<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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 0-19221
TECHNOLOGY FUNDING SECURED INVESTORS III,
AN INCOME AND GROWTH PARTNERSHIP, L.P.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3081010
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 Alameda de las Pulgas, Suite 250
San Mateo, California 94403
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(650) 345-2200
--------------------------------------------------
(Registrant's telephone number, including area code)
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 Venture Capital Fund VI, LLC, as revised January 22, 1998,
forming a part of the December 5, 1997, Pre-Effective Amendment No. 1
to the Form N-2 Registration Statement No. 333-23913 dated July 11,
1997, 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
- ------ -----------------
There are no material pending legal proceedings to which the
Registrant is party or of which any of its property is the
subject, other than ordinary routine litigation incidental to
the business of the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matter was submitted to a vote of the holders of units of
limited partnership interests ("Units") during 1997.
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, 1997, there were 5,198 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>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Total income $ 184,836 512,955 1,589,346 1,512,194 1,367,023
Net operating (loss) income (629,279) (322,541) 729,824 569,968 313,492
Net realized gain from sales
of equity investments 246,049 106,823 2,454,187 425,431 476,335
Realized losses from
investment write-downs -- (125,099) (4,508,628) (4,082,445) (1,902,799)
Recoveries from investments
previously written-off 9,497 103,807 -- -- --
Net realized loss (373,733) (237,010) (1,324,617) (3,087,046) (1,112,972)
Change in net unrealized
fair value:
Equity investments (11,998) (1,835,611) 2,786,658 (2,281,481) 209,851
Secured notes receivable (15,000) (49,000) (212,000) (139,000) (118,000)
Net (loss) income (400,731) (2,121,621) 1,250,041 (5,507,527) (1,021,121)
Net realized loss
per Unit (1) (1) (3) (8) (3)
Total assets 10,315,265 11,006,297 13,586,829 12,058,547 18,141,077
Distributions declared -- -- 391,777 574,167 2,445,411
Distributions declared
per Unit (1) -- -- 1 1 6
(1) Calculation is based on weighted average number of Limited Partner Units outstanding
during the year.
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.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Liquidity and Capital Resources
-------------------------------
In 1997, net cash used by operating activities totaled
$1,037,277. The Partnership paid management fees of $200,100
to the Managing General Partner, reimbursed related parties
for operating expenses of $455,837 and paid affiliated
partnerships $4,500 for net loan participations. Other
operating expenses of $561,676 were paid and $184,836 in
interest income was received.
During 1997, the Partnership purchased equity investments of
$3,786,014 and issued $325,513 in secured notes receivable
primarily to a portfolio company in the industrial/business
automation industry. Repayments of notes receivable provided
cash of $4,989 and proceeds from sales of equity investments
totaled $319,294. Recoveries of $9,497 were received for
investments previously written off. As of December 31, 1997,
the Partnership was committed to fund $398,987 in additional
investments and has guaranteed certain portfolio company
obligations as disclosed in Note 9 to the financial
statements.
Cash and cash equivalents at December 31, 1997, were
$1,706,059. 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
- ---------------------
1997 compared to 1996
- ---------------------
Net losses in 1997 and 1996 were $400,731 and $2,121,621,
respectively. The improvement was primarily a result of an
$1,823,613 increase in the change in net unrealized fair
value of equity investments and a $139,226 increase in net
realized gain from sales of investments, partially offset by
a $322,570 decrease in interest income.
The $11,998 decrease in net unrealized fair value of equity
investments in 1997 was primarily due to decreases in a
portfolio company in the telecommunications industry,
partially offset by increases in portfolio companies in the
microelectronics and computers and computer equipment
industries. During 1996, the decrease in equity investment
fair value of $1,835,611 primarily related to portfolio
companies in the computer software and systems and
industrial/business automation industries.
