<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, 1998
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 (pages 23 to 25) of the Prospectus
of Technology Funding Venture Capital Fund VI, LLC, as revised June 4,
1998 (accession number 0000950133-98-002220), 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. In April 1998, the General Partners
exercised their right and extended the term of the
Partnership to December 31, 2000. If the General Partners so
determine, the Partnership can be further extended for an
additional two-year period or the Partnership may be
dissolved earlier.
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 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 1998.
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, 1998, there were 5,199 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>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Total income $ 53,100 184,836 512,955 1,589,346 1,512,194
Net operating (loss) income (2,288,674) (629,279) (322,541) 729,824 569,968
Net realized gain from sales
of equity investments 13,234 246,049 106,823 2,454,187 425,431
Realized losses from
investment write-downs (2,142,840) -- (125,099) (4,508,628) (4,082,445)
Recoveries from investments
previously written-off 185,174 9,497 103,807 -- --
Net realized loss (4,233,106) (373,733) (237,010) (1,324,617) (3,087,046)
Change in net unrealized
fair value:
Equity investments (526,472) (11,998) (1,835,611) 2,786,658 (2,281,481)
Notes receivable 1,666,000 (15,000) (49,000) (212,000) (139,000)
Net (loss) income (3,093,578) (400,731) (2,121,621) 1,250,041 (5,507,527)
Net realized loss
per Unit (10) (1) (1) (3) (8)
Total assets 8,981,400 10,315,265 11,006,297 13,586,829 12,058,547
Distributions declared -- -- -- 391,777 574,167
Distributions declared
per Unit (1) -- -- -- 1 1
(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 1998, net cash used by operating activities totaled
$519,403. The Partnership paid management fees of $201,508
to the Managing General Partner and reimbursed related
parties for operating expenses of $176,648. Other operating
expenses of $194,347 were paid and $53,100 in interest income
was received.
During 1998, the Partnership purchased equity investments of
$903,987 and issued $250,000 in notes receivable to a
portfolio company in the industrial/business automation
industry. Proceeds from sales of equity investments provided
cash of $55,484 and recoveries of $185,174 were received from
investments previously written off. As disclosed in Note 10
to the Financial Statements, certain funds escrowed as
collateral for a note payable of a portfolio company were
released in 1998, providing cash of $502,650.
Cash and cash equivalents at December 31, 1998, were
$775,977. Operating cash reserves, repayments of secured
notes receivable, future investment sale proceeds, interest
income received on short-term investments, and Managing
General Partner's support are expected to be sufficient to
fund Partnership operations through the next twelve months.
Results of Operations
- - ---------------------
1998 compared to 1997
- - ---------------------
Net losses were $3,093,578 and $400,731 for the years ended
December 31, 1998 and 1997, respectively. The increased loss
was primarily due to a $2,142,840 increase in realized losses
from investment write-downs, a $1,716,682 increase in
operating expenses, a $514,474 decrease in the change in net
unrealized fair value of equity investments, and a $232,815
decrease in realized gain from sales of equity investments.
These decreases were partially offset by a $1,681,000
increase in the change in net unrealized fair value of notes
receivable and a $190,431 decrease in other investment
expenses.
Realized losses from investment write-downs totaled
$2,142,840 in 1998 and resulted from the write-down of equity
investments in Wasatch Education Systems Corporation. This
write-down was based on the opinion of the Managing General
Partner that the operating status of the company combined
with the highly competitive educational software market
indicated a permanent decline in value of the company's
equity investment. There were no investment write-downs in
1997.
Total operating expenses were $2,140,266 and $423,584 in 1998
and 1997, respectively. As disclosed in Note 3 to the
financial statements, the Partnership may not reimburse the
General Partners for certain operating expenses that
aggregate more than one percent of total Limited Partner
capital contributions. This limitation is calculated over an
operating year beginning May 1. As a result, operating
expenses of $339,591 and $131,882 were absorbed by the
General Partners in 1998 and 1997, respectively. During
1998, it was determined that certain operational costs,
primarily rent and professional fees, paid directly by the
Partnership were not subject to the general partner expense
limitation. Consequently, $1,735,002 of direct partnership
expenses absorbed by the General Partners in prior years were
recognized as additional expenses in 1998. Also disclosed in
Note 3, the Managing General Partner re-evaluated allocations
to the Partnership in 1998 and determined that they had not
fully recovered allocable operating expenses, primarily
salary, benefits, and professional fees, as permitted by the
Partnership agreement. As a result, the Partnership was
charged $134,141 of additional operating expenses in 1998 of
which $16,085 and $118,056 related to 1997 and prior years,
respectively. Had the limitation not been in effect and had
the additional expense been recorded in prior years, total
operating expenses would have been $610,714 and $571,551 for
1998 and 1997, respectively.
