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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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)
1107 Investment Boulevard, Suite 180
El Dorado Hills, California 95762
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(916) 941-1400
--------------------------------------------------
(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
--- ---
No active market for the units of limited partnership interest ("Units")
exists, and therefore the market value of such Units cannot be
determined.
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.
I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
- --------------
(unaudited)
June 30, December 31,
2002 2001
------------ ------------
ASSETS
Equity investments (cost of
$14,605,432 and $13,334,652 at
June 30, 2002 and December 31,
2001, respectively) $ 8,936,382 $10,555,484
Notes receivable (cost of
$4,849,396 and $5,366,048 at
June 30, 2002 and December 31,
2001, respectively) 6,296 212,928
---------- ----------
Total investments 8,942,678 10,768,412
Cash and cash equivalents 4,498,034 6,253,950
Other receivables 666,667 --
Other assets 386 2,900
---------- ----------
Total assets $14,107,765 $17,025,262
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 86,569 $ 109,574
Due to related parties 72,975 49,711
Other liabilities 1,977 1,977
---------- ----------
Total liabilities 161,521 161,262
Commitments and contingencies
See Note 7.
Partners' capital:
Limited Partners
(160,000 Units outstanding) 17,170,270 20,058,849
General Partners (3,224,026) (3,194,849)
---------- ----------
Total partners' capital 13,946,244 16,864,000
---------- ----------
Total liabilities
and partners' capital $14,107,765 $17,025,262
========== ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal (unaudited)
Amount or June 30, 2002 December 31, 2001
Industry Shares at ---------------- -----------------
(1) Investment June 30, Cost Fair Cost Fair
Company Position Date 2002 Basis Value Basis Value
- ------------- -------- ---------- ---------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
2.2% and 2.7% at June 30, 2002 and December 31, 2001, respectively
- ------------------------------------------------------------------
ISCO Common
International, share
Inc. warrants at
$1.47;
expired
2002 1999 -- $ -- $ -- $ 7,183 $ 0
iVillage Inc. Common 1996-
shares 2000 240,375 990,716 302,873 990,716 456,713
--------- --------- --------- ---------
990,716 302,873 997,899 456,713
--------- --------- --------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Computers and Computer Equipment
- --------------------------------
1.0% and 0.7% at June 30, 2002 and December 31, 2001, respectively
- ------------------------------------------------------------------
White Electronic
Designs Common
Corporation shares 2000 19,125 120,095 143,820 120,095 117,619
--------- --------- --------- ---------
120,095 143,820 120,095 117,619
--------- --------- --------- ---------
Computer Systems and Software
- -----------------------------
0.0% and 0.0% at June 30, 2002 and December 31, 2001, respectively
- ------------------------------------------------------------------
Ascential Software Common
Corporation shares 2001 -- -- -- 0 867
Virage, Inc. Common
Shares 2002 451 834 361 1,194 1,569
--------- --------- --------- ---------
834 361 1,194 2,436
--------- --------- --------- ---------
Environmental
- -------------
0.1% and 0.1% at June 30, 2002 and December 31, 2001, respectively
- ------------------------------------------------------------------
Triangle
Biomedical Common
Sciences, Inc.(a) shares 1999 4,099 79,792 11,477 79,792 11,477
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Triangle Common
Biomedical share
Sciences, Inc.(a) warrants at
$28.00;
expiring
2009 1999 4,099 4,099 411 4,099 411
--------- --------- --------- ---------
83,891 11,888 83,891 11,888
--------- --------- --------- ---------
Information Technology
- ----------------------
6.0% and 4.3% at June 30, 2002 and December 31, 2001, respectively
