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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, 2001
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)
1035 Suncast Lane, Suite 122
El Dorado Hills, California 95762
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(916) 941-7550
--------------------------------------------------
(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.
PART I
Item 1. BUSINESS
- ------ --------
Technology Funding Partners III, L.P. (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 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. On March 15, 2002, the Individual General
Partners recommended a proxy be sent to the Limited Partners
requesting an extension of the Partnership's term to December
31, 2003, and to authorize the Partnership's Management
Committee to extend the Partnership for up to two one-year
additional terms.
Item 2. PROPERTIES
- ------ ----------
The Registrant has no material physical properties.
Item 3. LEGAL PROCEEDINGS
- ------ -----------------
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
was seeking to recover $2,000,000, the purchase price in a
contract by which the Partnership and the other entities were
alleged to have agreed to purchase certain debt securities of
the portfolio company from Kanematsu. The Partnership and
affiliated partnerships asserted counterclaims against
Kanematsu. On February 12, 2002, the Partnership, affiliated
partnerships and the co-investor were awarded $4,000,000 and
all of Kanematsu's claims were denied. The award is in full
settlement of all claims and counterclaims. Kanematsu has
indicated that it will petition for reconsideration and, if
necessary, will appeal.
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
- ------ ---------------------------------------------------
There were no matters submitted to a vote of the Limited
Partners during 2001.
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, 2001, there were 5,661 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
- ------ -----------------------
For the Years Ended and As of December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Total investment income $ 309,810 $ 1,158,257 $ 110,361 $ 165,624 $ 341,607
Net investment loss (1,388,085) (1,667,706) (1,196,362) (1,450,097) (1,202,447)
Net realized gain from
venture capital limited
partnership investments 324,536 587,735 135,893 108,591 622,207
Net realized gain (loss) from
sales of equity investments 1,514,305 10,703,511 (883,446) (1,535,862) 5,770,758
Realized losses from
impairment write-downs (1,727,140) (2,392,941) -- (836,249) (53,600)
Net realized loss on foreign
currency -- (63,370) -- -- --
(Decrease) increase in unrealized
appreciation(depreciation):
Equity investments 1,016,437 (20,273,430) 16,105,208 (1,639,131) (4,881,218)
Notes receivable (313,870) (4,839,250) -- -- --
Net (decrease) increase in
partners' capital resulting
from operations (543,817)(17,945,451) 14,161,293 (5,352,748) 255,700
Net (decrease) increase in
partners' capital resulting
from operations per Unit (1) (3.36) (94.91) 68.39 (28.46) 1.02
Total assets 17,025,262 20,832,769 38,293,191 24,420,151 29,855,568
Distributions declared -- 2,862,928 283,627 -- 4,279,267
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 (decrease) increase 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, 2001, net cash used by operating
activities totaled $1,663,254. The Partnership paid management
fees of $180,976 to the Managing General Partners and reimbursed
related parties for operating expenses of $1,151,438. In
addition, $64,545 was paid to the Individual General Partners as
compensation for their services. Other operating expenses and
interest expense paid totaled $467,280 and $73,404, respectively.
Interest income of $274,389 was received.
For the year ended December 31, 2001, the Partnership funded
equity investments of $1,809,683, primarily to portfolio companies
in the medical/biotechnology and information technology
industries, and issued $500,000 in notes receivable to a portfolio
company in the environmental industry. Proceeds from sales of
equity investments totaled $2,402,744 and repayments of notes
receivable were $333. The Partnership received $225,458 in cash
distributions from venture capital limited partnership
investments. The Partnership repaid $3,000,000 in short-term
borrowings.
Cash and cash equivalents at December 31, 2001, were $6,253,950.
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.
Results of Operations
- ---------------------
2001 compared to 2000
- ---------------------
The net decrease in partners' capital resulting from operations
was $543,817 in 2001 compared to a net decrease in partners'
capital resulting from operations of $17,945,451 in 2000. The
change was primarily due to decreased unrealized depreciation on
equity investments and notes receivable, decreased realized loss
from impairment write-downs and decreased investment loss,
partially offset by a decrease in net realized gain from sales of
equity investments.