During 1997, the Partnership's net realized gain from sales
of equity investments of $246,049 resulted from the sale of
its investment in MTI Technology Corporation. During 1996,
the Partnership realized a gain of $106,823 from sales of
Hybridon, Inc. and Allegiant Physician Services, Inc. stock.
Interest income was $184,836 and $507,406 in 1997 and 1996,
respectively. The decrease is a result of lower cash
balances on hand and loans to portfolio companies on non-
accrual status due to uncertainty of the borrowers financial
condition.
Total operating expenses were $423,584 and $386,668 in 1997
and 1996, respectively. Included in 1997 operating expenses
are the costs of the Partnership's relocation of its
administrative and investor service operations to Santa Fe,
New Mexico. As explained in Note 2 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 1997 and 1996, the
General Partners absorbed $131,882 and $143,040,
respectively. As disclosed in Note 2 to the financial
statements, the 1997 and 1996 operating expenses were reduced
by reimbursements of $16,120 and $44,760, respectively, for
prior period collection expenses. Had this reimbursement not
occurred and had the operating expense limitation not been in
effect, total operating expenses in 1997 and 1996 would have
been $571,586 and $574,468, respectively.
Given the inherent risk associated with the business of the
Partnership, the future performance of portfolio company
investments may significantly impact future 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 2 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 2 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 2 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.
The Year 2000
- -------------
The Managing General Partner is currently reviewing the
Partnership's information systems in anticipation of the
potential computer software problems associated with the Year
2000. The Year 2000 issue exists because many computer
software programs use only two digits to identify a year in
the date field and were developed without considering the
impact of the upcoming change in the century. The Managing
General Partner currently expects to complete the necessary
critical software conversion modifications in 1999, and does
not anticipate any material adverse impact on the financial
position or results of operations of the Partnership, as a
result of the Year 2000 issue.
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
------------------------
None
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 Venture Capital Fund VI, LLC, Prospectus,
revised January 22, 1998, forming a part of the December 5,
1997, Pre-Effective Amendment No. 1 to the Form N-2
Registration Statement No. 333-23913 dated July 11, 1997,
which is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or
directors. In 1997, the Partnership incurred management fees
of $200,100. 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, 1997. 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, 1997
and 1996
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Statements of Partners' Capital for
the years ended December 31, 1997, 1996
and 1995
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995
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, 1997.
(c) Financial Data Schedule for the year ended and as of
December 31, 1997 (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, 1997 and 1996, and
the related statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended
December 31, 1997. 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, 1997 and
1996. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted
accounting principles.
Albuquerque, New Mexico /S/KPMG Peat Marwick LLP
March 25, 1998
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Investments:
Secured notes receivable, net
(cost basis of $6,652,801 and
$6,332,277 in 1997 and 1996,
respectively) $ 2,560,801 2,255,277
Equity investments (cost basis
of $7,014,676 and $3,301,907 in
1997 and 1996, respectively) 5,376,245 1,675,474
---------- ----------
Total investments 7,937,046 3,930,751
Cash and cash equivalents 1,706,059 6,414,538
Restricted cash 536,150 642,695
Due from affiliated
partnerships 4,500 --
Due from related parties 98,848 --
Other assets 32,662 18,313
---------- ----------
Total $10,315,265 11,006,297
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable
and accrued expenses $ 61,768 309,810
Due to related parties -- 38,937
Other liabilities -- 3,322
---------- ----------
Total liabilities 61,768 352,069
Commitments and contingencies
(Notes 2 and 9)
Partners' capital:
Limited Partners
(Units outstanding of 399,977
