<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, 1996
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, are 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 9 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 1996.
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, 1996, there were 5,194 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>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total income $ 512,955 1,589,346 1,512,194 1,367,023 2,806,215
Net operating (loss) income (322,541) 729,824 569,968 313,492 1,092,444
Net realized gain from sales
of equity investments 106,823 2,454,187 425,431 476,335 127,957
Realized losses from
investment write-downs (125,099) (4,508,628) (4,082,445) (1,902,799) (276,284)
Recoveries from investments
previously written-off 103,807 -- -- -- --
Net realized (loss) income (237,010) (1,324,617) (3,087,046) (1,112,972) 944,117
Change in net unrealized
fair value:
Equity investments (1,835,611) 2,786,658 (2,281,481) 209,851 (1,506,486)
Secured notes receivable (49,000) (212,000) (139,000) (118,000) (2,945,926)
Net (loss) income (2,121,621) 1,250,041 (5,507,527) (1,021,121) (3,508,295)
Net realized (loss) income
per Unit (1) (3) (8) (3) 2
Total assets 11,006,297 13,586,829 12,058,547 18,141,077 22,919,883
Distributions declared -- 391,777 574,167 2,445,411 3,646,141
Distributions declared
per Unit (1) -- 1 1 6 9
(1) Calculation is based on weighted average number of Limited Partner Units outstanding
during the year.
</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
for 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 1996, net cash used by operating activities totaled
$470,291. The Partnership paid management fees of $247,008
to the Managing General Partner, reimbursed related parties
for operating expenses of $319,091 and paid affiliated
partnerships $1,930 for net loan participations. Other
operating expenses of $397,474 were paid and $444,903 and
$5,549 in interest and other income, respectively, were
received. In addition, the Partnership received collection
expense reimbursements of $44,760 from portfolio companies.
Distributions declared in 1995 of $391,777 were paid to
Limited and General Partners.
During 1996, the Partnership issued $251,102 in secured notes
receivable primarily to a portfolio company in the computers
and computer equipment industry. Repayments of notes
receivable provided cash of $843,151 and proceeds from sales
of equity investments totaled $126,823. Recoveries of
$103,807 were received for investments previously written
off. The Partnership is an indirect party to litigation, see
Note 9 for additional information regarding the future use of
Partnership funds and restricted cash as of December 31,
1996. As of December 31, 1996, the Partnership was committed
to fund up to $24,300 related to term note financing to an
existing borrowing company.
Cash and cash equivalents at December 31, 1996, were
$6,414,538. Operating cash reserves, future investment sale
proceeds, interest income received on short-term investments,
and repayments of secured notes receivable are expected to be
sufficient to fund Partnership operations through the next
twelve months.
Results of Operations
- ---------------------
1996 compared to 1995
- ---------------------
Net loss was $2,121,621 in 1996, compared to a net income of
$1,250,041 in 1995. The change was substantially due to a
$4,622,269 decrease in the change in net unrealized fair
value of equity investments, a $2,347,364 decrease in net
realized gain from sales of equity investments, and a
$1,311,410 decrease in secured notes receivable interest
income. These changes were partially offset by a $4,383,529
decrease in realized losses from investment write-downs.
In 1996, the decrease in equity investment fair value of
$1,835,611 was primarily due to portfolio companies in the
computer software and systems, and industrial/business
automation industries. In 1995, the increase of $2,786,658
was primarily due to the reversal of unrealized losses, which
were realized as investment write-downs for portfolio
companies in the medical and retail/consumer products
industries.
In 1996, the net realized gain of $106,823 related to sales
of Allegiant Physicians Services, Inc., and Hybridon, Inc.,
stock. Net realized gain totaled $2,454,187 in 1995 mostly
from the sales of Imagine Publishing, Inc., 3Com Corporation
and Datalogix International, Inc.
