notes receivable 139,000 118,000 2,945,926
Changes in:
Accrued interest on secured and
convertible notes receivable (563,112) (212,938) (88,630)
Accounts payable and accrued
expenses (21,134) (29,114) (4,469)
Due to/from related parties 16,144 (459,825) 66,714
Due to/from affiliated
partnerships 40,179 (55,985) 457,634
Other assets (73,283) 9,322 (7,834)
Other, net 11,868 4,845 15,814
--------- --------- ---------
Net cash (used) provided
by operations $ (28,480) (493,285) 1,358,379
========== ========= =========
Non-cash investing activities:
Additions to equity investments $ 100,556 6,667 126,929
========== ========= =========
Conversion of secured notes
receivable and interest to
equity investments $ 2,270,450 2,374,746 785,700
========== ========= =========
Conversion of other investments
to secured notes receivable $ 650,000 -- --
========== ========= =========
Non-cash exercise of warrants $ (1,122) -- 105,290
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
- ------------
Technology Funding Secured Investors III, An Income and Growth
Partnership, L.P., (the "Partnership") is a limited partnership
organized under the laws of the State of California on
December 9, 1988. From December 9, 1988 through March 15, 1989, the
Partnership was inactive. The registration statement of the
Partnership was filed with the Securities and Exchange Commission and
became effective on March 16, 1989. The purpose of the Partnership is
to provide loans secured by equipment and other assets to new and
developing companies and to acquire, hold, sell, trade, exchange or
otherwise dispose of warrants and/or capital stock acquired by the
Partnership in conjunction with these loans. The General Partners are
Technology Funding Ltd. ("TFL") and Technology Funding Inc. ("TFI"), a
wholly-owned subsidiary of TFL. TFI is the Managing General Partner.
A wholly-owned subsidiary of TFI, Technology Funding Securities
Corporation ("TFSC"), was the dealer-manager for the offering.
The Partnership commenced selling units of limited partnership interest
("Units") on April 13, 1989. On May 2, 1989 the minimum number of
Units required to commence Partnership operations (12,000) had been
sold. The Partnership completed the offering of the Units of limited
partnership interest on March 15, 1991. The offering terminated with
399,977 Units sold. The Partnership Agreement provides that the
Partnership will continue until December 31, 1998, unless further
extended for up to two additional two-year periods from such date if
the General Partners so determine or the Partnership may be dissolved
sooner.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents are principally comprised of cash invested in
demand accounts, money market instruments and commercial paper and are
stated at cost plus accrued interest. The Partnership considers all
money market and short-term investments with an original maturity of
three months or less to be cash equivalents.
Organizational Costs
- --------------------
Included in other assets are organizational costs of $45,000, which are
amortized over 60 months using the straight-line method.
Provision for Income Taxes
- --------------------------
No provision for income taxes has been made by the Partnership, as the
Partnership is not directly subject to taxation. The partners are to
report their respective shares of Partnership income or loss on their
individual tax returns.
The accompanying financial statements are prepared using generally
accepted accounting principles which may not equate to tax accounting,
however, the difference in the total book and tax basis as of December
31, 1994 is not material.
Net Realized Income (Loss) Per Unit
- -----------------------------------
Net realized income (loss) per Unit is calculated by dividing the
number of Units outstanding (399,977) at December 31, 1994, 1993 and
1992 into total net realized income (loss) allocated to the Limited
Partners. The General Partners contributed an amount equal to 0.1% of
total Limited Partner capital contributions and did not receive any
Partnership Units.
Investments:
- -----------
The Partnership's method of accounting for investments, in accordance
with generally accepted accounting principles, is the fair value basis
used for investment companies. The fair value of Partnership
investments is their initial cost basis with changes as noted below:
Secured Notes Receivable, Net
-----------------------------
The secured notes receivable portfolio includes accrued interest less
the discount related to warrants and the allowance for loan losses.
The portfolio approximates fair value through inclusion of an allowance
for loan losses. Allowance for loan losses is reviewed quarterly by
the Managing General Partner and is adjusted to a level deemed adequate
to cover possible losses inherent in notes and unfunded commitments.
Notes receivable are placed on nonaccrual status when, in the opinion
of the Managing General Partner, the future collectibility of interest
or principal is in doubt.