in both 1997 and 1996) 16,138,607 16,508,603
General Partners (154,679) (150,942)
Net unrealized fair value
(decrease)increase from cost:
Secured notes receivable (4,092,000) (4,077,000)
Equity investments (1,638,431) (1,626,433)
---------- ----------
Total partners' capital 10,253,497 10,654,228
---------- ----------
Total $10,315,265 11,006,297
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Income:
Secured notes receivable
interest $ 11,497 168,203 1,479,613
Short-term investment
interest 173,339 339,203 102,875
Other income -- 5,549 6,858
------- --------- ---------
Total income 184,836 512,955 1,589,346
Costs and expenses:
Management fees 200,100 247,008 201,640
Other investment expenses 190,431 201,820 272,034
Operating expenses:
Lending operations and
investment management 159,253 160,438 155,642
Administrative and investor
services 281,005 240,876 750,214
Computer services 68,107 81,249 65,695
Professional fees 47,101 47,145 67,970
Expenses absorbed by
General Partners (131,882) (143,040) (653,673)
------- --------- ---------
Total operating expenses 423,584 386,668 385,848
------- --------- ---------
Total costs and expenses 814,115 835,496 859,522
------- --------- ---------
Net operating (loss) income (629,279) (322,541) 729,824
Net realized gain from sales
of equity investments 246,049 106,823 2,454,187
Realized losses from
investment write-downs -- (125,099) (4,508,628)
Recoveries from investments
previously written off 9,497 103,807 --
------- --------- ---------
Net realized loss (373,733) (237,010) (1,324,617)
Change in net unrealized
fair value:
Equity investments (11,998) (1,835,611) 2,786,658
Secured notes receivable (15,000) (49,000) (212,000)
------- --------- ---------
Net (loss) income $(400,731) (2,121,621) 1,250,041
======= ========= =========
Net realized loss
per Unit $ (1) (1) (3)
======= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- ------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1997, 1996 and 1995:
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, 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
Net realized loss (369,996) (3,737) -- -- (373,733)
Change in net unrealized fair
value:
Equity investments -- -- (11,998) -- (11,998)
Secured notes receivable -- -- -- (15,000) (15,000)
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1997 $16,138,607 (154,679) (1,638,431) (4,092,000) 10,253,497
========== ======= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 184,836 444,903 1,590,420
Other income received -- 5,549 6,858
Cash paid to vendors (577,796) (397,474) (315,059)
Cash paid to related parties (655,937) (566,099) (429,369)
Cash (paid to) received from
affiliated partnerships (4,500) (1,930) 876
Reimbursement of collection
expenses received from
portfolio companies 16,120 44,760 --
--------- --------- ---------
Net cash (used) provided
by operating activities (1,037,277) (470,291) 853,726
--------- --------- ---------
Cash flows from investing
activities:
Purchase of equity investments (3,786,014) -- (471)
Secured notes receivable issued (325,513) (251,102) (1,216,335)
Repayments of secured notes
receivable 4,989 843,151 2,170,864
Proceeds from sales of
equity investments 319,294 126,823 3,366,988
Recoveries from investments
previously written off 9,497 103,807 --
Payments from (deposits to)
restricted cash 106,545 (592,695) (50,000)
--------- --------- ---------
Net cash (used) provided by
investing activities (3,671,202) 229,984 4,271,046
--------- --------- ---------
Cash flows from financing
activities:
Distributions to Limited and
General Partners -- (391,777) --
--------- --------- ---------
Net cash used by financing
activities -- (391,777) --
--------- --------- ---------
Net (decrease) increase in cash
and cash equivalents (4,708,479) (632,084) 5,124,772
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents at
beginning of year 6,414,538 7,046,622 1,921,850
--------- --------- ---------
Cash and cash equivalents at
end of year $ 1,706,059 6,414,538 7,096,622
========= ========= =========
Reconciliation of net
(loss) income to net cash
(used) provided by operating
activities:
Net (loss) income $ (400,731) (2,121,621) 1,250,041
Adjustments to reconcile net
(loss) income to net cash
(used) provided by operating
activities:
Amortization of discount
on secured notes receivable -- (66,809) (18,163)
Net realized gain from sales of
equity investments (246,049) (106,823) (2,454,187)
Realized losses from investment
write-downs -- 125,099 4,508,628
Recoveries from investments
previously written off (9,497) (103,807) --
Change in net unrealized
fair value:
Equity investments 11,998 1,835,611 (2,786,658)
Secured notes receivable 15,000 49,000 212,000
