<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, 1999
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 1999.
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, 1999, there were 5,211 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>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Total income $ 5,438 53,100 184,836 512,955 1,589,346
Net operating (loss) income (734,152) (2,288,674) (629,279) (322,541) 729,824
Net realized gain from sales
of equity investments -- 13,234 246,049 106,823 2,454,187
Realized losses from
investment write-downs -- (2,142,840) -- (125,099) (4,508,628)
Recoveries from investments
previously written-off -- 185,174 9,497 103,807 --
Net realized loss (734,152) (4,233,106) (373,733) (237,010) (1,324,617)
Change in net unrealized
fair value:
Equity investments (1,812,107) (526,472) (11,998) (1,835,611) 2,786,658
Notes receivable (608,000) 1,666,000 (15,000) (49,000) (212,000)
Net (loss) income (3,154,259) (3,093,578) (400,731) (2,121,621) 1,250,041
Net (loss) income per Unit (1) (7.81) (7.66) (0.99) (5.25) 2.65
Total assets 5,005,817 8,981,400 10,315,265 11,006,297 13,586,829
Distributions declared -- -- -- -- 391,777
Distributions declared
per Unit (2) -- -- -- -- 0.91
(1) See Notes 1 and 4 to the Financial Statements for discussion of partners' capital
reclassification and the method of calculation of net income (loss) per Unit.
(2) Calculation is based on distributions declared to Limited Partners divided by the weighted
average number of Units outstanding during the year.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Liquidity and Capital Resources
-------------------------------
In 1999, net cash used by operating activities totaled
$1,874,621. The Partnership paid management fees of $71,556
to the Managing General Partner and reimbursed related
parties for operating expenses of $1,583,674. Cash paid to
affiliated partnerships totaled $1,629. Other operating
expenses of $223,200 were paid and interest income received
was $5,438.
During 1999, the Partnership received $807,578 in secured
notes receivable repayments and borrowed $575,000 from a
portfolio company in the computer and computer equipment
industry, $275,000 of which was repaid prior to December 31,
1999.
Cash and cash equivalents at December 31, 1999, were $8,934.
The Partnership is scheduled to terminate on December 31,
2000. If the General Partners so determine, the Partnership
can be further extended for an additional two-year period or
the Partnership will be liquidated in accordance with the
Partnership Agreement. The General Partners expect to extend
the term of the Partnership.
The General Partners have made loans to the Partnership to
finance its recurring losses from on-going operations. The
Partnership has very limited cash resources and primarily
illiquid assets. The General Partners are under no
obligation to continue financing the Partnership's daily
operations and may elect to discontinue such support at any
time during the remaining life of the Partnership. The
General Partners may attempt to secure third party financing
to continue operations using the collateral value of the
Partnership's remaining investments. It is likely that a
potential lender would require the remaining Partnership
investment be appraised by an independent third party,
specifically to assess their value as readily liquid
collateral prior to any financing. The collateral values
determined by a lender may differ significantly from the
investment fair value reflected in these financial
statements.
Results of Operations
- ---------------------
1999 compared to 1998
- ---------------------
Net losses were $3,154,259 and $3,093,578 for the years ended
December 31, 1999 and 1998, respectively.
The Partnership recorded decreases in the change in fair
value of equity investments of $1,812,107 and $526,472 in
1999 and 1998, respectively. The 1999 decrease was due to
decreases in the valuations of the Cyclean entities and
Wasatch Education Systems Corporation. 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.
In 1999, the Partnership recorded a $608,000 decrease in the
fair value of notes receivable, as compared to a $1,666,000
increase in 1998. These changes were due to changes in
expected loan repayments based on the financial conditions of
the borrowing companies.
There were no investment write-downs in 1999. 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.
Total operating expenses were $603,324 and $2,140,266 in 1999
and 1998, 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 $45,393 and $339,591 were absorbed by the General
Partners in 1999 and 1998, 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
which related to prior years. Had the limitation not been in
effect and had the additional expense been recorded in prior
years, total operating expenses would have been $648,717 and
$610,714 for 1999 and 1998, respectively.
Given the inherent risk associated with the business of the
Partnership, the future performance of portfolio company
investments may significantly impact future 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.
