<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, 1995
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
filed pursuant to Rule 424(c) of the General Rules and Regulations
under the Securities Act of 1933, 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, 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
- ------ -----------------
Except as disclosed in Note 10 to the financial statements,
there are no other 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 1995.
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, 1995, there were 5,191 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>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Total income $ 1,589,346 1,512,194 1,367,023 2,806,215 3,009,081
Net operating income 729,824 569,968 313,492 1,092,444 1,501,349
Net realized gain from sales
of equity investments 2,454,187 425,431 476,335 127,957 138,399
Realized losses from
investment write-downs (4,508,628) (4,082,445) (1,902,799) (276,284) (50,552)
Net realized (loss) income (1,324,617) (3,087,046) (1,112,972) 944,117 1,589,196
Change in net unrealized
fair value:
Equity investments 2,786,658 (2,281,481) 209,851 (1,506,486) 987,225
Secured notes receivable (212,000) (139,000) (118,000) (2,945,926) (496,887)
Net income (loss) 1,250,041 (5,507,527) (1,021,121) (3,508,295) 2,079,534
Net realized (loss) income
per Unit (3) (8) (3) 2 4
Total assets 13,586,829 12,058,547 18,141,077 22,919,883 29,978,859
Distributions declared (391,777) (574,167) (2,445,411) (3,646,141) (3,377,394)
</TABLE>
Refer to financial statement notes 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 1995, net cash provided by operating activities totaled
$803,726. The Partnership paid management fees of $201,640
to the Managing General Partner, reimbursed related parties
for operating expenses of $227,729 and received $876 in net
loan participations from affiliated partnerships. Other
operating expenses of $365,059 were paid and $1,590,420 and
$6,858 in interest and other income, respectively, were
received.
In 1995, the Partnership issued $1,216,335 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 $2,170,864. In
addition, the Partnership received proceeds totaling
$3,366,988 from sales of equity investments. As of December
31, 1995, the Partnership was committed to fund up to an
additional $306,000 on term note financings to existing
borrowing companies.
Datalogix International, Inc. and Celeritek, Inc. completed
their initial public offerings ("IPOs") in 1995. Hybridon,
Inc. completes its IPO in early 1996. The Partnership sold
its Datalogix International, Inc. investment for total
proceeds of $228,812. Although the Celeritek, Inc. and
Hybridon, Inc. shares are subject to selling restrictions,
their IPOs indicate potential future liquidity.
In December 1995, the Partnership sold its remaining 50%
ownership in Imagine Publishing, Inc. (formerly GP
Publishing, Inc.) for net cash proceeds of $2,450,316. The
first half of the investment was sold in 1993 for net
proceeds of $572,917.
All management fees which are due have been paid through
December 31, 1995. 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, 1995 were
$7,046,622. 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
- ---------------------
1995 compared to 1994
- ---------------------
Net income was $1,250,041 in 1995, compared to a net loss of
$5,507,527 in 1994. The change was mainly due to a
$5,068,139 increase in the change in net unrealized fair
value of equity investments, a $2,028,756 increase in net
realized gain from sales of equity investments, partially
offset by a $426,183 increase in realized losses from
investment write-downs.
In 1995, the increase in equity investment fair value of
$2,786,658 was primarily due to the reversal of unrealized
losses, which were realized from investment write-downs for
portfolio companies in the medical and retail/consumer
products industries. In 1994, the decrease of $2,281,481 was
primarily due to a net decrease in the fair value of the
Partnership's holdings in a portfolio company in the medical
industry.
Net realized gain from sales of equity investments totaled
$2,454,187 in 1995 mostly from the sales of Imagine
Publishing, Inc. as discussed above, 3Com Corporation and
Datalogix International, Inc. In 1994, the realized gain of
$425,431 primarily related to the sale of Alantec.
In 1995 and 1994, the Partnership realized losses from
investments write-downs of $4,508,628 and $4,082,445,
respectively. Realized losses in 1995 primarily related to
equity and secured notes receivable investments for portfolio
companies in the medical and retail/consumer industries.
Realized losses in 1994 primarily related to secured notes
receivable to a portfolio company in the computers and
computer equipment industry.
Secured notes receivable interest income increased to
$1,479,613 in 1995 from $1,376,736 in 1994. The increase was
primarily due to interest payments received in 1995 from
portfolio companies in the computer software and systems,
telecommunications, and medical industries which had been on
nonaccrual status.