- ------------------------------------------------------------------
WorldRes, Inc. Common 1997-
(a) (b) shares 2001 604,392 2,218,124 725,271 2,218,124 725,271
WorldRes, Inc. Convertible
(a) (b) note (2) 2002 $284,500 290,706 116,282 -- --
WorldRes, Inc. Common and
(a) (b) preferred
share
warrants at
$3.00-$3.70;
expiring 1997-
2002-2007 2002 55,017 195 0 195 0
--------- --------- --------- ---------
2,509,025 841,553 2,218,319 725,271
--------- --------- --------- ---------
Medical/Biotechnology
- ---------------------
49.2% and 50.1% at June 30, 2002 and December 31, 2001, respectively
- --------------------------------------------------------------------
Acusphere, Inc. Preferred 1995-
(a) shares 2002 690,437 1,536,176 584,109 1,201,975 1,292,233
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
American OBGYN, Preferred
Inc. (a) shares 1994 148,439 1,226,202 0 1,226,202 207,468
American OBGYN, Common
Inc. (a) shares 1994 12,611 0 0 0 5,675
Applied Molecular Common
Evolution, Inc. shares 2001 16,713 224,623 96,601 224,623 205,737
CareCentric Common
Solutions, Inc. shares 1999 47,836 382,875 24,874 382,875 28,702
CollaGenex
Pharmaceuticals, Common
Inc. shares 2001 6,819 54,444 50,461 54,444 55,234
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 3,255,798 1,416,252 4,419,110
LifeCell Common 1992-
Corporation shares 2002 551,060 1,866,335 1,350,096 1,263,574 796,907
Matrix
Pharmaceutical, Common 1992-
Inc. shares 2001 -- -- -- 258,829 464,092
Molecular
Geriatrics Common
Corporation (a) shares 1993 23,585 125,000 2,123 125,000 2,123
Natus Medical, Common
Inc. shares 2002 16,225 84,484 64,089 -- --
Pharmadigm, Preferred 1993-
Inc. (a) (b) shares 2002 771,143 1,170,039 308,457 945,039 163,843
Pherin
Pharmaceuticals, Preferred
Inc. (a) shares 1991 200,000 200,000 424,000 200,000 106,000
Sanarus Medical, Preferred 2000-
Inc. (a) (b) shares 2001 807,508 1,335,000 697,400 1,335,000 697,400
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Sanarus Medical, Bridge Loan
Inc. (a) (b) warrants at
exercise
price TBD;
expiring
2006 2001 195 195 98 195 98
---------- ---------- ---------- ----------
9,621,625 6,858,106 8,634,008 8,444,622
---------- ---------- ---------- ----------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
5.6% and 4.7% at June 30, 2002 and December 31, 2001, respectively
- ------------------------------------------------------------------
Batterson,
Johnson and Ltd.
Wang Limited Partnership
Partnership (a) interests various $500,000 0 73,955 0 73,955
Columbine Ltd.
Venture Fund II, Partnership
L.P. (a) interests various $750,000 415,224 176,475 415,224 199,123
Delphi Ltd.
Ventures, L.P. Partnership
(a) interests various $1,000,000 652,842 288,934 652,842 243,009
Medical Science Ltd.
Partners, L.P. Partnership
(a) interests various $500,000 187,222 194,394 187,222 194,394
O,W&W Pacrim Ltd.
Investments Partnership
Limited (a) interests various 200 505 21,909 505 63,060
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Trinity Ventures Ltd.
IV, L.P. (a) Partnership
interests various $125,008 23,453 22,114 23,453 23,394
---------- ---------- ---------- ----------
1,279,246 777,781 1,279,246 796,935
---------- ---------- ---------- ----------
Total equity investments - 64.1% and 62.6% at
June 30, 2002 and December 31, 2001,
respectively 14,605,432 8,936,382 13,334,652 10,555,484
---------- ---------- ---------- ----------
Notes Receivable, Net
- ---------------------
Avalon Vision Secured
Solutions, note, 16%,
Inc. due 2004 1999 $11,676 12,591 6,296 12,303 6,152
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 -- -- -- 516,940 206,776
---------- ---------- ---------- ----------
Total notes receivable - 0.0% and 1.3% at
June 30, 2002 and December 31, 2001,
Respectively 4,849,396 6,296 5,366,048 212,928
---------- ---------- ---------- ----------
Total investment - 64.1% and 63.9% at
June 30, 2002 and December 31, 2001,
Respectively $19,454,828 $ 8,942,678 $18,700,700 $10,768,412
========== ========== ========== ==========
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 6/30/02 and 12/31/01.