In conjunction with the secured notes granted, the Partnership has
received warrants to purchase certain shares of capital stock of the
borrowing company. The cost basis of the warrants and the resulting
discount has been estimated by the Managing General Partner to be 1% of
the principal balance of the original notes made to the borrowing
company. The discount is amortized to interest income on a straight-
line basis over the term of the loan. These warrants are included in
the equity investment portfolio.
Nonrefundable fees received in connection with loan fundings are
deferred and amortized to interest income over the contractual life of
the loan using the effective interest method or the straight-line
method if it is not materially different. Direct loan origination
costs mainly consist of third-party costs and generally are reimbursed
by portfolio companies.
Equity Investments
------------------
The fair value for publicly-traded equity investments (marketable
equity securities) is based upon the five-day average closing sales
price or bid/ask price that is available on a national securities
exchange or over-the-counter market. Certain publicly-traded equity
investments may not be marketable due to selling restrictions. For
publicly-traded equity investments with selling restrictions, an
illiquidity discount of 25% is applied when determining the fair value.
Sales of equity investments are recorded on the trade date. The basis
on which cost is determined in computing realized gains or losses is
generally specific identification.
Other equity investments, which are not publicly traded, are generally
valued utilizing pricing obtained from the most recent round of third
party financings. Valuation is determined quarterly by the Managing
General Partner. Included in equity investments are convertible or
subordinated notes receivable as repayment of these notes may occur
through conversion into equity investments.
Equity investments with temporary changes in fair value result in
increases or decreases to the unrealized fair value of equity
investments. The cost basis does not change. In the case of an other
than temporary decline in value below cost basis, an appropriate
reduction in the cost basis is recognized as a realized loss.
Adjustments to fair value basis are reflected as "Change in net
unrealized fair value of equity investments." Cost basis adjustments
are reflected as "Realized losses from investment write-downs" on the
Statements of Operations.
Non-cash Exercise of Warrants
- -----------------------------
Periodically, the Partnership may acquire stock through the non-cash
exercise of warrants. During 1994 and 1992, realized (losses) gains
resulting from the non-cash exercise of warrants totaled $(1,122) and
$105,290, respectively. No such event occurred in 1993. These amounts
are included in net realized gain from sale of equity investments.
Distributions
- -------------
Distributions made to the Limited Partners are made among such partners
in proportion to their respective capital accounts to the total of all
capital accounts of the group. Distributions are made generally
quarterly within 90 days following the end of each previous calendar
quarter unless an eligible partner elects a monthly distribution.
Unnegotiated distribution checks, if any, after a reasonable amount of
time, are recorded as other liabilities on the Balance Sheets.
Reclassifications
- -----------------
Certain 1993 and 1992 balance have been reclassified to conform with
the 1994 financial statement presentation.
2. Change in Net Unrealized Fair Value of Equity Investments
---------------------------------------------------------
In accordance with the accounting policy as stated in Note 1, the
Statements of Operations include a line item entitled "Change in net
unrealized fair value of equity investments." The table below
discloses details of the changes:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
(Decrease) increase in fair
value from cost of marketable
equity securities $ (9,163) 37,000 299,035
Decrease in fair
value from cost of non-
marketable equity securities (2,568,317) (332,999) (804,885)
--------- ------- ---------
Net unrealized fair value
decrease from
cost at end of year (2,577,480) (295,999) (505,850)
Net unrealized fair value
(decrease) increase from
cost at beginning of year (295,999) (505,850) 1,000,636
--------- ------- ---------
Change in net unrealized
fair value of equity
investments $(2,281,481) 209,851 (1,506,486)
========= ======= =========
</TABLE>
3. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. For the years ended December 31, 1994, 1993
and 1992, related party costs were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Management fees $272,615 374,130 513,659
Amortization of
organizational costs 3,000 9,000 9,000
Reimbursable operating
expenses:
Lending operations and
investment management 234,262 229,194 444,543
Administrative and
investor services 216,225 225,858 329,250
Computer services 77,113 94,518 150,353
Expenses absorbed by
General Partners (95,227) (268,515) (77,452)
</TABLE>
Management fees compensate the General Partners solely for General
Partner Overhead (as defined in the Partnership Agreement) incurred in
supervising the operation, management, and progress of Partnership
loans to borrowing companies and its portfolio of warrants and capital
stock of borrowing companies, as well as for the general administration
of the Partnership. For the first and second years after the
commencement date, management fees are incurred and payable at 3% of
total limited partners' capital contributions. Thereafter, the
management fee is equal to the greater of one-half of one percent of
the Partnership's assets under management or $2,500 each quarter.