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 1999, the Partnership incurred management fees
of $136,266. 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, 1999. 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, 1999
and 1998
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Statements of Partners' Capital for
the years ended December 31, 1999, 1998
and 1997
Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997
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, 1999.
(c) Financial Data Schedule for the year ended and as of
December 31, 1999 (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, 1999 and 1998, and
the related statements of operations, partners' capital, and cash
flows for each of the years in the three-year period ended
December 31, 1999. 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, 1999 and
1998. 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
the Partnership will continue as a going concern. As discussed in
Note 2 to the financial statements, the Partnership has suffered
recurring losses from operations and has primarily illiquid assets
that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Albuquerque, New Mexico /S/KPMG LLP
March 29, 2000
<PAGE>
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION> December 31,
-----------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Investments:
Notes receivable, net (cost basis
of $6,095,223 and $6,902,801 in
1999 and 1998, respectively) $3,061,223 4,476,801
Equity investments (cost basis
of $5,733,573) 1,756,563 3,568,670
--------- ---------
Total investments 4,817,786 8,045,471
Cash and cash equivalents 8,934 775,977
Restricted cash 33,500 33,500
Due from affiliated partnerships 6,129 4,500
Other assets 139,468 121,952
--------- ---------
Total assets $5,005,817 8,981,400
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 70,587 68,155
Due to related parties 610,100 1,753,326
Related party note payable
(includes accrued interest
of $19,470) 319,470 --
--------- ---------
Total liabilities 1,000,157 1,821,481
Commitments, contingencies and
subsequent events
(Notes 2, 3, 5, 9, and 11)
Partners' capital
(399,977 Limited Partner Units
outstanding) 4,005,660 7,159,919
--------- ---------
Total liabilities and
partners' capital $5,005,817 8,981,400
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION> For the Years Ended December 31,
--------------------------------
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Income:
Notes receivable interest $ -- -- 11,497
Short-term investment interest 5,438 53,100 173,339
--------- --------- -------
Total income 5,438 53,100 184,836
Costs and expenses:
Management fees 136,266 201,508 200,100
Other investment expenses -- -- 190,431
Operating expenses:
Lending operations and investment
management 123,427 211,963 159,253
Administrative and investor services 339,257 410,499 281,005
Computer services 86,857 48,364 68,107
Professional fees 79,706 74,029 47,101
Expenses absorbed by General Partners (45,393) (339,591) (131,882)
Interest expense 19,470 -- --
Expenses absorbed by General
Partners in prior years -- 1,735,002 --
--------- --------- -------
Total operating expenses 603,324 2,140,266 423,584
--------- --------- -------
Total costs and expenses 739,590 2,341,774 814,115
--------- --------- -------
Net operating loss (734,152)(2,288,674) (629,279)
Net realized gain from sales
of equity investments -- 13,234 246,049
Realized losses from
investment write-downs -- (2,142,840) --
Recoveries from investments
previously written off -- 185,174 9,497
--------- --------- -------
Net realized loss (734,152)(4,233,106) (373,733)
Change in net unrealized fair value:
Equity investments (1,812,107) (526,472) (11,998)
Notes receivable (608,000) 1,666,000 (15,000)
--------- --------- -------
Net loss $(3,154,259)(3,093,578) (400,731)
========= ========= =======
Net loss per Unit $ (7.81) (7.66) (0.99)
========= ========= =======
</TABLE>
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL
- ------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1999, 1998, and 1997:
Reclassified-(see Note 1)
------------------------
Limited General
Partners Partners Total
-------- -------- -----
<S> <C> <C> <C>
Partners' capital,
December 31, 1996 $10,691,406 (37,178) 10,654,228
Net loss (396,724) (4,007) (400,731)