Total operating expenses were $385,848 and $534,391 in 1995
and 1994, respectively. 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 1995 and 1994,
the General Partners absorbed $653,673 and $95,227,
respectively. Also discussed in Note 3, is the inclusion of
$561,530 of additional administrative and investors services
expenses. Had such additional expenses been recorded in
prior years, the operating expense limitation not been in
effect, and the 1994 recoveries discussed in Note 3 to the
financial statements not occurred, total operating expenses
in 1995 and 1994 would have been $538,002 and $840,391,
respectively. The decrease in total operating expenses was
primarily due to lower administrative and investor services,
and lending operations and investment management expenses
from lower overall portfolio activities.
There is no established source of market value information
for the Partnership's portfolio of equity investments and
secured notes receivable. 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 portfolio company
investments may significantly impact future 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. In 1994 and 1993, the General Partners
absorbed operating expenses of $95,227 and $268,515,
respectively. As explained above, had the operating expense
limitation not been in effect, had the 1994 recoveries not
occurred, and had the additional expenses in 1995 been
recorded in prior years, total operating expenses in 1994 and
1993 would have been $840,391 and $1,001,198, 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.
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 1995, the Partnership incurred management fees
of $201,640. 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, 1995. General Partner Overhead includes the
General Partners' share of rent and utilities, and certain
salaries and benefits paid by the General Partners in
performing their obligations to the Partnership.
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, or its investee companies, have 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 Partnership Agreement.
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, 1995
and 1994
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993
Statements of Partners' Capital for
the years ended December 31, 1995, 1994
and 1993
Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993
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, 1995.
(c) Financial Data Schedule for the year ended and as of
December 31, 1995 (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, 1995 and 1994, and
the related statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended
December 31, 1995. 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 certain
loans and securities owned, by correspondence with the individual
borrowing and investee companies, and a physical examination of
securities held by a safeguarding agent as of December 31, 1995 and
1994. 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, 1995 and 1994, and the results of its operations
and its cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted
accounting principles.
San Francisco, California KPMG Peat Marwick LLP
March 22, 1996
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $6,861,823 and
$12,385,060 in 1995 and 1994,
respectively) $ 2,833,823 8,569,060
Equity investments (cost basis
of $3,447,006 and $4,070,004 in
1995 and 1994, respectively) 3,656,184 1,492,524
---------- ----------
Total investments 6,490,007 10,061,584
Cash and cash equivalents 7,046,622 1,921,850
Other assets 50,200 75,113
---------- ----------
Total $13,586,829 12,058,547
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 349,663 100,005
Due to affiliated partnerships 1,930 1,054
Due to related parties 36,737 7,376
Distributions payable 391,777 --
Other liabilities 30,873 32,527
---------- ----------
Total liabilities 810,980 140,962
Commitments (Notes 3 and 9)
Partners' capital:
Limited Partners
(Units outstanding of 399,977
in both 1995 and 1994) 16,743,243 18,419,721
General Partners (148,572) (108,656)
Net unrealized fair value (decrease)
increase from cost:
Secured notes receivable (4,028,000) (3,816,000)
Equity investments 209,178 (2,577,480)
---------- ----------
Total partners' capital 12,775,849 11,917,585
---------- ----------
Total $13,586,829 12,058,547
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ 1,479,613 1,376,736 1,185,647
Short-term investment interest 102,875 118,585 147,704
Other income 6,858 16,873 33,672
--------- --------- ---------
Total income 1,589,346 1,512,194 1,367,023
Costs and expenses:
Management fees 201,640 272,615 374,130
Amortization of organizational
costs -- 3,000 9,000
Other investment expenses 272,034 132,220 --
Operating expenses:
Lending operations and
investment management 155,642 220,552 428,277
Administrative and investor
services 750,214 280,705 326,591
Computer services 65,695 77,113 94,518
Professional fees 67,970 51,248 89,530
Expenses absorbed by
General Partners (653,673) (95,227) (268,515)
--------- --------- ---------
Total operating expenses 385,848 534,391 670,401
--------- --------- ---------
Total costs and expenses 859,522 942,226 1,053,531
--------- --------- ---------