Changes in:
Accrued interest on secured and
convertible notes receivable -- 4,306 16,095
Accounts payable and accrued
expenses (248,042) (39,853) 12,474
Due to/from related parties (137,785) 2,200 29,361
Due to/from affiliated
partnerships (4,500) (1,930) 876
Other assets (14,349) (18,113) 74,913
Other liabilities (3,322) (27,551) (1,654)
Other, net -- -- 10,000
--------- --------- ---------
Net cash (used) provided
by operating activities $(1,037,277) (470,291) 853,726
========= ========= =========
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Non-cash investing activities:
Additions to equity investments $ -- -- 142,432
========= ========= =========
Conversion of secured notes
receivable and interest to
equity investments $ -- -- 2,919,541
========= ========= =========
Conversion of other investments
to secured notes receivable $ 10,000 -- --
========= ========= =========
Non-cash exercise of warrants $ -- 16,994 113,933
========= ========= =========
</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
- --------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates. Estimates are used when accounting for investments,
change in unrealized fair value of investments, liabilities and
contingencies. Because of the inherent uncertainty of valuation, the
estimated fair value of investments may differ significantly from the
values that would have been used had a ready market for investments
existed, and the differences could be material.
Investments
- -----------
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 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 equity
investments is their initial cost basis with changes as noted below:
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 and for
those securities, 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. Investments valued under
this method were $131,613 and $216,855 at December 31, 1997 and 1996,
respectively.
All investments which are not publicly traded are valued at fair
market value as determined by the Managing General Partner in the
absence of readily ascertainable market values. Equity investments
valued under this method were $5,244,632 and $1,458,619 at December
31, 1997 and 1996, respectively. Generally, investments in privately
held companies are valued at original cost unless there is clear
evidence of a change in fair value, such as a recent round of third-
party financings or events that, in the opinion of the Managing
General Partners, indicate a change in value.
Convertible and subordinated notes receivable are stated at cost plus
accrued interest, which is equivalent to fair value, and are included
in equity investments as repayment of these notes generally occurs
through conversion into equity investments.
When, in the opinion of the Managing General Partner, events indicate
that the fair value of equity investments may not be recoverable, a
write down to estimated fair value is recorded. Temporary changes in
fair value result in increases or decreases to the unrealized fair
value of equity investments. Adjustments to fair value basis are
reflected as "Change in net unrealized fair value of equity
investments." 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 with the fair value being adjusted to
match the new cost basis. Cost basis adjustments are reflected as
"Realized losses from investment write-downs" on the Statements of
Operations.
Sales of equity investments are recorded on the trade date. The basis
on which cost is determined in computing realized gains or losses is
specific identification.
The Partnership does not consolidate the financial statements of a
portfolio company, Cyclean of Long Beach, LLC ("CLB"), in which it has
a 60% ownership interest. The Managing General Partner believes that
accounting for this majority owned portfolio company on the fair value
basis more appropriately represents the economic impact of the effect
of CLB's operations on the Partnership, and is more consistent with
the nature of the Partnership's business.
CLB began operations April 1, 1997. For the partial fiscal year ended
December 31, 1997, CLB's unaudited financial statements reported total
revenues of approximately $857,000, net loss of approximately
$933,000, and a net working capital deficit of $205,000. The
Partnership and an affiliated partnership have secured notes invested
in CLB. At December 31, 1997, when the effect of these secured notes
is eliminated, CLB had net equity of approximately $5,695,000
(unaudited). At December 31, 1997, the Partnership reflected its
equity investment in CLB at a fair value of $3,786,013 and its
corresponding secured notes receivable from CLB at a fair value of
$268,000.