---------- ------- ----------
Partners' capital,
December 31, 1997 10,294,682 (41,185) 10,253,497
Net loss (3,062,642) (30,936) (3,093,578)
---------- ------- ----------
Partners' capital,
December 31, 1998 7,232,040 (72,121) 7,159,919
Net loss (3,122,716) (31,543) (3,154,259)
---------- ------- ----------
Partners' capital,
December 31, 1999 $ 4,109,324 (103,664) 4,005,660
========== ======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating
activities:
Interest received $ 5,438 53,100 184,836
Cash paid to vendors (223,200) (194,347) (577,796)
Cash paid to related parties (1,655,230) (378,156) (655,937)
Cash paid to affiliated
partnerships (1,629) -- (4,500)
Reimbursement of collection
expenses received from
portfolio companies -- -- 16,120
--------- --------- ---------
Net cash used by operating
activities (1,874,621) (519,403) (1,037,277)
--------- --------- ---------
Cash flows from investing
activities:
Purchase of equity investments -- (903,987) (3,786,014)
Notes receivable issued -- (250,000) (325,513)
Repayments of notes receivable 807,578 -- 4,989
Proceeds from sales of equity
investments -- 55,484 319,294
Recoveries from investments
previously written off -- 185,174 9,497
Payments from restricted cash -- 502,650 106,545
--------- --------- ---------
Net cash provided (used) by
investing activities 807,578 (410,679) (3,671,202)
--------- --------- ---------
Cash flows from financing
activities:
Proceeds from related party
borrowings 575,000 -- --
Repayments of related party
borrowings (275,000) -- --
--------- --------- ---------
Net cash provided by
financing activities 300,000 -- --
--------- --------- ---------
Net decrease in cash and cash
equivalents (767,043) (930,082) (4,708,479)
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents at
beginning of year 775,977 1,706,059 6,414,538
--------- --------- ---------
Cash and cash equivalents at
end of year $ 8,934 775,977 1,706,059
========= ========= =========
Reconciliation of net loss to net
cash used by operating
activities:
Net loss $(3,154,259)(3,093,578) (400,731)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Net realized gain from sales of
equity investments -- (13,234) (246,049)
Realized losses from investment
write-downs -- 2,142,840 --
Recoveries from investments
previously written off -- (185,174) (9,497)
Change in net unrealized
fair value:
Equity investments 1,812,107 526,472 11,998
Notes receivable 608,000 (1,666,000) 15,000
Changes in:
Accounts payable and accrued
expenses 21,902 6,387 (248,042)
Due to/from related parties (1,143,226) 1,852,174 (137,785)
Other assets (17,516) (89,290) (14,349)
Other, net (1,629) -- (7,822)
--------- --------- ---------
Net cash used by operating
activities $(1,874,621) (519,403) (1,037,277)
========= ========= =========
Non-cash investing activities:
Conversion of other investments
to notes receivable $ -- -- 10,000
========= ========= =========
</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 will be liquidated in accordance with the
Partnership agreement. The General Partners expect to extend the term
of the Partnership.
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.
Partners' Capital Reclassification
- ----------------------------------
<TABLE>
<CAPTION>
Commencing in the fourth quarter of 1999, the Partnership is including the change in net
unrealized fair value of investments in the profits and losses allocated to partners' capital
accounts based on a reevaluation of the Partnership Agreement. Accordingly, prior years have been
reclassified to conform to the current year presentation. The allocations of the net unrealized
fair value increase (decrease) from cost of investments, and resulting reclassifications, were
determined by applying the provisions of the Partnership Agreement described in Note 4 from the
inception of the Partnership. The reclassification has no effect on total partners' capital or
the Partnership's net income or loss for any period. The reclassifications resulting from the
reevaluation of the Partnership Agreement have the effect of accelerating the allocation of
profits or losses (under the provisions described in Note 4) to partners' capital accounts and, as
a result, may change the timing of any distributions allowable under the Partnership Agreement.