Unrealized depreciation on equity investments was $2,779,168 and
$3,825,605 at December 31, 2001 and 2000, respectively. During
the year ended December 31, 2001, the net decrease in unrealized
depreciation of equity investments of $1,046,437 was primarily
attributable to favorable events and market conditions for
portfolio companies in the medical/biotechnology and
communications industries. Equity investments sold or written off
during 2001 contributed a $1,009,933 net decrease in unrealized
depreciation as the depreciation was realized upon sale or write-
off. In 2000, the net increase in unrealized depreciation of
equity investments of $20,273,430 was primarily attributable to
decreases in the value of the Partnership's marketable equity
securities and the fair value of the Partnership's investments in
restricted securities.
Net realized gain from sales of investments during 2001 totaled
$1,514,305 and primarily resulted from gains on the sale of shares
of Photon Dynamics, Inc. 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.
Unrealized depreciation on notes receivable investments was
$5,153,120 and $4,839,250 at December 31, 2001 and 2000,
respectively. During 2001, the Partnership recorded an increase
in unrealized depreciation of $313,870 primarily related to the
decrease in fair value of loans made to a portfolio company in the
environmental industry. During 2000, the Partnership recorded an
increase in unrealized depreciation of notes receivable of
$4,839,250 primarily related to a decrease in the fair value of
loans made to Sutmyn Storage Corporation, a portfolio company in
the computer equipment, systems and software industry.
During 2001, the Partnership recorded realized losses from
impairment write-downs on investments of $1,727,140, which
represents the Partnership's total investment in Adesso Healthcare
Technology Services, Inc. Adesso ceased operations in the third
quarter of 2001. During 2000, the Partnership recorded realized
losses from impairment write-downs on investments of $2,392,941,
which represents the Partnership's total investment in Biex, Inc.
and its equity investment in Thermatrix Inc. Biex, Inc. suspended
operations in November 2000 after it was unable to obtain
additional funding.
Investment expenses were $1,697,895 and $2,825,963 for 2001 and
2000, 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, investment expenses for 2000 would
have been $1,880,549. The decrease is primarily due to decreased
management fees and personnel costs, partially offset by increased
professional fees due to the Kanematsu arbitration and increased
interest expense.
Interest income was $309,810 and $1,158,257 for 2001 and 2000,
respectively. The decrease was primarily the result of secured
notes receivable being placed on non-accrual status on September
30, 2000.
During 2001, the Partnership recorded net realized gains from
venture capital limited partnership investments of $324,536 as
compared to gains of $587,735 during 2000. 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.
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 unfavorable events and market conditions
for the Partnership's public and restricted holdings. 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.
During 2000, the Partnership recorded realized losses from
impairment write-downs on investments of $2,392,941, which
represents the Partnership's total investment in Biex, Inc. and
its equity investment in Thermatrix Inc. Biex, Inc. suspended
operations in November 2000 after it was unable to obtain
additional funding. There were no impairment write-downs in 1999.
Investment expenses were $2,825,963 and $1,306,723 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, investment expenses for 2000 and 1999
would have been $1,880,549 and $1,653,930, 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.
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
- ------ --------------------
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
2001, the Partnership incurred management fees of $172,640. The
fees are designed to compensate the Managing General Partners for
General Partner Overhead incurred in performing management duties
for the Partnership. 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 2001, $64,545 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
percent 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 years ended December 31, 2001 and 2000
Independent Auditors' Report for the year
ended December 31, 1999
Balance Sheets as of December 31, 2001 and 2000
Statements of Investments as of
December 31, 2001 and 2000
Statements of Operations for the years
ended December 31, 2001, 2000 and 1999
Statements of Partners' Capital for the years
ended December 31, 2001, 2000 and 1999
Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999
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
No reports on Form 8-K were filed by the Registrant during
the year ended December 31, 2001.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To the Partners of
Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheets of Technology Funding
Partners III, L.P. (a Delaware limited partnership) (the Fund),
including the statements of investments, as of December 31, 2001 and
2000, and the related statements of operations, partners' capital, and
cash flows for the years 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 audits.
