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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 September 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 Blvd., 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 fair 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)
September 30, December 31,
2002 2001
------------- -------------
ASSETS
Equity investments (cost of
$15,612,061 and $13,334,652 at
September 30, 2002 and December 31,
2001, respectively) $ 8,516,584 $10,555,484
Notes receivable (cost of
$13,057 and $5,366,048 at
September 30, 2002 and December 31,
2001, respectively) 6,528 212,928
---------- ----------
Total investments 8,523,112 10,768,412
Cash and cash equivalents 3,581,770 6,253,950
Other receivables 666,667 --
Other assets 4,705 2,900
---------- ----------
Total assets $12,776,254 $17,025,262
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 58,059 $ 109,574
Due to related parties 25,371 49,711
Other liabilities 1,977 1,977
---------- ----------
Total liabilities 85,407 161,262
Commitments and contingencies
See Note 7.
Partners' capital:
Limited Partners
(160,000 Units outstanding) 15,927,428 20,058,849
General Partners (3,236,581) (3,194,849)
---------- ----------
Total partners' capital 12,690,847 16,864,000
---------- ----------
Total liabilities
and partners' capital $12,776,254 $17,025,262
========== ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal (unaudited)
Amount or September 30, 2002 December 31, 2001
Industry Shares at ------------------ -----------------
(1) Investment September 30, Cost Fair Cost Fair
Company Position Date 2002 Basis Value Basis Value
- ------------- -------- ---------- ---------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
1.1% and 2.7% at September 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 240,375 990,716 139,415 990,716 456,713
--------- --------- --------- ---------
990,716 139,415 997,899 456,713
--------- --------- --------- ---------
Computers and Computer Equipment
- --------------------------------
1.1% and 0.7% at September 30, 2002 and December 31, 2001, respectively
- -----------------------------------------------------------------------
White Electronic
Designs Common
Corporation shares 2000 19,125 120,095 143,246 120,095 117,619
--------- --------- --------- ---------
120,095 143,246 120,095 117,619
--------- --------- --------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Computer Systems and Software
- -----------------------------
0.0% and 0.0% at September 30, 2002 and December 31, 2001, respectively
- -----------------------------------------------------------------------
Ascential Software Common
Corporation shares 2001 -- -- -- 0 867
Virage, Inc. Common
Shares 2002 1,022 1,188 797 1,194 1,569
--------- --------- --------- ---------
1,188 797 1,194 2,436
--------- --------- --------- ---------
Environmental
- -------------
0.1% and 0.1% at September 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
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
--------- --------- --------- ---------
High Tech/Financial
- -------------------
2.2% and 0.0% at September 30, 2002 and December 31, 2001, respectively
- -----------------------------------------------------------------------
Vencore Solutions, Series A
LLC units 2002 625,000 625,000 250,000 -- --
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Vencore Solutions, Series A
LLC warrants
at $0.001
expiring
2007 2002 62,500 0 24,975 -- --
---------- ---------- ---------- ----------
625,000 274,975 -- --
---------- ---------- ---------- ----------
Information Technology
- ----------------------
5.0% and 4.3% at September 30, 2002 and December 31, 2001, respectively
- -----------------------------------------------------------------------
WorldRes, Inc. Common 1997-
(a) (b) shares 2001 604,392 2,218,124 543,953 2,218,124 725,271
WorldRes, Inc. Convertible
(a) (b) note (2) 2002 $284,500 296,981 89,094 -- --
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
--------- --------- --------- ---------
2,515,300 633,047 2,218,319 725,271
--------- --------- --------- ---------
Medical/Biotechnology
- ---------------------
52.6% and 50.1% at September 30, 2002 and December 31, 2001, respectively
- -------------------------------------------------------------------------
Acusphere, Inc. Preferred 1995-
(a) shares 2002 690,437 1,536,176 389,406 1,201,975 1,292,233
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 65,515 224,623 205,737
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
CareCentric Common
Solutions, Inc. shares 1999 47,836 382,875 17,221 382,875 28,702
CellzDirect, Preferred
Inc. shares 2002 970,761 375,000 150,000 -- --
CollaGenex
Pharmaceuticals, Common
Inc. shares 2001 6,819 54,444 42,960 54,444 55,234
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 3,526,908 1,416,252 4,419,110
LifeCell Common 1992-
Corporation shares 2002 551,060 1,866,335 991,909 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 57,599 -- --
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
Sanarus Medical, Bridge Loan
Inc. (a) (b) warrants at
exercise
price TBD;
expiring
2006 2001 195 195 98 195 98
---------- ---------- ---------- ----------
9,996,625 6,673,596 8,634,008 8,444,622
---------- ---------- ---------- ----------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
5.0% and 4.7% at September 30, 2002 and December 31, 2001, respectively
- -----------------------------------------------------------------------
Batterson,
Johnson and Ltd.