The allocations of the net unrealized fair value decrease reclassified in prior periods are as
follows:
Net Unrealized
Fair Value
Decrease From
Limited General Cost of
Partners Partners Investments Total
-------- -------- ----------------- -----
<S> <C> <C> <C> <C>
Partners' capital, December 31, 1996,
before reclassification $16,508,603 (150,942) (5,703,433) 10,654,228
Allocation of net unrealized fair value
decrease from cost (5,817,197) 113,764 5,703,433 --
---------- ------- --------- ----------
Partners' capital, December 31, 1996,
as reclassified $10,691,406 (37,178) -- 10,654,228
========== ======= ========= ==========
Partners' capital, December 31, 1997,
before reclassification $16,138,607 (154,679) (5,730,431) 10,253,497
Allocation of net unrealized fair value
decrease from cost (5,843,925) 113,494 5,730,431 --
---------- ------- --------- ----------
Partners' capital, December 31, 1997,
as reclassified $10,294,682 (41,185) -- 10,253,497
========== ======= ========= ==========
Partners' capital, December 31, 1998,
before reclassification $11,947,832 (197,010) (4,590,903) 7,159,919
Allocation of net unrealized fair value
decrease from cost (4,715,792) 124,889 4,590,903 --
---------- ------- --------- ----------
Partners' capital, December 31, 1998,
as reclassified $ 7,232,040 (72,121) -- 7,159,919
========== ======= ========= ==========
The reclassifications of the change in net unrealized fair value of investments for prior periods
are as follows:
Limited General
Partners Partners Total
-------- -------- -----
For the Year Ended December 31, 1997 $ (26,728) (270) (26,998)
For the Year Ended December 31, 1998 1,128,133 11,395 1,139,528
</TABLE>
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. There were no investments
valued under this method at December 31, 1999 or 1998.
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 $1,756,563 and $3,568,670 at December
31, 1999 and 1998, 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 Income (Loss) Per Unit
- -----------------------------------
Commencing in the fourth quarter of 1999, the Partnership is including
the change in net unrealized fair value of equity investments in the
profits and losses allocated to partners' capital accounts. (See
Partners' Capital Reclassification discussion above. The 1998 and
1997 per Unit amounts have been modified to conform to this
presentation.) Net income (loss) per Unit is calculated by dividing
the weighted average number of Units outstanding of 399,977 for the
years ended December 31, 1999, 1998 and 1997, into total net income
(loss) allocated to the Limited Partners. The Managing General
Partners contributed 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 lower than the
reported total cost basis of $11,828,796 by $419,805.
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 General Partners have made loans to the Partnership to finance its
recurring losses from on-going operations. The Partnership has very
limited cash resources and primarily illiquid assets. The General
Partners are under no obligation to continue the financing of the
Partnership's daily operations and may elect to discontinue such
support at any time during the remaining life of the Partnership. The
General Partners may attempt to secure third party financing to
continue operations using the collateral value of the Partnership's
remaining investments. It is likely that a potential lender will
require the remaining Partnership investments be appraised by an
independent third party, specifically to assess their value as readily
liquid collateral prior to any financing. The collateral values
determined by a lender may differ significantly from the investment
fair value reflected in these financial statements.
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, 1999, 1998
and 1997, related party costs were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Management fees $ 136,266 201,508 200,100
Reimbursable operating expenses:
Lending operations and investment
management 122,799 201,348 173,675
Administrative and investor services 211,475 383,699 215,417
Computer services 86,857 48,364 60,842
Expenses absorbed by General Partners (45,393) (339,591) (131,882)
Expenses previously absorbed by General
Partners -- 1,735,002 --
</TABLE>
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 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 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 equities plus the
aggregate fair market value of any equity securities distributed to
the partners, exceeds the total management fees payable. At December
31, 1999 and 1998, management fees payable were $64,710 and $0,
respectively.
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. Pursuant to the Partnership Agreement, the
Partnership may not reimburse the General Partners for expenses that
aggregate more than 1% of total Limited Partner capital contributions.
For purposes of this limitation, the Partnership's operating year
begins each May 1. At December 31, 1999 and 1998, amounts due to
related parties totaled $545,390 and $1,753,326, respectively. In
1999, 1998, and 1997, the General Partners absorbed $45,393, $339,591,
and $131,882, 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 and
$118,056 for 1997 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
$648,717, $610,714 and $571,551 for 1999, 1998 and 1997, respectively.
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. Effective December 31,
1998, TFPM was acquired by TFL. Under the terms of a rent agreement,
TFL charges the Partnership for its share of office rent and related
overhead costs on a cost recovery basis. 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.
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 has notes payable to MARCorp (see Note 9.) MARCorp and
affiliated partnerships have advanced loans to Sutmyn Storage
Corporation. Wasatch Education Systems Corporation, a portfolio
company, advanced $500,000 to MARCorp during 1999 (see Notes 5 and 6.)
