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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, 2000
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.
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(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
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(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 Registrant's
Proxy Statement relating to the Registrant's Meeting of Limited
Partners held on December 8, 2000 are incorporated by reference into
Part III of this Form 10-K where indicated.
Forward-Looking Statements
- --------------------------
The Private Securities Litigation Reform Act of 1995 (the Act)
provides a safe harbor for forward-looking statements made by or on
behalf of the Partnership. The Partnership and its representatives
may from time to time make written or oral statements that are
"forward-looking", including statements contained in this report and
other filings with the Securities and Exchange Commission, and reports
to the Partnership's shareholders and news releases. All statements
that express expectations, estimates, forecasts and projections are
forward-looking statements within the meaning of the Act. In
addition, other written or oral statements which constitute forward-
looking statements may be made by or on behalf of the Partnership.
Words such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", "projects", "forecasts", "may", "should",
variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks,
uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in or suggested by such forward-looking
statements. The Partnership undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
PART I
Item 1. BUSINESS
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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. 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's original contributed capital was $40,040,054,
consisting of $40,000,000 from Limited Partners for 160,000
units and $40,054 from the General Partners, Technology
Funding Ltd. (TFL) and Technology Funding Inc. (TFI). The
General Partners do not own any units.
The principal investment objectives of the Partnership are
long-term capital appreciation from venture capital
investments in new and developing companies and preservation
of Limited Partner capital through risk management and active
involvement with such companies (portfolio companies). The
Partnership's investments in portfolio companies primarily
consist of equity securities such as common and preferred
shares, but also include debt convertible into equity
securities and warrants and options to acquire equity
securities. Although venture capital investments offer the
opportunity for significant gains, such investments involve a
high degree of business and financial risk that can result in
substantial losses. Among these are the risks associated
with investment in companies in an early stage of development
or with little or no operating history, companies operating
at a loss or with substantial variations in operating results
from period to period, and companies with the need for
substantial additional capital to support expansion or to
achieve or maintain a competitive position. Such companies
may face intense competition, including competition from
companies with greater financial resources, more extensive
development, manufacturing, marketing and service
capabilities, and a larger number of qualified managerial and
technical personnel. There is no ready market for many of
the Partnership's investments. The Partnership's investments
in portfolio companies are generally subject to restrictions
on sale because they were acquired from the issuer in private
placement transactions or because the Partnership is an
affiliate of the issuer.
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 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 Management Committee and approved by a
majority of the Limited Partners. On October 25, 2000, the
Management Committee voted to extend the life of the
Partnership to December 31, 2002.
Item 2. PROPERTIES
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The Registrant has no material physical properties.
Item 3. LEGAL PROCEEDINGS
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In October 2000, Kanematsu Corporation, a creditor of one of
the Partnership's portfolio companies, initiated an
arbitration proceeding against the Partnership, two
affiliated partnerships, and a fourth co-investor. Kanematsu
is seeking to recover $2,000,000, the purchase price in a
contract by which the Partnership and the other entities are
alleged to have agreed to purchase certain debt securities of
the portfolio company from Kanematsu. The Partnership and
affiliated partnerships have asserted counterclaims against
Kanematsu. An arbitrator has been selected and a hearing has
been scheduled. The Partnership intends to defend its
position vigorously in this arbitration. It is the Managing
General Partners' belief that the Partnership will ultimately
prevail in this matter, although there can be no assurance in
this regard. Accordingly, the Partnership has not accrued
any liability associated with the arbitration proceeding.
From time to time, the Partnership is subject to routine
litigation incidental to the business of the Partnership.
Although there can be no assurances as to the ultimate
disposition of these matters and the proceeding disclosed
above, it is the opinion of the Managing General Partners,
based upon the information available at this time, that the
expected outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the
results of operations and financial condition of the
Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
A meeting of the Limited Partners of the Partnership was held
on December 8, 2000. At that meeting, the Limited Partners
elected three Individual General Partners to serve as members
of the Partnership's Management Committee each for a three-
year term: G. Whitney Baines, Ph.D. (155,207 Units voting
for, 4,793 Units voting against or abstaining), A. Logan
Craft (155,253 Units voting for, 4,747 Units voting against
or abstaining) and Michael S. Tempesta, Ph.D. (155,067 Units
voting for, 4,933 Units voting against or abstaining). Two
Managing General Partners were also elected to serve as
members of the Partnership's Management Committee each for a
three-year term: Technology Funding Inc. (154,845 Units
voting for, 5,155 voting against or abstaining) and
Technology Funding Limited (154,801 Units voting for, 5,199
voting against or abstaining). The Limited Partners also
ratified the selection of Arthur Andersen LLP as independent
public accountants (154,630 Units voting for, 1,248 Units
voting against and 4,122 Units abstaining). In addition, the
Limited Partners approved: (1) an amendment to Article 2,
Section (m) of the Partnership Agreement so that the salary
and benefits of a controlling person of a Managing General
Partner directly involved in carrying out the business of the
Partnership are expenses of the Partnership (130,530 Units
voting for, 21,604 Units voting against and 7,866 Units
abstaining), (2) an amendment to Article 1.03 of the
Partnership Agreement to clarify that the Partnership's
investment objective is to maximize long-term capital
appreciation for the Limited Partners up to and including the
final day of the Partnership's operations prior to
dissolution (146,965 Units voting for, 7,322 Units voting
against and 5,713 Units abstaining), and (3) an amendment to
Article 5.04 of the Partnership Agreement to clarify the
Limited Partners' right to vote under the Investment Company
Act of 1940, as amended (149,371 Units voting for, 4,964
Units voting against and 5,665 Units abstaining).
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, 2000, there were 5,656 record holders of
Units.
(c) The Registrant, being a partnership, does not pay
dividends. Cash distributions, however, may be made to
the partners pursuant to the Partnership Agreement.