Currently, management fees are accrued and are only paid to the extent
that the aggregate amount of all proceeds (including those from
warrants exercised without cash) received by the Partnership from the
sale or other disposition of borrowing company equity securities plus
the aggregate fair market value of any equity interest distributed to
the partners exceeds the total management fees payable. All management
fees had been paid at December 31, 1994 compared to $7,671 of
management fees payable at December 31, 1993 as this limitation was in
effect.
The Partnership reimburses the General Partners and affiliates for
operating costs incurred in connection with the business of the
Partnership. Reimbursable operating costs include costs other than
Organizational and Offering Expenses and General Partner Overhead (as
defined in the Partnership Agreement). At December 31, 1994, due to
related parties totaled $7,376 for reimbursable operating expenses,
compared to due from related parties of $16,439 at December 31, 1993.
As discussed in the Partnership Agreement, the Partnership may not pay
or reimburse the General Partners for expenses that aggregate more than
2% of total Limited Partner capital contributions in any of the first
five years of Partnership operations, and 1% thereafter. For purposes
of this limitation, the Partnership's operating year begins each May
1st. Beginning May 1, 1994, the limitation was calculated using 1% of
total Limited Partner capital contributions. Operating costs of
$95,227, $268,515, and $77,452 for the years ended December 31, 1994,
1993 and 1992, respectively, were absorbed by the General Partners.
During 1994, the Partnership was reimbursed $187,441 by a portfolio
company for legal, consulting, and other external costs incurred in the
defense of the Partnership's secured note rights through bankruptcy
court. Of the amount reimbursed, approximately $130,000 was incurred
in prior periods during which the operating expense limitation applied.
Similarly, another reimbursement of approximately $28,000 was received
during the year, of which approximately $24,000 was expensed during the
prior fiscal year when the operating expense limitation applied. The
$130,000 and $24,000 recoveries were recorded as reductions to lending
operations and investment management expense, and the amount absorbed
by General Partners was reduced by equivalent amounts.
Under the terms of a computer support agreement, the Partnership
recognized charges from Technology Administrative Management, a
division of TFL, for its share of computer support costs. These
amounts are included in computer services expense.
Within the normal course of business, the Partnership participates with
affiliated partnerships in secured notes receivable granted to non-
affiliated borrowing companies by affiliated partnerships which are
also managed by the General Partners. At December 31, 1994, due to
affiliated partnerships on such participations were $1,054 compared to
a due from of $39,125 at December 31, 1993. The amounts were paid to
and received from such affiliated partnerships by the Partnership
immediately following the respective year ends. The Partnership may
also reparticipate such secured notes receivable amongst affiliated
partnerships to meet business needs.
TFL currently has a sublease rental agreement with a Partnership
portfolio company in the computers and computer equipment industry.
4. Allocation of Profits and Losses
--------------------------------
Net realized profit and loss of the Partnership are allocated based on
the beginning of year partners' capital balances as follows:
(a) Profits:
(i) first, to those partners with deficit capital account
balances until deficits have been eliminated;
(ii) second, to the partners as necessary to offset the net
realized loss previously allocated under (b)(ii) below
and sales commissions;
(iii)third, 99% to the Limited Partners and 1% to the General
Partners until the Limited Partners have been allocated
cumulative net realized profit or other income which
would, if distributed, result in a cumulative,
compounded annual return to the Limited Partners of 8%
of their adjusted capital contributions;
(iv) fourth, 75% to the Limited Partners as a group in
proportion to the number of Units held, 5% to the
Limited Partners in proportion to the Unit months of
each Limited Partner, and 20% to the General Partners.
Unit months are the number of half months a Unit would
be outstanding if held from the date the original holder
of such Unit was deemed admitted into the Partnership
until the termination of the offering of Units.