We conducted our audits 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,
2001 and 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, 2001 and 2000, and the
results of its operations, changes in partners' capital, and its cash
flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
Los Angeles, California /S/ARTHUR ANDERSEN LLP
March 15, 2002
INDEPENDENT AUDITORS' REPORT
----------------------------
The Partners
Technology Funding Partners III, L.P.:
We have audited the accompanying statements of operations, partners'
capital, and cash flows of Technology Funding Partners III, L.P. (a
Delaware limited partnership) for the year 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 audit.
We conducted our audit 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.
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 results of operations and cash
flows of Technology Funding Partners III, L.P. for the year 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,
------------------------
2001 2000
-------- --------
ASSETS
Equity investments (cost basis of
$13,334,652 and $14,023,401 for 2001
and 2000, respectively) $10,555,484 $10,197,796
Notes receivable, net (cost basis
of $5,366,048 and $4,849,029 for 2001
and 2000, respectively) 212,928 9,779
---------- ----------
Total investments 10,768,412 10,207,575
Cash and cash equivalents 6,253,950 10,598,352
Other assets 2,900 26,842
---------- ----------
Total assets $17,025,262 $20,832,769
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 109,574 $ 103,712
Due to related parties 49,711 317,404
Short-term borrowings -- 3,000,000
Other liabilities 1,977 3,836
---------- ----------
Total liabilities 161,262 3,424,952
Commitments and contingencies
Partners' capital
(160,000 Limited Partner Units
outstanding) 16,864,000 17,407,817
---------- ----------
Total liabilities
and partners' capital $17,025,262 $20,832,769
========== ==========
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal
Amount or December 31, 2001 December 31, 2000
Industry Shares at ----------------- ------------------
(1) Investment December 31, Cost Fair Cost Fair
Company Position Date 2001 Basis Value Basis Value
- ------------- -------- ---- ----------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
2.7% and 2.2% at December 31, 2001 and 2000, respectively
- ---------------------------------------------------------
Efficient Common
Networks, Inc. shares 2000 -- $ -- $ -- $ 306,875 $ 213,750
ISCO Common
International, share
Inc. (formerly warrants at
Illinois $1.47;
Superconductor expiring
Corporation) 2002 1999 526 7,183 0 7,183 0
iVillage Inc. Common 1996-
shares 2000 240,375 990,716 456,713 990,716 163,335
--------- --------- --------- ---------
997,899 456,713 1,304,774 377,085
--------- --------- --------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Computers and Computer Equipment
- --------------------------------
0.7% and 0.7% at December 31, 2001 and 2000, respectively
- ---------------------------------------------------------
White Electronic
Designs Common
Corporation shares 2000 19,125 120,095 117,619 50,681 123,720
--------- --------- --------- ---------
120,095 117,619 50,681 123,720
--------- --------- --------- ---------
Computer Systems and Software
- -----------------------------
0.0% and 6.5% at December 31, 2001 and 2000, respectively
- ---------------------------------------------------------
Ascential Software Common
Corporation shares 2001 214 0 867 -- --
Photon Dynamics, Common 1996-
Inc. shares 2000 -- -- -- 569,188 1,125,000
Virage, Inc. Common
Shares 2001 474 1,194 1,569 -- --
--------- --------- --------- ---------
1,194 2,436 569,188 1,125,000
--------- --------- --------- ---------
Environmental
- -------------
0.1% and 0.2% at December 31, 2001 and 2000, respectively
- ---------------------------------------------------------
Triangle
Biomedical Common
Sciences, Inc.(a) shares 1999 4,099 79,792 11,477 79,792 40,170
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Triangle Common
Biomedical share
Sciences, Inc.(a) warrants at
$28.00;
expiring
2009 1999 4,099 4,099 411 4,099 1,435
--------- --------- --------- ---------
83,891 11,888 83,891 41,605
--------- --------- --------- ---------
Information Technology
- ----------------------
4.3% and 3.0% at December 31, 2001 and 2000, respectively