Net operating income 729,824 569,968 313,492
Net realized gain from sales
of equity investments 2,454,187 425,431 476,335
Realized losses from
investment write-downs (4,508,628) (4,082,445) (1,902,799)
--------- --------- ---------
Net realized loss (1,324,617) (3,087,046) (1,112,972)
Change in net unrealized
fair value:
Equity investments 2,786,658 (2,281,481) 209,851
Secured notes receivable (212,000) (139,000) (118,000)
--------- --------- ---------
Net income (loss) $ 1,250,041 (5,507,527) (1,021,121)
========= ========= =========
Net realized loss
per Unit $ (3) (8) (3)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- ------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1995, 1994 and 1993:
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, 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
Distributions (365,107) (26,670) (391,777)
Net realized loss (1,311,371) (13,246) -- -- (1,324,617)
Change in net unrealized fair
value:
Equity investments -- -- 2,786,658 -- 2,786,658
Secured notes receivable -- -- -- (212,000) (212,000)
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1995 $16,743,243 (148,572) 209,178 (4,028,000) 12,775,849
========== ======= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 1,590,420 920,099 1,048,331
Other income received 6,858 16,873 33,672
Cash paid to vendors (365,059) (504,228) (404,293)
Cash paid to related parties (429,369) (688,844) (1,115,010)
Cash received from/(paid to)
affiliated partnerships 876 40,179 (55,985)
Reimbursement of collection
expenses received from a
portfolio company -- 187,441 --
--------- --------- ---------
Net cash provided (used)
by operating activities 803,726 (28,480) (493,285)
--------- --------- ---------
Cash flows from investing
activities:
Secured notes receivable issued (1,216,335) (4,075,046) (9,089,745)
Repayments of secured notes
receivable 2,170,864 3,147,801 8,133,335
Proceeds from sales of
equity investments 3,366,988 430,181 1,852,576
Purchase of equity investments (471) (48,206) (21,101)
Purchase of other investments -- -- (650,000)
--------- --------- ----------
Net cash provided (used) by
investing activities 4,321,046 (545,270) 225,065
--------- --------- ----------
Cash flows from financing
activities:
Distributions to Limited and
General Partners -- (574,167) (3,265,499)
--------- --------- ---------
Net cash used by financing
activities -- (574,167) (3,265,499)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 5,124,772 (1,147,917) (3,533,719)
Cash and cash equivalents at
beginning of year 1,921,850 3,069,767 6,603,486
--------- --------- ---------
Cash and cash equivalents at
end of year $ 7,046,622 1,921,850 3,069,767
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net income
(loss) to net cash provided
(used) by operating activities:
Net income (loss) $ 1,250,041 (5,507,527) (1,021,121)
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Amortization of organizational
costs -- 3,000 9,000
Amortization of discount
on secured notes receivable (18,163) (12,110) (72,082)
Net realized gain from sales of
equity investments (2,454,187) (425,431) (476,335)
Realized losses from investment
write-downs 4,508,628 4,082,445 1,902,799
Change in net unrealized
fair value:
Equity investments (2,786,658) 2,281,481 (209,851)
Secured notes receivable 212,000 139,000 118,000
Changes in:
Accrued interest on secured and
convertible notes receivable 16,095 (563,112) (212,938)
Accounts payable and accrued
expenses 12,474 (21,134) (29,114)
Due to/from related parties 29,361 16,144 (459,825)
Due to/from affiliated
partnerships 876 40,179 (55,985)
Other assets 24,913 (73,283) 9,322
Other liabilities (1,654) 11,868 4,845
Other, net 10,000 -- --
--------- --------- ---------
Net cash provided (used)
by operating activities $ 803,726 (28,480) (493,285)
========== ========= =========
Non-cash investing activities:
Additions to equity investments $ 142,432 100,556 6,667
========== ========= =========
Conversion of secured notes
receivable and interest to
equity investments $ 2,919,541 2,270,450 2,374,746
========== ========= =========
Conversion of other investments
to secured notes receivable $ -- 650,000 --
========== ========= =========
Non-cash exercise of warrants $ 113,933 (1,122) --
========== ========= =========
</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.
Preparation of Financial Statements and Use of Estimates
- --------------------------------------------------------
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting
principles. This requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The financial statements include non-marketable investments of
$6,259,013 and $9,844,904 (49% and 83% of partners' capital) as of
December 31, 1995 and 1994, respectively, whose values have been
estimated by the Managing General Partner in the absence of readily
ascertainable market values. 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 investments
existed, and the differences could be material. In addition, for
certain publicly traded investments that may not be marketable due to
selling restrictions, the Managing General Partner has applied an
illiquidity discount of 25% in determining fair value as mentioned
below.