Secured notes receivable interest income totaled $168,203 in
1996, compared to $1,479,613 in 1995. The higher 1995
balance was mostly due to cash interest payments received
from portfolio companies in the computer software and
systems, telecommunications, and medical industries which had
been on nonaccrual status. At December 31, 1996, the
remaining portfolio was on non-accrual status due to
uncertainty of the borrowers' financial conditions.
During 1996 and 1995, realized losses from investment write-
downs totaled $125,099 and $4,508,628, respectively.
Realized losses in 1996 substantially related to equity
investments in a portfolio company in the computers and
computer equipment industry. Realized losses in 1995
primarily related to equity and secured notes receivable
investments in portfolio companies in the medical and
retail/consumer industries.
Total operating expenses were $386,668 and $385,848 in 1996
and 1995, 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 1996 and 1995,
the General Partners absorbed $143,040 and $653,673,
respectively. Also discussed in Note 3 is the inclusion of
$561,530 of additional administrative and investors services
expenses in 1995. Had such additional expenses been recorded
in prior years, the operating expense limitation not been in
effect, and the 1996 recoveries discussed in Note 3 not
occurred, total operating expenses in 1996 and 1995 would
have been $574,468 and $538,002, respectively. The increase
was primarily due to higher collection costs as the remaining
portfolio requires additional workout efforts to realize
maximum value by the Partnership.
Given the inherent risk associated with the business of the
Partnership, the future performance of portfolio company
investments may significantly impact future 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 as 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., 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.
Total operating expenses were $385,848 and $534,391 in 1995
and 1994, respectively. In 1995 and 1994, the General
Partners absorbed $653,673 and $95,227, respectively. As
explained in Note 3 to the financial statements, had the
additional expenses been recorded in prior years, the
operating expense limitation not been in effect, and the 1994
recoveries 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.
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 1996, the Partnership incurred management fees
of $247,008. 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, 1996. 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, 1996
and 1995
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Statements of Partners' Capital for
the years ended December 31, 1996, 1995
and 1994
Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
(2) Financial Statement 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, 1996.
(c) Financial Data Schedule for the year ended and as of
December 31, 1996 (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, 1996 and 1995, and
the related statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended
December 31, 1996. 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, 1996 and
1995. 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, 1996 and 1995, and the results of its operations
and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted
accounting principles.
San Francisco, California /S/KPMG Peat Marwick LLP
March 27, 1997
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $6,332,277 and
$6,861,823 in 1996 and 1995,
respectively) $ 2,255,277 2,833,823
Equity investments (cost basis
of $3,301,907 and $3,447,006 in
1996 and 1995, respectively) 1,675,474 3,656,184
---------- ----------
Total investments 3,930,751 6,490,007
Cash and cash equivalents 6,414,538 7,046,622
Restricted cash 642,695 50,000
Other assets 18,313 200
---------- ----------
Total $11,006,297 13,586,829
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 309,810 349,663
Due to affiliated partnerships -- 1,930
Due to related parties 38,937 36,737
Distributions payable -- 391,777
Other liabilities 3,322 30,873
---------- ----------
Total liabilities 352,069 810,980
Commitments, contingencies and
subsequent events
(Notes 3, 6 and 9)
Partners' capital:
Limited Partners
(Units outstanding of 399,977
in both 1996 and 1995) 16,508,603 16,743,243
General Partners (150,942) (148,572)
Net unrealized fair value (decrease)
increase from cost:
Secured notes receivable (4,077,000) (4,028,000)
Equity investments (1,626,433) 209,178
---------- ----------
Total partners' capital 10,654,228 12,775,849