Item 6. SELECTED FINANCIAL DATA
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For the Years Ended and As of December 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Total investment income $ 1,158,257 110,361 165,624 341,607 522,715
Net investment loss (1,667,706) (1,196,362) (1,450,097) (1,202,447) (856,975)
Net realized gain from
venture capital limited
partnership investments 587,735 135,893 108,591 622,207 814,400
Net realized gain (loss) from
sales of equity investments 10,703,511 (883,446) (1,535,862) 5,770,758 3,414,575
Realized losses from
impairment write-downs (2,392,941) -- (836,249) (53,600) (3,041,310)
Recovery from investments
previously written off -- -- -- -- 8,775
Net realized loss on foreign
currency (63,370) -- -- -- --
(Decrease) increase in unrealized
appreciation(depreciation):
Equity investments (20,273,430) 16,105,208 (1,639,131) (4,881,218) (3,647,984)
Notes receivable (4,839,250) -- -- -- 309,000
Net (decrease) increase in
partners' capital resulting
from operations (17,945,451) 14,161,293 (5,352,748) 255,700 (2,999,519)
Net (decrease) increase in
partners' capital resulting
from operations per Unit (1) (94.91) 68.39 (28.46) 1.02 (0.20)
Total assets 20,832,769 38,293,191 24,420,151 29,855,568 33,890,281
Distributions declared 2,862,928 283,627 -- 4,279,267 159,809
Distributions declared
per Unit (2) -- -- -- 24.75 --
(1) See Notes 1 and 3 to the Financial Statements for a description of the method of calculation of
net increase (decrease) in partners' capital resulting from operations 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
-----------------------------------
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Partnership operates as a business development company under
the Investment Company Act of 1940 and makes venture capital
investments in new and developing companies. The Partnership's
financial condition is dependent upon the success of the portfolio
companies. There is no ready market for many of the Partnership's
investments. It is possible that some of its venture capital
investments may be a complete loss or may be unprofitable and that
others will appear likely to become successful, but may never
realize their potential. The valuation of the Partnership's
investments in securities for which there are no available market
quotes is subject to the estimate of the Managing General Partners
in accordance with the valuation guidance described in Note 1 to
the financial statements. In the absence of readily obtainable
market values, the estimated fair value of the Partnership's
investments may differ significantly from the values that would
have been used had a ready market existed.
For the year ended December 31, 2000, net cash used by operating
activities totaled $2,118,612. The Partnership paid management
fees of $377,279 to the Managing General Partners and reimbursed
related parties for operating expenses of $1,643,556. The
Partnership also received investment sales proceeds of $72,496
from an affiliated partnership. In addition, $46,129 was paid to
the Individual General Partners as compensation for their
services. Other operating expenses of $441,193 were paid and
interest income of $317,049 was received.
For the year ended December 31, 2000, the Partnership funded
equity investments of $2,014,052, primarily to portfolio companies
in the computer systems and software, medical/biotechnology and
communications industries, and issued $4,000,000 in notes
receivable to a portfolio company in the computer systems and
software industry. Proceeds from sales of equity investments
totaled $16,867,191 and repayments of notes receivable were
$8,482. The Partnership received $220,868 in cash distributions
from venture capital limited partnership investments. Tax
distributions to General Partners totaled $2,862,928 and the
Partnership received $3,000,000 in proceeds from short-term
borrowings.
Cash and cash equivalents at December 31, 2000, were $10,598,352,
$3,000,000 of which was pledged as collateral for short-term
borrowings. The Partnership's short-term borrowing of $3,000,000
accrues interest at a commercial financial institution's prime
rate, which was 9.5% at December 31, 2000, and is due on March 31,
2001. 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. On October 25, 2000, the
Management Committee voted to extend the life of the Partnership
to December 31, 2002.
Results of Operations
- ---------------------
2000 compared to 1999
- ---------------------
The net decrease in partners' capital resulting from operations
was $17,945,451 in 2000 compared to a net increase in partners'
capital resulting from operations of $14,161,293 in 1999. The
change was primarily due to increased unrealized depreciation on
equity investments and notes receivable, an increase in realized
losses from impairment write-downs on investments and increased
operating expenses, partially offset by an increase in net
realized gain from sales of equity investments, increased interest
income and an increase in realized gains from venture capital
limited partnership investments.
Unrealized depreciation on equity investments was $3,825,605 at
December 31, 2000, compared to unrealized appreciation on equity
investments of $16,447,825 at December 31, 1999. During the year
ended December 31, 2000, the net decrease in unrealized
appreciation of equity investments of $20,273,430 was primarily
attributable to a $14,581,596 decrease in fair value of equity
investments to reflect revisions to the valuation methodology as
discussed in Note 1 to the financial statements. Equity
investments sold during 2000 resulted in a $3,824,087 decrease in
unrealized appreciation as the appreciation was realized upon
sale. The remaining decrease is primarily attributable to
unfavorable events and market conditions for portfolio companies
in the communications, computer and computer equipment,
information technology and medical/biotechnology industries. In
1999, the net increase in unrealized appreciation of equity
investments 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.
Unrealized depreciation on notes receivable investments was
$4,839,250 and $0 at December 31, 2000 and 1999, respectively.
During 2000, the Partnership recorded an increase in unrealized
depreciation of notes receivable of $4,839,250 primarily related
to loans made to Sutmyn Storage Corporation, a portfolio company
in the computer equipment, systems and software industry. Based
on events at the portfolio company, the Managing General Partners
believe the notes and accrued interest totaling $4,836,805 have a
fair value of $0.
During 2000, the Partnership recorded realized losses from
impairment write-downs on investments of $2,392,941, which
represents the Partnership's total investments in Biex, Inc. and
Thermatrix Inc. Biex, Inc. suspended operations in November 2000
after it was unable to obtain additional funding. Thermatrix
Inc.'s existing equity has no value under the reorganization plan
approved by the bankruptcy court in December 2000. There were no
impairment write-downs in 1999.
Operating expenses were $2,407,969 and $987,624 for 2000 and 1999,
respectively. In the second quarter of 2000, the Managing General
Partners billed the Partnership an additional $182,297 for
investment management expenses incurred by the General Partners in
1998 and 1999, but not previously billed to the Partnership. In
the fourth quarter of 2000, the Managing General Partners billed
the Partnership an additional $763,117 for operating expenses
relating to prior years that had not been fully recovered as
permitted by the Partnership Agreement. If these expenses had
been billed in prior years, operating expenses for 2000 and 1999
would have been $1,462,555 and $1,334,831, respectively. In
December 2000, the Limited Partners of the Partnership approved an
amendment to the Partnership Agreement so that the salary and
benefits of a controlling person of a Managing General Partner
directly involved in carrying out the business of the Partnership
are expenses of the Partnership. This resulted in additional
operating expenses in 2000 of $66,137.
During 2000, net realized gain from sales of equity investments of
$10,703,511 primarily resulted from gains on the sales of shares
in Matrix Pharmaceuticals, Inc., Oxford GylcoSciences Plc and
White Electronic Designs Corporation. 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.
In 2000, interest income of $1,158,257 was primarily the result of
interest earned on secured notes receivable and higher cash
balances. During 1999, interest income was $110,361.
During 2000, the Partnership recorded net realized gains from
venture capital limited partnership investments of $587,735.
During 1999, there were gains of $135,893. The gains represented
distributions from profits of venture capital limited
partnerships.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
1999 compared to 1998
- ---------------------
The net increase in partners' capital resulting from operations
was $14,161,293 in 1999 compared to a net decrease in partners'
capital resulting from operations of $5,352,748 in 1998. The
change was primarily due to an increase in unrealized appreciation
of equity investments, a decrease in realized losses from
impairment write-downs on investments, a decrease in net realized
losses from sales of equity investments, and decreased operating
expenses.