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.
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, 1997, 1996 and
1995, 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.
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 $13,667,477 by $2,383,515.
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.
2. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. For the years ended December 31, 1997, 1996
and 1995, related party costs were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Management fees $ 200,100 247,008 201,640
Reimbursable operating
expenses:
Lending operations and
investment management 173,675 175,407 128,757
Administrative and
investor services 215,417 165,652 716,311
Computer services 60,842 81,249 65,695
Expenses absorbed by
General Partners (131,882) (143,040) (653,673)
</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, 1997 and 1996.
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. At December 31, 1997 amounts due from related
parties totaled $98,848 and at December 31, 1996, amounts due to
related parties totaled $38,937. 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 and $501,519
related to 1995 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 $131,882, $143,040 and $653,673 for the years ended
December 31, 1997, 1996 and 1995, respectively, were absorbed by the
General Partners.
During 1997 and 1996, the Partnership was reimbursed $16,120 and
$44,760, 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. Since
these costs were incurred in prior periods during which the operating
expense limitation applied, the recovery was recorded as a reduction
to lending operations and investment management expense, and the
amount absorbed by General Partners was reduced by an equivalent
amount.
Effective November 1, 1997, TFL assigned its California office lease
to Technology Funding Property Management LLC (TFPM), an entity that
is affiliated to the Managing General Partner. Under the terms of a
rent agreement, TFPM charges the Partnership for its share of office
rent and related overhead costs. These amounts are included in
administrative and investor service costs.
Under the terms of a computer service agreement, Technology
Administrative Management, a division of TFL, charges the Partnership
for its share of computer support costs. These amounts are included
in computer services expenses.
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, 1997, $4,500 was
due from affiliated partnerships on such participations. At December
31, 1996, no amounts were due to or from affiliated partnerships.
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 will become effective upon
approval of a joint venture operating agreement.
In 1995, 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.
3. 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.
4. Secured Notes Receivable, Net
-----------------------------
At December 31, 1997 and 1996, secured notes receivable consisted of:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Secured notes receivable $6,898,953 6,588,429
Accrued interest -- --
Unamortized discount (246,152) (256,152)
--------- ---------
Secured notes receivable, net
(cost basis) 6,652,801 6,332,277
Allowance for loan losses (4,092,000) (4,077,000)
--------- ---------
Secured notes receivable, net
(fair value) $2,560,801 2,255,277
========= =========
</TABLE>
The 1997 notes are from two portfolio companies 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, 1997, ranged from 8% to 15%.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C>
Balance, beginning of year $4,077,000 4,028,000 3,816,000
--------- --------- ---------
Increase (decrease) provision
for loan losses 5,503 (54,807) 1,285,925
Secured notes receivable write-
downs -- -- (1,073,925)
Recoveries of previous write-offs 9,497 103,807 --
--------- --------- ---------
Change in net unrealized fair
value of secured notes receivable 15,000 49,000 212,000
--------- --------- ---------
Balance, end of year $4,092,000 4,077,000 4,028,000
========= ========= =========
</TABLE>
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 $6,652,801 and $6,332,277 at December 31, 1997 and
1996, respectively, were on nonaccrual status due to uncertainty of
the borrowers' financial condition. 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, 1997, 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>
1998 $1,099,647
1999 348,292
2000 5,451,014
---------
$6,898,953
=========
</TABLE>
Secured notes receivable which are due on demand are included as
principal repayments in 1998. In addition, the Managing General
Partner has, and may in the future 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.