---------- ----------
Total $11,006,297 13,586,829
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ 168,203 1,479,613 1,376,736
Short-term investment
interest 339,203 102,875 118,585
Other income 5,549 6,858 16,873
--------- --------- ---------
Total income 512,955 1,589,346 1,512,194
Costs and expenses:
Management fees 247,008 201,640 272,615
Amortization of
organizational costs -- -- 3,000
Other investment expenses 201,820 272,034 132,220
Operating expenses:
Lending operations and
investment management 160,438 155,642 220,552
Administrative and investor
services 240,876 750,214 280,705
Computer services 81,249 65,695 77,113
Professional fees 47,145 67,970 51,248
Expenses absorbed by
General Partners (143,040) (653,673) (95,227)
--------- --------- ---------
Total operating expenses 386,668 385,848 534,391
--------- --------- ---------
Total costs and expenses 835,496 859,522 942,226
--------- --------- ---------
Net operating (loss) income (322,541) 729,824 569,968
Net realized gain from sales
of equity investments 106,823 2,454,187 425,431
Realized losses from
investment write-downs (125,099) (4,508,628) (4,082,445)
Recoveries from investments
previously written off 103,807 -- --
--------- --------- ---------
Net realized loss (237,010) (1,324,617) (3,087,046)
Change in net unrealized
fair value:
Equity investments (1,835,611) 2,786,658 (2,281,481)
Secured notes receivable (49,000) (212,000) (139,000)
--------- --------- ---------
Net (loss) income $(2,121,621) 1,250,041 (5,507,527)
========= ========= =========
Net realized loss
per Unit $ (1) (3) (8)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- ------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1996, 1995 and 1994:
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, 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
Net realized loss (234,640) (2,370) -- -- (237,010)
Change in net unrealized fair
value:
Equity investments -- -- (1,835,611) -- (1,835,611)
Secured notes receivable -- -- -- (49,000) (49,000)
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1996 $ 16,508,603 (150,942) (1,626,433) (4,077,000) 10,654,228
========== ======= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 444,903 1,590,420 920,099
Other income received 5,549 6,858 16,873
Cash paid to vendors (397,474) (315,059) (504,228)
Cash paid to related parties (566,099) (429,369) (688,844)
Cash (paid to) received from
affiliated partnerships (1,930) 876 40,179
Reimbursement of collection
expenses received from
portfolio companies 44,760 -- 187,441
--------- --------- ---------
Net cash (used) provided
by operating activities (470,291) 853,726 (28,480)
--------- --------- ---------
Cash flows from investing
activities:
Secured notes receivable issued (251,102) (1,216,335) (4,075,046)
Repayments of secured notes
receivable 843,151 2,170,864 3,147,801
Proceeds from sales of
equity investments 126,823 3,366,988 430,181
Recoveries from investments
previously written off 103,807 -- --
Purchase of equity investments -- (471) (48,206)
Deposits to restricted cash (592,695) (50,000) --
--------- --------- ---------
Net cash provided (used) by
investing activities 229,984 4,271,046 (545,270)
--------- --------- ---------
Cash flows from financing
activities:
Distributions to Limited and
General Partners (391,777) -- (574,167)
--------- --------- ---------
Net cash used by financing
activities (391,777) -- (574,167)
--------- --------- ---------
Net (decrease) increase in cash
and cash equivalents (632,084) 5,124,772 (1,147,917)
Cash and cash equivalents at
beginning of year 7,046,622 1,921,850 3,069,767
--------- --------- ---------
Cash and cash equivalents at
end of year $ 6,414,538 7,046,622 1,921,850
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net (loss)
income to net cash (used)
provided by operating activities:
Net (loss) income $(2,121,621) 1,250,041 (5,507,527)
Adjustments to reconcile net
(loss) income to net cash
(used) provided by operating
activities:
Amortization of organizational
costs -- -- 3,000
Amortization of discount
on secured notes receivable (66,809) (18,163) (12,110)
Net realized gain from sales of
equity investments (106,823) (2,454,187) (425,431)
Realized losses from investment
write-downs 125,099 4,508,628 4,082,445
Recoveries from investments
previously written off (103,807) -- --
Change in net unrealized
fair value:
Equity investments 1,835,611 (2,786,658) 2,281,481
Secured notes receivable 49,000 212,000 139,000
Changes in:
Accrued interest on secured and
convertible notes receivable 4,306 16,095 (563,112)