Allocations to the Limited Partners are made in the
proportion that the number of Units held by each Limited
Partner multiplied by the number of Unit months for those
Units represents of the total number of Units multiplied by
the total number of Unit months of all Units. In no event
are the General Partners allocated less than 1% of the net
realized profit of the Partnership.
(b) Losses:
(i) first, to the partners as necessary to offset the net
realized profit previously allocated to the partners
under (a)(iv) above; then
(ii) 99% to the Limited Partners and 1% to the General
Partners.
Losses in excess of Limited Partner capital accounts will be
allocated to the General Partners.
5. Equity Investments
------------------
At December 31, 1994 and 1993, equity investments consisted of:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
----------------- -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
WARRANTS:
Biotechnology
- -------------
Biocircuits 01/91 20,000 Common
Corporation shares at $2.00;
expiring 01/96 $ 0 0 4,000 41,000
Hybridon, Inc. 03/91 7,142 Common
shares at $3.50;
expiring 03/97 2,500 32,139 2,500 67,583
Computers and Computer Equipment
- --------------------------------
Alantec 08/91 79,221 Common
shares at $.66;
expiring 08/98 -- -- 3,500 114,078
Komag, Inc. 12/91 238 Common shares
at $21.61; exercised
08/94 -- -- 1,250 1,250
MARCorp 05/92 1,595,745 Series B
Preferred shares
at $1.00; expiring
05/97 0 0 0 0
MARCorp 06/93 566,667 Series B
Preferred shares
at $.75; expiring
06/98 0 0 0 0
MARCorp 08/93 500,000 Series B
Preferred shares at
$.75; expiring 08/98 0 0 0 0
MARCorp 03/94 125,000 Series B
Preferred shares at
$.75; expiring 03/99 0 0 -- --
Pinnacle Systems, 05/90 2,083 Common
Inc. shares at $8.00;
expiring 05/95 2,500 14,164 2,500 2,500
Computer Software and Systems
- -----------------------------
Datalogix 01/92 35,575 Common
International, shares at $1.87;
Inc. expiring 01/97 20,000 20,000 20,000 20,000
Logisticon, Inc. 08/89 21,739 Common
shares at $.23;
expired 08/94 -- -- 0 0
Logisticon, Inc. 02/90 16,304 Common
shares at $.23;
expired 08/94 -- -- 0 0
Molecular 10/90 6,111 Common
Simulations, Inc. shares at
(formerly Polygen $18.00;
Corporation) expiring 10/95 0 0 10,000 10,000
Wasatch Education 04/93 705,971 Common
Systems shares at $.50;
Corporation expiring 04/98 0 0 0 264,739
Wasatch Education 07/93 33,333 Common
Systems shares at $.50;
Corporation expiring 07/98 6,667 0 6,667 12,500
Wasatch Education 02/94 366,667 Common
Systems shares at $.50;
Corporation expiring 02/99 3,333 0 -- --
Wright Express 08/90 114,521 Common
Corporation shares at $.87;
expiring 08/95 -- -- 20,000 20,000
Industrial Business Automation
- ------------------------------
Cyclean, Inc. 03/91 44,589 Common
shares at $3.10;
expiring 04/01 7,500 0 7,500 7,500
Cyclean, Inc. 07/92 20,967 Common
shares at $3.10;
expiring 07/97 2,500 0 2,500 2,500
Cyclean, Inc. 07/92 53,130 Common
shares at $3.10;
expiring 07/02 1,176 0 1,176 1,176
Cyclean, Inc. 09/94 8,065 Common
shares at $3.10;
expiring 03/99 0 0 -- --
Cyclean, Inc. 09/94 9,464 Common
shares at $4.00;
expiring 03/99 0 0 -- --
ElectroScan 12/91 22,177 Common
Corporation shares at $3.10;
expiring 12/96 0 0 0 0
Medical
- -------
Loredan 04/91 150,000 Common
BioMedical, shares at $.60;
Inc. expiring 04/96 -- -- 0 0
Loredan 05/92 62,500 Common
BioMedical, shares at $.60;
Inc. expiring 05/97 0 0 0 0
Loredan 12/92 166,667 Common
BioMedical, shares at $.30;
Inc. expiring 12/97 0 0 0 0
Microgon, Inc. 10/90 125,000 Common
