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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. 814-48
TECHNOLOGY FUNDING PARTNERS III, L.P.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3033783
- ------------------------------- ----------------------------------
(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 active 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
February 26, 1988, forming a part of Registration Statement No. 33-
10896, 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.
PART I
Item 1. BUSINESS
- ------ --------
Technology Funding Partners III, L.P. (hereinafter referred
to as the "Partnership" or the "Registrant") was formed as a
Delaware limited partnership on December 4, 1986, and was
inactive until it commenced the sale of Units in April 1987.
The Partnership was organized as a business development
company under the Investment Company Act of 1940, as amended
(the "Act"), and operates as a nondiversified investment
company as that term is defined in the Act. The
Partnership's principal investment objectives are long term
capital appreciation from venture capital investments in new
and developing companies ("portfolio companies") and
preservation of Limited Partner capital through risk
management and active involvement with such companies.
Investments in portfolio companies are also described in the
"Introductory Statement" and "Business of the Partnership"
sections of the Prospectus dated February 26, 1988, that
forms a part of Registrant's Form N-2 Registration Statement
No. 33-10896 (such Prospectus 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
term was extended for a two-year period to December 31, 1998,
pursuant to unanimous approval by the Management Committee on
September 13, 1996. The Partnership term was further
extended to December 31, 2000 with an amendment by the
General Partners and approved by a majority of the Limited
Partners. If no further action is taken by the General
Partners before this termination date, the Partnership will
be liquidated in accordance with the Partnership Agreement.
The General Partners expect the Management Committee to vote
in favor of extending the term of the Partnership for one
additional two-year period. The Management Committee can
exercise this right to extend the Partnership under an
amendment to the Partnership Agreement approved by a vote of
the Limited Partners in December 1997.
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 5,647 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
- ------ -----------------------
For the Years Ended and As of December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Total income $ 110,361 165,624 341,607 522,715 470,792
Net operating loss (1,196,362) (1,450,097) (1,202,447) (856,975) (1,357,976)
Net realized gain from
venture capital limited
partnership investments 135,893 108,591 622,207 814,400 1,358,424
Net realized (loss) gain from
sales of equity investments (883,446) (1,535,862) 5,770,758 3,414,575 8,337,512
Realized losses from
investment write-downs -- (836,249) (53,600) (3,041,310) (399,427)
Recovery from investments
previously written off -- -- -- 8,775 62,231
Net realized (loss) income (1,943,915) (3,713,617) 5,136,918 339,465 8,000,764
Change in net unrealized
fair value:
Equity investments 16,105,208 (1,639,131) (4,881,218) (3,647,984) 398,770
Secured notes receivable -- -- -- 309,000 (309,000)
Net income (loss) 14,161,293 (5,352,748) 255,700 (2,999,519) 8,090,534
Net income (loss) per Unit 68.39 (28.46) 1.02 (0.20) 40.83
Total assets 38,293,191 24,420,151 29,855,568 33,890,281 41,388,167
Distributions declared 283,627 -- 4,279,267 159,809 3,565,256
Distributions declared
per Unit (2) -- -- 24.75 -- 22.06
(1) See Notes 1 and 3 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.
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 $1,183,418.
The Partnership paid management fees of $279,317 to the Managing
General Partners and reimbursed related parties for operating
expenses of $628,865. In addition, $36,778 was paid to the
Individual General Partners as compensation for their services.
Other operating expenses of $335,836 were paid, and interest and
other income of $97,378 was received.
In 1999, the Partnership funded equity investments of $2,626,060,
primarily to portfolio companies in the environmental,
medical/biotechnology, information technology and communications
industries, and issued $96,360 in notes receivable primarily to
portfolio companies in the medical/biotechnology industry.
Proceeds from sales of equity investments totaled $1,981,843 and
repayments of convertible and other notes receivable provided
$198,844; additional sales proceeds of $72,496 were receivable
from an affiliated partnership at December 31, 1999. The
Partnership received $408,876 in cash distributions from venture
capital limited partnership investments. Tax distributions to
General Partners totaled $283,627.
The Partnership is scheduled to terminate on December 31, 2000.
If no further action is taken by the General Partners before this
termination date, the Partnership will be liquidated in accordance
with the Partnership Agreement. The General Partners expect the
Management Committee to vote in favor of extending the term of the
Partnership for one additional two-year period. The Management
Committee can exercise this right to extend the Partnership under
an amendment to the Partnership Agreement approved by a vote of
the Limited Partners in December 1997.
Cash and cash equivalents at December 31, 1999, were $1,560,773.
Cash reserves, interest income on short-term investments and
future proceeds from equity investments sales are expected to be
adequate to fund Partnership operations and future investments
through the next twelve months. Subsequent to December 31, 1999,
the Partnership sold publicly traded shares in seven portfolio
companies for proceeds totaling $15,529,024 and a realized gain of
$11,062,388. Subsequent to December 31, 1999, a quarterly tax
distribution was declared and paid to the General Partners
totaling $1,238,366.
Results of Operations
- ---------------------
1999 compared to 1998
- ---------------------
Net income was $14,161,293 in 1999 compared to net loss of
$5,352,748 in 1998. The change was primarily due to a $17,744,339
increase in the change in net unrealized fair value of equity
investments, an $836,249 decrease in realized losses from
investment write-downs, a $652,416 decrease in net realized losses
from sales of equity investments, and a $301,982 decrease in
operating expenses.
During 1999, the increase in fair value of $16,105,208 was
primarily attributable to increases in portfolio companies in the
medical/biotechnology, communications, information technology,
computers and computer equipment and computer systems and software
industries. In 1998, the decrease in fair value of equity
investments of $1,639,131 was substantially attributable to
portfolio companies in the medical/biotechnology and computers and
computer equipment industries. These decreases were partially
offset by increases in portfolio companies in the environmental
industry.