The Partnership recorded decreases in the change in fair
value of equity investments of $526,472 and $11,998 in 1998
and 1997, respectively. The 1998 decrease was primarily
comprised of a decrease in the fair value of a portfolio
company in the industrial/business automation industry,
partially offset by an increase resulting from the
realization of the loss from the write-down of Wasatch. The
1997 loss 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 1998, the Partnership's $13,234 net realized gain from
sales of equity investments resulted from the sale of 3Com
Corporation common shares, partially offset by a loss on the
sale of Celeritek, Inc. common shares. The 1997 net realized
gain from sales of equity investments of $246,049 resulted
from the sale of the Partnership's investment in MTI
Technology Corporation.
The Partnership recorded a $1,666,000 increase in the fair
value of notes receivable in 1998 compared to a $15,000
decrease in 1997. The increase in 1998 was primarily due to
an increase in expected loan repayments resulting from the
improved financial condition of borrowing companies in the
computer and computer equipment and industrial/business
automation industries.
Other investment expenses of $190,431 in 1997 related to
litigation which was settled in 1997. There were no such
expenses in 1998.
Given the inherent risk associated with the business of the
Partnership, the future performance of portfolio company
investments may significantly impact future 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 3 to the financial
statements, the Partnership may not 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 3 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.
YEAR 2000
- - ---------
Widespread use of computer programs that use two digits
rather than four to store, calculate, and display year values
in dates may cause computer systems to malfunction in the
year 2000, resulting in significant business delays and
disruptions.
The Partnership's State of Readiness
- - ------------------------------------
Computer services are provided to the Partnership by its
Managing General Partner, Technology Funding Inc. ("TFI".)
For several years, TFI has sought to use Year 2000 compliant
storage formats and algorithms in its internally-developed
and maintained systems. TFI has also completed initial
evaluations of computer systems, software, and embedded
technologies. Those evaluations confirmed that certain
components of its network server hardware and operating
systems, voice mail system, e-mail system, and accounting
software may have Year 2000 compliance issues. These
resources and several less-critical components of the systems
environment were all scheduled as part of normal maintenance
and replacement cycles to be replaced or upgraded as Year
2000 compatible components became available from vendors
during 1998 and 1999. That program remains on schedule to
provide Year 2000 capable systems timely without significant
expenditures or disruption of Partnership operations.
However, the risk remains that TFI may not be able to verify
whether Year 2000 compatibility claims by vendors are
accurate, or whether changes undertaken to achieve Year 2000
compatibility will create other undetected problems in
associated systems. Therefore, TFI anticipates that Year
2000 compliance testing and maintenance of these systems will
continue as needed into the first quarter of 2000.
As part of Year 2000 evaluation, TFI has also assembled a
database listing its significant suppliers to assess the
extent to which it needs to prepare for any of those parties'
potential failure to remediate their Year 2000 compliance
issues. TFI is reviewing public Year 2000 statements of
those suppliers and preparing questionnaires to be sent to
mission-critical vendors whose public statements were not
adequate for assessment. TFI will continue to monitor its
significant suppliers as part of its Year 2000 evaluation.
However, there can be no guarantee that the systems of other
companies on which TFI relies will be timely converted, or
that failure to convert will not have a material adverse
effect on the Partnership and its operations. TFI is also
working with the Partnership's portfolio companies to
determine the extent to which their operations are vulnerable
to Year 2000 issues. There can be no guarantee that the
systems of portfolio companies in which the Partnership has
invested will be timely converted, or that their failure to
convert will not have a material adverse effect on the
Partnership.