shares at $.60;
expiring 10/95 0 0 0 0
Microgon, Inc. 09/91 29,167 Common
shares at $.60;
expiring 09/96 0 0 0 0
Microgon, Inc. 06/92 125,000 Common
shares at $.60;
expiring 06/97 0 0 0 0
National Pain 03/92 45,920 Common
Institute shares at $8.33;
expiring 03/97 -- -- 30,000 30,000
Resonex, Inc. 08/90 187,500 Common
shares at $1.00;
expiring 08/95 -- -- 0 0
Resonex, Inc. 09/90 46,875 Common
shares at $1.00;
expiring 09/95 -- -- 0 0
Resonex, Inc. 10/91 600,000 Common
shares at $1.00;
expiring 10/96 -- -- 0 0
Resonex, Inc. 10/92 228,000 Common
shares at $1.00;
expiring 10/97 -- -- 0 0
Resonex, Inc. 04/93 680,000 Common
shares at $1.00;
expiring 01/98 -- -- 0 0
Microelectronics
- ----------------
Celeritek 05/89 4,523 Common
shares at $7.50;
exercised 05/94 -- -- 2,164 2,164
Telecommunications
- ------------------
All Post, Inc. 08/93 17,574 Common
shares at $.79;
expiring 08/95 -- -- 0 0
Integrated Network 06/91 11,765 Common
Corporation shares at $17.00;
expiring 06/96 20,000 100,002 20,000 20,000
Primary Access 10/90 33,333 Common
Corporation shares at $2.25;
expiring 10/95 6,000 6,000 6,000 6,000
------ ------- ------- -------
Total warrants 72,176 172,305 139,757 622,990
------ ------- ------- -------
STOCKS:
Computers and Computer Equipment
- --------------------------------
MTI Technology 04/94 20,927 Common
Corporation shares 188,343 74,563 -- --
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 09/94 36,042 Series D
Preferred
shares 100,556 100,556 -- --
Medical
- -------
Allegiant
Physicians 08/94 63,000 Common
Services, Inc. shares 35,000 127,953 -- --
Resonex Holding 02/94 22,804 Common
Corporation shares 1,682,507 0 -- --
Microelectronics
- ----------------
Celeritek, Inc. 05/94 4,523 Common
shares 36,087 36,087 -- --
Retail/Consumer Products
- ------------------------
GP Publications, 03/92 200,000 Common
Inc. shares 200,000 200,000 200,000 200,000
GP Publications, 06/93 435,310 Common
Inc. shares 435,310 435,310 435,310 435,310
S-TRON 05/93 Subordinated
note (1), $390,000
principal amount 392,015 130,316 390,000 203,148
S-TRON 05/93 390,000 Common
shares 0 0 0 0
S-TRON 05/93 897,000
Series 1
Preferred shares 295,740 0 295,740 0
S-TRON 05/93 2,753,356
Series 2
Preferred shares 618,387 201,551 618,387 321,747
Telecommunications
- ------------------
All Post, Inc. 10/94 17,574 Common
shares 13,883 13,883 -- --
--------- --------- --------- ---------
Total stocks 3,997,828 1,320,219 1,939,437 1,160,205
--------- --------- --------- ---------
Total equity investments $4,070,004 1,492,524 2,079,194 1,783,195
========= ========= ========= =========
- -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(1) Subordinated note includes accrued interest. The subordinated note interest rate was 6%.
</TABLE>
Marketable Equity Securities
- ----------------------------
At December 31, 1994 and 1993, marketable equity securities had
aggregate costs of $225,843 and $5,250, respectively, and aggregate
market values of $216,680 and $42,250, respectively. The net
unrealized (loss) gain at December 31, 1994 and 1993 included gross
gains of $104,617 and $37,000, respectively.
Alantec
- -------
In February 1994, the company completed its initial public offering at
an offering price of $13.00 per share. The Partnership exercised its
common warrants and then sold the resulting common shares in the
offering for $430,053 and realized a gain on the sale of $426,553.
All Post, Inc.
- --------------
In October 1994, the Partnership cash exercised its warrants to
purchase 17,574 common shares.