During 1999, there were no investment write-downs. During 1998,
the Partnership recorded realized losses from investment write-
downs of $836,249 primarily due to a portfolio company in the
environmental industry.
During 1999, net realized loss from sales of equity investments of
$883,446 primarily resulted from losses on the sales of shares in
Naiad Technologies, Inc. ,CardioTech International, Inc.,
CareCentric Solutions, Inc. and Splash Technology Holdings, Inc.
partially offset by gains on the sales of shares in Synopsys, Inc.
and Photon Dynamics, Inc. During 1998, net realized loss from
sales of equity investments of $1,535,862 was substantially
attributable to sales of the Partnership's investments in Geoworks
Corporation, Nanodyne Incorporated, and NetChannel, Inc.
Total operating expenses were $987,624 and $1,289,606 for 1999 and
1998, respectively. As disclosed in Note 2 to the financial
statements, the Managing General Partners 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 $212,420 of
additional operating expenses in 1998 which related to prior
years. If the additional expense had been recorded in prior
years, total operating expenses would have been $987,624 and
$1,077,186 for 1999 and 1998, respectively.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
1998 compared to 1997
- ---------------------
Net loss was $5,352,748 in 1998 compared to net income of $255,700
in 1997. The change was primarily due to a $7,306,620 decrease in
net realized gain from sales of equity investments, a $782,649
increase in realized losses from investment write-downs, and a
$513,616 decrease in net realized gain from venture capital
limited partnership investments. These changes were partially
offset by a $3,242,087 increase in the change in net unrealized
fair value of equity investments.
During 1998, net realized loss from sales of equity investments of
$1,535,862 was substantially attributable to sales of the
Partnership's investments in Geoworks Corporation, Nanodyne
Incorporated, and NetChannel, Inc. During 1997, net realized gain
of $5,770,758 primarily resulted from the sales of shares in
Geoworks Corporation, PolyMedica Industries, Inc., TheraTx, Inc.,
SyStemix, Inc., and Thermo Electron Corporation.
During 1998, the Partnership recorded realized losses from
investment write-downs of $836,249 primarily due to a portfolio
company in the environmental industry. During 1997, write-downs
of $53,600 were attributable to a portfolio company in the
computer systems and software industry.
During 1998 and 1997, the Partnership recorded net realized gains
from venture capital limited partnership investments of $108,591
and $622,207, respectively. These gains represented distributions
from profits of certain venture capital limited partnerships.
During 1998, the decrease in fair value of equity investments of
$1,639,131 was substantially attributable to portfolio companies
in the medical/biotechnology and computers and computer equipment
industries. These decreases were partially offset by increases in
portfolio companies in the environmental industry. In 1997, the
decrease in fair value of $4,881,218 was primarily attributable to
decreases related to stock sales, partially offset by increases in
portfolio companies in the medical/biotechnology and
communications industries.
Total operating expenses were $1,289,606 and $1,166,765 for 1998
and 1997, respectively. As disclosed in Note 2 to the financial
statements, the Managing General Partners 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 $212,420 of
additional operating expenses in 1998, of which $28,599 and
$183,821 related to 1997 and prior years, respectively. If the
additional expense had been recorded in prior years, total
operating expenses would have been $1,077,186 and $1,195,364 for
1998 and 1997, respectively.
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. The Management Committee is responsible for the
management and administration of the Partnership. The members of
the Management Committee consist of three Individual General
Partners and a representative from each of Technology Funding
Ltd., a California limited partnership ("TFL"), and its wholly-
owned subsidiary, Technology Funding Inc., a California
corporation ("TFI"). TFL and TFI are the Managing General
Partners. 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" 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
are 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 $282,321. The
fees are designed to compensate the Managing General Partners for
General Partner Overhead incurred in performing management duties
for the Partnership through December 31, 1999. General Partner
Overhead (as defined in the Partnership Agreement) includes the
General Partners' share of rent and utilities, and certain
salaries and benefits paid by Managing General Partners in
performing their obligations to the Partnership. As compensation
for their services, each of the Individual General Partners
receive $10,000 annually plus $1,000 and related expenses for each
attended meeting of the Management Committee. In 1999, $36,778 of
such fees were paid.
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 Managing General Partners nor any of their
officers, directors or partners own any Units. The Individual
General Partners each own eight Units; in March 1999, one of the
three Individual General Partners withdrew from his position and
his Units will be transferred to his successor. The Management
Committee controls 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 Managing General Partners or their officers
and partners other than as described above, in the notes to the
financial statements, or in the Prospectus.
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 February 26, 1988, included
in Registration Statement No. 33-10896 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).
INDEPENDENT AUDITORS' REPORT
----------------------------
The Partners
Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheets of Technology Funding
Partners III, L.P. (a Delaware 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
securities and notes owned, by correspondence with the individual
investee and borrowing companies, and a physical examination of those
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 Partners III, 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.