The Cost to Address Year 2000 Issues
- - ------------------------------------
Expenditures in 1998 related to Year 2000 issues were not
material to the Partnership's financial statements. TFI
expects that additional expenditures for Year 2000 compliance
will not be material to the Partnership.
The Risks Associated with Year 2000 Issues
- - ------------------------------------------
Any failure by the portfolio companies in which the
Partnership has invested, or by those portfolio companies'
key suppliers or customers, to anticipate and avoid Year 2000
related problems at reasonable cost could have a material
adverse effect on the value of and/or the timing of
realization of value from the Partnership's investments. If
Year 2000 compliance issues are not resolved by December 31,
1999, internal system failures or miscalculations could cause
a temporary inability to process transactions, loss of
ability to send or receive e-mail and voice mail messages, or
disruptions in other normal business activities.
Additionally, failure of third parties on whom TFI relies to
remediate their Year 2000 issues timely could result in
disruptions in the Partnership's relationship with its
financial institutions, temporary disruptions in processing
transactions, unanticipated costs, and problems related to
the Partnership's daily operations. While TFI continues to
address its internal Year 2000 issues, until TFI receives and
evaluates responses from a significant number of its
suppliers, the overall risks associated with the Year 2000
issue remain difficult to describe and quantify. There can
be no guarantee that the Year 2000 issue will not have a
material adverse effect on the Partnership and its
operations.
TFI's Contingency Plan
- - ----------------------
As part of its normal efforts to assure business continuation
in the event of natural disasters, systems failures, or other
disruptions, TFI has prepared contingency plans including an
extensive Year 2000 contingency plan. Taken together with
TFI's Year 2000 remediation plan, it identifies potential
points of failure, approaches to correcting known Year 2000
problems, dates by which the preferred corrections are
anticipated to be made and tested, and alternative approaches
if the corrections are not completed timely or are later
found to be inadequate. Although backup systems and
contingency approaches have been identified for most mission-
critical systems and vendor dependencies, there remain some
systems for which no good alternative exists, and there may
be some problems that prove more intractable than currently
anticipated.
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 on pages 23 to
25 in the Technology Funding Venture Capital Fund VI, LLC
Prospectus, revised June 4, 1998 (accession number
0000950133-98-002220), 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 1998, the Partnership incurred management fees
of $201,508. 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, 1998. 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, 1998
and 1997
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Statements of Partners' Capital for
the years ended December 31, 1998, 1997
and 1996
Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
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, 1998.
(c) Financial Data Schedule for the year ended and as of
December 31, 1998 (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, 1998 and 1997, and
the related statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended
December 31, 1998. 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, 1998 and
1997. 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, 1998 and 1997, and the results of its operations
and its cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted
accounting principles.
Albuquerque, New Mexico /S/KPMG LLP
March 26, 1999
<PAGE>
BALANCE SHEETS
- - --------------
<TABLE>
<CAPTION> December 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Investments:
Notes receivable, net (cost basis
of $6,902,801 and $6,652,801 in
1998 and 1997, respectively) $4,476,801 2,560,801
Equity investments (cost basis
of $5,733,573 and $7,014,676 in
1998 and 1997, respectively) 3,568,670 5,376,245
--------- ----------
Total investments 8,045,471 7,937,046
Cash and cash equivalents 775,977 1,706,059
Restricted cash 33,500 536,150
Due from affiliated partnerships 4,500 4,500
Due from related parties -- 98,848
Other assets 121,952 32,662
--------- ----------
Total $8,981,400 10,315,265
========= ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 68,155 61,768
Due to related parties 1,753,326 --
--------- ----------
Total liabilities 1,821,481 61,768
Commitments, contingencies and
subsequent event
(Notes 3, 5, and 10)
Partners' capital:
Limited Partners
(Units outstanding of 399,977 in
both 1998 and 1997) 11,947,832 16,138,607
General Partners (197,010) (154,679)
Net unrealized fair value
(decrease)increase from cost:
Notes receivable (2,426,000) (4,092,000)
Equity investments (2,164,903) (1,638,431)
--------- ----------
Total partners' capital 7,159,919 10,253,497
--------- ----------
Total $8,981,400 10,315,265
========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- - ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Income:
Notes receivable interest $ -- 11,497 168,203