- ----------------------------------------------------------
WorldRes, Inc. Common 1997-
(a) (b) shares 2001 604,392 2,218,124 725,271 1,708,124 521,271
WorldRes, Inc. Common
(a) (b) share
warrants at
$3.70;
expiring
2002 1997 7,601 195 0 195 0
--------- --------- --------- ---------
2,218,319 725,271 1,708,319 521,271
--------- --------- --------- ---------
Medical/Biotechnology
- ---------------------
50.1% and 36.7% at December 31, 2001 and 2000, respectively
- -----------------------------------------------------------
Acambis Plc. Common
shares 1998 -- -- -- 2,659 1,210
Acusphere, Inc. Preferred 1995-
(a) shares 2001 453,415 1,201,975 1,292,233 1,100,909 1,231,594
Adesso Healthcare
Technology
Services, Inc. Preferred 1997-
(a) (b) shares 2000 -- -- -- 1,393,803 0
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Adesso Healthcare
Technology
Services, Inc. Convertible
(a) (b) note 2000 -- -- -- 315,268 236,451
American OBGYN, Preferred
Inc. (a) shares 1994 148,439 1,226,202 207,468 1,226,202 207,468
American OBGYN, Common
Inc. (a) shares 1994 12,611 0 5,675 0 5,675
Applied Molecular Common
Evolution, Inc. shares 2001 16,713 224,623 205,737 -- --
CareCentric Common
Solutions, Inc. shares 1999 47,836 382,875 28,702 382,875 64,383
CollaGenex
Pharmaceuticals, Common
Inc. shares 2001 6,819 54,444 55,234 -- --
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 4,419,110 1,416,252 3,142,424
LifeCell Common 1992-
Corporation shares 1997 351,060 1,263,574 796,907 1,263,574 559,520
Matrix
Pharmaceutical, Common 1992-
Inc. shares 2001 295,599 258,829 464,092 74,821 541,715
Molecular
Geriatrics Common
Corporation (a) shares 1993 23,585 125,000 2,123 125,000 16,510
Oxford Common
GlycoSciences Plc shares 1993 -- -- -- 234 987
Pharmadigm, Preferred 1993-
Inc. (a) (b) shares 1998 546,143 945,039 163,843 945,039 163,843
Pherin
Pharmaceuticals, Preferred
Inc. (a) shares 1991 200,000 200,000 106,000 200,000 106,000
Sanarus Medical, Preferred 2000-
Inc. (a) (b) shares 2001 807,508 1,335,000 697,400 390,000 117,000
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Sanarus Medical, Bridge Loan
Inc. (a) (b) warrants at
exercise
price TBD;
expiring
2006 2001 195 195 98 -- --
---------- ---------- ---------- ----------
8,634,008 8,444,622 8,836,636 6,394,780
---------- ---------- ---------- ----------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
4.7% and 9.3% at December 31, 2001 and 2000, respectively
- ---------------------------------------------------------
Alta IV Limited Ltd.
Partnership (a) Partnership
interests various -- -- -- 136,217 0
Batterson,
Johnson and Ltd.
Wang Limited Partnership
Partnership (a) interests various $500,000 0 73,955 0 99,880
Columbine Ltd.
Venture Fund II, Partnership
L.P. (a) interests various $750,000 415,224 199,123 469,667 501,061
Delphi Ltd.
Ventures, L.P. Partnership
(a) interests various $1,000,000 652,842 243,009 652,842 698,280
Medical Science Ltd.
Partners, L.P. Partnership
(a) interests various $500,000 187,222 194,394 187,222 135,900
O,W&W Pacrim Ltd.
Investments Partnership
Limited (a) interests various 200 505 63,060 505 131,562
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Trinity Ventures Ltd.
IV, L.P. (a) Partnership
interests various $125,008 23,453 23,394 23,459 47,652
---------- ---------- ---------- ----------
1,279,246 796,935 1,469,912 1,614,335
---------- ---------- ---------- ----------
Total equity investments - 62.6% and 58.6% at
December 31, 2001 and 2000, respectively 13,334,652 10,555,484 14,023,401 10,197,796
---------- ---------- ---------- ----------
Notes Receivable, Net
- ---------------------
Avalon Vision Secured
Solutions, note, 16%,
Inc. due 2004 1999 $11,676 12,303 6,152 12,224 9,779
Sutmyn Secured
Storage note, 50%,
Corporation due on
(b) demand 2000 $4,000,000 4,836,805 0 4,836,805 0
Thermatrix Inc. Unsecured
(b) note, 12%,
due on
demand 2001 $500,000 516,940 206,776 -- --
---------- ---------- ---------- ----------
Total notes receivable - 1.3% and 0.0% at
December 31, 2001 and 2000, respectively 5,366,048 212,928 4,849,029 9,779
---------- ---------- ---------- ----------
Total investment - 63.9% and 58.6% at
December 31, 2001 and 2000, respectively $18,700,700 $10,768,412 $18,872,430 $10,207,575
========== ========== ========== ==========
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 12/31/01 and 12/31/00.