Albuquerque, New Mexico /S/KPMG LLP
March 29, 2000
BALANCE SHEETS
- --------------
December 31,
------------------------
1999 1998
-------- --------
ASSETS
Equity investments (cost basis of
$20,194,582 and $20,686,838 for 1999
and 1998, respectively) $36,642,407 21,029,455
Notes receivable, net (cost basis
of $20,824 and $202,777 for 1999
and 1998, respectively) 20,824 202,777
---------- ----------
Total investments 36,663,231 21,232,232
Cash and cash equivalents 1,560,773 3,160,675
Due from related parties 66,844 23,135
Other assets 2,343 4,109
---------- ----------
Total assets $38,293,191 24,420,151
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 73,159 66,479
Other liabilities 3,836 15,142
---------- ----------
Total liabilities 76,995 81,621
Commitments, contingencies, and subsequent
events (Notes 2, 4, 8, 9, and 10)
Partners' capital
(160,000 Limited Partner Units
outstanding) 38,216,196 24,338,530
---------- ----------
Total liabilities
and partners' capital $38,293,191 24,420,151
========== ==========
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
Income:
Notes receivable interest $ 21,611 19,640 55,071
Short-term investment interest 88,137 145,385 283,411
Other income 613 599 3,125
--------- --------- ---------
Total income 110,361 165,624 341,607
Costs and expenses:
Management fees 282,321 280,034 334,168
Individual General
Partners' compensation 36,778 46,081 43,121
Operating expenses:
Administrative and
investor services 560,706 696,680 608,253
Investment operations 214,860 325,684 328,943
Computer services 130,828 181,617 134,884
Professional fees 81,230 85,625 94,685
---------- --------- ---------
Total operating expenses 987,624 1,289,606 1,166,765
---------- --------- ---------
Total costs and expenses 1,306,723 1,615,721 1,544,054
---------- --------- ---------
Net operating loss (1,196,362) (1,450,097) (1,202,447)
Net realized gain from venture
capital limited partnership
investments 135,893 108,591 622,207
Net realized (loss) gain from
sales of equity investments (883,446) (1,535,862) 5,770,758
Realized losses from
investment write-downs -- (836,249) (53,600)
---------- --------- ---------
Net realized (loss) income (1,943,915) (3,713,617) 5,136,918
Change in net unrealized fair
value of equity investments 16,105,208 (1,639,131) (4,881,218)
---------- --------- ---------
Net income (loss) $14,161,293 (5,352,748) 255,700
========== ========= =========
Net income (loss) per Unit $ 68.39 (28.46) 1.02
========== ========= =========
See accompanying notes to financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 1999, 1998 and 1997:
Reclassified-(see Note 1)
------------------------
Limited General
Partners Partners Total
-------- -------- -----
Partners' capital,
December 31, 1996 $33,189,881 524,964 33,714,845
Net income 163,320 92,380 255,700
Tax distribution (3,960,000) (319,267) (4,279,267)
---------- --------- ----------
Partners' capital,
December 31, 1997 29,393,201 298,077 29,691,278
Net loss (4,553,191) (799,557) (5,352,748)
---------- --------- ----------
Partners' capital,
December 31, 1998 24,840,010 (501,480) 24,338,530
Net income 10,942,274 3,219,019 14,161,293
Tax distribution -- (283,627) (283,627)
---------- --------- ----------
Partners' capital,
December 31, 1999 $35,782,284 2,433,912 38,216,196
========== ========= ==========
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For The Years Ended December 31,
-----------------------------------
1999 1998 1997
------ ------ ------
Cash flows from operating
activities:
Interest and other income
received $ 97,378 144,919 286,537
Cash paid to vendors (335,836) (316,522) (332,753)
Cash paid to related parties (944,960) (1,403,679) (1,224,672)
--------- --------- ----------
Net cash used by operating
activities (1,183,418) (1,575,282) (1,270,888)
--------- --------- ----------
Cash flows from investing
activities:
Notes receivable issued (96,360) (234,806) --
Purchase of equity investments (2,626,060) (1,134,639) (6,825,868)
Repayments of convertible and
other notes receivable 198,844 450,712 --
Proceeds from sales of equity
investments 1,981,843 1,292,093 10,946,242
Distributions from venture
capital limited partnerships 408,876 57,669 417,458
--------- --------- ----------
Net cash (used) provided by
investing activities (132,857) 431,029 4,537,832
--------- --------- ----------
Cash flows from financing
activities:
Distributions to Limited
and General Partners (283,627) -- (4,279,267)
--------- --------- ----------
Net cash used by financing
activities (283,627) -- (4,279,267)
--------- --------- ----------
Net decrease in cash and
cash equivalents (1,599,902) (1,144,253) (1,012,323)
Cash and cash equivalents
at beginning of year 3,160,675 4,304,928 5,317,251
--------- --------- ----------
Cash and cash equivalents
at end of year $1,560,773 3,160,675 4,304,928
========= ========= ==========
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For The Years Ended December 31,
-----------------------------------
1999 1998 1997
------ ------ ------
Reconciliation of net income
(loss) to net cash used by
operating activities:
Net income (loss) $14,161,293 (5,352,748) 255,700
Adjustments to reconcile net
income (loss) to net cash
used by operating activities:
Net realized gain from
venture capital limited
partnership investments (135,893) (108,591) (622,207)
Net realized loss (gain)
from sales of equity
investments 883,446 1,535,862 (5,770,758)
Realized losses from
investment write-downs -- 836,249 53,600
Change in net unrealized
fair value of equity
investments (16,105,208) 1,639,131 4,881,218
Changes in:
Accrued interest on notes
receivable (12,983) (20,705) (55,069)
Accounts payable and
accrued expenses 6,680 (269) 8,447
Due to/from related parties 28,787 (103,668) (8,984)
Other, net (9,540) (543) (12,835)
---------- --------- ---------
Net cash used by operating
activities $(1,183,418) (1,575,282) (1,270,888)
========== ========= =========
Supplemental schedule of
non-cash investing activity:
Secured notes receivable
converted to equity
investments $ 75,868 -- --
========== ========= =========
Investment sales receivable
from affiliated partnership $ 72,496 -- --
========== ========= =========
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
- ------------
Technology Funding Partners III, L.P., (the "Partnership") is a limited
partnership organized under the laws of the State of Delaware on December
4, 1986, to make venture capital investments in new and developing
companies. The Partnership elected to be a business development company
under the Investment Company Act of 1940, as amended (the "Act"), and
operates as a nondiversified investment company as that term is defined in
the Act. The Managing General Partners are Technology Funding Ltd. ("TFL")
and Technology Funding Inc. ("TFI"), a wholly owned subsidiary of TFL.
There are generally three Individual General Partners; one Individual
General Partner withdrew from his position in March 1999 and a successor
will be designated.