5. Equity Investments
------------------
At December 31, 1997 and December 1996, equity investments consisted of:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------ -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- ---------------- ---------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
WARRANTS:
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 0
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
------ ------- ------- -------
Total warrants 10,000 0 10,000 0
------ ------- ------- -------
STOCKS:
Computers and Computer Equipment
- --------------------------------
MTI Technology 04/94 20,927 Common
Corporation shares -- -- 73,244 65,146
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 1,454,225
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 09/94 36,042 Series D
Preferred shares 38,908 0 38,908 0
Cyclean, Inc. 01/95 51,051 Series D
Preferred shares 55,111 0 55,111 0
Cyclean, Inc. 04/96 137,995 Series D
Preferred shares 148,969 0 148,969 0
Cyclean of 03/95 Class A LLC Unit
Los Angeles, LLC - 44% ownership 11,091 0 11,091 0
Cyclean of 04/97 3,685,000
Long Beach, LLC LLC Units 3,685,000 3,685,000 -- --
Cyclean of 12/97 101,013
Long Beach, LLC LLC Units 101,013 101,013 -- --
Medical
- -------
Resonex Holding 02/94 22,804 Common
Corporation shares 0 0 0 0
Microelectronics
- ----------------
Celeritek, Inc. 05/94 6,784 Common
shares 36,087 94,500 36,087 69,366
Telecommunications
- ------------------
All Post, Inc. 10/94 17,574 Common
shares 13,883 4,394 13,883 4,394
3Com Corporation 06/95 1,082 Common
shares 6,164 37,113 6,164 82,343
--------- --------- --------- ---------
Total stocks 7,004,676 5,376,245 3,291,907 1,675,474
--------- --------- --------- ---------
Total equity investments $7,014,676 5,376,245 3,301,907 1,675,474
========= ========= ========= =========
- -- 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, 1997 and 1996, marketable equity securities had an
aggregate cost of $42,251 and $115,495, respectively, and aggregate
market values of $131,613 and $216,855, respectively. The net
unrealized gain at December 31, 1997 and 1996, included gross gains of
$89,362 and $109,458, respectively.
Celeritek, Inc.
- ---------------
At December 31, 1997, the Partnership recorded an increase in fair
value of $25,134 to reflect the publicly-traded market price of its
investment.
Cyclean of Long Beach, LLC
- --------------------------
In April 1997, the Partnership purchased 3,685,000 LLC Units for
$3,685,000. See Note 8 for additional information.
In December 1997, the Partnership purchased an additional 101,013
Units for $101,013. The Partnership is also committed to fund
additional equity investments as described in Note 9. The
Partnership, together with an affiliated partnership, owns 100% of the
company.
MTI Technology Corporation
- --------------------------
In October 1997, the Partnership sold its entire investment in the
company for total proceeds of $319,294 and realized a gain of
$246,049.
Wasatch Education Systems Corporation
- -------------------------------------
In February 1997, the company sold its education market net assets to
Wasatch Interactive Learning Company (an entity formed by the
company's former management team), for $1.5 million in cash and future
royalties over a five year period, while retaining ownership of the
majority of its technology.
Currently, the company's operations have been limited to pursuit of
additional markets for its technology, debt service and the receipt of
royalty income. At December 31, 1997, the company had capitalized
technology costs, net current assets, and stockholders equity of
$3,044,000, $83,000 and $3,127,000 (unaudited), respectively. The
Partnership has valued its investment in the company at its share of
expected future royalty payments and estimated proceeds from the sale
of the company's technology. Because of the inherent uncertainties
involved in estimating these future proceeds, the estimated fair value
of $1,454,225 may differ significantly from a value that would have
been used had a ready market existed, and the differences could be
material.
3Com Corporation
- ----------------
At December 31, 1997, the Partnership recorded a decrease in fair
value of $45,230 to reflect the publicly-traded market price of its
investment.