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 charged CLB for certain management
services provided during 1999 and 1998.
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 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 was pursuant to, and was
defined in, the profit and loss provisions of the Partnership's
Partnership Agreement. The Partnership and the General Partners
realized recoveries of $182,674 and $0, respectively, from the joint
venture through 1998. No future recoveries are expected.
4. Allocation of Profits and Losses
--------------------------------
In accordance with the Partnership Agreement (see Note 1), net profits
and losses 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
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 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 profit of the Partnership.
(b) Losses:
(i) first, to the partners as necessary to offset the net
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, 1999 and 1998, notes receivable consisted of:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------- -----------------
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 $ 933,792 659,037 933,792 1,267,037
CLB, LLC 04/97- Unsecured notes
10/98 receivable, plus
interest 518,000 518,000 518,000 518,000
Computers and Computer Equipment
- --------------------------------
MARCorp 12/89- Secured notes
02/93 receivable, plus
interest 4,643,431 1,884,186 5,451,009 2,691,764
--------- --------- --------- ---------
Total notes receivable $6,095,223 3,061,223 6,902,801 4,476,801
========= ========= ========= =========
</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 $659,037 at December 31, 1999 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.
MARCorp
- -------
In 1998, MARCorp 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 MARCorp at its
expected share of the proceeds from this sale. In February 1999, the
Partnership received $807,578 of these proceeds. The fair market
value of the remaining proceeds at December 31, 1999 was $1,884,186.
During 1999, MARCorp purchased $3,000,000 (unaudited) in senior
secured convertible debentures of Sutmyn Storage Corporation, a
company in the computer industry. As of December 31, 1999, an
affiliated partnership has advanced loans totaling $2,000,000 to
Sutmyn in the form of demand notes. Subsequent to December 31, 1999,
affiliated partnerships have funded additional demand notes to Sutmyn
totaling $4,000,000 (unaudited).
Changes in the net unrealized fair value of secured notes receivable
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net unrealized fair value
decrease from cost at
beginning of year $(2,426,000) (4,092,000) (4,077,000)
Change in net unrealized fair
value of notes receivable (608,000) 1,666,000 (15,000)
--------- --------- ---------
Net unrealized fair value
decrease from cost at end
of year $(3,034,000) (2,426,000) (4,092,000)
========= ========= =========
</TABLE>
The secured notes are collateralized by specific assets of the
borrowing companies, and interest rates on secured and unsecured notes
at December 31, 1999 ranged from 12% to 13%. All notes are scheduled
for repayment in 2000 or due upon demand. 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, 1999 and 1998, 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, 1999 and December 1998, equity investments consisted of:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------ -----------------
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 (a) (b) 1,159,546 shares
at $0.50;
expiring 06/00 $ 0 0 0 0
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 03/91- Common share
(a) (b) 01/95 warrants for
107,469 shares (1) 0 0 0 0
------ ------- ------- -------
Total warrants 0 0 0 0
------ ------- ------- -------
STOCKS:
Computer Software and Systems
- -----------------------------
Wasatch Education 06/95 2,908,450
Systems Series C
Corporation (a) (b) Preferred
shares 775,610 652,897 775,610 775,610
Industrial/Business Automation
- ------------------------------
Cyclean, Inc. 09/94- 225,088 Series D
(a) (b) 04/96 Preferred shares 242,988 0 242,988 0
Cyclean of
Los Angeles, Class A LLC Unit
LLC (a) (b) 03/95 - 44% ownership 11,091 0 11,091 0
CLB,LLC 04/97- 4,690,000
(a) (b) 06/98 LLC Units 4,690,000 1,103,666 4,690,000 2,788,667
Telecommunications
- ------------------
All Post, Inc. 10/94 17,574 Common
(a) shares 13,884 0 13,884 4,393
--------- --------- --------- ---------
Total stocks 5,733,573 1,756,563 5,733,573 3,568,670
--------- --------- --------- ---------
Total equity investments $5,733,573 1,756,563 5,733,573 3,568,670
========= ========= ========= =========
Legends and footnotes:
0 Investment active with a carrying value or fair value of zero.
(1) Cyclean, Inc. common share warrants are exercisable at prices ranging from $2.74 to $3.10 per
share and expire on dates ranging from 06/00 to 07/02.