Biocircuits, Inc.
- -----------------
Based on the Managing General Partner's opinion, there has been an
other than temporary decline in the market value of the Partnership's
investment. Accordingly, the Partnership had written off its warrant
investment of $4,000 and recorded a decrease in fair value of $41,000
at December 31, 1994.
Celeritek, Inc.
- ---------------
In May 1994, the Partnership exercised its warrants to purchase 4,523
common shares. The recorded cost basis and fair value of $36,087
included the cash exercise price of $33,923 at $7.50 per share
(adjusted during 1994) and the warrant cost basis of $2,164.
Cyclean, Inc.
- -------------
In September 1994, the Partnership restructured its secured notes
previously issued to Cyclean, Inc. In exchange for an extension of
the maturity date and certain interest rate changes, the Partnership
received a warrant for 8,065 shares of common stock exercisable at
$3.10 per share expiring March 1999, a second warrant for 9,464 shares
of common stock exercisable at $4.00 per share expiring March 1999,
and 36,042 shares of Series D Preferred stock. The Partnership
recorded the cost basis and fair value at $100,556 for the preferred
stock received, and recorded a decrease in fair value of $11,176 for
the Partnership's existing warrants based on the Managing General
Partner's judgment. In addition, the expiration dates for the
Partnership's existing Cyclean, Inc. common stock warrants were
extended as part of the restructuring.
Integrated Network Corporation
- ------------------------------
In addition to the Partnership's right to exercise its warrant for
common stocks, the Partnership has an option to sell its common share
warrant back to the company for $100,002. Accordingly, this amount is
recorded as the fair value at December 31, 1994.
Komag, Inc.
- -----------
In August 1994, the Partnership exercised its warrants without cash
and received 5 common shares. Immediately after the warrant exercise,
these shares were sold for total proceeds of $128 resulting in a
realized loss of $1,122.
MTI Technology Corporation
- --------------------------
System Industries, Inc. (System), a notes receivable portfolio company
of the partnership, filed for protection under Chapter 11 of the
United States Bankruptcy Code in late 1993. In April 1994,
substantially all the assets of System were acquired by MTI. As
consideration for the amount due, the Partnership received a new
secured note in MTI, cash from certain MTI common shares sold, and
received an additional 20,927 shares of MTI common stock. A cost
basis of $188,343 was assigned to the common shares received (based on
market value at time of issuance), and an unrealized fair value
decrease of $113,780 was recorded to reflect the market price for
these unrestricted, publicly-traded shares at December 31, 1994.
Pinnacle Systems, Inc.
- ----------------------
In November 1994, Pinnacle Systems, Inc. completed its initial public
offering at $8 per share. The Partnership recorded an increase in
fair value of $11,664 for its existing warrant investment at December
31, 1994 to reflect the publicly-traded market value for the common
stock.
Allegiant Physicians Services, Inc./National Pain Institute, Inc.
- -----------------------------------------------------------------
In August 1994, the Partnership received 63,000 common shares of
Allegiant Physicians Services, Inc. (Allegiant) in exchange for its
45,920 common share warrants in National Pain Institute, Inc. (NPI) as
a result of Allegiant's acquisition of NPI. The Partnership recorded
an unrealized fair value increase of $92,953 to reflect the market
price for these unrestricted shares at December 31, 1994.
Resonex, Inc./Resonex Holding Corporation
- -----------------------------------------
In February 1994 the Partnership, together with two affiliated
partnerships, assigned their Resonex, Inc. note holdings to Resonex
Holding Corporation ("RHC"), a new company wholly-owned by the
Partnership and the affiliated partnerships. RHC foreclosed on the
assets of Resonex, Inc. The partnerships' ownership of RHC is in
proportion to their respective Resonex, Inc. loan balances. The
Partnership received 22,804 common shares of RHC in exchange for $400
cash and its share of Resonex, Inc. secured notes totaling $2,082,107.
During 1994, a realized loss of $400,000 was recorded based on the
Managing General Partner's opinion, reducing the investment book value
to $1,682,507 with an estimated fair value of zero at September 30,
1994 pending the results of management actions being taken. The
Managing General Partner's intention is to maximize the net realizable
value on this investment.