(2) The Partnership has no income-producing equity investments except for a convertible note
which includes accrued interest. The interest rate on such note is 8.75 percent.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2002 2001 2002 2001
------ ------ ------ ------
Investment income:
Notes receivable interest $ 20,649 $ 24,645 $ 36,563 $ 38,094
Short-term investment interest 19,061 56,969 41,404 186,119
--------- ---------- --------- ----------
Total investment income 39,710 81,614 77,967 224,213
Investment expenses:
Management fees 42,563 37,447 85,126 89,549
Individual General Partners'
compensation 8,121 18,080 21,000 35,297
Administrative and investor services 410,161 260,146 895,557 373,304
Investment operations 36,444 79,702 162,693 104,798
Professional fees 41,121 103,620 80,215 147,274
Computer services 41,032 40,720 76,236 70,928
Interest expense -- -- -- 73,404
--------- ---------- --------- ----------
Total investment expenses 579,442 539,715 1,320,827 894,554
--------- ---------- --------- ----------
Net investment loss (539,732) (458,101) (1,242,860) (670,341)
--------- ---------- --------- ----------
Net realized gain from sales
of equity investments -- 765 375,741 38,879
Realized gains from venture capital
limited partnership investments 16,247 16,454 112,558 245,496
Realized loss from write-off of note
receivable (250,000) -- (250,000) --
--------- ---------- --------- ----------
Net realized (loss) income (233,753) 17,219 238,299 284,375
--------- ---------- --------- ----------
STATEMENTS OF OPERATIONS (unaudited) (continued)
- -----------------------------------------------
(Increase) decrease in unrealized
depreciation:
Equity investments (3,198,648) 3,130,993 (2,889,882) 817,825
Notes receivable 91 (5,888) 310,020 (307,009)
--------- ---------- --------- ----------
Net (increase) decrease in
unrealized depreciation (3,198,557) 3,125,105 (2,579,862) 510,776
--------- ---------- --------- ----------
Other income -- -- 666,667 --
--------- --------- --------- ----------
Net (decrease) increase in
partners' capital resulting
from operations $(3,972,042) $ 2,684,223 $(2,917,756) $ 124,810
========= ========== ========= ==========
Net (decrease) increase in
partners' capital resulting
from operations per Unit $ (17.44) $ 15.73 $ (18.05) $ (0.11)
========= ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
For the Six Months Ended June 30,
-----------------------------------
2002 2001
--------- ---------
Net (decrease) increase in partners'
capital resulting from operations $(2,917,756) $ 124,810
Adjustments to reconcile net (decrease)
increase in partners' capital
resulting from operations to net cash
used by operating activities:
Net realized gain from sales of
equity investments (375,741) (38,879)
Realized gains from venture capital
limited partnership investments (112,558) (245,496)
Realized loss from write-off of
note receivable 250,000 --
Net increase (decrease) in unrealized
depreciation of equity investments 2,889,882 (817,875)
Net (decrease) increase in unrealized
depreciation of notes receivable (310,020) 307,099
Increase in other receivable (666,667) --
Decrease (increase) in accrued
interest on notes receivable 10,446 (31,916)
Decrease in accounts payable
and accrued expenses (23,005) (11,392)
Increase (decrease) in due to
related parties 23,264 (368,270)
Other changes, net 2,514 20,645
---------- ----------
Net cash used by operating
activities (1,229,641) (1,061,274)
---------- ----------
Cash flows from investing activities:
Proceeds from sales of
equity investments 644,775 345,754
Purchase of equity investments (1,446,463) (875,676)
Notes receivable issued -- (500,000)
Repayment of notes receivable 250,000 333
Distributions from venture capital
limited partnerships 25,413 150,016
---------- ----------
Net cash used by investing activities (526,275) (879,573)
---------- ----------
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
Cash flows from financing activities:
Repayment of short-term borrowings -- (3,000,000)
---------- ----------
Net cash used by financing activities -- (3,000,000)
---------- ----------
Net decrease in cash and cash
equivalents (1,755,916) (4,940,847)
Cash and cash equivalents at beginning
of year 6,253,950 10,598,352
---------- ----------
Cash and cash equivalents
at June 30 $ 4,498,034 $ 5,657,505
========== ==========
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. Interim Financial Statements
----------------------------
The accompanying unaudited financial statements included herein have been
prepared in accordance with the requirements of Form 10-Q and, therefore,
do not include all information and footnotes which would be presented were
such financial statements prepared in accordance with generally accepted
accounting principles. These statements should be read in conjunction
with the Annual Report on Form 10-K for the year ended December 31, 2001.