Wang Limited Partnership
Partnership (a) interests various $500,000 0 0 0 73,955
Columbine Ltd.
Venture Fund II, Partnership
L.P. (a) interests various $750,000 415,224 207,612 415,224 199,123
Delphi Ltd.
Ventures, L.P. Partnership
(a) interests various $1,000,000 652,842 326,421 652,842 243,009
Medical Science Ltd.
Partners, L.P. Partnership
(a) interests various $500,000 187,222 93,611 187,222 194,394
O,W&W Pacrim Ltd.
Investments Partnership
Limited (a) interests various 200 505 250 505 63,060
Trinity Ventures Ltd.
IV, L.P. (a) Partnership
interests various $125,008 23,453 11,726 23,453 23,394
---------- ---------- ---------- ----------
1,279,246 639,620 1,279,246 796,935
---------- ---------- ---------- ----------
Total equity investments - 67.1% and 62.6% at
September 30, 2002 and December 31, 2001,
respectively 15,612,061 8,516,584 13,334,652 10,555,484
---------- ---------- ---------- ----------
Notes Receivable, Net
- ---------------------
Avalon Vision Secured
Solutions, note, 16%,
Inc. due 2004 1999 $11,676 13,057 6,528 12,303 6,152
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Sutmyn Secured
Storage note, 50%,
Corporation due on
(b) demand 2000 -- -- -- 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
September 30, 2002 and December 31, 2001,
Respectively 13,057 6,528 5,366,048 212,928
---------- ---------- ---------- ----------
Total investment - 67.1% and 63.9% at
September 30, 2002 and December 31, 2001,
Respectively $15,625,118 $ 8,523,112 $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 9/30/02 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.
STATEMENT OF OPERATIONS (unaudited)
- -----------------------------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Investment income:
Notes receivable interest $ 6,742 $ 21,779 $ 43,305 $ 59,873
Short-term investment interest 13,964 38,468 55,368 224,587
--------- --------- --------- ---------
Total investment income 20,706 60,247 98,673 284,460
Investment expenses:
Management fees 35,270 44,068 120,396 133,617
Individual General Partners'
compensation 10,500 14,858 31,500 50,155
Administrative and investor services 197,521 181,417 1,093,078 554,721
Investment operations 41,196 30,714 203,889 135,512
Professional fees 17,107 54,945 97,322 202,219
Computer services 25,612 38,891 101,848 109,819
Interest expense -- -- -- 73,404
--------- --------- --------- ---------
Total investment expenses 327,206 364,893 1,648,033 1,259,447
--------- --------- --------- ---------
Net investment loss (306,500) (304,646) (1,549,360) (974,987)
--------- --------- --------- ---------
Net realized (loss) gain from sales
of equity investments -- (4,045) 375,741 34,834
Realized gains from venture capital
limited partnership investments 18,390 14,904 130,948 260,400
Realized loss from investment
write-offs (4,836,806) (1,727,140) (5,086,806) (1,727,140)
Realized gain from recovery of
investments previously written off 459,375 -- 459,375 --
--------- --------- --------- ---------
Net realized (loss) income (4,359,041) (1,716,281) (4,120,742) (1,431,906)
--------- --------- --------- ---------
STATEMENTS OF OPERATIONS (unaudited) (continued)
- -----------------------------------------------
(Increase) decrease in unrealized
depreciation:
Equity investments (1,426,427) (46,329) (4,316,309) 771,546
Notes receivable 4,836,571 (301) 5,146,591 (307,400)
--------- --------- --------- ---------
Net decrease (increase) in
unrealized depreciation 3,410,144 (46,630) 830,282 464,146
--------- --------- --------- ---------
Other income -- -- 666,667 --
--------- --------- --------- ---------
Net decrease in partners'
capital resulting from
operations $(1,255,397) $(2,067,557)$(4,173,153)$(1,942,747)
========= ========= ========= =========
Net decrease in partners'
capital resulting
from operations per Unit $ (7.77) $ (11.91)$ (25.82)$ (12.02)
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
For the Nine Months Ended September 30,
---------------------------------------
2002 2001
--------- ---------
Net decrease partners' capital
resulting from operations $(4,173,153) $(1,942,747)
Adjustments to reconcile net decrease
in partners' capital resulting
from operations to net cash
used by operating activities:
Net realized gain from sales of
equity investments (375,741) (34,834)
Realized gains from venture capital
limited partnership investments (130,948) (260,400)
Realized gain from recovery of
investments previously written off (459,375) --
Realized loss from investment
write off 5,086,806 1,727,140
Net increase (decrease) in unrealized
depreciation of equity investments 4,316,309 (771,546)
Net (decrease) increase in unrealized
depreciation of notes receivable (5,146,591) 307,400
Increase in other receivable (666,667) --
Decrease (increase) in accrued
interest on notes receivable 3,704 (35,145)
Decrease in accounts payable