Unrealized appreciation on equity investments was $16,447,825 and
$342,617 at December 31, 1999 and 1998, respectively. During
1999, the increase in unrealized appreciation 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 unrealized
appreciation 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 impairment write-downs. During 1998,
the Partnership recorded realized losses from impairment write-
downs on investments 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. In 2000,
the Managing General Partners billed the Partnership an additional
$945,414 for investment management expenses consisting of
$347,207, $229,879 and $368,328 for 1999, 1998 and prior years,
respectively, that were incurred by the General Partners but not
previously billed to the Partnership. If the additional expense
had been recorded in prior years, total operating expenses would
have been $1,334,831 and $1,307,065 for 1999 and 1998,
respectively.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The Partnership is subject to financial market risks, including
changes in interest rates with respect to its investments in debt
securities and interest bearing cash equivalents as well as
changes in marketable equity security prices. The Partnership
does not use derivative financial instruments to mitigate any of
these risks. The return on the Partnership's investments is
generally not affected by foreign currency fluctuations.
The Partnership does not have a significant exposure to modest
public market price fluctuations as the Partnership primarily
invests in private business enterprises. However, should
significant changes in market equity prices occur, there could be
a longer-term effect on valuations of private companies, which
could affect the carrying value and the amount and timing of gains
realized on these investments. Since there is typically no public
market for the Partnership's investments in private companies, the
valuation of the investments is subject to the estimate of the
Partnership's Managing General Partners. In the absence of a
readily ascertainable market value, the estimated value of the
Partnership's investments in private companies may differ
significantly from the values that would be placed on the
portfolio if a ready market existed. The Partnership's portfolio
also includes common stocks in publicly traded companies. These
investments are directly exposed to equity price risk, in that a
hypothetical ten percent change in these equity prices would
result in a similar percentage change in the fair value of these
securities. The Partnership's investments also include some debt
securities. Since the debt securities are generally priced at a
fixed rate, changes in interest rates do not directly impact
interest income. The Partnership's debt securities are generally
held to maturity or converted into equity securities of private
companies.
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. Reference
is made to the information regarding Individual General Partners
and the Managing General Partners in the Registrant's Proxy
Statement related to the Meeting of Limited Partners held on
December 8, 2000, which information is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or directors. In
2000, the Partnership incurred management fees of $371,865. 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, 2000. General Partner
Overhead (as defined in the Partnership Agreement) includes the
General Partners' share of rent, utilities, property taxes and the
cost of capital equipment and the general and administrative
expenses 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 and committees thereof. In
2000, $46,129 of such fees and expenses 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. 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:
Report of Independent Public Accountants as of and for
the year ended December 31, 2000
Independent Auditors' Report as of December 31, 1999
and for the years ended December 31, 1999 and 1998
Balance Sheets as of December 31, 2000
and 1999
Statements of Investments as of
December 31, 2000 and 1999
Statements of Operations for the years
ended December 31, 2000, 1999 and 1998
Statements of Partners' Capital for the years
ended December 31, 2000, 1999 and 1998
Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998
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
None
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Registrant on November
13, 2000, to report the appointment of Arthur Andersen LLP
as the Partnership's independent public accountants. No
financial statements were filed.
(c) Financial Data Schedule for the year ended and as of
December 31, 2000 (Exhibit 27).
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To the Partners of
Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheet of Technology Funding
Partners III, L.P. (a Delaware limited partnership) (the Fund),
including the statement of investments, as of December 31, 2000, and
the related statements of operations, partners' capital, and cash
flows for the year then ended. These financial statements are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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
physical inspection of securities owned as of December 31, 2000. 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 audit
provides 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, 2000, and the results of
its operations, changes in partners' capital and its cash flows for
the year then ended in conformity with accounting principles generally
accepted in the United States.
Los Angeles, California /S/ARTHUR ANDERSEN LLP
March 16, 2001
INDEPENDENT AUDITORS' REPORT
----------------------------
The Partners
Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheet of Technology Funding
Partners III, L.P. (a Delaware limited partnership), including the
statement of investments, as of December 31, 1999, and the related
statements of operations, partners' capital, and cash flows for each
of the years in the two-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 auditing standards
generally accepted in the United States of America. 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. 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 the results of
its operations and its cash flows for each of the years in the two-
year period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
Albuquerque, New Mexico /S/KPMG LLP
March 29, 2000
BALANCE SHEETS
- --------------
December 31,
------------------------
2000 1999
-------- --------
ASSETS
Equity investments (cost basis of
$14,023,401 and $20,194,582 for 2000
and 1999, respectively) $10,197,796 36,642,407
Notes receivable, net (cost basis
of $4,849,029 and $20,824 for 2000
and 1999, respectively) 9,779 20,824
---------- ----------
Total investments 10,207,575 36,663,231
Cash and cash equivalents 10,598,352 1,560,773
Due from related parties -- 66,844
Other assets 26,842 2,343
---------- ----------
Total assets $20,832,769 38,293,191
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 103,712 73,159
Due to related parties 317,404 --
Short-term borrowings 3,000,000 --
Other liabilities 3,836 3,836
---------- ----------
Total liabilities 3,424,952 76,995
Commitments and contingencies
Partners' capital
(160,000 Limited Partner Units
outstanding) 17,407,817 38,216,196
---------- ----------
Total liabilities
and partners' capital $20,832,769 38,293,191
========== ==========
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal
Amount or December 31, 2000 December 31, 1999