(2) The Partnership has no income-producing equity investments.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
----------------------------------
2001 2000 1999
---- ---- ----
Investment income:
Notes receivable interest $ 60,873 $ 844,030 $ 21,611
Short-term investment interest 244,962 314,227 88,137
Other operating income 3,975 -- 613
--------- ---------- ----------
Total investment income 309,810 1,158,257 110,361
Investment expenses:
Management fees 172,640 371,865 282,321
Individual General
Partners' compensation 64,545 46,129 36,778
Administrative and
investor services 758,411 696,006 560,706
Investment operations 179,822 1,414,932 214,860
Computer services 152,104 135,065 130,828
Professional fees 296,969 161,966 81,230
Interest expense 73,404 -- --
--------- ---------- ----------
Total investment expenses 1,697,895 2,825,963 1,306,723
--------- ---------- ----------
Net investment loss (1,388,085) (1,667,706) (1,196,362)
--------- ---------- ----------
Net realized gain (loss) from
sales of equity investments 1,514,305 10,703,511 (883,446)
Realized gain from venture capital
limited partnership investments 324,536 587,735 135,893
Realized loss from impairment
write-downs (1,727,140) (2,392,941) --
Net realized loss on foreign
currency -- (63,370) --
--------- ---------- ----------
Net realized income (loss) 111,701 8,834,935 (747,553)
--------- ---------- ----------
STATEMENTS OF OPERATIONS (continued)
- -----------------------------------
For the Years Ended December 31,
----------------------------------
2001 2000 1999
---- ---- ----
Increase (decrease) in unrealized
(depreciation) appreciation:
Equity investments 1,046,437 (20,273,430) 16,105,208
Notes receivable (313,870) (4,839,250) --
--------- ---------- ----------
Net increase (decrease) in
unrealized (depreciation)
appreciation 732,567 (25,112,680) 16,105,208
--------- ---------- ----------
Net (decrease) increase in
partners' capital resulting
from operations $ (543,817) $(17,945,451) $14,161,293
========= ========== ==========
Net (decrease) increase in
partners' capital resulting
from operations per Unit $ (3.36) $ (94.91) $ 68.39
========= ========== ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 2001, 2000 and 1999:
Limited General
Partners Partners Total
-------- -------- -----
Partners' capital,
January 1, 1999 $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
Net investment loss (1,374,205) (13,880) (1,388,085)
Net realized income 110,584 1,117 111,701
Net decrease in
unrealized depreciation 725,242 7,325 732,567
---------- --------- ----------
Partners' capital,
December 31, 2001 $20,058,849 $(3,194,849) $16,864,000
========== ========= ==========
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For The Years Ended December 31,
-----------------------------------
2001 2000 1999
------ ------ ------
Net (decrease) increase in
partners' capital resulting
from operations $ (543,817) $(17,945,451) $14,161,293
Adjustments to reconcile net
(decrease) increase in
partners' capital resulting
from operations to net cash
used by operating activities:
Net realized (gain) loss
from sales of equity
investments (1,514,305) (10,703,511) 883,446
Realized gain from venture
capital limited partnership
investments (324,536) (587,735) (135,893)
Realized loss from
impairment write-downs 1,727,140 2,392,941 --
Net (increase) decrease in
unrealized appreciation
(depreciation):
Equity investments (1,046,437) 20,273,430 (16,105,208)
Notes receivable 313,870 4,839,250 --
Net realized loss on foreign
currency transaction -- 63,370 --
Increase in accrued interest on
notes receivable (35,421) (841,208) (12,983)
Increase in accounts payable and
accrued expenses 5,862 30,553 6,680
(Decrease) increase in due
to/from related parties (267,693) 384,248 28,787
Other changes, net 22,083 (24,499) (9,540)
---------- ---------- ----------
Net cash used by operating
activities (1,663,254) (2,118,612) (1,183,418)
---------- ---------- ----------
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For The Years Ended December 31,
-----------------------------------
2001 2000 1999
------ ------ ------
Cash flows from investing
activities:
Notes receivable issued (500,000) (4,000,000) (96,360)
Purchase of equity investments (1,809,683) (2,014,052) (2,626,060)
Repayments of notes receivable 333 8,482 198,844
Proceeds from sales of equity
investments 2,402,744 16,867,191 1,981,843
Distributions from venture
capital limited partnerships 225,458 220,868 408,876
---------- ---------- ----------
Net cash provided (used) by
investing activities 318,852 11,082,489 (132,857)
---------- ---------- ----------