Short-term investment interest 53,100 173,339 339,203
Other income -- -- 5,549
--------- ------- ---------
Total income 53,100 184,836 512,955
Costs and expenses:
Management fees 201,508 200,100 247,008
Other investment expenses -- 190,431 201,820
Operating expenses:
Lending operations and investment
management 211,963 159,253 160,438
Administrative and investor
services 410,499 281,005 240,876
Computer services 48,364 68,107 81,249
Professional fees 74,029 47,101 47,145
Expenses absorbed by General
Partners (339,591) (131,882) (143,040)
Expenses absorbed by General
Partners in prior years 1,735,002 -- --
--------- ------- ---------
Total operating expenses 2,140,266 423,584 386,668
--------- ------- ---------
Total costs and expenses 2,341,774 814,115 835,496
--------- ------- ---------
Net operating loss (2,288,674) (629,279) (322,541)
Net realized gain from sales
of equity investments 13,234 246,049 106,823
Realized losses from
investment write-downs (2,142,840) -- (125,099)
Recoveries from investments
previously written off 185,174 9,497 103,807
--------- ------- ---------
Net realized loss (4,233,106) (373,733) (237,010)
Change in net unrealized fair value:
Equity investments (526,472) (11,998)(1,835,611)
Notes receivable 1,666,000 (15,000) (49,000)
--------- ------- ---------
Net loss $(3,093,578) (400,731)(2,121,621)
========= ======= =========
Net realized loss per Unit $ (10) (1) (1)
========= ======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- - ------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1998, 1997, and 1996:
Net Unrealized Fair
Value Increase
(Decrease) From Cost
------------------------
Limited General Equity Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C>
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)
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)
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
Net realized loss (4,190,775) (42,331) -- -- (4,233,106)
Change in net unrealized fair
value:
Equity investments -- -- (526,472) -- (526,472)
Notes receivable -- -- -- 1,666,000 1,666,000
---------- ------- --------- --------- ----------
Partners' capital,
December 31, 1998 $11,947,832 (197,010) (2,164,903) (2,426,000) 7,159,919
========== ======= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- - ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 53,100 184,836 444,903
Other income received -- -- 5,549
Cash paid to vendors (194,347) (577,796) (397,474)
Cash paid to related parties (378,156) (655,937) (566,099)
Cash paid to affiliated
partnerships -- (4,500) (1,930)
Reimbursement of collection
expenses received from
portfolio companies -- 16,120 44,760
--------- --------- ---------
Net cash used by operating
activities (519,403)(1,037,277) (470,291)
--------- --------- ---------
Cash flows from investing
activities:
Purchase of equity investments (903,987)(3,786,014) --
Notes receivable issued (250,000) (325,513) (251,102)
Repayments of notes receivable -- 4,989 843,151
Proceeds from sales of
equity investments 55,484 319,294 126,823
Recoveries from investments
previously written off 185,174 9,497 103,807
Payments from (deposits to)
restricted cash 502,650 106,545 (592,695)
--------- --------- ---------
Net cash (used) provided by
investing activities (410,679)(3,671,202) 229,984
--------- --------- ---------
Cash flows from financing
activities:
Distributions to Limited and
General Partners -- -- (391,777)
--------- --------- ---------
Net cash used by financing
activities -- -- (391,777)
--------- --------- ---------
Net decrease in cash and cash
equivalents (930,082)(4,708,479) (632,084)
STATEMENTS OF CASH FLOWS (continued)
- - -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents at
beginning of year 1,706,059 6,414,538 7,046,622
--------- --------- ---------
Cash and cash equivalents at
end of year $ 775,977 1,706,059 6,414,538
========= ========= =========
Reconciliation of net loss to net
cash used by operating
activities:
Net loss $(3,093,578) (400,731) (2,121,621)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Amortization of discount
on notes receivable -- -- (66,809)
Net realized gain from sales of
equity investments (13,234) (246,049) (106,823)
Realized losses from investment
write-downs 2,142,840 -- 125,099
Recoveries from investments
previously written off (185,174) (9,497) (103,807)
Change in net unrealized
fair value:
Equity investments 526,472 11,998 1,835,611
Notes receivable (1,666,000) 15,000 49,000
Changes in:
Accounts payable and accrued
expenses 6,387 (248,042) (39,853)
Due to/from related parties 1,852,174 (137,785) 2,200
Other assets (89,290) (14,349) (18,113)
Other, net -- (7,822) (25,175)
--------- --------- ---------
Net cash used by operating
activities $ (519,403)(1,037,277) (470,291)
========= ========= =========
Non-cash investing activities:
Conversion of other investments
to notes receivable $ -- 10,000 --
========= ========= =========
Non-cash exercise of warrants $ -- -- 16,994
========= ========= =========
</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. In April 1998, the General Partners
exercised their right and extended the term of the Partnership to
December 31, 2000. If the General Partners so determine, the
Partnership can be further extended for an additional two-year period
or the Partnership may be dissolved earlier.