For the period from December 5, 1986, through March 25, 1987, the
Partnership was inactive. The Partnership filed a registration statement
with the Securities and Exchange Commission on March 25, 1987, and
commenced selling units of limited partnership interest ("Units") in April
1987. On June 2, 1987, the minimum number of Units required to commence
Partnership operations (6,000) had been sold. The offering terminated with
160,000 Units sold on February 3, 1989. The Partnership was scheduled to
be dissolved on December 31, 1996, but the term was extended for a two-year
period to December 31, 1998, pursuant to unanimous approval by the
Management Committee on September 13, 1996. The Partnership term was
further extended to December 31, 2000 with an amendment by the General
Partners and approved by a majority of the Limited Partners. If no further
action is taken by the General Partners before this termination date, the
Partnership will be liquidated in accordance with the Partnership
agreement. The General Partners expect the Management Committee to vote in
favor of extending the term of the Partnership for one additional two-year
period. The Management Committee can exercise this right to extend the
Partnership under an amendment to the Partnership Agreement approved by a
vote of the Limited Partners in December 1997.
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
- ------------------------------------
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 3 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 3) to partners' capital accounts and, as
a result, may permit the acceleration of distributions to Partners to the extent allowable under
the Partnership Agreement.
The allocations of the net unrealized fair value increase reclassified in prior periods are as
follows:
Net Unrealized
Fair Value
Increase
Limited General From Cost of
Partners Partners Equity Investments Total
-------- -------- ------------------ -----
Partners' capital, December 31, 1996,
before reclassification $26,997,022 (145,143) 6,862,966 33,714,845
Allocation of net unrealized fair value
increase from cost 6,192,859 670,107 (6,862,966) --
---------- ------- --------- ----------
Partners' capital, December 31, 1996,
as reclassified $33,189,881 524,964 -- 33,714,845
========== ======= ========= ==========
Partners' capital, December 31, 1997,
before reclassification $27,670,313 39,217 1,981,748 29,691,278
Allocation of net unrealized fair value
increase from cost 1,722,888 258,860 (1,981,748) --
---------- ------- --------- ----------
Partners' capital, December 31, 1997,
as reclassified $29,393,201 298,077 -- 29,691,278
========== ======= ========= ==========
Partners' capital, December 31, 1998,
before reclassification $24,328,469 (332,556) 342,617 24,338,530
Allocation of net unrealized fair value
increase from cost 511,541 (168,924) (342,617) --
---------- ------- --------- ----------
Partners' capital, December 31, 1998,
as reclassified $24,840,010 (501,480) -- 24,338,530
========== ======== ========= ==========
The reclassifications of the change in net unrealized fair value of equity investments for prior
periods are as follows:
Limited General
Partners Partners Total
-------- -------- ---------
For the Year Ended December 31, 1997 $(4,469,971) (411,247) (4,881,218)
For the Year Ended December 31, 1998 (1,211,347) (427,784) (1,639,131)
Investments
- -----------
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 $14,819,273
and $6,797,268 at December 31, 1999 and 1998, respectively.
All investments which are not publicly traded are valued at fair market
value as determined by the Managing General Partners in the absence of
readily ascertainable market values. Investments valued under this method
were $21,823,134 and $14,232,187 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.
Venture capital limited partnership investments are initially recorded at
cost and are valued based on the fair value of the underlying
investments. Limited partnership distributions that are a return of
capital reduce the cost basis of the Partnership's investment.
Distributions from limited partnership cumulative earnings are reflected
as realized gains by the Partnership.
Where, in the opinion of the Managing General Partners, events indicate
that the fair value of equity and venture capital investments and
convertible and subordinated notes receivable 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" or "Net realized loss from venture capital limited
partnership investments" 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.
Notes Receivable
----------------
The secured and unsecured notes receivable portfolio includes accrued
interest less the allowance for loan losses. The portfolio approximates
fair value through inclusion of an allowance for loan losses. Allowance
for loan losses is reviewed quarterly by the Managing General Partners
and is adjusted to a level deemed adequate to cover possible losses
inherent in notes and unfunded commitments. Notes receivable are placed
on nonaccrual status when, in the opinion of the Managing General
Partners, the future collectibility of interest or principal is in doubt.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents are principally comprised of cash invested in
money market instruments and commercial paper and are stated at cost plus
accrued interest. The Partnership considers all money market and short-
term investments with an original maturity of three months or less to be
cash equivalents.
Provision for Income Taxes
- --------------------------
No provision for income taxes has been made by the Partnership as the
Partnership is not directly subject to taxation. The partners are to
report their respective shares of Partnership income or loss on their
individual tax returns.
The accompanying financial statements are prepared using generally
accepted accounting principles which may not equate to tax accounting.
The total book cost basis exceeds the tax cost basis of investments by
$348,407 as of December 31, 1999.
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 160,000 for the years ended December 31,
1999, 1998 and 1997 into the 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.
2. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
------ ------ ------
Management fees $282,321 280,034 334,168
Individual General
Partners' compensation 36,778 46,081 43,121
Reimbursable operating expenses:
Administrative and investor
services 322,351 519,669 401,967
Investment operations 201,469 272,610 309,431
Computer services 130,828 181,617 127,001
Management fees are equal to one quarter of one percent of the fair value
of Partnership assets for each quarter. Management fees compensate the
Managing General Partners solely for General Partner Overhead (as defined
in the Partnership Agreement) incurred in supervising the operation and
management of the Partnership and the Partnership's investments. The
management fees are payable monthly in arrears. Amounts due to related
parties for management fees were $26,758 and $23,754 at December 31, 1999
and 1998, respectively.
As compensation for their services, each of the Individual General
Partners receives $10,000 annually plus $1,000 and related expenses for
each management committee meeting attended. The Individual General
Partners each own 8 Units; in March 1999, one of the Individual General
Partners withdrew from his position and his Units will be transferred to
his successor when appointed.