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.
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.
The Partnership's total tax basis in investments was higher than the
reported total cost basis of $10,308,829 by $3,068,406.
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, 1995, 1994 and
1993 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 certain secured notes issued, the Partnership
receives 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 and
subordinated notes receivable as repayment of these notes generally
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 1995 and 1994, realized gains (losses)
resulting from the non-cash exercise of warrants totaled $113,933 and
$(1,122), respectively. No such event occurred in 1993. These
amounts are included in net realized gain from sales 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. Unnegotiated distribution
checks, if any, after a reasonable amount of time, are recorded as
other liabilities on the Balance Sheets.
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,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(Decrease) increase in fair
value from cost of
marketable equity securities $ (17,136) (9,163) 37,000
Increase (decrease) in fair
value from cost of non-
marketable equity securities 226,314 (2,568,317) (332,999)
--------- --------- -------
Net unrealized fair value
increase (decrease) from
cost at end of year 209,178 (2,577,480) (295,999)
Net unrealized fair value
decrease from cost
at beginning of year (2,577,480) (295,999) (505,850)
--------- --------- -------
Change in net unrealized
fair value of equity
investments $ 2,786,658 (2,281,481) 209,851
========= ========= =======
</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, 1995, 1994
and 1993, related party costs were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Management fees $201,640 272,615 374,130
Amortization of
organizational costs -- 3,000 9,000
Reimbursable operating
expenses:
Lending operations and
investment management 128,757 234,262 229,194
Administrative and
investor services 716,311 216,225 225,858
Computer services 65,695 77,113 94,518
Expenses absorbed by
General Partners (653,673) (95,227) (268,515)
</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. Management fees are equal to the
greater of one-half of one percent of the Partnership's assets under
management or $2,500 each quarter.
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, 1995 and 1994.
The Partnership reimburses the Managing General Partner and affiliates
for operating expenses incurred in connection with the business of the
Partnership. Reimbursable operating expenses include expenses (other
than Organization and Offering and General Partner Overhead) such as
investment operations, administrative, and investor services and
computer services. During late 1995, operating cost allocations to
the Partnership were reevaluated. The Managing General Partner
determined that it had not fully recovered allocable overhead as
permitted by the Partnership Agreement. As a result, the Partnership
was allocated additional administrative and investor services costs of
$561,530, which were not previously recognized by the Partnership;
however, $523,886 of this amount was absorbed by the General Partners.
The $561,530 consisted of $60,011, $58,585, $62,282, and $380,652
related to 1995, 1994, 1993, and prior years, respectively.
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 $653,673, $95,227, and $268,515 for the years ended
December 31, 1995, 1994 and 1993, 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 periods prior to 1994 during which the operating
expense limitation applied. Similarly, another reimbursement of
approximately $28,000 was received during 1994, of which approximately
$24,000 was expensed during 1993 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.
Had the operating expense limitation not been in effect and the above
additional charge been recorded in prior years, and had the above
reimbursement not been received, total operating expenses would have
been $538,002, $840,391, and $1,001,198 for 1995, 1994 and 1993,
respectively. At December 31, 1995 and 1994, due to related parties
totaled $36,737 and $7,376, respectively.
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 issued to
non-affiliated borrowing companies by affiliated partnerships which
are also managed by the General Partners. The Partnership may also
reparticipate such secured notes receivable amongst affiliated
partnerships to meet business needs. At December 31, 1995 and 1994,
due to affiliated partnerships on such participations were $1,930 and
$1,054, respectively. These amounts were paid to such affiliated
partnerships by the Partnership immediately following the respective
year ends.
In order to increase the future investment returns from several
portfolio companies, the Partnership has contracted directly with
Affiliates of the General Partners or the General Partners as provided
in Article 3 sections 3.02(d) and 3.08. These agreements generally
provide for the Partnership to make current payment of the direct
expenses of the Affiliate or the General Partners related to such
recovery efforts as well as a performance incentive payment based on
the amount of incremental recovery less expenses previously paid,
which expenses will be returned to the Partnership from recoveries.