Industry Shares at ----------------- ------------------
(1) Investment December 31, Cost Fair Cost Fair
Company Position Date 2000 Basis Value Basis Value
- ------------- -------- ---- ----------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
2.2% and 16.5% at December 31, 2000 and 1999, respectively
- ----------------------------------------------------------
Efficient Common
Networks, Inc. shares 2000 15,000 $306,875 213,750 -- --
Illinois
Superconductor Common
Corporation shares 1999 -- -- -- 87,847 4,754
Illinois
Superconductor Common
Corporation share
warrants at
$1.47;
expiring
2002 1999 526 7,183 0 7,183 0
Illinois
Superconductor Common
Corporation share
warrants at
$9.56;
expired
2000 1999 -- -- -- 11,675 0
Women.com Common 1996-
Networks, Inc. shares 2000 746,502 990,716 163,335 1,609,163 6,296,111
--------- --------- --------- ---------
1,304,774 377,085 1,715,868 6,300,865
--------- --------- --------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Computers and Computer Equipment
- --------------------------------
0.7% and 10.7% at December 31, 2000 and 1999, respectively
- ----------------------------------------------------------
White Electronic
Designs Common
Corporation shares 2000 19,125 50,681 123,720 2,958,084 4,073,766
--------- --------- --------- ---------
50,681 123,720 2,958,084 4,073,766
--------- --------- --------- ---------
Computer Systems and Software
- -----------------------------
6.5% and 3.6% at December 31, 2000 and 1999, respectively
- ---------------------------------------------------------
Photon Dynamics, Common 1996-
Inc. shares 2000 50,000 569,188 1,125,000 225,000 1,366,875
--------- --------- --------- ---------
569,188 1,125,000 225,000 1,366,875
--------- --------- --------- ---------
Electronic Design Automation
- ----------------------------
0.0% and 1.5% at December 31, 2000 and 1999, respectively
- ---------------------------------------------------------
Cadence Design Common
Systems, Inc. shares 1996 -- -- -- 313,439 557,400
--------- --------- --------- ---------
-- -- 313,439 557,400
--------- --------- --------- ---------
Environmental
- -------------
0.2% and 3.5% at December 31, 2000 and 1999, respectively
- ---------------------------------------------------------
Thermatrix Inc. Common
(b) shares 1996 -- -- -- 346,338 62,532
Thermatrix Inc. Preferred
(a) (b) shares 1999 -- -- -- 990,000 1,153,846
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Thermatrix Inc. Common share
(b) warrant
at $5.31;
expiring
2002 1999 -- -- -- 10,000 0
Triangle
Biomedical Common
Sciences, Inc.(a) shares 1999 4,099 79,792 40,170 79,792 114,772
Triangle Common
Biomedical share
Sciences, Inc.(a) warrants at
$28.00;
expiring
2009 1999 4,099 4,099 1,435 4,099 4,099
--------- --------- --------- ---------
83,891 41,605 1,430,229 1,335,249
--------- --------- --------- ---------
Industrial/Business Automation
- ------------------------------
0.0% and 0.0% at December 31, 2000 and 1999, respectively
- ---------------------------------------------------------
PRI Automation, Common
Inc. shares 1999 -- -- -- 315 445
--------- --------- --------- ---------
-- -- 315 445
--------- --------- --------- ---------
Information Technology
- ----------------------
3.0% and 13.7% at December 31, 2000 and 1999, respectively
- ----------------------------------------------------------
WorldRes, Inc. Preferred 1997-
(a) (b) shares 1999 434,392 1,708,124 521,271 1,708,124 5,047,638
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
WorldRes, Inc. Preferred
(a) (b) share
warrants at
$3.70-$4.63;
expiring 1997-
2002-2003 1998 24,305 195 0 195 176,961
--------- --------- --------- ---------
1,708,319 521,271 1,708,319 5,224,599
--------- --------- --------- ---------
Medical/Biotechnology
- ---------------------
36.7% and 43.6% at December 31, 2000 and 1999, respectively
- -----------------------------------------------------------
Acusphere, Inc. Preferred 1995-
(a) shares 2000 432,138 1,100,909 1,231,594 797,251 1,215,093
Adesso Healthcare
Technology
Services, Inc.
(formerly ADESSO
Specialty
Services
Organization Preferred 1997-
Inc.)(a) (b) shares 2000 204,670 1,393,803 0 1,264,006 1,654,330
Adesso Healthcare
Technology
Services, Inc.
(formerly ADESSO
Specialty
Services
Organization Convertible
Inc.)(a) (b) note (2) 2000 $315,268 315,268 236,451 -- --
American OBGYN,
Inc. (formerly
Spectrascan Health
Services, Preferred
Inc.) (a) shares 1994 148,439 1,226,202 207,468 1,226,202 1,383,117
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
American OBGYN,
Inc. (formerly
Spectrascan Health
Services, Common
Inc.) (a) shares 1994 12,611 0 5,675 0 37,833
Biex, Inc. (a) (b) Preferred 1993-
shares 1999 -- -- -- 1,023,540 1,023,540
CareCentric
Solutions, Inc.
(formerly Simione
Central Holdings, Common
Inc.) shares 1999 25,561 382,875 64,383 382,875 136,593
CollaGenex
Pharmaceuticals, Common
Inc. shares 1999 -- -- -- 108,100 98,714
CV Therapeutics, Common
Inc. share
warrant
at $20.00;
expiring
2000 1995 -- -- -- 1,152 14,869
CV Therapeutics, Common
Inc. shares 1996 -- -- -- 79,987 199,568
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 3,142,424 1,416,252 4,103,635
Inhale
Therapeutic Common
Systems, Inc. shares 1999 -- -- -- 69,889 78,671
LifeCell Common 1992-
Corporation shares 1997 351,060 1,263,574 559,520 1,263,574 1,803,746
Matrix
Pharmaceutical, Common 1992-
Inc. shares 1995 31,633 74,821 541,715 800,439 1,471,471
Molecular
Geriatrics Common
Corporation (a) shares 1993 23,585 125,000 16,510 125,000 47,170
Oxford Common
GlycoSciences Plc shares 1993 50 234 987 499,963 886,208
Peptide
Therapeutics Common
Group Plc shares 1998 978 2,659 1,210 2,659 812
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Pharmadigm, Preferred 1993-
Inc. (a) shares 1998 546,143 945,039 163,843 945,039 1,321,666
Pharmadigm, Preferred
Inc. (a) share
warrants at
$2.00;
expiring
2001 1996 5,416 0 0 0 2,275
Pharmadigm, Preferred
Inc. (a) share
warrants at
$2.20-$2.50;
expired 1995-
2000 1997 -- -- -- 2,772 1,940
Pharmos Common
Corporation shares 1995 -- -- -- 45,248 122,170
Pherin
Pharmaceuticals, Preferred
Inc. (a) shares 1991 200,000 200,000 106,000 200,000 1,060,000
Sanarus Medical, Preferred
Inc. (a) (b) shares 2000 260,000 390,000 117,000 -- --
---------- ---------- ---------- ----------
8,836,636 6,394,780 10,253,948 16,663,421
---------- ---------- ---------- ----------
Retail/Consumer Products
- ------------------------
0.0% and 0.0% at December 31, 2000 and 1999, respectively
- ---------------------------------------------------------
YES!
Entertainment Common
Corporation shares 1995 -- -- -- 0 3,000
---------- ---------- ---------- ----------
-- -- 0 3,000
---------- ---------- ---------- ----------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
9.3% and 2.9% at December 31, 2000 and 1999, respectively
- ---------------------------------------------------------
Alta IV Limited Ltd.
Partnership (a) Partnership
interests various $1,000,000 136,217 0 146,698 100,991
Batterson,
Johnson and Ltd.
Wang Limited Partnership
Partnership (a) interests various $500,000 0 99,880 68,360 129,198
Columbine Ltd.
Venture Fund II, Partnership
L.P. (a) interests various $750,000 469,667 501,061 469,667 424,586
Delphi Ltd.
Ventures, L.P. Partnership
(a) interests various $1,000,000 652,842 698,280 652,842 202,180
Medical Science Ltd.
Partners, L.P. Partnership
(a) interests various $500,000 187,222 135,900 215,424 195,121
O,W&W Pacrim Ltd.
Investments Partnership
Limited (a) interests various 200 505 131,562 12,950 10,859
Trinity Ventures Ltd.