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
- - -----------
Notes Receivable, Net
---------------------
The Partnership's method of accounting for secured and unsecured notes
receivable, in accordance with generally accepted accounting
principles, is the fair value basis used for investment companies.
The fair value of secured and unsecured notes receivable is their
initial cost basis adjusted for unrealized gains and losses. The cost
basis is comprised of note principal plus accrued interest, less any
discount related to warrants. The net unrealized gain or loss is
reviewed quarterly by the Managing General Partner and is adjusted
upward or downward to reflect the change in the fair market value of
the notes. Fair value may change due to an increase or decrease in
the allowance for loan losses, or when the current expected loan
proceeds exceed the cost basis. Adjustments to fair value are
reflected as "Change in net unrealized fair value of notes
receivable". 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.
Where, in the opinion of the Managing General Partner, events indicate
there has been an other than temporary decline in value below the cost
basis of the note, an appropriate reduction in the cost basis is
recognized as "Realized losses from investment write-downs" on the
Statements of Operations. "Recoveries from investments previously
written off" represent realized gains when payment is received on such
notes.
In conjunction with certain secured notes, upon note issuance or
restructure, the Partnership has received warrants to purchase certain
types of capital stock or capital stock of the borrowing company. The
cost basis of such warrants and the resulting discount has generally
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 $0 and $131,613 at December 31, 1998 and 1997,
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 $3,568,670 and $5,244,632 at December
31, 1998 and 1997, 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.
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 of 399,977 at December 31, 1998, 1997 and
1996, 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 $12,636,374 by $538,075.
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. Financing Partnership Operations
--------------------------------
The Managing General Partner expects that cash received from
liquidation of Partnership investments will provide the necessary
liquidity to fund Partnership operations. Until such future proceeds
are received, the Partnership will be dependent upon the financial
support of the Managing General Partner to fund operations. The
Managing General Partner has committed to this support in the form of
short-term cash advances.
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, 1998, 1997
and 1996, related party costs were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Management fees $ 201,508 200,100 247,008
Reimbursable operating expenses:
Lending operations and investment
management 201,348 173,675 175,407
Administrative and investor services 383,699 215,417 165,652
Computer services 48,364 60,842 81,249
Expenses absorbed by General Partners (339,591) (131,882) (143,040)
Expenses previously absorbed by General
Partners 1,735,002 -- --
</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, 1998 and 1997.
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. As discussed in the Partnership Agreement, the
Partnership may not 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 1. Beginning May 1, 1994, the
limitation was calculated using 1% of total Limited Partner capital
contributions. At December 31, 1998 amounts due to related parties
totaled $1,753,326 and at December 31, 1997, amounts due from related
parties totaled $98,848. In 1998, 1997, and 1996, the General
Partners absorbed $339,591, $131,882, and $143,040, respectively, in
operating expenses. In late 1998, it was determined that certain
operational costs, primarily rent and professional fees, absorbed by
the General Partners in prior years were not subject to this
limitation; consequently, $1,735,002 was reimbursable to the General
Partners.
The Managing General Partner allocates operating expenses incurred in
connection with the business of the Partnership based on employee
hours incurred. In 1998, operating cost allocations to the
Partnership were reevaluated. The Managing General Partner determined
that they had not fully recovered allocable operating expenses,
primarily salary, benefits, and professional fees, as permitted by the
Partnership Agreement. As a result, the Partnership was charged
additional operating expenses of $134,141, consisting of $16,085,
$23,852, and $94,204 for 1997, 1996, and prior years, respectively.