In the opinion of the Managing General Partners, the accompanying interim
financial statements reflect all adjustments necessary for the fair
presentation of the financial position, results of operations, and cash
flows for the interim periods presented. Allocation of income and loss to
Limited and General Partners is based on cumulative income and loss.
Adjustments, if any, are reflected in the current quarter balances. The
results of operations for such interim periods are not necessarily
indicative of results of operations to be expected for the full year.
2. 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 June 30, 2002
and December 31, 2001, was $14,523,796 and $13,827,531, respectively. At
June 30, 2002 and December 31, 2001, gross unrealized depreciation on
investments based on cost for federal income tax purposes was as follows:
June 30, December 31,
2002 2001
------------ ------------
Unrealized appreciation $ 2,613,376 $ 4,155,677
Unrealized depreciation (8,194,494) (7,214,796)
---------- ----------
Net unrealized depreciation $(5,581,118) $(3,059,119)
========== ==========
3. Related Party Transactions
--------------------------
Related party costs are included in investment expenses shown on the
Statements of Operations. Related party expenses for the six months ended
June 30, 2002 and 2001, were as follows:
2002 2001
---------- --------
Management fees $ 85,126 $ 89,549
Individual General Partners'
compensation 21,000 35,297
Reimbursable operating expenses 1,000,452 477,208
Certain reimbursable expenses have been accrued based upon interim
estimates prepared by the Managing General Partners and are adjusted to
actual costs periodically. There was $58,787 due to related parties for
such expenses at June 30, 2002, compared to $36,703 due to related parties
at December 31, 2001.
Management fees due to the Managing General Partners were $14,188 and
$13,008 at June 30, 2002 and December 31, 2001, respectively and were
included in due to related parties.
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 June 30, 2002, 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 $195,886.
4. Equity Investments
------------------
All investments are valued at fair value as determined in good faith by
the Managing General Partners.
Marketable Equity Securities
- ----------------------------
At June 30, 2002 and December 31, 2001, marketable equity securities had
aggregate costs of $3,724,407 and $3,296,350, respectively, and aggregate
market values of $2,033,175 and $2,127,440, respectively. The net
unrealized losses at June 30, 2002 and December 31, 2001, included gross
gains of $25,655 and $283,368, respectively.
Restricted Securities
- ---------------------
At June 30, 2002 and December 31, 2001, restricted securities had
aggregate fair values of $6,903,207 and $8,428,044, respectively,
representing 49.5 percent and 50.0 percent, respectively, of the net
assets of the Partnership.
Significant purchases and sales of equity investments during the six
months ended June 30, 2002, are as follows:
Acusphere, Inc.
- ---------------
In June 2002, the Partnership purchased 237,022 shares of Series J
Preferred stock of the company for $334,201.
Lifecell, Inc.
- --------------
In the second quarter of 2002, the Partnership purchased 200,000 common
shares of the company for $602,761.
Matrix Pharmaceuticals, Inc.
- ----------------------------
In January 2002, the Partnership sold its entire investment in the company
for proceeds of $640,807 and realized a gain of $381,978.
Pharmadigm, Inc.
- ----------------
In May 2002, the Partnership acquired 225,000 shares of Series F Preferred
stock of the company for $225,000.
WorldRes, Inc.
- --------------
In April 2002, the Partnership issued a convertible note for $284,500 to
the company with an interest rate equal to prime plus 4 percent. The note
and accrued interest are due in April 2003.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
The Partnership received stock distributions of Natus Medical, Inc. and
Virage, Inc. with fair values totaling $87,145 and cash distributions of
$25,413 which were recorded as realized gains.
The Partnership recorded a $19,154 decrease in fair value primarily as a
result of the above distributions offset by an increase 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 included in the Partnership's December 31, 2001 Form 10-K.
Subsequent Events
- -----------------
In August 2002, the Partnership purchased 970,761 Series B Preferred
shares of CellzDirect for $375,000.
5. Notes Receivable
----------------
Activity from January 1 through June 30 consisted of:
2002 2001
--------- ---------
Balance at January 1 $212,928 $ 9,779
Notes receivable issued -- 500,000
Repayments of notes receivable (250,000) (333)
Write-off of notes receivable (250,000) --
Change in accrued interest receivable (16,652) 16,097
Net decrease (increase) in unrealized
depreciation of notes receivable 310,020 (307,099)
------- -------
Balance at June 30 $ 6,296 $218,444
======= =======
The interest rate on notes receivable at June 30, 2002 ranged from 16
percent to 50 percent. All notes are due on demand with the exception of
$12,591, due 2004.