The General Partners have agreed to waive any profit interest payable
pursuant to Article 8 Section 8.01(d) attributable to any recoveries
from the portfolio companies subject to these separate written
agreements. These agreements are subject to review by legal counsel
for the Partnership and may be modified to assure conformity with the
terms of the Partnership's Amended and Restated Limited Partnership
Agreement. Consistent with note participations as discussed above,
the agreements provide for a pro-rata payment of expenses and
incentive payments and a pro-rata participation in the results of
recovery efforts.
In 1995 and 1994, TFL had a sublease rental agreement with a
Partnership portfolio company in the computers and computer equipment
industry. The terms of this agreement were similar to those which
would apply to an unrelated party. This agreement was terminated in
the fourth quarter of 1995.
4. Distributions Payable
---------------------
In early 1995, the Partnership ended its mandatory reinvestment
period, as defined in the Partnership Agreement, and entered its
liquidation stage. In December 1995, distributions totaling $391,777
were declared and will be paid in March 1996. Future distributions
will be dependent upon loan repayments from borrowing companies and
available cash, and are expected to fluctuate.
5. 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 as discussed below, 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.
6. Equity Investments
------------------
At December 31, 1995 and 1994, equity investments consisted of:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
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 5,000 Common
Corporation shares at $8.00;
expiring 01/96 $ 0 600 0 0
Hybridon, Inc. 03/91 7,142 Common
shares at $3.50;
expiring 03/97 2,500 32,139 2,500 32,139
Computers and Computer Equipment
- --------------------------------
MARCorp 05/92 1,595,745 Series B
Preferred shares
at $1.00; expiring
05/97 -- -- 0 0
MARCorp 06/93 566,667 Series B
Preferred shares
at $.75; expiring
06/98 -- -- 0 0
MARCorp 08/93 500,000 Series B
Preferred shares at
$.75; expiring 08/98 -- -- 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;
exercised 02/95 -- -- 2,500 14,164
Computer Software and Systems
- -----------------------------
Datalogix 01/92 35,575 Common
International, shares at $1.87;
Inc. exercised 06/95 -- -- 20,000 20,000
Molecular 10/90 6,111 Common
Simulations, Inc. shares at
$18.00;
expired 10/95 -- -- 0 0
Wasatch Education 04/93 705,971 Common
Systems shares at $.50;
Corporation expiring 04/98 -- -- 0 0
Wasatch Education 07/93 33,333 Common
Systems shares at $.50;
Corporation expiring 07/98 -- -- 6,667 0
Wasatch Education 02/94 366,667 Common
Systems shares at $.50;
Corporation expiring 02/99 -- -- 3,333 0
Wasatch Education 06/95 1,159,546 Common
Systems shares at $0.50;
Corporation expiring 06/00 10,000 217,415 -- --
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 03/91 44,589 Common
shares at $3.10;
expiring 04/01 0 0 7,500 0
Cyclean, Inc. 07/92 20,967 Common
shares at $3.10;
expiring 07/97 0 0 2,500 0
Cyclean, Inc. 07/92 53,130 Common
shares at $3.10;
expiring 07/02 0 0 1,176 0
Cyclean, Inc. 09/94 8,065 Common
shares at $3.10;
expiring 03/99 0 0 0 0
Cyclean, Inc. 09/94 9,464 Common
shares at $4.00;
expiring 03/99 0 0 0 0
Cyclean, Inc. 01/95 9,750 Common
shares at $4.00;
expiring 01/00 0 0 -- --
ElectroScan 12/91 22,177 Common
Corporation shares at $3.10;
expiring 12/96 0 0 0 0
Medical
- -------
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;
expired 10/95 -- -- 0 0
Microgon, Inc. 09/91 29,167 Common
shares at $.60;
expiring 09/96 -- -- 0 0
Microgon, Inc. 06/92 125,000 Common
shares at $.60;
expiring 06/97 -- -- 0 0
Telecommunications
- ------------------
Integrated Network 06/91 5,882 Common
Corporation shares at $17.00;
expiring 06/96 10,000 0 20,000 100,002
Primary Access 10/90 30,000 Common
Corporation shares at $2.25;
exercised 06/95 -- -- 6,000 6,000
------ ------- ------- -------
Total warrants 22,500 250,154 72,176 172,305
------ ------- ------- -------
STOCKS:
Computers and Computer Equipment
- --------------------------------
MTI Technology 04/94 20,927 Common
Corporation shares 188,343 43,947 188,343 74,563
Wasatch Education 06/95 2,908,450
Systems Series C
Corporation Preferred
shares 2,908,450 2,908,450 -- --