IV, L.P. (a) Partnership
interests various $125,008 23,459 47,652 23,439 53,852
---------- ---------- ---------- ----------
1,469,912 1,614,335 1,589,380 1,116,787
---------- ---------- ---------- ----------
Total equity investments - 58.6% and 96.0% at
December 31, 2000 and 1999, respectively 14,023,401 10,197,796 20,194,582 36,642,407
---------- ---------- ---------- ----------
Notes Receivable, Net
- ---------------------
Avalon Vision Secured
Solutions, note, 16%,
Inc. due 2004 1999 $12,010 12,224 9,779 20,824 20,824
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Sutmyn Secured
Storage note, 50%,
Corporation due on
demand 2000 $4,000,000 4,836,805 0 -- --
---------- ---------- ---------- ----------
Total notes receivable - 0.0% and 0.0% at
December 31, 2000 and 1999, respectively 4,849,029 9,779 20,824 20,824
---------- ---------- ---------- ----------
Total investment - 58.6% and 96.0% at
December 31, 2000 and 1999, respectively $18,872,430 10,207,575 20,215,406 36,663,231
========== ========== ========== ==========
Legends and footnotes:
- -- No investment held at end of period.
0 Investment active with a cost basis 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 12/31/00 and 12/31/99.
(2) The Partnership has no income-producing equity investments except for a convertible note
which includes accrued interest. The interest rate on the note is 9.5%.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
----------------------------------
2000 1999 1998
---- ---- ----
Investment income:
Notes receivable interest $ 844,030 21,611 19,640
Short-term investment interest 314,227 88,137 145,385
Other operating income -- 613 599
---------- ---------- ---------
Total investment income 1,158,257 110,361 165,624
Costs and expenses:
Management fees 371,865 282,321 280,034
Individual General
Partners' compensation 46,129 36,778 46,081
Operating expenses:
Administrative and
investor services 696,006 560,706 696,680
Investment operations 1,414,932 214,860 325,684
Computer services 135,065 130,828 181,617
Professional fees 161,966 81,230 85,625
---------- ---------- ---------
Total operating expenses 2,407,969 987,624 1,289,606
---------- ---------- ---------
Total costs and expenses 2,825,963 1,306,723 1,615,721
---------- ---------- ---------
Net investment loss (1,667,706) (1,196,362) (1,450,097)
---------- ---------- ---------
Net realized gain from
investments in venture capital
limited partnerships 587,735 135,893 108,591
Net realized gain (loss) from
sales of equity investments 10,703,511 (883,446) (1,535,862)
Realized losses from
impairment write-downs (2,392,941) -- (836,249)
Net realized loss on foreign
currency (63,370) -- --
---------- ---------- ---------
Net realized income (loss) 8,834,935 (747,553) (2,263,520)
---------- ---------- ---------
(Decrease) increase in unrealized
appreciation(depreciation):
Equity investments (20,273,430) 16,105,208 (1,639,131)
Notes receivable (4,839,250) -- --
---------- ---------- ---------
Net (decrease) increase in
unrealized appreciation
(depreciation) (25,112,680) 16,105,208 (1,639,131)
---------- ---------- ---------
Net (decrease) increase in
partners' capital resulting
from operations $(17,945,451) 14,161,293 (5,352,748)
========== ========== =========
Net (decrease) increase in
partners' capital resulting
from operations per Unit $ (94.91) 68.39 (28.46)
========== ========== =========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 2000, 1999 and 1998:
Limited General
Partners Partners Total
-------- -------- -----
Partners' capital,
January 1, 1998 $29,393,201 298,077 29,691,278
Net investment loss (1,216,212) (233,885) (1,450,097)
Net realized loss (1,882,011) (381,509) (2,263,520)
Net decrease in
unrealized appreciation (1,454,968) (184,163) (1,639,131)
---------- --------- ----------
Partners' capital,
December 31, 1998 24,840,010 (501,480) 24,338,530
Net investment loss (923,015) (273,347) (1,196,362)
Net realized loss (547,060) (200,493) (747,553)
Net increase in
unrealized appreciation 12,412,349 3,692,859 16,105,208
Tax distribution -- (283,627) (283,627)
---------- --------- ----------
Partners' capital,
December 31, 1999 35,782,284 2,433,912 38,216,196
Net investment loss (1,426,266) (241,440) (1,667,706)
Net realized income 7,635,081 1,199,854 8,834,935
Net decrease in
unrealized appreciation
(depreciation) (21,393,871) (3,718,809) (25,112,680)
Tax distribution -- (2,862,928) (2,862,928)
---------- --------- ----------
Partners' capital,
December 31, 2000 $20,597,228 (3,189,411) 17,407,817
========== ========= ==========
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For The Years Ended December 31,
-----------------------------------
2000 1999 1998
------ ------ ------
Cash flows from operating
activities:
Interest and other income
received $ 317,049 97,378 144,919
Cash paid to vendors (441,193) (335,836) (316,522)
Cash paid to related parties (1,994,468) (944,960) (1,403,679)
---------- ---------- ---------
Net cash used by operating
activities (2,118,612) (1,183,418) (1,575,282)
---------- ---------- ---------
Cash flows from investing
activities:
Notes receivable issued (4,000,000) (96,360) (234,806)
Purchase of equity investments (2,014,052) (2,626,060) (1,134,639)
Repayments of notes receivable 8,482 198,844 450,712
Proceeds from sales of equity
investments 16,867,191 1,981,843 1,292,093
Distributions from venture
capital limited partnerships 220,868 408,876 57,669
---------- ---------- ---------
Net cash provided (used) by
investing activities 11,082,489 (132,857) 431,029
---------- ---------- ---------
Cash flows from financing
activities:
Distributions to Limited
and General Partners (2,862,928) (283,627) --
Proceeds from short-term
borrowings 3,000,000 -- --
---------- ---------- ---------
Net cash provided (used)
by financing activities 137,072 (283,627) --
---------- ---------- ---------
Effect of exchange rate changes
on cash and cash equivalents (63,370) -- --
---------- ---------- ---------
Net increase (decrease) in cash
and cash equivalents 9,037,579 (1,599,902) (1,144,253)
Cash and cash equivalents
at beginning of year 1,560,773 3,160,675 4,304,928
---------- ---------- ---------
Cash and cash equivalents
at end of year $10,598,352 1,560,773 3,160,675
========== ========== =========
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For The Years Ended December 31,
-----------------------------------
2000 1999 1998
------ ------ ------
Reconciliation of net (decrease)
increase in partners' capital
resulting from operations to
net cash used by operating
activities:
Net (decrease) increase in
partners' capital resulting
from operations $(17,945,451) 14,161,293 (5,352,748)
Adjustments to reconcile net
(decrease) increase in
partners' capital resulting
from operations to net cash
used by operating activities:
Net realized gain from
venture capital limited
partnership investments (587,735) (135,893) (108,591)
Net realized (gain) loss
from sales of equity
investments (10,703,511) 883,446 1,535,862
Realized losses from
impairment write-downs 2,392,941 -- 836,249
Net decrease (increase) in
unrealized appreciation
(depreciation):
Equity investments 20,273,430 (16,105,208) 1,639,131
Notes receivable 4,839,250 -- --
Net realized loss on foreign
currency transaction 63,370 -- --
Changes in:
Accrued interest on notes
receivable (841,208) (12,983) (20,705)
Accounts payable and
accrued expenses 30,553 6,680 (269)
Due to/from related parties 384,248 28,787 (103,668)
Other, net (24,499) (9,540) (543)
---------- ---------- ---------
Net cash used by operating
activities $ (2,118,612) (1,183,418) (1,575,282)
========== ========== =========
Supplemental schedule of
non-cash investing activity:
Secured notes receivable
converted to equity
investments $ -- 75,868 --
========== ========== =========
Investment sales receivable
from affiliated partnership $ -- 72,496 --
========== ========== =========
The accompanying notes are an integral part of these 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 treated 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 Managing General Partners are Technology
Funding Ltd. (TFL) and Technology Funding Inc. (TFI), a wholly owned
subsidiary of TFL. There are three Individual General Partners. The
Individual General Partners and a representative from each of the
Managing General Partners constitute the Management Committee, which is
responsible for the management and administration of the Partnership.