In April 2002, the Partnership received $250,000 as payment in full on a
$500,000 note receivable from Thermatrix Inc. The unpaid portion of the
note, $250,000, was written off. Accrued interest of $46,356 was paid in
full.
6. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at June 30, 2002, and December 31, 2001,
consisted of:
2002 2001
--------- --------
Demand accounts $ 356,083 $ 573,206
Money-market accounts 4,141,951 5,680,744
--------- ---------
$4,498,034 $6,253,950
========= =========
7. 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 June 30, 2002, there were unfunded commitments of $659,500.
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 filed a
complaint in federal district court regarding the arbitration; however,
Kanematsu has not filed a motion to vacate the award. A ruling on the
complaint is still pending. The Partnership has recognized revenue and a
receivable of $666,667 as of February 12, 2002, for its proportionate
share of the award.
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.
8. Financial Highlights
--------------------
For The Six Months Ended June 30,
---------------------------------
2002 2001
------ ------
(all amounts on a per Unit basis)
Net asset value,
beginning of period $85.06 $90.64
Loss from investment
operations:
Net investment loss (7.69) --
Net realized and unrealized
loss on investments (10.36) (0.11)
----- -----
Total from investment operations (18.05) (0.11)
----- -----
Net asset value, end of period $67.01 $90.53
===== =====
Total Return (21.22)% (0.12)%
Ratios to average net assets:
Net investment loss (10.11)% (0.00)%
Expenses 10.86% 6.17%
Pursuant to the Partnership Agreement, net profit shall be allocated first
to those Partners with deficit capital account balances until such
deficits have been eliminated. As of June 30, 2002, the General Partners
have a negative capital balance of $3,224,026. Net asset value has been
calculated in accordance with this provision of the Partnership Agreement.
Item 2. 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 included in the Partnership's Form 10-K for the year ended
December 31, 2001. 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.
During the six months ended June 30, 2002, net cash used by operating
activities totaled $1,229,641. The Partnership paid management fees of
$83,946 to the Managing General Partners and reimbursed related parties
for investment expenses of $978,368. In addition, $21,000 was paid to the
Individual General Partners as compensation for their services. Interest
income received totaled $88,413. Other investment expenses of $234,740
were paid.
During the six months ended June 30, 2002, the Partnership funded equity
investments of $1,446,463 primarily to portfolio companies in the
medical/biotechnology industry. Proceeds from equity investment sales
were $644,775 and repayments of notes receivable were $250,000. Cash
distributions of $25,413 were received from venture capital limited
partnership investments. At June 30, 2002, the Partnership had unfunded
commitments of $659,500.
Cash and cash equivalents at June 30, 2002, were $4,498,034. Cash
reserves, interest income on short-term investments, and future proceeds
from equity investment sales are expected to be adequate to fund
Partnership operations and future investments through the next twelve
months.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
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Net decrease in partners' capital resulting from operations was $3,972,042
for the quarter ended June 30, 2002, compared to a net increase in
partners' capital resulting from operations of $2,684,223 for the same
period in 2001.
Net unrealized depreciation on equity investments was $5,669,050 and
$2,470,402 at June 30 and March 31, 2002, respectively. During the
quarter ended June 30, 2002, the Partnership recorded a increase in net
unrealized depreciation on equity investments of $3,198,648 compared to an
decrease in unrealized depreciation of $3,130,993 during 2001. The change
in 2002 was primarily attributable to a decrease in the publicly-traded
price of Endocare, Inc., along with decreases in the fair values of
private portfolio companies in the medical/biotechnology and
communications industries. The 2001 decrease in net unrealized
depreciation on investments was primarily due to an increase in the
publicly-traded price of Endocare, Inc., along with increases in the fair
market values of public companies in the medical, communications and
computer systems and software industries.
During the quarter ended June 30, 2002, realized loss from the write-off
of notes receivable totaled $250,000 and related to notes receivable from
Thermatrix Inc. which were partially repaid and the remainder written off.
There were no amounts written off in the corresponding quarter of 2001.