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 09/94 36,042 Series D
Preferred
shares 100,556 100,556 100,556 100,556
Cyclean, Inc. 01/95 51,051 Series D
Preferred shares 142,432 142,432 -- --
Cyclean of 03/95 Class A LLC Unit -
Los Angeles, LLC 44% ownership 11,091 11,091 -- --
Medical
- -------
Allegiant 08/94 31,500 Common
Physicians shares
Services, Inc. 11,250 52,500 35,000 127,953
Allegiant 11/95 17,500 Common
Physicians shares
Services, Inc. 6,250 29,167 -- --
Resonex Holding 02/94 22,804 Common
Corporation shares 0 0 1,682,507 0
Microelectronics
- ----------------
Celeritek, Inc. 05/94 6,785 Common
shares 36,087 52,563 36,087 36,087
Retail/Consumer Products
- ------------------------
Imagine Publishing, 03/92 200,000 Common
Inc. (formerly shares
GP Publications,
Inc.) -- -- 200,000 200,000
Imagine Publishing, 06/93 435,310 Common
Inc. (formerly shares
GP Publications,
Inc.) -- -- 435,310 435,310
S-TRON 05/93 Subordinated
note (1), $390,000
principal amount 0 0 392,015 130,316
S-TRON 05/93 390,000 Common
shares 0 0 0 0
S-TRON 05/93 897,000
Series 1
Preferred shares 0 0 295,740 0
S-TRON 05/93 2,753,356
Series 2
Preferred shares 0 0 618,387 201,551
Telecommunications
- ------------------
All Post, Inc. 10/94 17,574 Common
shares 13,883 13,883 13,883 13,883
3Com Corporation 06/95 1,160 Common
shares in
escrow 6,164 51,441 -- --
--------- --------- --------- ---------
Total stocks 3,424,506 3,406,030 3,997,828 1,320,219
--------- --------- --------- ---------
Total equity investments $3,447,006 3,656,184 4,070,004 1,492,524
========= ========= ========= =========
- -- 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, 1995 and 1994, marketable equity securities had
aggregate costs of $248,130 and $225,843, respectively, and aggregate
market values of $230,994 and $216,680, respectively. The net
unrealized loss at December 31, 1995 and 1994 included gross gains of
$127,260 and $104,617, respectively.
Allegiant Physician Services, Inc.
- ----------------------------------
In August 1995, the Partnership exercised its option to sell half of
its common stock holdings to the company for $52,500 and realized a
gain of $35,000. In November 1995, the Partnership received an
additional 17,500 common shares from the company as settlement for the
company's failure to register the Partnership's common stock holdings
by March 1995 as stipulated in a 1994 agreement. The Partnership has
options to sell all shares to the company at a later date. An
unrealized fair value of $81,667 was recorded to reflect the option
value which is greater than the market value for the Partnership's
unrestricted common shares at December 31, 1995.
Celeritek , Inc.
- ----------------
In December 1995, Celeritek, Inc. completed its IPO after effecting a
common stock 3-for-2 split. The Partnership sold 141 of its post-
split common shares acquired in April 1995 into the IPO for proceeds
of $986 and realized a gain of $515. The Partnership recorded a
$16,476 increase in fair value to reflect the market value of $52,563
for its remaining shares at December 31, 1995. The market value
reflects a 25% discount for certain lockup restrictions.
Cyclean, Inc./Cyclean of Los Angeles, LLC
- -----------------------------------------
In January 1995, the Partnership obtained the right to receive 51,051
Series D Preferred shares with a twelve month vesting schedule in
exchange for a one year maturity date extension of secured notes
receivable. At December 31, 1995, all 51,051 shares were fully vested
with a recorded cost basis and fair value of $142,432.
In March 1995, Cyclean, Inc. ("Cyclean") formed Cyclean of Los
Angeles, LLC ("Cyclean LLC") and contributed certain assets and
contracts to the new entity. Cyclean LLC is completing a new round of
financing through the offering of Class A LLC Units. As a result of
this transaction, one of the Partnership's secured notes receivable
was transferred from Cyclean to Cyclean LLC with modified terms;
Cyclean has guaranteed note repayments. The Partnership received a
participated percentage of one Class A LLC Unit in exchange for
certain interest payments and late charges totaling $11,091. The
Partnership is also entitled to royalty payments and additional Series
D Preferred shares based on the total proceeds raised from the Cyclean
LLC offering, which is expected to be completed by early 1996.