Had the additional expenses been recorded in prior years and had the
operating expense limitation not been in effect, operating expenses
would have been $610,714, 571,551, and 553,560 for 1998, 1997, and
1996, respectively.
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 TFI, 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, 1998 and 1997
$4,500 was due from affiliated partnerships.
An affiliated partnership owns approximately 80% of MARCorp, a
portfolio company. In addition, the Partnership and affiliated
partnerships have secured notes receivable from MARCorp.
The Partnership together with affiliated entities own a 66% interest
in Cyclean, Inc., a portfolio company. In addition, the Partnership
and affiliated partnerships wholly own Cyclean of Los Angeles, LLC
("CLA"), a portfolio company. The Partnership also owns 67% of CLB,
LLC ("CLB"), a portfolio company, and together with an affiliated
partnership wholly own CLB. The Partnership and other affiliated
partnerships have notes receivable from Cyclean, Inc., CLA, and CLB.
Additionally, the General Partners have charged CLB for certain
management services provided during 1998 and 1997.
In 1996, a portfolio company of the Partnership and affiliated
partnerships entered into a joint venture with the General Partners to
perform investment recovery efforts in order to increase the future
investment returns to the Partnership. 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. Through December 31, 1998, the Partnership
realized recoveries of $182,674 and the General Partners had not
realized any profit from the joint venture.
4. Allocation of Profits and Losses
--------------------------------
Net realized profit and loss of the Partnership are allocated based on
the beginning-of-year partners' capital balances as follows:
(a) Profits:
(i) first, to those partners with deficit capital account
balances until deficits have been eliminated;
(ii) second, to the partners as necessary to offset the net
realized loss previously allocated under (b)(ii) below
and sales commissions;
(iii)third, 99% to the Limited Partners and 1% to the
General Partners until the Limited Partners have been
allocated cumulative net realized profit or other
income which would, if distributed, result in a
cumulative, compounded annual return to the Limited
Partners of 8% of their adjusted capital contributions;
(iv) fourth, 75% to the Limited Partners as a group in
proportion to the number of Units held, 5% to the
Limited Partners in proportion to the Unit months of
each Limited Partner 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.
5. Notes Receivable, Net
---------------------
At December 31, 1998 and 1997, notes receivable consisted of:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------- -----------------
Investment Cost Fair Cost Fair
Industry/Company Date Position Basis Value Basis Value
- - ---------------- ---------- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Industrial/Business Automation
- - ------------------------------
Cyclean, Inc. and 09/87- Secured notes
Cyclean of 09/94 receivable, plus
Los Angeles, LLC interest, totaling
$2,435,456 $ 933,792 1,267,037 933,792 421,792
CLB, LLC 04/97- Unsecured notes
10/98 receivable, plus
interest, totaling
$583,740 518,000 518,000 268,000 268,000
Computers and Computer Equipment
- - --------------------------------
MARCorp 12/89- Secured notes
02/93 receivable, plus
interest, totaling
$14,055,562 5,451,009 2,691,764 5,451,009 1,871,009
--------- --------- --------- ---------
Total notes receivable $6,902,801 4,476,801 6,652,801 2,560,801
========= ========= ========= =========
</TABLE>
Cyclean, Inc. and Cyclean of Los Angeles, LLC
- - ---------------------------------------------
The Partnership has valued its secured notes receivable investment in these
companies at its estimated share of proceeds that could result from a
current sale or liquidation. Because both companies are on going
operations and not currently pursuing sale or liquidation, there are
inherent uncertainties involved in estimating these proceeds. The
estimated fair value of $1,267,037 at December 31, 1998 may differ
significantly from a value that would have been used had the ultimate
realization of the investment been known, and the differences could be
material.
CLB, LLC
- - --------
In 1998, the Partnership funded an unsecured note receivable of $250,000
with an interest rate of 13%.
MARCorp
- - -------
In 1998, the Company entered into an agreement to sell the majority of its
assets to the management of one of its subsidiaries. The Partnership has
valued its secured notes receivable investment in the company at its
expected share of the proceeds from this sale. The fair market value of
these proceeds at December 31, 1998 was $2,691,764. In February 1999, the
Partnership received $807,578 of these proceeds, the remainder of which are
due to be received no later than August 2000.