The Partnership reimburses the Managing General Partners for operating
expenses incurred in connection with the business of the Partnership.
Reimbursable operating expenses include expenses (other than
Organizational and Offering and General Partner Overhead) such as
investment operations, administrative and investor services, and computer
services. There was $21,106 and $46,889 due from related parties for
operating expenses at December 31, 1999 and 1998, respectively.
The Partnership, at December 31, 1999, has recorded a $72,496 receivable
from an affiliated partnership for proceeds from equity investment sales.
There was no such receivable at December 31, 1998.
The Managing General Partners allocate 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
re-evaluated. The Managing General Partners 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
$212,420 consisting of $28,599 and $183,821 for 1997 and prior years,
respectively. Had the additional expenses been recorded in prior years,
operating expenses would have been $1,077,186 and $1,195,364 for 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 TFL, charges the Partnership for
its share of computer support costs. These amounts are included in
computer services expenses.
Officers of the Managing General Partners occasionally receive stock
options as compensation for serving on the Boards of Directors of
portfolio companies. It is the Managing General Partners' policy that
all such compensation be transferred to the investing partnerships. If
the options are non-transferable, they are not recorded as an asset of
the Partnership. Any profit from the exercise of such options will be
transferred if and when the options are exercised and the underlying
stock is sold by the officers. Any such profit is allocated amongst the
Partnership and affiliated Partnerships based upon their proportionate
investments in the portfolio company. At December 31, 1999, the
Partnership had an indirect interest in non-transferable Thermatrix Inc.
options at an exercise price higher than the current market value. At
December 31, 1999, the Partnership and affiliated Partnerships had an
indirect interest in non-transferable Endocare, Inc. and White Electronic
Designs Corporation options with a fair market value of $170,188.
3. 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 such deficits have been eliminated; then
(ii) Second, to the partners as necessary to offset net loss
previously allocated under (b)(ii) below and sales
commissions; then
(iii)Third, 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, and
20% to the Managing 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.
(b) Losses:
(i) First, to the partners as necessary to offset the net profit
previously allocated to the partners under (a)(iii) above;
then
(ii) 99% to the Limited Partners and 1% to the Managing General
Partners.
Losses allocable to Limited Partners in excess of their capital account
balances will be allocated to the Managing General Partners. Net profits
thereafter, otherwise allocable to those Limited Partners, are allocated
to the Managing General Partners to the extent of such losses.
Losses from unaffiliated venture capital limited partnership investments
are allocated pursuant to section (b) above. Gains are allocated 99% to
Limited Partners and 1% to the Managing General Partners.
In no event are the Managing General Partners allocated less than 1% of
the net realized profit or loss of the Partnership.
4. Equity Investments
------------------
At December 31, 1999, and December 31, 1998, equity investments consisted of:
December 31, 1999 December 31, 1998
Principal ----------------- ------------------
Industry (1)/ Investment Amount or Cost Fair Cost Fair
Company Position Date Shares Basis Value Basis Value
- ------------- -------- ---- ------ ----- ----- ----- -----
Communications--16.5%
- ---------------------
Illinois
Superconductor Common
Corporation shares 1999 5,810 $87,847 4,754 -- --
Illinois
Superconductor Common
Corporation share
warrants at
$1.47-$9.56;
expiring
2000-2002 1999 2,624 18,858 -- -- --
MediaOne Preferred
Group, Inc. shares 1997 -- -- -- 10,447 20,361
NetChannel, Escrowed
Inc. sales
proceeds 1998 -- -- -- 161,983 161,983
NewsEDGE Common
Corporation shares 1998 -- -- -- 46,882 36,542
Women.com Common 1996-
Networks, Inc.(a) shares 1999 580,956 1,609,163 6,296,111 1,270,594 1,799,956
--------- --------- --------- ---------
1,715,868 6,300,865 1,489,906 2,018,842
--------- --------- --------- ---------
Computers and Computer Equipment--10.7%
- ---------------------------------------
Splash Technology Common
Holdings, Inc. Shares 1997 -- -- -- 198,812 37,250
White Electronic
Designs Common 1994-
Corporation (b) shares 1996 822,983 2,958,084 4,073,766 2,958,084 959,608
--------- --------- --------- ---------
2,958,084 4,073,766 3,156,896 996,858
--------- --------- --------- ---------
Computer Systems and Software--3.6%
- -----------------------------------
Photon Dynamics, Common
Inc. shares 1996 37,500 225,000 1,366,875 300,000 258,450
Versant Common
Corporation shares 1997 -- -- -- 13,250 3,416
--------- --------- --------- ---------
225,000 1,366,875 313,250 261,866
--------- --------- --------- ---------
Electronic Design Automation--1.5%
- ----------------------------------
Cadence Design Common