S-TRON
- ------
In late 1994, based on the Managing General Partner's estimate, the
fair value of the Partnership's investment had declined. Accordingly,
the Partnership recorded a change in fair value decrease of $195,043
on its existing investments at December 31, 1994.
Wasatch Education Systems Corporation
- -------------------------------------
In February 1994, the Partnership increased the borrowing capacity on
an accounts receivable line of credit to the company and received
366,667 common share warrants. The Partnership recorded a change in
fair value decrease of $280,572 for the company's restricted warrants
based on the publicly-traded market price of this investment at
December 31, 1994.
In 1993, based on a June 1993 financing round and the relatively low
level of common stock trading to set a market price, the fair value
for the company's common stock was estimated to be $1.00 per share.
Since there has not been a recent round of financing, the publicly-
traded market price is used to value warrants at December 31, 1994.
Other Equity Investments
- ------------------------
In 1994, the Partnership realized losses of $30,000 from equity
investment write-offs for two portfolio companies not previously
discussed above due to discontinued operations or an other than
temporary decline in value.
All other equity investments not specifically discussed above are
privately held and no public market for the sale of these securities
exists.
6. Secured Notes Receivable, Net
-----------------------------
At December 31, 1994 and 1993, secured notes receivable consisted of:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Secured notes receivable $12,069,120 16,290,272
Accrued interest 514,632 295,700
Unamortized discount (198,692) (323,580)
---------- ----------
Secured notes receivable, net
(cost basis) 12,385,060 16,262,392
Allowance for loan losses (3,816,000) (3,677,000)
---------- ----------
Secured notes receivable, net
(fair value) $ 8,569,060 12,585,392
========== ==========
</TABLE>
The 1994 notes were primarily from three portfolio companies in the
computers and computer equipment, computer software and systems, and
telecommunications industries. The remaining loans were from
approximately five companies in a variety of industries. All notes
are secured by specific assets of the borrowing company. Interest
rates on secured notes receivable at December 31, 1994 ranged from 10%
to 21%.
During 1994, approximately $190,000 of accrued interest was converted
to equity investments and approximately $154,000 was written off as a
result of notes being placed on nonaccrual status.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Balance, beginning of year $ 3,677,000 3,559,000
--------- ---------
Provision for loan losses 3,633,632 969,776
Secured notes receivable write-downs:
Computers and computer equipment (3,465,000) (575,000)
Medical (29,632) --
Retail/consumer products -- (276,776)
--------- ---------
Total write-offs (3,494,632) (851,776)
--------- ---------
Change in net unrealized fair value of
secured notes receivable 139,000 118,000
--------- ---------
Balance, end of year $ 3,816,000 3,677,000
========= =========
</TABLE>
The provision for loan losses is generally comprised of realized
losses, net of recognized recoveries, and a change in net unrealized
fair value based upon the level of loan loss reserves deemed adequate
by the Managing General Partner at the respective year ends.
Notes receivable with a total cost basis of $6,867,764 and $10,078,126
were on nonaccrual status at December 31, 1994 and 1993, respectively,
due to uncertainties in the financial condition of certain portfolio
companies. The decrease in nonaccrual notes was primarily due to
secured note write-downs. The Managing General Partner continues to
monitor the progress of these companies and intends to manage these
investments to maximize the Partnership's net realizable value. The
fair value at December 31, 1994 is based on the Managing General
Partner's estimate of collectibility of these notes.
The allowance for loan losses is adjusted based upon changes to the
portfolio size and risk profile. Although the allowance for loan
losses is established by evaluating individual debtor repayment
ability, the allowance represents the Managing General Partner's
assessment of the portfolio as a whole.
During 1993, the Partnership invested $650,000 in a certificate of
deposit (CD) with a financial institution which was recorded as an
other investment. The CD was pledged as collateral for a loan between
the financial institution and a portfolio company in the computers and
computer equipment industry. In August 1994, a decision was made by
the Managing General Partner to allow the financial institution to
draw on the CD for principal repayment and the secured note was
assigned to the Partnership.