Resonex Holding Corporation
- - ---------------------------
In 1998, the Partnership realized recoveries of $182,674 on notes
receivable written off in prior years. (See Note 3.)
Changes in the net unrealized fair value of secured notes receivable were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net unrealized fair value decrease
from cost at beginning of year $(4,092,000) (4,077,000) (4,028,000)
Change in net unrealized fair value
of notes receivable 1,666,000 (15,000) (49,000)
--------- --------- ---------
Net unrealized fair value decrease
from cost at end of year $(2,426,000) (4,092,000) (4,077,000)
========= ========= =========
</TABLE>
The secured notes are collateralized by specific assets of the borrowing
companies, and interest rates on secured and unsecured notes at December
31, 1998, ranged from 12% to 13%. Scheduled principal repayments are
$1,697,939 and $5,451,014 for 1999 and 2000, respectively. Notes
receivable which are due on demand are included as principal repayments in
1999. 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.
The notes receivable portfolio at December 31, 1998 and 1997, was on
nonaccrual status due to uncertainty of the 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.
6. Equity Investments
------------------
At December 31, 1998 and December 1997, equity investments consisted of:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------ -----------------
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 Common share
Systems warrant for
Corporation 1,159,546 shares
at $0.50;
expiring 06/00 $ 0 0 10,000 0
Industrial/Business Automation
- - ------------------------------
Cyclean, Inc. 03/91- Common share
01/95 warrants for
145,965 shares (1) 0 0 0 0
------ ------- ------- -------
Total warrants 0 0 10,000 0
------ ------- ------- -------
STOCKS:
Computer Software and Systems
- - -----------------------------
Wasatch Education 06/95 2,908,450
Systems Series C
Corporation Preferred
shares 775,610 775,610 2,908,450 1,454,225
Industrial/Business Automation
- - ------------------------------
Cyclean, Inc. 09/94- 225,088 Series D
04/96 Preferred shares 242,988 0 242,988 0
Cyclean of 03/95 Class A LLC Unit
Los Angeles, LLC - 44% ownership 11,091 0 11,091 0
CLB,LLC 04/97- 4,690,000
06/98 LLC Units 4,690,000 2,788,667 3,786,013 3,786,013
Medical
- - -------
Resonex Holding 02/94 22,804 Common
Corporation shares 0 0 0 0
Microelectronics
- - ----------------
Celeritek, Inc. 05/94 6,784 Common
shares -- -- 36,086 94,500
Telecommunications
- - ------------------
All Post, Inc. 10/94 17,574 Common
shares 13,884 4,393 13,884 4,394
3Com Corporation 06/95 1,082 Common
shares -- -- 6,164 37,113
--------- --------- --------- ---------
Total stocks 5,733,573 3,568,670 7,004,676 5,376,245
--------- --------- --------- ---------
Total equity investments $5,733,573 3,568,670 7,014,676 5,376,245
========= ========= ========= =========
- - -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(1) Cyclean, Inc. common share warrants are exercisable at prices ranging from $3.10 to $4.00
per share and expire on dates ranging from 03/99 to 07/02.
</TABLE>
Marketable Equity Securities
- - ----------------------------
At December 31, 1997, marketable equity securities had an aggregate
cost of $42,251 and aggregate market values of $131,613. The net
unrealized gain at December 31, 1997, did not include any gross
losses. All the Partnership's marketable equity securities were sold
in 1998.
3Com Corporation
- - ----------------
In 1998, the Partnership sold its investment in the company for total
proceeds of $34,285 and realized a gain of $28,121.
CLB, LLC
- - --------
In 1998, the Partnership purchased 903,987 LLC Units for $903,987.
The Partnership, together with an affiliated partnership, owns 100% of
the company.
The Partnership has valued its investment in the company at its
estimated share of proceeds that could result from a current sale or
liquidation of the company. Because the company is an on going
operation and not currently pursuing a sale or liquidation, there are
inherent uncertainties involved in estimating these proceeds. The
estimated fair value of $2,788,667 at December 31, 1998 may differ
significantly from a value that would have been used had the ultimate
realization of the investment been known, and the differences could be
material.
Celeritek, Inc.
- - ---------------
In September 1998, the Partnership sold its investment in the company
for total proceeds of $21,199 and realized a loss of $14,887.