Systems, Inc. shares 1996 24,000 313,439 557,400 313,439 674,400
Synopsys, Inc. Common
shares 1997 -- -- -- 560,005 735,000
--------- --------- --------- ---------
313,439 557,400 873,444 1,409,400
--------- --------- --------- ---------
Environmental--3.5%
- -------------------
Conversion
Technologies
International, Common
Inc. shares 1996 -- -- -- 0 692
Conversion
Technologies
International, Preferred 1997-
Inc. shares 1998 -- -- -- 0 2,365
Naiad
Technologies, Preferred 1995-
Inc. shares 1997 -- -- -- 405,202 680,330
Thermatrix Inc. Common
(b) shares 1996 65,970 346,338 62,532 346,338 203,860
Thermatrix Inc. Preferred
(a) (b) shares 1999 1,000 990,000 1,153,846 -- --
Thermatrix Inc. Common share
(b) warrant
at $5.31;
expiring
2002 1999 35,000 10,000 0 -- --
Triangle
Biomedical Common
Sciences, Inc.(a) shares 1999 4,099 79,792 114,772 -- --
Triangle Common
Biomedical share
Sciences, Inc.(a) warrants at
$28.00;
expiring
2009 1999 4,099 4,099 4,099 -- --
--------- --------- --------- ---------
1,430,229 1,335,249 751,540 887,247
--------- --------- --------- ---------
Industrial/Business Automation--0.0%
- ------------------------------------
PRI Automation, Common 1998-
Inc. shares 1999 7 315 445 1,740 1,868
--------- --------- --------- ---------
315 445 1,740 1,868
--------- --------- --------- ---------
Information Technology--13.7%
- -----------------------------
WorldRes, Inc. Preferred 1997-
(a) (b) shares 1999 434,392 1,708,124 5,047,638 1,265,627 1,336,633
WorldRes, Inc. Preferred
(a) (b) share
warrants at
$3.70-$4.63;
expiring 1997-
2002-2003 1998 24,305 195 176,961 28 0
--------- --------- --------- ---------
1,708,319 5,224,599 1,265,655 1,336,633
--------- --------- --------- ---------
Medical/Biotechnology--43.6%
- ----------------------------
Acusphere, Inc. Preferred 1995-
(a) shares 1998 368,210 797,251 1,215,093 797,251 1,215,093
ADESSO Specialty
Services
Organization Preferred
Inc. (a) (b) shares 1997 196,944 1,264,006 1,654,330 1,264,006 1,654,330
Avalon Imaging, Preferred
Inc. shares 1998 -- -- -- 90,071 90,071
Biex, Inc. (a) (b) Preferred 1993-
shares 1999 777,021 1,023,540 1,023,540 663,916 1,527,518
Biex, Inc. (a) (b) Preferred
share warrant
at $1.00;
exercised
1999 1994 -- -- -- 8 35,310
Biex, Inc. (a) (b) Preferred
share warrants
at $2.50;
expiring 1998-
2003 1999 59,653 0 0 0 0
Cardiac
Pathways Common
Corporation shares 1991 -- -- -- 72,267 29,164
CardioTech
International, Common
Inc. shares 1996 -- -- -- 397,788 293,400
CareCentric
Solutions, Preferred 1995-
Inc. shares 1997 -- -- -- 514,257 384,432
CareCentric Common
Solutions, share
Inc. warrant
at $.15;
expiring
2002 1997 -- -- -- 34,932 34,932
CareCentric Convertible
Solutions, Inc. notes (2) 1998 -- -- -- 102,327 102,327
CollaGenex
Pharmaceuticals, Common
Inc. shares 1999 4,401 108,100 98,714 -- --
CV Therapeutics, Common
Inc. share
warrant
at $20.00;
expiring
2000 1995 2,880 1,152 14,869 1,152 0
CV Therapeutics, Common
Inc. shares 1996 7,931 79,987 199,568 508,819 159,346
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 4,103,635 1,078,752 756,293
Hybridon, Inc. Common
shares 1998 -- -- -- 42,161 1,832
Inhale
Therapeutic Common
Systems, Inc. shares 1999 1,850 69,889 78,671 -- --
LifeCell Common 1992-
Corporation shares 1997 351,060 1,263,574 1,803,746 1,263,574 1,522,898
Matrix
Pharmaceutical, Common 1992-
Inc. shares 1995 321,633 800,439 1,471,471 800,439 856,509
Molecular
Geriatrics Common
Corporation (a) shares 1993 23,585 125,000 47,170 125,000 47,170
Oxford Common
GlycoSciences Plc shares 1993 106,772 499,963 886,208 499,963 447,054
Peptide
Therapeutics Common
Group Plc shares 1998 978 2,659 812 2,659 772
Pharmadigm, Preferred 1993-
Inc. (a) shares 1998 546,143 945,039 1,321,666 945,039 1,291,174
Pharmadigm, Preferred
Inc. (a) share
warrants at
$2.00-$2.50;
expiring 1995-
2000-2001 1997 19,361 2,772 4,215 2,772 5,979
Pharmos Common
Corporation shares 1995 60,331 45,248 122,170 45,248 95,444
Pherin
Pharmaceuticals, Preferred
Inc. (a) shares 1991 200,000 200,000 1,060,000 200,000 400,000
Simione Central Preferred
Holdings, Inc.(a) shares 1999 127,806 382,875 136,593 -- --
Spectrascan
Health Preferred
Services, Inc.(a) shares 1994 148,439 1,226,202 1,383,117 1,226,202 1,383,117
Spectrascan
Health Common
Services, Inc.(a) shares 1994 12,611 0 37,833 0 37,833
---------- ---------- ---------- ----------
10,253,948 16,663,421 10,678,603 12,371,998
---------- ---------- ---------- ----------
Retail/Consumer Products--0.0%
- ------------------------------
YES!
Entertainment Common
Corporation shares 1995 33,333 0 3,000 0 1,533
---------- ---------- ---------- ----------
0 3,000 0 1,533
---------- ---------- ---------- ----------
Venture Capital Limited Partnership Investments--2.9%
- -----------------------------------------------------
Alta IV, Limited Ltd.
Partnership (a) Partnership
interests various $1,000,000 146,698 100,991 146,698 123,215
Batterson,
Johnson, and Ltd.
Wang Limited Partnership
Partnership (a) interests various $500,000 68,360 129,198 280,634 180,888
Columbine Ltd.
Venture Fund II, Partnership
L.P. (a) interests various $750,000 469,667 424,586 653,769 690,760
Delphi Ltd.
Ventures, L.P. Partnership
(a) interests various $1,000,000 652,842 202,180 652,842 278,901
Medical Science Ltd.
Partners, L.P. Partnership
(a) interests various $500,000 215,424 195,121 318,583 383,845
O,W&W Pacrim Ltd.