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's original
contributed capital was $40,040,054, consisting of $40,000,000 from
Limited Partners for 160,000 units and $40,054 from General Partners.
The General Partners do not own any units. 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
Management Committee and approved by a majority of the Limited Partners.
On October 25, 2000, the Management Committee voted to extend the life of
the Partnership to December 31, 2002.
Preparation of Financial Statements and Use of Estimates
- --------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates. Significant
estimates include the estimate of 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.
Reclassifications
- -----------------
Certain reclassifications have been made to prior-year balances to
conform to the current year presentation.
Investments
- -----------
Investments are carried at fair value.
Equity Investments
------------------
The Management Committee has the authority to establish valuation
procedures and periodically apply such procedures to the Partnership's
investment portfolio. In fulfilling this responsibility, the Managing
General Partners under the direction of the Management Committee
periodically update and revise the valuation procedures used to determine
fair value in order to reflect new events, changing market conditions,
more experience with investee companies or additional information, any of
which may require the revision of previous estimating procedures. The
valuation procedures were revised and approved by the Management
Committee in the year ended December 31, 2000.
Unrestricted publicly traded securities are valued at the closing sales
price or bid price that is available on a national securities exchange or
over-the-counter market. Valuation discounts of 5% to 50% are applied to
publicly traded securities subject to resale restrictions resulting from
Rule 144 or contractual lock-ups, such as those commonly associated with
underwriting agreements or knowledge of material non-public information.
The fair value of all other investments is determined in good faith by
the Managing General Partners under the direction of the Management
Committee after consideration of available relevant information. There
is no ready market for the Partnership's investments in private companies
or unregistered securities of public companies. Fair value is generally
defined as the amount the Partnership could reasonably expect to receive
for an investment in an orderly disposition based on a current sale.
Significant factors considered in the estimation of fair value include
the inherent illiquidity of and lack of marketability associated with
venture capital investments in private companies or unregistered
securities, the investee company's enterprise value established in the
last round of venture financing, changes in market conditions since the
last round of venture financing or since the last reporting period, the
value of a minority interest in the investee company, contractual
restrictions on resale typical of venture financing instruments, the
investee company's financial position and ability to obtain any necessary
additional financing, the investee company's performance as compared to
its business plan, and the investee company's progress towards initial
public offering. The values determined for the Partnership's investments
in these securities are based upon available information at the time the
good faith valuations are made and do not necessarily represent the
amount which might ultimately be realized, which could be higher or lower
than the reported fair value.
At December 31, 2000 and December 31, 1999, the investment portfolio
included investments totaling $2,649,487 and $13,227,472, respectively,
whose fair values were established in good faith by the Managing General
Partners under the direction of the Management Committee in the absence
of readily ascertainable market values. In addition, investments in
publicly traded securities which have been subjected to a discount for
legal or contractual restrictions as determined by the Management
Committee amounted to $3,142,431 and $7,478,875 at December 31, 2000 and
December 31, 1999, respectively. Because of the inherent uncertainty in
the valuation, the values may differ significantly from the values that
would have been used had a ready market for the securities existed, and
the differences could be material.
Venture capital limited partnership investments 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.
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 new cost basis being adjusted to equal the fair value of
the investment. Cost basis adjustments are reflected as "Realized losses
from impairment 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 fair value of notes receivable is determined in good faith by the
Managing General Partners under the direction of the Management
Committee. Fair value is generally defined as the amount the Partnership
could reasonably expect to receive for the notes and accrued interest on
the valuation date. The values determined for the Partnership's notes
receivable are based upon available information at the time the good
faith valuations are made and do not necessarily represent the amount
which might ultimately be realized which could be higher or lower than
the reported fair value. When the Managing General Partners' assessment
of fair value indicates that future collectability of interest or
principal is in doubt, notes are placed on nonaccrual status.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents are principally comprised of cash invested in
demand accounts and money market instruments 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 accounting
principles generally accepted in the United States which may not equate
to tax accounting. The cost of investments on a tax basis at December
31, 2000 and 1999, was $14,390,779 and $19,866,978, respectively. At
December 31, 2000 and 1999, gross unrealized appreciation and
depreciation on investments based on cost for federal income tax purposes
were as follows:
December 31, December 31,
2000 1999
------------ ------------
Unrealized appreciation $ 3,810,502 17,866,387
Unrealized depreciation (7,993,706) (1,070,134)
---------- ----------
Net unrealized (depreciation)
appreciation $(4,183,204) 16,796,253
========== ==========
Net Increase (Decrease) in Partners' Capital Resulting from Operations
- ---------------------------------------------------------------------
Per Unit
- --------
Net increase (decrease) in partners' capital resulting from operations
per Unit is calculated by dividing the weighted average number of Units
outstanding of 160,000 for the years ended December 31, 2000, 1999 and
1998, into the total net increase (decrease) in partners' capital
resulting from operations 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,
-----------------------------------
2000 1999 1998
------ ------ ------
Management fees $ 371,865 282,321 280,034
Individual General
Partners' compensation 46,129 36,778 46,081
Reimbursable operating expenses:
Administrative and investor
services 421,358 322,351 519,669
Investment operations 1,404,299 201,469 272,610
Computer services 135,065 130,828 181,617
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.
Management fees due to the Managing General Partners were $21,344 and
$26,758 and were included in due to related parties at December 31, 2000
and 1999, respectively.
As compensation for their services, each of the Individual General
Partners receives $10,000 annually plus $1,000 and related expenses for
each meeting of the Management Committee or committee thereof. The
Individual General Partners each own eight Units.