Accounts payable and accrued
expenses (39,853) 12,474 (21,134)
Due to/from related parties 2,200 29,361 16,144
Due to/from affiliated
partnerships (1,930) 876 40,179
Other assets (18,113) 74,913 (73,283)
Other liabilities (27,551) (1,654) 11,868
Other, net -- 10,000 --
--------- --------- ---------
Net cash (used) provided
by operating activities $ (470,291) 853,726 (28,480)
========== ========= =========
Non-cash investing activities:
Additions to equity investments $ -- 142,432 100,556
========== ========= =========
Conversion of secured notes
receivable and interest to
equity investments $ -- 2,919,541 2,270,450
========== ========= =========
Conversion of other investments
to secured notes receivable $ -- -- 650,000
========== ========= =========
Non-cash exercise of warrants $ 16,994 113,933 (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 marketable and non-marketable
investments of $3,930,751 and $6,490,007 (37% and 51% of partners'
capital) as of December 31, 1996 and 1995, respectively. For the non-
marketable investments, the Managing General Partner has estimated the
fair value of such investments 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 up to 33% in determining fair value as discussed 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 $9,634,184 by $2,251,017.
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, 1996, 1995 and
1994, 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:
- -----------
In accordance with generally accepted accounting principles, the
Partnership's method of accounting for investments 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 receivable
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, upon issuance or
restructure, the Partnership receives warrants (to purchase certain
types of capital stock) or 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 cost
basis of capital stock and the resulting discount are generally based
on the valuation set at the latest round of financing. The discount
is amortized to interest income on a straight-line basis over the term
of the loan. These warrants and capital stock are included in the
equity investment portfolio.
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 up to 33% is applied when determining the fair
value; the actual discount percentage is based on the type and length
of the restrictions. 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. Upon the non-cash exercises of warrants, the
Partnership recorded realized gains (losses) of $16,994, $113,933, and
$(1,122), during 1996, 1995, and 1994, respectively, as a result of
the underlying stock prices at the date of exercise. These amounts
are included in net realized gain from sales of equity investments in
the Statements of Operations.
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. After a reasonable amount
of time, unnegotiated distribution checks, if any, are recorded as
other liabilities on the Balance Sheets.
Reclassifications
- -----------------
Certain prior year balances have been reclassified to conform with the
1996 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,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in fair
value from cost of
marketable equity securities $ 101,360 (17,136) (9,163)
(Decrease) increase in fair
value from cost of non-
marketable equity securities (1,727,793) 226,314 (2,568,317)
--------- --------- ---------
Net unrealized fair value
(decrease) increase from
cost at end of year (1,626,433) 209,178 (2,577,480)
Net unrealized fair value
increase (decrease) from cost
at beginning of year 209,178 (2,577,480) (295,999)
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $(1,835,611) 2,786,658 (2,281,481)
========= ========= =========
</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, 1996, 1995
and 1994, related party costs were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Management fees $247,008 201,640 272,615
Amortization of
organizational costs -- -- 3,000
Reimbursable operating
expenses:
Lending operations and
investment management 175,407 128,757 234,262
Administrative and
investor services 165,652 716,311 216,225
Computer services 81,249 65,695 77,113
Expenses absorbed by
General Partners (143,040) (653,673) (95,227)
</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, 1996 and 1995.
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, and $442,934 related to
1995, 1994, 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 $143,040, $653,673, and $95,227 for the years ended
December 31, 1996, 1995 and 1994, respectively, were absorbed by the
General Partners.