Investments Partnership
Limited (a) interests various 200 12,950 10,859 87,650 37,107
Trinity Ventures Ltd.
IV, L.P. (a) Partnership
interests various $125,008 23,439 53,852 15,628 48,494
---------- ---------- ---------- ----------
1,589,380 1,116,787 2,155,804 1,743,210
---------- ---------- ---------- ----------
Total equity investments--96.0% $20,194,582 36,642,407 20,686,838 21,029,455
========== ========== ========== ==========
Legends and footnotes:
- -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(a) Equity security acquired in a private placement transaction; resale may be subject to
certain selling restrictions.
(b) Portfolio company is an affiliate of the Partnership; resale may be subject to certain
selling restrictions.
(1) Represents the total fair value of a particular industry segment as a percentage of
partners' capital at 12/31/99.
(2) The Partnership has no income-producing equity investments except for convertible and
subordinated notes which include accrued interest. Interest rates on such notes range from
5% to 10%.
Marketable Equity Securities
- ----------------------------
At December 31, 1999 and 1998, marketable equity securities had aggregate
costs of $8,032,948 and $9,045,454, respectively, and aggregate fair values
of $14,819,273 and $6,797,268, respectively. The net unrealized gain at
December 31, 1999 included gross gains of $7,005,352 and the net unrealized
loss at December 31, 1998 included gross gains of $911,588.
Avalon Imaging, Inc.
- --------------------
In October 1999, the company agreed to sell its assets. The Partnership
received no proceeds and realized a loss of $90,071.
Biex, Inc.
- ----------
In March 1999, the Partnership purchased 132,743 Series F Preferred shares
for $345,132. In May 1999, the Partnership received a stock dividend of
18,786 Preferred shares with a fair value of $20,253. In October 1999, the
Partnership exercised a warrant and purchased 14,486 Series B Preferred
shares for $14,492. The company's failure to meet certain revenue targets
established in the Series F Preferred shares round had a dilutive impact on
the Partnership's expected return and, as a result, the Partnership
recorded a $898,904 decrease in fair value at December 31, 1999.
Cardiac Pathways Corporation
- ----------------------------
In March 1999, the Partnership sold its entire investment in the company
for proceeds of $19,618 and realized a loss of $52,649.
CardioTech International, Inc.
- ------------------------------
In December 1999, the Partnership sold its entire investment in the company
for proceeds of $60,485 and realized a loss of $337,303.
CV Therapeutics, Inc.
- ---------------------
In 1999, the Partnership sold 25,793 common shares for proceeds of $451,592
and realized a gain of $22,760.
Endocare, Inc.
- --------------
In July 1999, the Partnership exercised a warrant and purchased 112,500
common shares for $337,500.
Inhale Therapeutic Systems, Inc.
- --------------------------------
In December 1999, the Partnership purchased 1,850 common shares for
$69,889.
NetChannel, Inc.
- ----------------
In 1999, the Partnership received the total escrowed proceeds of $161,983
related to the company's sale to America Online in May 1998.
Pherin Pharmaceuticals, Inc.
- ----------------------------
In May 1999, the company completed a new round of financing in which the
Partnership did not participate. The pricing of this round, in which third
parties participated, indicated a $660,000 increase in the fair value of
the Partnership's investment.
Photon Dynamics, Inc.
- ---------------------
In October 1999, the Partnership sold 12,500 shares for total proceeds of
$314,219 and realized a gain of $239,219.
Simione Central Holdings, Inc. (formerly CareCentric Solutions, Inc.)
- --------------------------------------------------------------------
In August 1999, CareCentric Solutions, Inc. was acquired by Simione Central
Holdings, Inc. The Partnership received 127,806 Simione common shares and
realized a loss of $361,091 on the sale.
Splash Technology Holding, Inc.
- -------------------------------
In December 1999, the Partnership sold its entire investment in the company
for total proceeds of $45,469 and realized a loss of $153,343.
Synopsys, Inc.
- --------------
In January 1999, the Partnership sold its entire investment in the company
for proceeds of $812,000 and realized a gain of $251,995.
Thermatrix Inc.
- ---------------
In June 1999, the Partnership purchased 1,000 Series E Preferred shares and
a warrant for 35,000 common shares for $1,000,000 in a private placement.
The Preferred shares are convertible to common shares, with the number of
common shares to be received determined by dividing the aggregate purchase
price of the shares and warrant by the lesser of $5.00 per share or 85% of
the common share market price on the conversion date. At December 31,
1999, the Preferred shares would have been convertible into 1,758,242
common shares; the Preferred shares were valued by applying the publicly
traded market price of the common shares to the number of common shares
into which the Preferred shares were convertible at December 31, 1999 and
applying a discount for selling restrictions.
Triangle Biomedical Sciences, Inc. (formerly Naiad Technologies, Inc.)
- ---------------------------------------------------------------------
In August 1999, Naiad Technologies, Inc. was acquired by Triangle
Biomedical Sciences, Inc., a privately held company. The Partnership
received 479 Triangle common shares and a warrant for 479 Triangle common
shares and realized a loss of $391,311 on the sale. In conjunction with
the sale, the Partnership agreed to advance $70,000 to Naiad to settle
outstanding liabilities for which the Partnership received 3,620 Triangle
common shares and warrants for 3,620 common shares.
Women.com Networks, Inc.
- ------------------------
In May 1999, the Partnership purchased 33,857 Series E Preferred shares for
$338,570. In October 1999, the company completed an initial public
offering priced at $10 per common share and the Partnership's Preferred
shares were converted into 580,956 common shares.
WorldRes, Inc.
- --------------
In March 1999, the Partnership purchased 73,140 Series D Preferred shares
for $442,497. In November 1999, the company completed an additional round
of financing in which the Partnership did not participate. The pricing of
these rounds, in which third parties participated, indicated a $3,445,302
increase in the fair value of the Partnership's investment in the company's
Preferred shares and warrants at December 31, 1999.