(a) All investments are restricted securities acquired in private placement transactions; resale
may be subject to certain restrictions. None of the Partnership's investments are income-
producing.
(b) Portfolio company is an affiliate of the Partnership; resale may be subject to certain
restrictions.
</TABLE>
CLB, LLC
- --------
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 $1,103,666 at December 31, 1999 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.
Wasatch Education Systems Corporation
- -------------------------------------
In 1999, Wasatch's operations were limited to pursuit of additional
markets for its technology, debt service and the collection of royalty
income. At December 31, 1999, Wasatch had net current assets of
$508,000(unaudited) and is expected to receive future royalties of
approximately $680,000(unaudited). The Partnership valued its
investment in Wasatch at its share of net current assets and expected
future royalty payments. In 1999, Wasatch advanced $500,000
(unaudited) to MARCorp, a portfolio company (see Note 5). This
advance, in the form of a promissory note, bears interest at the rate
of 9% per annum and is repayable on demand. Because of the highly
competitive educational software marketplace, no value has been
assigned to Wasatch's capitalized technology costs. Based on this
valuation, the Partnership's investment has an estimated fair value of
$652,897 at December 31, 1999. Because of the inherent uncertainties
involved in estimating these future proceeds, the estimated fair value
of $652,897 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,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Increase in fair value from
cost of marketable equity
securities $ -- -- 89,362
Decrease in fair value from
cost of non-marketable
equity securities (3,977,010) (2,164,903) (1,727,793)
--------- --------- ---------
Net unrealized fair value
decrease from cost at end
of year (3,977,010) (2,164,903) (1,638,431)
Net unrealized fair value
decrease from cost at
beginning of year (2,164,903) (1,638,431) (1,626,433)
--------- --------- ---------
Change in net unrealized
fair value of equity
investments $(1,812,107) (526,472) (11,998)
========= ========= =========
</TABLE>
8. Cash and Cash Equivalents
-------------------------
At December 31, 1999 and 1998, cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Demand and brokerage accounts $7,214 320,775
Money-market accounts 1,720 455,202
----- -------
Total $8,934 775,977
===== =======
</TABLE>
9. Note Payable to Related Party
-----------------------------
In 1999, the Partnership borrowed $575,000 from MARCorp, a portfolio
company of the Partnership, under unsecured promissory notes. A note
totaling $275,000 was repaid during 1999. An affiliated partnership
owns more than 80% of MARCorp. The remaining note bears interest at
9% and both principal and interest are payable on June 15, 2000. The
terms of the note require that the note be repaid prior to any
distributions to partners.
10. Litigation and Other Investment Expenses
----------------------------------------
Other investment expenses in 1997 of $190,431 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 11, the
Partnership's escrowed funds were released in June 1998.
11. 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, 1999, 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, 2000 By: /s/Michael Brenner
--------------------------------------
Michael Brenner
Vice President
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, 2000
- ------------------------ 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, 1999, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 11,828,796
<INVESTMENTS-AT-VALUE> 4,817,786
<RECEIVABLES> 0
<ASSETS-OTHER> 145,597
<OTHER-ITEMS-ASSETS> 42,434
<TOTAL-ASSETS> 5,005,817
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,000,157
<TOTAL-LIABILITIES> 1,000,157
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,016,670
<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> (7,011,010)
<NET-ASSETS> 4,005,660
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,438
<OTHER-INCOME> 0
<EXPENSES-NET> 739,590
<NET-INVESTMENT-INCOME> (734,152)
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (2,420,107)
<NET-CHANGE-FROM-OPS> (3,154,259)
<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> (3,154,259)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 136,266
<INTEREST-EXPENSE> 19,470
<GROSS-EXPENSE> 742,690
<AVERAGE-NET-ASSETS> 5,582,789
<PER-SHARE-NAV-BEGIN> 18.08
<PER-SHARE-NII> (7.81)
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.27
<EXPENSE-RATIO> 13.25
</TABLE>