Cash flows from financing
activities:
Distributions to Limited
and General Partners -- (2,862,928) (283,627)
(Repayment of) proceeds from
short-term borrowings (3,000,000) 3,000,000 --
---------- ---------- ----------
Net cash (used) provided
by financing activities (3,000,000) 137,072 (283,627)
---------- ---------- ----------
Effect of exchange rate changes
on cash and cash equivalents -- (63,370) --
---------- ---------- ----------
Net (decrease) increase in cash
and cash equivalents (4,344,402) 9,037,579 (1,599,902)
Cash and cash equivalents
at beginning of year 10,598,352 1,560,773 3,160,675
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 6,253,950 $ 10,598,352 $ 1,560,773
========== ========== ==========
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 or the Registrant)
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 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. On March 15, 2002, the Individual
General Partners recommended a proxy be sent to the Limited Partners
requesting an extension of the Partnership's term to December 31, 2003, and
to authorize the Partnership's Management Committee to extend the
Partnership for up to two one-year additional terms.
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.
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.
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 percent to 50 percent
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, 2001 and December 31, 2000, the investment portfolio
included investments totaling $3,211,993 and $2,649,487, 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 $4,419,116 and $3,142,431 at December 31, 2001 and December 31, 2000,
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 fair 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,
2001 and 2000, was $13,827,531 and $14,390,779, respectively. At December
31, 2001 and 2000, gross unrealized depreciation on investments based on
cost for federal income tax purposes were as follows:
December 31, December 31,
2001 2000
------------ ------------
Unrealized appreciation $ 4,155,677 $ 3,810,502
Unrealized depreciation (7,214,796) (7,993,706)
---------- ----------
Net unrealized depreciation $(3,059,119) $(4,183,204)
========== ==========
Net (Decrease) Increase in Partners' Capital Resulting from Operations
- ---------------------------------------------------------------------
Per Unit
- --------
Net (decrease) increase 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, 2001, 2000 and
1999, into the total net (decrease) increase in partners' capital resulting
from operations allocated to the Limited Partners. The Managing General
Partners contributed 0.1 percent 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,
-----------------------------------
2001 2000 1999
------ ------ ------
Management fees $172,640 $ 371,865 $282,321
Individual General
Partners' compensation 64,545 46,129 36,778
Reimbursable operating expenses:
Administrative and investor
services 581,337 421,358 322,351
Investment operations 158,640 1,404,299 201,469
Computer services 152,104 135,065 130,828
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 $13,008 and
$21,344 and were included in due to related parties at December 31, 2001
and 2000, 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. Amounts due to
related parties for such expenses totaled $36,703 and $296,060 at December
31, 2001 and 2000, respectively.
The Managing General Partners allocate operating expenses incurred in
connection with the business of the Partnership based on employee hours
incurred. In 2000, the Managing General Partners billed the Partnership an
additional $945,414 for investment management expenses consisting of
$347,207 and $598,207 for 1999 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,
investment expenses would have been $1,880,549 and $1,653,930 for 2000 and
1999, respectively.
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, 2001, the Partnership and affiliated
partnerships had an indirect interest in non-transferable Endocare, Inc.
and White Electronic Designs Corporation options with a fair value of
$244,376.
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 percent to the Limited Partners as a group in
proportion to the number of Units held, 5 percent to the
Limited Partners in proportion to the Unit Months of each
Limited Partner, and 20 percent 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 percent to the Limited Partners and 1 percent 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
percent to Limited Partners and 1 percent to the Managing General Partners.