Venture Capital Limited Partnerships
- ------------------------------------
The Partnership made additional investments totaling $7,813 in venture
capital limited partnerships during the year ended December 31, 1999. The
Partnership received cash distributions of $408,876 from Alta IV, Limited
Partnership, Batterson, Johnson and Wang, Limited Partnership, Delphi
Ventures, L.P., Medical Science Partners, LP, O, W & W Pacrim Investments
Limited and Trinity Ventures IV, L.P. The Partnership also received stock
distributions of Illinois Superconductor Corporation, Informix Corporation,
PRI Automation, Inc., CollaGenex Pharmaceuticals, Inc. and Bolder
Technologies, Inc. with fair values totaling $301,254. Distributions
totaling $135,893 were recorded as realized gains and distributions
totaling $574,237 were recorded as returns of capital.
The Partnership recorded a $59,999 decrease in fair value as a result of a
net decrease in the fair value of the underlying investments of the
partnerships, caused, in part, by distributions received from the
partnerships.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations or the elimination of a discount relating to selling
restrictions for publicly traded portfolio companies. Portions of the
Partnership's Simione Central Holdings, Inc., Women.com Networks, Inc. and
Thermatrix Inc. investments are restricted.
5. Change in Net Unrealized Fair Value of Equity Investments
---------------------------------------------------------
In accordance with the accounting policy as stated in Note 1, the
Statements of Operations includes a line item entitled "Change in net
unrealized fair value of equity investments." The table below discloses
details of the changes:
For the Years Ended December 31,
----------------------------------
1999 1998 1997
------ ------ ------
Increase (decrease) in fair value
from cost of marketable equity
securities $ 6,786,325 (2,248,186) (389,092)
Increase in fair value from cost of
non-marketable equity securities 9,661,500 2,590,803 2,370,840
---------- --------- ---------
Net unrealized fair value increase
from cost at end of year 16,447,825 342,617 1,981,748
Net unrealized fair value increase
from cost at beginning of year 342,617 1,981,748 6,862,966
---------- --------- ---------
Change in net unrealized fair value
of equity investments $16,105,208 (1,639,131) (4,881,218)
========== ========= =========
6. Notes Receivable
----------------
Activity from January 1 through December 31 consisted of:
1999 1998
------ ------
Balance, beginning of year $202,777 --
Secured notes receivable issued 96,360 35,962
Unsecured notes receivable issued -- 198,844
Repayments of notes receivable (198,844) (35,962)
Secured notes converted to equity investment (75,868) --
(Decrease) increase in accrued interest (3,601) 3,933
------- -------
Balance, end of year $ 20,824 202,777
======= =======
The interest rate on notes receivable at December 31, 1999 was 16%.
7. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 1999 and 1998 consisted of:
1999 1998
------ ------
Demand accounts $ 161,015 55,472
Money-market accounts 1,399,758 3,105,203
--------- ---------
Total $1,560,773 3,160,675
========= =========
8. Distributions
-------------
In the third quarter of 1999, a tax distribution was paid to the General
Partners totaling $283,627. Subsequent to December 31, 1999, a quarterly
tax distribution was declared and paid to the General Partners totaling
$1,238,366.
9. Commitments and Contingencies
-----------------------------
The Partnership is a party to financial instruments with off-balance-sheet
risk in the normal course of its business. Generally, these instruments
are commitments for future equity investment fundings, venture capital
limited partnership investments, 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, there were
no unfunded investment commitments to portfolio companies and venture
capital limited partnerships.
The Partnership uses the same credit policies in making these commitments
and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend financing are agreements to lend to a company as long
as there are no violations of any conditions established in the contract.
The credit lines generally have fixed termination dates or other
termination clauses. Since many of the commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. All convertible and
secured note commitments funded require collateral specified in the
agreements.
10. Subsequent Events
-----------------
Subsequent to December 31, 1999, the Partnership sold publicly traded
shares in seven portfolio companies for proceeds totaling $15,529,024 and a
realized gain of $11,062,388. The following table discloses details of the
transactions:
Additional
12/31/99 Sale Value Realized
Company Fair Value Proceeds Realized Gain (Loss)
- ----------- ---------- -------- ---------- ----------
CV Therapeutics, Inc. $ 199,568 214,137 14,569 134,150
Illinois Superconductor
Corporation 4,754 7,989 3,235 (79,858)
Inhale Therapeutic
Systems, Inc. 78,671 203,348 124,677 133,459
Matrix Pharmaceutical, Inc. 1,362,750 4,543,436 3,180,686 3,817,818
Oxford GlycoSciences Plc 886,208 3,823,992 2,937,784 3,324,029
Pharmos Corporation 122,170 191,382 69,212 146,134
White Electronic Designs
Corporation 4,073,766 6,544,740 2,470,974 3,586,656
--------- ---------- --------- ----------
Total $6,727,887 15,529,024 8,801,137 11,062,388
========= ========== ========= ==========
Significant changes in the fair value of the Partnership's investments
subsequent to December 31, 1999 are:
Increase
(Decrease)
12/31/99 03/20/00 in
Company Fair Value Fair Value Fair Value
- ----------- ---------- ---------- ----------
Endocare, Inc. $ 4,103,635 9,488,883 5,385,248
LifeCell Corporation 1,803,746 2,808,480 1,004,734
Photon Dynamics, Inc. 1,366,875 3,093,750 1,726,875
Women.com Networks, Inc. 6,296,111 4,411,635 (1,884,476)
---------- ---------- ---------
Total $13,570,367 19,802,748 6,232,381
========== ========== =========
The March 20, 2000 fair value is based on the closing price of the
portfolio company's publicly traded common shares on that date with an
illiquidity discount for selling restrictions where applicable.
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 PARTNERS III, 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.