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 $296,060 due to related parties at December 31, 2000,
compared to $21,106 due from related parties for operating expenses at
December 31, 1999.
The Partnership recorded a receivable from an affiliated partnership for
proceeds from equity investment sales of $72,496 at December 31, 1999.
These monies were received in the first quarter of 2000.
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 relating to prior years. In 2000, the Managing General Partners
billed the Partnership an additional $945,414 for investment management
expenses consisting of $347,207, $229,879 and $368,328 for 1999, 1998 and
prior years, respectively, that were incurred by the General Partners but
not previously billed to the Partnership. Had the additional expenses
been recorded in prior years, operating expenses would have been
$1,462,555, $1,334,831 and $1,307,065 for 2000, 1999 and 1998,
respectively.
In December 2000, the Limited Partners of the Partnership approved an
amendment to the Partnership Agreement so that the salary and benefits of
a controlling person of a Managing General Partner directly involved in
carrying out the business of the Partnership are expenses of the
Partnership. This resulted in additional operating expenses in 2000 of
$66,137.
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. In 2000 and 1999, these costs totaled
$65,904 and $35,838, respectively, and 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, 2000, 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, 2000, 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 $161,425.
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 decrease
in partners' capital resulting from operations 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
------------------
All investments are valued at fair value as determined in good faith by the
Managing General Partners. See Note 1-Investments.
Marketable Equity Securities
- ----------------------------
At December 31, 2000 and 1999, marketable equity securities had aggregate
costs of $3,545,904 and $8,032,948, respectively, and aggregate fair values
of $2,791,543 and $14,819,273, respectively. The net unrealized loss at
December 31, 2000, included gross gains of $1,159,436 and the net
unrealized gain at December 31, 1999, included gross gains of $7,005,352.
Restricted Securities
- ---------------------
At December 31, 2000 and 1999, restricted securities had aggregate market
values of $7,406,253 and $21,823,134, respectively, representing 42.5% and
57.1%, respectively, of the net assets of the Partnership.
Significant purchases and sales of equity investments during 2000 are as
follows:
Acusphere, Inc.
- ---------------
In February 2000, the Partnership funded a convertible note to the company
in the amount of $299,137, with an interest rate of 8% and a maturity date
of December 31, 2000.
In April 2000, the note, together with interest, was converted into 63,928
Series F Preferred shares.
Adesso Healthcare Technology Services, Inc. (formerly ADESSO Specialty
- ----------------------------------------------------------------------
Services Organization, Inc.)
- ---------------------------
In March 2000, the Partnership purchased 7,726 Series E Preferred shares
for $129,797.
In December 2000, the Partnership funded a bridge loan in the amount of
$315,268 with an interest rate of 9.5% and a maturity date of January 12,
2002.
Biex, Inc.
- ----------
The company was unable to complete a round of financing in November 2000
and suspended operations and laid off all employees. As a result, the
Partnership recorded a realized loss from impairment write-downs on
investments of $1,046,604, its entire investment in the company. As of
January 2001, an offer to purchase the company was being negotiated;
however, proceeds from the sale were expected to satisfy only a majority of
the company's creditors with nothing remaining for equity investors.
Cadence Design Systems, Inc.
- ----------------------------
In December 2000, the Partnership sold its entire investment in the company
for proceeds of $682,587 and realized a gain of $369,148.
CareCentric Solutions, Inc. (formerly Simione Central Holdings, Inc.)
- ---------------------------------------------------------------------
In March 2000, the company's shareholders approved a one-for-five reverse
stock split in order to meet requirements to maintain the company's listing
on the Nasdaq National Market.
CollaGenex Pharmaceuticals, Inc.
- --------------------------------
In December 2000, the Partnership sold its entire investment in the company
for proceeds of $15,139 and realized a loss of $92,961.
CV Therapeutics, Inc.
- ---------------------
In September 2000, the Partnership net exercised a common share warrant for
2,880 shares at $20.00 each and received 1,974 common shares with a cost
basis of $39,538. The Partnership realized a gain of $39,538 on the
warrant exercise.
During 2000, the Partnership sold 9,905 common shares for proceeds of
$372,052 and realized a gain of $252,527.
Efficient Networks, Inc.
- ------------------------
In December 2000, the Partnership purchased 15,000 common shares in the
company for $306,875.
Illinois Superconductor Corporation
- -----------------------------------
In January 2000, the Partnership sold 5,810 common shares in the company
for proceeds of $7,815 and realized a loss of $80,032.
Inhale Therapeutic Systems, Inc.
- --------------------------------
In March 2000, the Partnership sold its entire investment in the company
for proceeds of $203,348 and realized a gain of $133,459.
Matrix Pharmaceutical, Inc.
- ---------------------------
During the first quarter of 2000, the Partnership sold 290,000 common
shares in the company for proceeds of $4,530,536 and realized a gain of
$3,804,918.
Nanophase Technologies Corporation
- ----------------------------------
In March 2000, the Partnership received a distribution of 14,557 shares
from Batterson, Johnson and Wang Limited Partnership.
In December 2000, the Partnership sold its entire investment in the company
for proceeds of $175,486 and realized a loss of $75,622.
Oxford GlycoSciences Plc
- ------------------------
During the first quarter of 2000, the Partnership sold 106,722 common
shares in the company for proceeds of $4,052,250 and realized a gain of
$3,552,521.
Pharmadigm, Inc.
- ----------------
In March 2000, the company completed a new round of financing at a lower
valuation. The Partnership did not participate in this round.
Pharmos Corporation
- -------------------
In January 2000, the Partnership sold its entire investment in the company
for proceeds of $187,762 and realized a gain of $142,514.
Photon Dynamics, Inc.
- ---------------------
The Partnership purchased 12,500 common shares in December 2000 for
$344,188.
Sanarus Medical, Inc.
- ---------------------
In February 2000, the Partnership purchased 260,000 Series A Preferred
shares in the company for $390,000.
Thermatrix Inc.
- ---------------
The common and preferred shares of the company have no value under the
reorganization plan approved by the bankruptcy court in December 2000. As
a result, the Partnership recorded a realized loss from impairment write-
downs on investments of $1,346,338, its entire investment in the company.
White Electronic Designs Corporation
- ------------------------------------
During the first quarter of 2000, the Partnership sold its entire
investment in the company for proceeds of $6,496,284 and realized a gain of
$3,538,200.
In November 2000, an officer of the Managing General Partners of the
Partnership exercised options for 19,125 common shares in the company at a
total cost of $50,681. The shares were then transferred to the Partnership.
Women.Com Networks, Inc.
- ------------------------
In the fourth quarter of 2000, the Partnership purchased 332,471 common
shares for $155,045. The Partnership sold 166,925 common shares in
December 2000 for proceeds of $19,646 and realized a loss of $753,846.