In no event are the Managing General Partners allocated less than 1 percent
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.
Marketable Equity Securities
- ----------------------------
At December 31, 2001 and 2000, marketable equity securities had aggregate
costs of $3,296,350 and $3,545,904, respectively, and aggregate fair values
of $2,127,440 and $2,791,543, respectively. The net unrealized losses at
December 31, 2001 and 2000 included gross gains of $283,368 and $1,159,436,
respectively.
Restricted Securities
- ---------------------
At December 31, 2001 and 2000, restricted securities had aggregate fair
values of $8,428,044 and $7,406,253, respectively, representing 50.0
percent and 42.5 percent, respectively, of the net assets of the
Partnership.
Significant purchases, sales and write-downs of equity investments during
2001 are as follows:
Acusphere, Inc.
- ---------------
In June 2001, the Partnership purchased 21,277 shares of Series I Preferred
stock for $101,066.
Adesso Healthcare Technology Services, Inc.
- -------------------------------------------
The company ceased operations during the third quarter and the Partnership
is not expecting any return on its investment. Preferred shares
and convertible notes of $1,727,140 were written off as of September
30, 2001.
Efficient Networks, Inc.
- ------------------------
In January 2001, the Partnership sold its entire investment in the company
for proceeds of $344,989 and realized a gain of $38,114.
Matrix Pharmaceutical, Inc.
- ---------------------------
In October 2001, the Partnership purchased 263,966 common shares on the
open market for $184,008. Subsequent to December 31, 2001, the Partnership
sold its entire position in the company for $640,817 and realized a gain of
$381,988.
IVillage Inc. (formerly Women.com Networks, Inc.)
- -------------------------------------------------
Effective June 18, 2001, iVillage Inc. acquired Women.com Networks, Inc.
In connection with this transaction, the Partnership's Women.com shares
were exchanged for 240,375 iVillage common shares. The Partnership
realized a gain of $765 on the sale of fractional shares.
Photon Dynamics, Inc.
- ---------------------
In December 2001, the Partnership sold its entire investment in the company
for proceeds of $2,051,556 and realized a gain of $1,482,368.
Sanarus Medical, Inc.
- ---------------------
In April 2001, the Partnership issued a convertible bridge loan for
$195,000 to the company.
In July 2001, the company converted the $195,000 note to 112,978 shares of
Series B Preferred stock and paid the Partnership $3,590 for the accrued
interest. Also in July 2001, the Partnership purchased 434,530 shares of
Series B Preferred stock for $750,000.
WorldRes, Inc.
- --------------
In March 2001, the Partnership purchased 170,000 Preferred shares in the
company for $510,000. The company effected a conversion of all preferred
stock to common stock on March 21, 2001. Each of the Partnership's
preferred shares was converted to one common share.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
The Partnership received stock distributions of Applied Molecular
Evolution, Inc., CollaGenex Pharmaceuticals, Inc. and Virage, Inc. with
fair values totaling $289,744, of which $54,449 were recorded as returns of
capital and the remainder as realized gains. The Partnership also received
cash distributions of $225,458, $7,305 of which were recorded as returns of
capital and the remainder as realized gains.
The Alta IV Limited Partnership was terminated on December 31, 2000 and the
Partnership received its final liquidating distribution of $7,305 in June
2001 and realized a loss of $128,912.
In the year ended December 31, 2001, the Partnership recorded a $626,734
decrease in fair value primarily as a result of the above distributions and
a net decrease in the fair value of the underlying investments of the
partnerships.
Other Equity Investments
- ------------------------
Other significant changes reflected in the Statements of Investments 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.
Subsequent Events
- -----------------
Subsequent to December 31, 2001, the fair value of the Partnership's
investment in Lifecell Corporation increased by $466,909 as a result of an
increase in the publicly traded price on March 15, 2002.
American OBGYN, Inc., a portfolio company of the Partnership, filed for
Chapter 11 bankruptcy on February 14, 2002.
Thermatrix Inc., a portfolio company of the Partnership, is negotiating the
sale of the entire company to Selas Fluid Processing. It is unknown what
the Partnership will receive for it's investment.