In December 1995, all warrant cost bases totaling $11,176 were written
off as these warrants are expected to be canceled at the close of the
next financing round.
Datalogix International, Inc.
- -----------------------------
In June 1995, Datalogix International, Inc. completed its IPO. The
Partnership exercised its warrant without cash and sold all of its
resulting common shares in the company for total proceeds of $228,812
and a realized gain of $208,812.
Imagine Publishing, Inc. (formerly GP Publications, Inc.)
- ---------------------------------------------------------
In December 1995, the Partnership sold its remaining 50% investment of
635,310 common shares to a third party for net proceeds of $2,450,316
resulting in a realized gain of $1,815,006. The first half of the
investment was sold to the same buyer in October 1993 for net proceeds
of $572,917.
Integrated Network Corporation
- ------------------------------
During June 1995, the Partnership exercised its option to sell half of
its warrant holdings to the company for $100,000 and realized warrant
income of $90,000, which was included in "secured notes receivable
interest income" on the Statements of Operations. The Partnership
does not have this option for its remaining warrant.
Pinnacle Systems, Inc.
- ----------------------
In February 1995, the Partnership exercised its warrant without cash
and received 1,971 common shares. In May 1995, the Partnership sold
the common shares for total proceeds of $37,449 and realized a gain of
$34,949.
Primary Access Corporation/3Com Corporation
- -------------------------------------------
In June 1995, Primary Access Corporation ("Primary Access") was
acquired by 3Com Corporation ("3Com"), a public company. Immediately
prior to the acquisition, the Partnership exercised its Primary Access
common warrant holdings without cash and received 25,205 shares of
Primary Access common stock with a cost basis of $61,638, which
reflects a realized gain of $55,638 and a warrant cost basis of
$6,000. Upon the acquisition, these shares were then exchanged for
5,802 3Com common shares, of which 5,222 shares were sold for total
proceeds of $359,741 and a realized gain of $304,267 in July 1995.
The remaining 580 shares, which became 1,160 shares after a 2-for-1
stock split in August 1995, are held in an escrow account until March
21, 1996 to indemnify 3Com for any loss it may incur as a result of
any contractual breach of the merger agreement by Primary Access. The
Partnership recorded an increase in the change in fair value of
$45,277 to reflect the market value at December 31, 1995 for these
unrestricted shares.
Resonex Holding Corporation
- ---------------------------
Resonex Holding Corporation has licensed certain technologies and is
currently obtaining additional bids from potential licensees. The
company may wind down its operations by mid-1996. Based on the
opinion of the Managing General Partner, there has been an other than
temporary decline in Partnership's investment value and accordingly,
the common stock cost basis of $1,682,507 and secured notes receivable
investments totaling $1,073,925, which were on nonaccrual status, were
written off.
S-Tron
- ------
The company was unsuccessful in its efforts to obtain a major
government contract; as a result, operations will likely cease by
early 1996. Based on the Managing General Partner's opinion, there
has been an other than temporary decline in the fair value of the
Partnership's investment. Accordingly, the Partnership has written
off the cost basis of its Preferred stock investment of $914,127 and
recorded a write-down of $392,015 on its subordinated note investment.
Wasatch Education Systems Corporation
- -------------------------------------
In June 1995, the Partnership converted its secured notes receivable
totaling $2,908,450 into 2,908,450 Series C Preferred shares at $1.00
per share. As part of the conversion, the Partnership wrote off or
reversed all accrued interest totaling $631,019. In addition, the
Partnership's existing common warrants were replaced with new five-
year warrants with similar exercise prices. New warrants were also
received as a result of previous maturity extensions. The Partnership
recorded an unrealized fair value of $217,415 to reflect the
restricted market value of these warrants at December 31, 1995.
Other Equity Investments
- ------------------------
Biocircuits Corporation and MTI Technology Corporation are publicly-
traded companies. All such securities are unrestricted. All other
equity investments not specifically discussed above are privately held
and no public market for the sale of these securities existed at
December 31, 1995.