6. 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,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Increase (decrease) in fair
value from cost of
marketable equity securities $ 89,362 101,360 (17,136)
(Decrease) increase in fair
value from cost of non-
marketable equity securities (1,727,793) (1,727,793) 226,314
--------- --------- ---------
Net unrealized fair value
(decrease) increase from
cost at end of year (1,638,431) (1,626,433) 209,178
Net unrealized fair value
(decrease) increase from
cost at beginning of year (1,626,433) 209,178 (2,577,480)
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $ (11,998) (1,835,611) 2,786,658
========= ========= =========
</TABLE>
7. Cash and Cash Equivalents
-------------------------
At December 31, 1997 and 1996, cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Demand and brokerage accounts $ 5,282 11,163
Money-market accounts 1,700,777 6,403,375
--------- ---------
Total $1,706,059 6,414,538
========= =========
</TABLE>
8. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1997, 1996 and 1995 of $190,431, $201,820
and $272,034 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 sought 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. Quebecor's subsequent appeal
to the North Carolina Supreme Court was denied in July of 1997.
Quebecor's request for a rehearing was denied and all suits have been
terminated. The Partnership is seeking to recover certain costs of
this litigation.
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.
In January of 1997, a counter suit was filed by Ecopave and Vance
against the affiliated partnership.
As a result of a settlement conference, these lawsuits were resolved
effective April 1, 1997. The Partnership indirectly purchased Ecopave
Corp. and Vance's interest in Ecopave for $5.5 million, of which
$1,815,000 was participated by an affiliated partnership. In
addition, an escrow account for $750,000 was established as collateral
for a note payable by Ecopave to Ecopave Corp. The Partnerships'
share of this deposit is $502,500. While the Partnership expects
Ecopave to repay the note, if Ecopave fails to do so, the note holder
may assume the escrow account. The Managing General Partner believes
that the fair value of this additional investment is equal to or
greater than the purchase price and the Partnership has improved its
ability to recover its secured notes receivable.
9. Commitments and contingencies
-----------------------------
The Partnership is a party to financial instruments with off-balance-
sheet risk in the normal course of its business. Generally, these
instruments are equipment financing commitments or accounts receivable
lines of credit that are outstanding but not currently fully utilized
by a borrowing company. As they do not represent current outstanding
balances, these unfunded commitments are properly not recognized in
the financial statements. At December 31, 1997, the Partnership had
unfunded commitments for equity investments of $398,987.
At December 31, 1997, restricted cash of $536,150 included the
following:
In April 1997, the Partnership together with an affiliated
partnership, deposited $750,000 into an escrow account as collateral
for a note payable of Ecopave. The Partnership's share of the deposit
is $502,500. While the Partnership expects Ecopave to repay the note,
if Ecopave fails to do so, the note holder may assume the escrow
account.
In December 1997, the Partnership together with an affiliated
partnership, guaranteed equipment financing for a portfolio company by
depositing $50,000 collateral in an escrow account with the lending
institution. The Partnership funded $33,500 of this deposit. If the
portfolio company fails to repay the loan, the Partnership may lose
the escrowed funds.
<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 25, 1998 By: /s/Michael Brenner
--------------------------------------
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 25, 1998
- ------------------------ 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 25, 1998
- -------------------------- 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, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 13,667,477
<INVESTMENTS-AT-VALUE> 7,937,046
<RECEIVABLES> 0
<ASSETS-OTHER> 136,010
<OTHER-ITEMS-ASSETS> 2,242,209
<TOTAL-ASSETS> 10,315,265
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61,768
<TOTAL-LIABILITIES> 61,768
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,983,928
<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> (5,730,431)
<NET-ASSETS> 10,253,497
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 184,836
<OTHER-INCOME> 0
<EXPENSES-NET> 814,115
<NET-INVESTMENT-INCOME> (629,279)
<REALIZED-GAINS-CURRENT> 255,546
<APPREC-INCREASE-CURRENT> (26,998)
<NET-CHANGE-FROM-OPS> (400,731)
<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> (400,731)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 200,100
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 815,665
<AVERAGE-NET-ASSETS> 10,453,863
<PER-SHARE-NAV-BEGIN> 41
<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> 40
<EXPENSE-RATIO> 7.8
<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>