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,
----------------------------------
2001 2000 1999
------ ------ ------
Unrealized (depreciation)
appreciation from cost of
marketable equity securities $(1,168,910) $ (754,361) $ 6,786,325
Unrealized (depreciation)
appreciation from cost of
non-marketable equity securities (1,610,258) (3,071,244) 9,661,500
--------- ---------- ---------
Unrealized (depreciation)
appreciation from cost at end
of year (2,779,168) (3,825,605) 16,447,825
Unrealized (depreciation)
appreciation from cost
at beginning of year (3,825,605) 16,447,825 342,617
--------- ---------- ---------
Net increase (decrease) in
unrealized appreciation
(depreciation) of equity
investments $ 1,046,437 $(20,273,430) $16,105,208
========= ========== ==========
6. Notes Receivable
----------------
Activity from January 1 through December 31 consisted of:
2001 2000
------ ------
Balance, beginning of year $ 9,779 $ 20,824
Notes receivable issued 500,000 4,000,000
Repayments of notes receivable (333) (8,482)
Change in interest receivable 17,352 836,687
Net increase in unrealized
depreciation of notes receivable (313,870) (4,839,250)
------- ---------
Balance, end of year $ 212,928 $ 9,779
======= =========
The interest rate on notes receivable at December 31, 2001, ranged from 12
percent to 50 percent. All notes and accrued interest are due on demand
with the exception of $12,303, due 2004.
7. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 2001 and 2000, consisted of:
2001 2000
------ ------
Demand accounts $ 573,206 $ 614,972
Money-market accounts 5,680,744 6,983,380
Cash pledged as collateral for
short-term borrowings -- 3,000,000
--------- ----------
Total $6,253,950 $10,598,352
========= ==========
8. Short-Term Borrowings
---------------------
In December 2000, the Partnership borrowed $3,000,000 from a commercial
financial institution. The Partnership pledged $3,000,000 in cash as
collateral for the note. The note and accrued interest were repaid on
March 31, 2001. Interest expense totaled $73,404.
9. Distributions
-------------
There were no distributions in 2001. In the first quarter of 2000, a tax
distribution was declared and paid to the General Partners totaling
$1,238,366. In the second quarter of 2000, a tax distribution was declared
and paid to the General Partners totaling $1,624,562.
10. Commitments and Contingencies
-----------------------------
From time to time the Partnership becomes 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, 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 not recognized in the financial statements. At
December 31, 2001, there were no such unfunded commitments.
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 was seeking to recover $2,000,000, the purchase price
in a contract by which the Partnership and the other entities were alleged
to have agreed to purchase certain debt securities of the portfolio company
from Kanematsu. The Partnership and affiliated partnerships asserted
counterclaims against Kanematsu. On February 12, 2002, the Partnership,
affiliated partnerships and the co-investor were awarded $4,000,000 and all
of Kanematsu's claims were denied. The award is in full settlement of all
claims and counterclaims. Kanematsu has indicated that it will petition
for reconsideration and, if necessary, will appeal.
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.
11. Financial Highlights
--------------------
For The Years Ended December 31,
-----------------------------------
2001 2000 1999
------ ------ ------
(all amounts on a per Unit basis)
Net asset value,
beginning of period $128.73 $223.64 $155.25
(Loss) income from investment
operations:
Net investment loss (8.58) (8.92) (5.77)
Net realized and unrealized
gain (loss) on investments 5.22 (85.99) 74.16
------ ------ ------
Total from investment operations (3.36) (94.91) 68.39
------ ------ ------
Net asset value, end of period $125.37 $128.73 $223.64
====== ====== ======
Total Return (2.61)% (42.44)% 44.05%
Ratios to average net assets:
Net investment (loss) income (6.76)% (5.06)% (3.05)%
Expenses 8.35% 10.02% 4.31%
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.
TECHNOLOGY FUNDING LTD.
Managing General Partners
Date: March 20, 2002 By: /s/Charles R. Kokesh
--------------------------------
Charles R. Kokesh
President, Chief Executive Officer
Chief Financial Officer and
Chairman of Technology Funding Inc.
and Managing General Partner of
Technology Funding Ltd.
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 20, 2002
- ------------------------ 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.