During 1996 and 1994, the Partnership was reimbursed $44,760 and
$187,441, respectively, by portfolio companies primarily for legal,
consulting, and other external costs incurred in the defense of the
Partnership's secured note rights through bankruptcy court. Of the
amounts reimbursed in 1996 and 1994, $44,760 and approximately
$154,000, respectively, were incurred in prior periods during which
the operating expense limitation applied. The $44,760 and $154,000
recoveries were recorded as reductions to lending operations and
investment management expense, and the amounts absorbed by General
Partners in the respective years were reduced by equivalent amounts.
Had the operating expense limitation not been in effect, the above
additional charge been recorded in prior years, and had the above
reimbursements not been received, total operating expenses would have
been $574,468, $538,002, and $840,391 for 1996, 1995 and 1994,
respectively. At December 31, 1996 and 1995, due to related parties
totaled $38,937 and $36,737, 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, 1996, no amounts
were due to or from affiliated partnerships. At December 31, 1995,
$1,930 was due to affiliated partnerships on such participations.
This amount was paid to such affiliated partnerships immediately
following the 1995 year end.
In order to increase the future investment returns to the Partnership,
a portfolio company of the Partnership and affiliated partnerships has
entered into a joint venture with the General Partners to perform
investment recovery efforts. The General Partners have agreed to
waive any "post conversion" profit interest in the Partnership
attributable to any such recoveries for a share of the joint venture
net profits. The post conversion profit is pursuant to, and as
defined in, the profit and loss provisions of the Partnership's
Partnership Agreement. The joint venture documents are subject to
review by legal counsel for the Partnership to ensure conformity with
the terms of the Partnership Agreement.
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
---------------------
During 1996, distributions of $391,777 ($1 per Unit) declared in 1995
were paid to the Limited and General Partners. As the Partnership has
been in its liquidation stage since 1995, future distributions are
expected to fluctuate as distributions will be dependent upon loan
repayments from borrowing companies and available cash.
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.
Given the inherent risk associated with the business of the
Partnership, the future performance of portfolio company investments
may significantly impact future operations.
6. Equity Investments
------------------
At December 31, 1996 and 1995, equity investments consisted of:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------ -----------------
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;
expired 01/96 $ -- -- 0 600
Hybridon, Inc. 03/91 7,142 Common
shares at $3.50;
exercised 01/96 -- -- 2,500 32,139
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 1,159,546 Common
Systems shares at $0.50;
Corporation expiring 06/00 10,000 0 10,000 217,415
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 03/91 44,589 Common
shares at $3.10;
expiring 04/01 0 0 0 0
Cyclean, Inc. 07/92 20,967 Common
shares at $3.10;
expiring 07/97 0 0 0 0
Cyclean, Inc. 07/92 53,130 Common
shares at $3.10;
expiring 07/02 0 0 0 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 0 0
ElectroScan 12/91 22,177 Common
Corporation shares at $3.10;
expired 12/96 -- -- 0 0
Medical
- -------
Loredan 05/92 62,500 Common
BioMedical, shares at $.60;
Inc. expiring 05/97 -- -- 0 0
Loredan 12/92 166,667 Common
BioMedical, shares at $.30;
Inc. expiring 12/97 -- -- 0 0
Telecommunications
- ------------------
Integrated Network 06/91 5,882 Common
Corporation shares at $17.00;
expired 06/96 -- -- 10,000 0
------ ------- ------- -------
Total warrants 10,000 0 22,500 250,154
------ ------- ------- -------
STOCKS:
Computers and Computer Equipment
- --------------------------------
MTI Technology 04/94 20,927 Common
Corporation shares 73,244 65,146 188,343 43,947
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 2,908,450
Systems Series C
Corporation Preferred
shares 2,908,450 1,454,225 2,908,450 2,908,450
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 09/94 36,042 Series D