Wasatch Education Systems Corporation
- - -------------------------------------
In February 1997, the company sold its education market net assets to
Wasatch Interactive Learning Company ("WILC"), 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, 1998, the company had net current
assets of $505,000(unaudited) and is expected to receive future
royalties from WILC of approximately $900,000(unaudited). The
Partnership has valued its investment in the company at its share of
net current assets and expected future royalty payments. Because of
the highly competitive educational software marketplace, no value has
been assigned to the company's capitalized technology costs. Based on
this valuation, the Partnership recorded a write-down of the cost
basis and fair market value of its investment to $775,610 at December
31, 1998, resulting in a realized loss of $2,142,840. Because of the
inherent uncertainties involved in estimating these future proceeds,
the estimated fair value of $775,610 may differ significantly from a
value that would have been used had a ready market existed, and the
differences could be material.
7. 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,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Increase in fair value from
cost of marketable equity
securities $ -- 89,362 101,360
Decrease in fair value from
cost of non-marketable equity
securities (2,164,903) (1,727,793) (1,727,793)
--------- --------- ---------
Net unrealized fair value
decrease from cost at end
of year (2,164,903) (1,638,431) (1,626,433)
Net unrealized fair value
(decrease) increase from
cost at beginning of year (1,638,431) (1,626,433) 209,178
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $ (526,472) (11,998) (1,835,611)
========= ========= =========
</TABLE>
8. Cash and Cash Equivalents
-------------------------
At December 31, 1998 and 1997, cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Demand and brokerage accounts $320,775 5,282
Money-market accounts 455,202 1,700,777
------- ---------
Total $775,977 1,706,059
======= =========
</TABLE>
9. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1997 and 1996 of $190,431 and $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 sought relief for $2.6 million, including accrued
interest, legal costs and punitive damages. In March 1997, the
portfolio company and the affiliated partnership obtained a favorable
judgment in their appeal of a prior trial court ruling that declared
the assets of the portfolio company, for a sum not certain, were
available to satisfy certain claims of Quebecor. Quebecor's
subsequent appeal to the North Carolina Supreme Court was denied in
July 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 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 Partnership's
share of this deposit was $502,500. As disclosed in Note 10, the
Partnership's escrowed funds were released in June 1998.
10. 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, 1998, the Partnership had no
unfunded commitments.
In April 1997, the Partnership together with an affiliated partnership
deposited $750,000 into an escrow account as collateral for a $750,000
note payable of Ecopave. At December 31, 1997, the Partnership's
share of the deposit was $502,500. In June 1998, certain assets of
CLB, LLC, a portfolio company, were pledged as collateral for the
Ecopave note payable, resulting in the release of the Partnership's
escrowed funds. The Partnership, however, remains as a guarantor for
the note payable.
In December 1997, the Partnership together with an affiliated
partnership, guaranteed $50,000 of 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
forfeit 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 29, 1999 By: /s/Michael Brenner
--------------------------------------
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 29, 1999
- - ------------------------ Executive Officer,
Charles R. Kokesh Chief Financial officer
and Chairman of
Technology Funding Inc.
and Managing 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, 1998, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 12,636,374
<INVESTMENTS-AT-VALUE> 8,045,471
<RECEIVABLES> 0
<ASSETS-OTHER> 126,452
<OTHER-ITEMS-ASSETS> 809,477
<TOTAL-ASSETS> 8,981,400
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,821,481
<TOTAL-LIABILITIES> 1,821,481
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,750,822
<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> (4,590,903)
<NET-ASSETS> 7,159,919
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 53,100
<OTHER-INCOME> 0
<EXPENSES-NET> 2,341,774
<NET-INVESTMENT-INCOME> (2,288,674)
<REALIZED-GAINS-CURRENT> (1,944,432)
<APPREC-INCREASE-CURRENT> 1,139,528
<NET-CHANGE-FROM-OPS> (3,093,578)
<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> (3,093,578)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 201,508
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,343,574
<AVERAGE-NET-ASSETS> 8,706,708
<PER-SHARE-NAV-BEGIN> 40
<PER-SHARE-NII> (10)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 30
<EXPENSE-RATIO> 26.90
<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.
</FN>
</TABLE>