and accrued expenses (51,515) (32,637)
Decrease in due to related parties (24,340) (246,131)
Other changes, net (1,805) 22,459
---------- ----------
Net cash used by operating
activities (1,623,316) (1,266,441)
---------- ----------
Cash flows from investing activities:
Proceeds from sales of
equity investments 644,775 351,188
Purchase of equity investments (2,446,463) (1,625,676)
Notes receivable issued -- (500,000)
Proceeds from recovery of
investments 459,375 --
Repayment of notes receivable 250,000 333
Distributions from venture capital
limited partnership investments 43,449 162,516
---------- ----------
Net cash used by investing activities (1,048,864) (1,611,639)
---------- ----------
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 (2,672,180) (5,878,080)
Cash and cash equivalents at beginning
of year 6,253,950 10,598,352
---------- ----------
Cash and cash equivalents
at September 30 $ 3,581,770 $ 4,720,272
========== ==========
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 September 30,
2002 and December 31, 2001, was $15,526,634 and $13,827,531, respectively.
At September 30, 2002 and December 31, 2001, gross unrealized depreciation
on investments based on cost for federal income tax purposes was as
follows:
September 30, December 31,
2002 2001
------------ ------------
Unrealized appreciation $ 2,839,691 $ 4,155,677
Unrealized depreciation (9,843,213) (7,214,796)
---------- ----------
Net unrealized depreciation $(7,003,522) $(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 nine months
ended September 30, 2002 and 2001, were as follows:
2002 2001
---------- --------
Management fees $ 120,396 $133,617
Individual General Partners'
compensation 31,500 50,155
Reimbursable operating expenses 1,210,063 679,079
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 $16,046 due to related parties for
such expenses at September 30, 2002, compared to $36,703 due to related
parties at December 31, 2001.
Management fees due to the Managing General Partners were $9,325 and
$13,008 at September 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 September 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 $214,866.
4. Equity Investments
------------------
All investments are valued at fair value as determined in good faith by
the Managing General Partners.
Marketable Equity Securities
- ----------------------------
At September 30, 2002 and December 31, 2001, marketable equity securities
had aggregate costs of $3,724,761 and $3,296,350, respectively, and
aggregate market values of $1,458,664 and $2,127,440, respectively. The
net unrealized losses at September 30, 2002 and December 31, 2001,
included gross gains of $23,151 and $283,368, respectively.
Restricted Securities
- ---------------------
At September 30, 2002 and December 31, 2001, restricted securities had
aggregate fair values of $7,057,920 and $8,428,044, respectively,
representing 55.6 percent and 50.0 percent, respectively, of the net
assets of the Partnership.
Significant purchases and sales of equity investments during the nine
months ended September 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.
CellzDirect, Inc.
- -----------------
In August 2002, the Partnership purchased 970,761 Series B preferred
shares of the company for $375,000.
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.
Vencore Solutions, LLC
- ----------------------
During September 2002, the Partnership acquired 625,000 Series A units of
the Limited Liability Company for $625,000. In addition, a warrant for
62,500 Series A units was issued.
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 $87,499 and cash distributions of
$43,449 which were recorded as realized gains.
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
- -----------------
Subsequent to September 30, 2002, the fair value of the Partnership's
investment in Endocare, Inc. decreased by $2,777,656 as a result of a
decrease in the publicly-traded price on November 8, 2002.
5. Notes Receivable
----------------
Activity from January 1 through September 30 consisted of:
2002 2001
--------- ---------
Balance at January 1 $ 212,928 $ 9,779
Notes receivable issued -- 500,000
Repayment of notes receivable (250,000) (333)
Write-off of notes receivable and
accrued interest (5,086,806) --
Change in accrued interest receivable (16,185) 17,076
Net decrease (increase) in unrealized
depreciation of notes receivable 5,146,591 (307,400)
--------- -------
Balance at September 30 $ 6,528 $219,122
========= =======
The interest rate on notes receivable at September 30, 2002 was 16
percent. All notes are due in 2004.
In April 2002, the Partnership received a $250,000 payment on a $500,000
note receivable from Thermatrix Inc. Accrued interest of $46,356 was paid
in full. The remaining portion of the note, $250,000, was written off.