Preferred shares 38,908 0 100,556 100,556
Cyclean, Inc. 01/95 51,051 Series D
Preferred shares 55,111 0 142,432 142,432
Cyclean, Inc. 04/96 137,995 Series D
Preferred shares 148,969 0 -- --
Cyclean of 03/95 Class A LLC Unit
Los Angeles, LLC - 44% ownership 11,091 0 11,091 11,091
Medical
- -------
Allegiant 08/94 31,500 Common
Physicians shares
Services, Inc. -- -- 11,250 52,500
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 0 0
Microelectronics
- ----------------
Celeritek, Inc. 05/94 6,784 Common
shares 36,087 69,366 36,087 52,563
Retail/Consumer Products
- ------------------------
S-TRON 05/93 Subordinated
note, $390,000
principal amount -- -- 0 0
S-TRON 05/93 390,000 Common
shares -- -- 0 0
S-TRON 05/93 897,000
Series 1
Preferred shares -- -- 0 0
S-TRON 05/93 2,753,356
Series 2
Preferred shares -- -- 0 0
Telecommunications
- ------------------
All Post, Inc. 10/94 17,574 Common
shares 13,883 4,394 13,883 13,883
3Com Corporation 06/95 1,082 Common
shares 6,164 82,343 6,164 51,441
--------- --------- --------- ---------
Total stocks 3,291,907 1,675,474 3,424,506 3,406,030
--------- --------- --------- ---------
Total equity investments $3,301,907 1,675,474 3,447,006 3,656,184
========= ========= ========= =========
- -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
</TABLE>
Marketable Equity Securities
- ----------------------------
At December 31, 1996 and 1995, marketable equity securities had
aggregate costs of $115,495 and $248,130, respectively, and aggregate
market values of $216,855 and $230,994, respectively. The net
unrealized gain/loss at December 31, 1996 and 1995, included gross
gains of $109,458 and $127,260, respectively.
Allegiant Physicians Services, Inc.
- -----------------------------------
During 1996, the Partnership exercised its option to sell all of its
49,000 common shares to the company for $81,725 resulting in a
realized gain of $64,225.
Cyclean, Inc./Cyclean of Los Angeles, LLC
- -----------------------------------------
During the second quarter of 1996, the Partnership received 25,495
Series D Preferred shares as a stock dividend while another 112,500
shares were received pursuant to a prior debt restructure.
Subsequently, the Managing General Partner determined that the fair
value of the Partnership's investment had declined and accordingly,
the Partnership recorded a $254,079 decrease in fair value at December
31, 1996.
Hybridon, Inc.
- --------------
In January of 1996, Hybridon, Inc., completed its initial public
offering. The Partnership exercised its warrant holdings without cash
and received 5,062 shares of common stock, which were subsequently
sold for total proceeds of $45,098. The total realized gain from
these transactions was $42,598.
MTI Technology Corporation
- --------------------------
During the first quarter of 1996, the Managing General Partner
determined that there had been an other than temporary decline in the
value of the Partnership's investment. As a result, the Partnership
realized a loss of $115,099. The Partnership recorded an increase in
fair value of $21,199 to reflect the market price of the unrestricted
shares at December 31, 1996.
S-TRON
- ------
The company was unsuccessful in its efforts to obtain a major
government contract; as a result, the company ceased operations during
March of 1996. This investment, which had previously been written
off, is no longer held by the Partnership.
Wasatch Education Systems Corporation
- -------------------------------------
In early 1997, the company entered into a buyout agreement to sell
certain assets and liabilities and to grant an exclusive license for a
segment of the company's market to management. The company retains
the use of the technology for other markets along with certain
liabilities and will receive approximately $1.5 million in cash and a
royalty stream based on future revenues generated by the new company
formed by the former management team. Minimum royalty payments of
$500,000 per year for four years must be received in order for the new
company to retain exclusivity. Based on terms of the agreement and
the near term need to develop a new management team, the Managing
General Partner determined that there has been a fair value decline in
the Partnership's investment and accordingly, the Partnership recorded
a decrease of $1,671,640 at December 31, 1996.