For the quarters ended June 30, 2002 and 2001, interest income was $39,710
and $81,614, respectively. The decrease was primarily the result lower
cash balances in 2002.
Total investment expenses were $579,442 for the quarter ended June 30,
2002, compared to $539,715 for the same period in 2001. The increase was
primarily due to increased administrative costs offset by decreased
investment monitoring activity and professional fees.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
Current six months compared to corresponding six months in the preceding
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year
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Net decrease in partners' capital resulting from operations was $2,917,756
for the six months ended June 30, 2002, compared to a net increase in
partners' capital resulting from operations of $124,810 for the same
period in 2001.
Net unrealized depreciation on equity investments was $5,669,050 and
$2,779,168 at June 30, 2002 and December 31, 2001, respectively. During
the six months ended June 30, 2002, the Partnership recorded an increase
in net unrealized depreciation on equity investments of $2,889,882
compared to a decrease in net unrealized depreciation of $817,825 during
2001. The change in 2002 was primarily attributable to a decrease in the
publicly-traded price of Endocare, Inc., along with decreases in the fair
values of private portfolio companies in the medical/biotechnology and
communications industries. In 2001, the decrease in net unrealized
depreciation was mainly attributable to an increase in the publicly-traded
price of Endocare, Inc. and an increase in the market value of public
companies in the medical, communications and computer systems and software
industries.
Other income was $666,667 for the six months ended June 30, 2002. 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 filed a
complaint in federal district court regarding the arbitration; however,
Kanematsu has not filed a motion to vacate the award. A ruling on the
complaint is still pending. The Partnership has recognized revenue and a
receivable of $666,667 as of February 12, 2002, for its proportionate
share of the award. There was no such income in the corresponding period
of 2001.
Net unrealized depreciation on notes receivable was $4,843,100 and
$5,153,120 at June 30, 2002 and December 31, 2001, respectively. During
the six months ended June 30, 2002, the net decrease in unrealized
depreciation of notes receivable of $310,020 was primarily due to the
partial payment and subsequent write-off of notes receivable from
Thermatrix Inc. The Partnership recorded a $307,099 decrease in the fair
value of notes receivable during the six months ended June 30, 2001.
For the six months ended June 30, 2002, net realized gain from equity
investment sales of $375,741 was primarily related to the sale of Matrix
Pharmaceuticals, Inc. During the six months ended June 30, 2001, net
realized gain from sales of equity investments was $38,879, and was
primarily related to the sale of Efficient Networks, Inc.
During the six months ended June 30, 2002, realized loss from the
write-off of notes receivable totaled $250,000 and related to notes
receivable from Thermatrix Inc. which were partially repaid and the
remainder written off. There were no amounts written off in the
corresponding period of 2001.
Total investment expenses were $1,320,827 and $894,554 for the six months
ended June 30, 2002 and 2001, respectively. The increase was primarily
due to increased administrative costs and investment monitoring activity,
partially offset by decreased interest expense and professional fees.
During the six months ended June 30, 2002 and 2001, interest income was
$77,967 and $224,213, respectively. The decrease was primarily the result
of decreased cash balances in 2002.
During the six months ended June 30, 2002, the Partnership recorded net
realized gains from venture capital limited partnership investments of
$112,558. These gains represented distributions from profits of venture
capital limited partnership investments. During the same period in 2001,
there were gains of $245,496. The 2001 gains represented distributions
from profits of venture capital limited partnership investments offset by
a $128,912 loss recorded upon the termination of the Alta IV Limited
Partnership in June 2001.
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) A report on Form 8-K was filed by the Registrant on June 28, 2002, to
report the appointment of Grant Thornton LLP as the Partnership's
public accountants. No financial statements were filed. On July 30,
2002, the Partnership filed its Amended and Restated Limited
Partnership Agreement on Form 8-K.
CERTIFICATION
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The undersigned hereby certifies, to such officer's knowledge, that this
report fully complies with the requirements of Section 15(d) of the
Securities Exchange Act of 1934 and that the information contained in the
report fairly presents, in all material respects, the financial condition
and results of operation of the Partnership.
Date: August 14, 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 Limited
SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING PARTNERS III, L.P.
By: TECHNOLOGY FUNDING INC.
TECHNOLOGY FUNDING LTD.
Managing General Partners
Date: August 14, 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 Limited