7. Secured Notes Receivable, Net
-----------------------------
At December 31, 1995 and 1994, secured notes receivable consisted of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Secured notes receivable $ 7,180,478 12,069,120
Accrued interest 4,306 514,632
Unamortized discount (322,961) (198,692)
--------- ----------
Secured notes receivable, net
(cost basis) 6,861,823 12,385,060
Allowance for loan losses (4,028,000) (3,816,000)
--------- ----------
Secured notes receivable, net
(fair value) $ 2,833,823 8,569,060
========= ==========
</TABLE>
The 1995 notes were primarily from two portfolio companies in the
computers and computer equipment and industrial/business automation
industries. The remaining loans were from approximately four
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, 1995 ranged from 8.75% to 20.91%.
During 1995, $2,908,450 in secured notes and accrued interest of
$11,091 were converted to equity investments, and secured notes
totaling $1,073,925 were written off. Refer to Note 6, Equity
Investments, for disclosure regarding secured notes receivable
converted to equity investments, write-off of secured notes
receivable, and write-off or reversal of accrued interest.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Balance, beginning of year $ 3,816,000 3,677,000
--------- ---------
Provision for loan losses 1,285,925 3,633,632
Secured notes receivable write-downs:
Computers and computer equipment -- (3,465,000)
Medical (1,073,925) (29,632)
--------- ---------
Total write-offs (1,073,925) (3,494,632)
--------- ---------
Change in net unrealized fair value of
secured notes receivable 212,000 139,000
--------- ---------
Balance, end of year $ 4,028,000 3,816,000
========= =========
</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 $6,357,717 and $6,867,764
were on nonaccrual status at December 31, 1995 and 1994, respectively,
due to uncertainties in the financial condition of certain portfolio
companies. The decrease of approximately $510,000 included note
repayments and write-downs for a portfolio company in the medical
industry, partially offset by secured notes issued to a portfolio
company in the computers and computer equipment industry. 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,
1995 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.
The scheduled principal repayments remaining are:
<TABLE>
<CAPTION>
Year Ending Principal
December 31, Repayments
----------- ----------
<S> <C>
1996 $ 1,989,469
1997 --
1998 --
1999 --
2000 5,191,009
----------
$ 7,180,478
==========
</TABLE>
Secured notes receivable which are due on demand are included as
principal repayments for the year ending December 31, 1996. 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.
8. Cash and Cash Equivalents
-------------------------
At December 31, 1995 and 1994, cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Demand and brokerage accounts $ 2,071 7,802
Money-market accounts 7,044,551 1,914,048
--------- ---------
Total $7,046,622 1,921,850
========= =========
</TABLE>
9. 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, 1995, the Partnership had
unfunded commitments of $306,000 related to term note financings.
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.
10. 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, 1995, the Partnership had accrued
expenses of approximately $82,000 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. Currently, the portfolio company and
the affiliated partnership have appealed a recent trial court ruling
that absolved the affiliated partnership from wrongdoing but declared
that the assets of the portfolio company, for a sum not certain, are
available to satisfy certain claims of the third party. An estimate
of possible loss can not be determined at this time. The Managing
General Partner believes the Partnership has adequate defenses and
intends to pursue this matter vigorously. No amounts have been
provided in the accompanying financial statements for any possible
negative outcome of 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 22, 1996 By: /s/Debbie A. Wong
--------------------------------------
Debbie A. Wong
Controller
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 22, 1996
- ------------------------ Executive Officer
Charles R. Kokesh and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Gregory T. George Group Vice President March 22, 1996
- -------------------------- 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, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 10,308,829
<INVESTMENTS-AT-VALUE> 6,490,007
<RECEIVABLES> 0
<ASSETS-OTHER> 50,200
<OTHER-ITEMS-ASSETS> 7,046,622
<TOTAL-ASSETS> 13,586,829
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 810,980
<TOTAL-LIABILITIES> 810,980
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,594,671
<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> (3,818,822)
<NET-ASSETS> 12,775,849
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,582,488
<OTHER-INCOME> 6,858
<EXPENSES-NET> 859,522
<NET-INVESTMENT-INCOME> 729,824
<REALIZED-GAINS-CURRENT> (2,054,441)
<APPREC-INCREASE-CURRENT> 2,574,658
<NET-CHANGE-FROM-OPS> 1,250,041
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 391,777
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 858,264
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 201,640
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,587,752
<AVERAGE-NET-ASSETS> 12,346,717
<PER-SHARE-NAV-BEGIN> 46
<PER-SHARE-NII> (3)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 42
<EXPENSE-RATIO> 7
<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>