Other Equity Investments
- ------------------------
Other changes reflected above generally relate to market value
fluctuations or the elimination of a discount relating to selling
restrictions for publicly-traded portfolio companies. Celeritek,
Inc., and 3Com Corporation are publicly traded companies.
7. Secured Notes Receivable, Net
-----------------------------
At December 31, 1996 and 1995, secured notes receivable consisted of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Secured notes receivable $ 6,588,429 7,180,478
Accrued interest -- 4,306
Unamortized discount (256,152) (322,961)
--------- ---------
Secured notes receivable, net
(cost basis) 6,332,277 6,861,823
Allowance for loan losses (4,077,000) (4,028,000)
--------- ---------
Secured notes receivable, net
(fair value) $ 2,255,277 2,833,823
========= =========
</TABLE>
The 1996 notes are substantially from two portfolio companies
(representing 82% and 18% of the notes receivable fair value at
December 31, 1996) in the computers and computer equipment and
industrial/business automation industries. All notes are secured by
specific assets of the borrowing companies. Interest rates at
December 31, 1996, ranged from 8% to 15%.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of year $ 4,028,000 3,816,000
--------- ---------
(Decrease) increase provision
for loan losses (54,807) 1,285,925
Secured notes receivable write-downs:
Medical -- (1,073,925)
--------- ---------
Total Write-offs -- (1,073,925)
Recoveries of previous write-offs:
Medical 103,807 --
--------- ---------
Total Recoveries 103,807 --
--------- ---------
Change in net unrealized fair value of
secured notes receivable 49,000 212,000
--------- ---------
Balance, end of year $ 4,077,000 4,028,000
========= =========
</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.
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 and is considered adequate at
the respective year ends.
Secured notes of $6,332,277 and $6,357,717 at December 31, 1996 and
1995, respectively, were on nonaccrual status due to uncertainty of
certain borrowers' financial conditions. 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, 1996, is based on the Managing
General Partner's estimate of collectibility of these notes.
The scheduled principal repayments remaining are:
<TABLE>
<CAPTION>
Year Ending Principal
December 31, Repayments
----------- ----------
<S> <C>
1997 $ 803,428
1998 --
1999 348,292
2000 5,436,709
---------
$ 6,588,429
=========
</TABLE>
Secured notes receivable which are due on demand are included as
principal repayments in 1997. In addition, the Managing General
Partner may at times need to restructure notes by either extending
maturity dates or converting notes into equity investments to increase
the ultimate collectibility of the Partnership's investments.
8. Cash and Cash Equivalents
-------------------------
At December 31, 1996 and 1995, cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Demand and brokerage accounts $ 11,163 2,071
Money-market accounts 6,403,375 7,044,551
--------- ---------
Total $6,414,538 7,046,622
========= =========
</TABLE>
9. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1996 of $201,820 reflect the participated
costs of the following legal actions. 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.
In 1992, an affiliated partnership and a portfolio company in the
retail/consumer products industry filed a lawsuit against Quebecor in
the Superior Court of Guilford County, North Carolina, claiming that
the affiliated partnership had the right to take possession of
collateral upon foreclosure on the portfolio company, the price paid
was fair and did not interfere with the Quebecor legal rights. The
Partnership participated in investments to the portfolio company with
the affiliated partnership. Quebecor filed a counter suit claiming
otherwise and is seeking relief for $2.6 million, including accrued
interest, legal costs and punitive damages. In March of 1997, the
portfolio company and the affiliated partnership obtained a favorable
judgment in its appeal of a prior trial court ruling that declared the
assets of the portfolio company, for a sum not certain, are available
to satisfy certain claims of Quebecor. Unless Quebecor is granted the
right to appeal this decision to the North Carolina Supreme Court
within 30 days, there are no damages to the affiliated partnership.
The Managing General Partner believes the affiliated Partnership has
adequate defenses and no amounts have been provided in the
accompanying financial statements for any possible negative outcome
for this matter.