The scheduled principal repayments remaining are:
<TABLE>
<CAPTION>
Year Ending Principal
December 31, Repayments
----------- ----------
<S> <C>
1995 $ 6,366,606
1996 4,742,976
1997 375,000
1998 --
1999 584,538
----------
$12,069,120
==========
</TABLE>
Secured notes receivable which are due on demand are included as
principal repayments for the year ending December 31, 1995. In
addition, the Managing General Partner may at times need to
restructure notes by either extending maturity dates or converting
notes to equity investments to increase the ultimate collectibility of
investments to the Partnership.
7. Cash and Cash Equivalents
-------------------------
At December 31, 1994 and 1993, cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Demand and brokerage accounts $ 7,802 28,440
Money-market accounts 1,914,048 3,041,327
--------- ---------
Total $1,921,850 3,069,767
========= =========
</TABLE>
8. Commitments
-----------
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 December 31, 1994, the Partnership had
unfunded commitments of $484,000 related to accounts receivable lines
of credit.
The Partnership uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-
sheet instruments. Commitments to extend financing are agreements to
lend to a company as long as there are no violations of any conditions
established in the contract. The credit lines generally have fixed
termination dates or other termination clauses. Since many of the
commitments are expected to expire without being fully drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. All commitments funded require collateral specified in
the agreements.
9. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses reflect the participated cost of legal
action between a third party and a portfolio company in the
retail/consumer products industry. The Partnership participated in
investments to the portfolio company with an affiliated partnership.
The Managing General Partner is subject to indemnification for such
costs pursuant to the Partnership Agreement. Accordingly, these
expenses are excluded from the calculation of operating expense
limitation. At December 31, 1994, the Partnership had accrued
expenses of $47,000 for future costs to defend the case.
In late 1992, the portfolio company and the affiliated partnership
filed a lawsuit against the third party claiming that the affiliated
partnership had the right to take possession of collateral, the price
paid was fair and did not interfere with the third party's legal
rights. The third party filed a countersuit claiming otherwise and is
seeking relief for $2.6 million. An estimate of possible loss cannot
be determined at this time; however, the Managing General Partner
believes the outcome will not have a material adverse effect on
partners' capital. Accordingly, no amounts have been provided in the
accompanying financial statements for any possible negative outcome in
this matter.
<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: March 17, 1995 By: /s/Frank R. Pope
--------------------------------------
Frank R. Pope
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/Charles R. Kokesh President, Chief March 17, 1995
- ------------------------ Executive Officer
Charles R. Kokesh and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Frank R. Pope Executive Vice March 17, 1995
- ------------------------ President, Chief
Frank R. Pope Financial Officer,
Secretary and a
Director of Technology
Funding Inc. and a
General Partner of
Technology Funding Ltd.
/s/Gregory T. George Group Vice President March 17, 1995
- -------------------------- of Technology Funding
Gregory T. George Inc. and a General
Partner of Technology
Funding Ltd.
The above represents a majority of the Board of Directors of
Technology Funding Inc. and a majority of the General Partners of
Technology Funding Ltd.
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FORM 10-K AS OF DECEMBER 31, 1994 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 16,455,064
<INVESTMENTS-AT-VALUE> 10,061,584
<RECEIVABLES> 0
<ASSETS-OTHER> 75,113
<OTHER-ITEMS-ASSETS> 1,921,850
<TOTAL-ASSETS> 12,058,547
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 140,962
<TOTAL-LIABILITIES> 140,962
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,311,065
<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> (6,393,480)
<NET-ASSETS> 11,917,585
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,495,321
<OTHER-INCOME> 16,873
<EXPENSES-NET> 942,226
<NET-INVESTMENT-INCOME> 569,968
<REALIZED-GAINS-CURRENT> (3,657,014)
<APPREC-INCREASE-CURRENT> (2,420,481)
<NET-CHANGE-FROM-OPS> (5,507,527)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (574,167)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (6,081,694)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 272,615
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,050,148
<AVERAGE-NET-ASSETS> 14,958,432
<PER-SHARE-NAV-BEGIN> 55
<PER-SHARE-NII> (8)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 46
<EXPENSE-RATIO> .06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>
A zero value is used since the change in net unrealized fair value is
not allocated to General Partners and Limited Partners as it is not
taxable. Only taxable gains or losses are allocated in accordance
with the Partnership Agreement.
</FN>
</TABLE>