On February 5, 2001, iVillage, Inc. and Women.com entered into an agreement
to join forces. Ivillage, Inc. will issue shares of its own stock valued
at $27,000,000 to Women.com shareholders. In addition, a major investor in
Women.com has agreed to invest $20,000,000 in the new company and will own
about 30% of iVillage, Inc.
Venture Capital Limited Partnerships
- ------------------------------------
The Partnership received cash distributions totaling $220,868 from Alta IV
Limited Partnership, Batterson, Johnson and Wang Limited Partnership,
Medical Science Partners, L.P. and O,W&W Pacrim Investments Limited,
$51,113 of which were recorded as returns of capital and the remaining
recorded as realized gains. The Partnership received stock distributions
of Blaze Software, Inc., Epoch Pharmaceuticals Inc., Flamel Technologies
S. A. and Nanophase Technologies Corporation with fair values totaling
$486,335. Distributions totaling $417,980 were recorded as realized gains
and distributions totaling $68,355 were recorded as returns of capital.
The Partnership recorded a $617,021 increase in unrealized appreciation as
a result of a net increase in the fair value of the underlying investments
of the partnerships.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations for publicly traded portfolio companies or changes in the fair
value of private companies as determined in accordance with the policy
described in Note 1 to the financial statements.
Subsuquent Events
- -----------------
Subsequent to December 31, 2000, the fair value of the Partnership's
investment in Endocare, Inc. decreased by $785,607 as a result of a
decrease in the publicly traded market price on March 16, 2001.
5. Net Increase (Decrease) in Unrealized (Depreciation) Appreciation of
--------------------------------------------------------------------
Equity Investments
------------------
In accordance with the accounting policy as stated in Note 1, the
Statements of Operations includes a line item entitled "Net increase
(decrease) in unrealized (depreciation) appreciation of equity
investments." The table below discloses details of the changes:
For the Years Ended December 31,
----------------------------------
2000 1999 1998
------ ------ ------
Unrealized (depreciation)
appreciation from cost of
marketable equity securities $ (754,361) 6,786,325 (2,248,186)
Unrealized (depreciation)
appreciation from cost of
non-marketable equity securities (3,071,244) 9,661,500 2,590,803
---------- ---------- ---------
Unrealized (depreciation)
appreciation from cost at end
of year (3,825,605) 16,447,825 342,617
Unrealized appreciation from
cost at beginning of year 16,447,825 342,617 1,981,748
---------- ---------- ---------
Net (decrease) increase in
unrealized appreciation (depre-
ciation) of equity investments $(20,273,430) 16,105,208 (1,639,131)
========== ========== =========
6. Notes Receivable
----------------
Activity from January 1 through December 31 consisted of:
2000 1999
------ ------
Balance, beginning of year $ 20,824 202,777
Notes receivable issued 4,000,000 96,360
Repayments of notes receivable (8,482) (198,844)
Secured notes converted to equity
investment -- (75,868)
Change in interest receivable 836,687 (3,601)
Net increase in unrealized
depreciation of notes receivable (4,839,250) --
--------- -------
Balance, end of year $ 9,779 20,824
========= =======
The interest rate on notes receivable at December 31, 2000, ranged from 16%
to 50%. All notes and accrued interest are due on demand.
During 2000, the Partnership issued notes receivable totaling $4,000,000 to
Sutmyn Storage Corporation, a portfolio company in the computer equipment
industry. In determining fair value, the Managing General Partners gave
consideration to deterioration in the company's performance during the
quarter ended September 30, 2000, as a result of business, technical,
financing and legal challenges, the company's financial position at
September 30, 2000 and its ability to obtain critical additional financing.
As a result, the Partnership recorded a $4,836,805 increase in unrealized
depreciation of notes and interest receivable. The note was placed on non-
accrual status on September 30, 2000; interest income through September 30,
2000, totaled $836,805. There has been no improvement in the company's
prospects and the Managing General Partners believe the fair value of the
notes and accrued interest continues to be zero at December 31, 2000.
Because of the inherent uncertainties involved in predicting the outcome of
the company's ability to obtain additional financing, the estimated fair
value at December 31, 2000 may differ significantly from a value that would
have been used had the outcome of the company's efforts been known, and the
difference could be material.
7. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 2000 and 1999, consisted of:
2000 1999
------ ------
Demand accounts $ 614,972 161,015
Money-market accounts 6,983,380 1,399,758
Cash pledged as collateral for
short-term borrowings 3,000,000 --
---------- ---------
Total $10,598,352 1,560,773
========== =========
8. Short-Term Borrowings
---------------------
In December 2000, the Partnership borrowed $3,000,000 from a commercial
financial institution. The note bears interest at the lenders' prime rate,
which was 9.5% at December 31, 2000. Payment of all accrued unpaid
interest is due monthly and all outstanding principal plus any remaining
accrued unpaid interest are due on March 31, 2001. The Partnership has
pledged $3,000,000 in cash as collateral for the note.
9. Distributions
-------------
In the first quarter of 2000, a tax distribution was declared and paid to
the General Partners totaling $1,238,366.
In April 2000, a tax distribution was declared and paid to the General
Partners totaling $1,624,562.
10. Commitments and Contingencies
-----------------------------
The Partnership is a party to financial instruments with off-balance-sheet
risk in the normal course of its business. Generally, these instruments
are 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, 2000, there were
no unfunded investment commitments to portfolio companies and venture
capital limited partnerships.
In October 2000, Kanematsu Corporation, a creditor of one of the
Partnership's portfolio companies, initiated an arbitration proceeding
against the Partnership, two affiliated partnerships, and a fourth co-
investor. Kanematsu is seeking to recover $2,000,000, the purchase price
in a contract by which the Partnership and the other entities are alleged
to have agreed to purchase certain debt securities of the portfolio company
from Kanematsu. The Partnership and affiliated partnerships have asserted
counterclaims against Kanematsu. An arbitrator has been selected and a
hearing has been scheduled. The Partnership intends to defend its position
vigorously in this arbitration. It is the Managing General Partners'
belief that the Partnership will ultimately prevail in this matter,
although there can be no assurance in this regard. Accordingly, the
Partnership has not accrued any liability associated with the arbitration
proceeding.
From time to time, the Partnership is subject to routine litigation
incidental to the business of the Partnership. Although there can be no
assurances as to the ultimate disposition of these matters and the
proceeding disclosed above, it is the opinion of the Managing General
Partners, based upon the information available at this time, that the
expected outcome of these matters, individually or in the aggregate, will
not have a material adverse effect on the results of operations and
financial condition of the Partnership.
SIGNATURES
----------
Pursuant to the requirements 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 30, 2001 By: /s/Charles R. Kokesh
--------------------------------
Charles R. Kokesh
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed 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 30, 2001
- ------------------------ 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 a majority of the Board of Directors of Technology
Funding Inc. and the General Partners of Technology Funding Ltd.