In March of 1996, an affiliated partnership filed a lawsuit in the
United States District Court, Northern District of California, against
Cyclean, Inc. ("Cyclean"), Ecopave, L.P. ("Ecopave"), Ecopave Corp.
and Stephen M. Vance ("Vance"). The Partnership participated in the
secured notes investments to Cyclean with the affiliated partnership.
Ecopave was formed by Cyclean, Ecopave Corp. and Vance. Cyclean,
without the consent of the affiliated partnership, transferred certain
equipment worth approximately $488,000 to Ecopave that is subject to
the affiliated partnerships security interest. Cyclean further gave
Ecopave a license to use its patented technology. The equipment and
intellectual property were security interest on a secured loan
extended by the affiliated partnership to Cyclean. The affiliated
partnership thus commenced this legal action for patent infringement,
seeking to collect approximately $3.5 million of indebtedness owed to
the Partnership and affiliated partnerships by Cyclean and the
recovery of the equipment from Ecopave. In January of 1997, a counter
suit was filed by Ecopave Corp. and Vance against the affiliated
partnership which seeks declaration that certain patent rights held by
the Partnership as security for the Cyclean debt are invalid as well
as asserts a fraud claim. In addition, the counter suit seeks
compensatory damages of approximately $5 million and unspecified
punitive damages.
As a result of a settlement conference, the above lawsuits have
tentatively been resolved for an effective date of April 1, 1997. The
affiliated partnership has agreed to indirectly purchase Ecopave Corp.
and Vance's ownership interest in Ecopave for $5.5 million; the
Partnership will participate in this purchase. It is anticipated that
the settlement of this claim will not result in any material negative
impact to the Partnership or affiliated partnerships at December 31,
1996, or the date of settlement as the Managing General Partner
believes that the fair value of this additional investment is equal to
or great than the purchase price and improves the Partnership's
position to recover its secured notes receivable. The Managing
General Partner believes a settlement is the most cost effective
resolution of the dispute for the Partnership.
In the event that the aforementioned settlement is not consummated,
the above lawsuits will continue to trial. Estimates of possible
loss, if any, for the ongoing lawsuits cannot be determined at this
time. No amounts have been provided in the accompanying financial
statements for any possible negative outcome of this matter. The
Managing General Partner believes the affiliated partnership has
adequate defenses and intends to pursue this matter vigorously.
At December 31, 1996 and 1995, restricted cash of $642,695 and
$50,000, respectively, represented amounts held in escrow accounts
pending the outcome of these cases.
<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 27, 1997 By: /s/Debbie A. Wong
--------------------------------------
Debbie A. Wong
Vice President
and 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 27, 1997
- ------------------------ Executive Officer,
Charles R. Kokesh Chief Financial officer
and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Gregory T. George Group Vice President March 27, 1997
- -------------------------- of Technology Funding
Gregory T. George Inc. and a General
Partner of Technology
Funding Ltd.
The above represents the Board of Directors of Technology Funding Inc.
and 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, 1996, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 9,634,184
<INVESTMENTS-AT-VALUE> 3,930,751
<RECEIVABLES> 0
<ASSETS-OTHER> 18,313
<OTHER-ITEMS-ASSETS> 7,057,233
<TOTAL-ASSETS> 11,006,297
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 352,069
<TOTAL-LIABILITIES> 352,069
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,357,661
<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> (5,703,433)
<NET-ASSETS> 10,654,228
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 507,406
<OTHER-INCOME> 5,549
<EXPENSES-NET> 835,496
<NET-INVESTMENT-INCOME> (322,541)
<REALIZED-GAINS-CURRENT> 85,531
<APPREC-INCREASE-CURRENT> (1,884,611)
<NET-CHANGE-FROM-OPS> (2,121,621)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2,121,621)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 247,008
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,066,366
<AVERAGE-NET-ASSETS> 11,715,039
<PER-SHARE-NAV-BEGIN> 42
<PER-SHARE-NII> (1)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 41
<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>