During the third quarter of 2002, the Partnership recovered from
Thermatrix Inc. $250,000 for the portion of the note written off.
In September 2002, notes receivable and accrued interest due from Sutmyn
Storage Corporation in the amount of $4,836,806 were written off. The
fair value of these notes was reduced to zero during 2000 and it has been
determined by the Managing General Partners that there will be no recovery
on the notes as the company has ceased operations.
6. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at September 30, 2002, and December 31, 2001,
consisted of:
2002 2001
--------- --------
Demand accounts $ 425,855 $ 573,206
Money-market accounts 3,155,915 5,680,744
--------- ---------
$3,581,770 $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 September 30, 2002, there were unfunded commitments of $784,500.
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 immediately
filed a petition to vacate the award, and on October 9, 2002 the original
award was upheld by the Federal District Court. Kanematsu has filed an
appeal seeking to overturn the court's confirmation of the arbitration
decision. 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 Nine Months Ended September 30,
---------------------------------------
2002 2001
------ ------
(all amounts on a per Unit basis)
Net asset value,
beginning of period $84.91 $88.62
Loss from investment
operations:
Net investment loss (5.46) (6.03)
Net realized and unrealized
loss on investments (20.36) (5.99)
----- -----
Total from investment operations (25.82) (12.02)
----- -----
Net asset value, end of period $59.09 $76.60
===== =====
Total Return (30.41)% (13.56)%
Ratios to average net assets:
Net investment loss (7.59)% (7.30)%
Expenses 14.31% 9.53%
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 September 30, 2002, the General
Partners have a negative capital balance of $3,236,581. 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 nine months ended September 30, 2002, net cash used by
operating activities totaled $1,623,316. The Partnership paid management
fees of $124,079 to the Managing General Partners and reimbursed related
parties for investment expenses of $1,230,720. In addition, $31,500 was
paid to the Individual General Partners as compensation for their
services. Interest income received totaled $102,377. Other investment
expenses of $339,394 were paid.
During the nine months ended September 30, 2002, the Partnership funded
equity investments of $2,446,463 primarily to portfolio companies in the
high tech/financial and medical/biotechnology industries. Proceeds from
equity investment sales were $644,775 and repayments of notes receivable
were $250,000. Cash distributions of $43,449 were received from venture
capital limited partnership investments. The Partnership received
$459,375 as a recovery of investments in Thermatrix Inc. which were
previously written off. At September 30, 2002, the Partnership had
unfunded commitments of $784,500.
Cash and cash equivalents at September 30, 2002, were $3,581,770. 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
- -----------------------------------------------------------------------
Net decrease in partners' capital resulting from operations was $1,255,397
for the quarter ended September 30, 2002, compared to a net decrease of
$2,067,557 for the same period in 2001.
Realized loss from investment write offs total $4,836,806 during the
quarter ended September 30, 2002, and relate to notes and interest
receivable from Sutmyn Storage Corporation. The fair value of these notes
was reduced to zero during 2000 and it has been determined by the Managing
General Partners that there will be no recovery on the notes as the
company has ceased operations. During the quarter ended September 30,
2001, realized loss from investment write offs totaled $1,727,140. This
amount related to the write off of investments in Adesso Healthcare
Technology Services, Inc.
Net unrealized depreciation on notes receivable was $6,529 and $4,843,100
at September 30, and June 30, 2002, respectively. During the quarter
ended September 30, 2002, the net decrease in unrealized depreciation of
notes receivable of $4,836,571 was mainly attributable to the write off of
notes receivable from Sutmyn Storage Corporation. During the quarter
ended September 30, 2001, the Partnership recorded a $301 decrease in the
fair value of notes receivable.
Net unrealized depreciation on equity investments was $7,095,477 and
$5,669,050 at September 30 and June 30, 2002, respectively. During the
quarter ended September 30, 2002, the Partnership recorded an increase in
net unrealized depreciation on equity investments of $1,426,427 compared
to an increase in unrealized depreciation of $46,329 during 2001. The
change in 2002 was primarily attributable to decreases in the fair values
of private portfolio companies in the medical/biotechnology industry and a
decrease in the publicly-traded price of LifeCell Corporation, partially
offset by an increase in the publicly-traded price of Endocare, Inc. The
change in 2001 was primarily attributable to decreases in the fair values
of companies in the medical, communications and computer systems and
software industries, partially offset by the write off of Adesso
Healthcare Technology Services, Inc.
During the quarter ended September 30, 2002, the Partnership recovered
$459,375 from Thermatrix Inc. for equity and note receivable investments
previously written off. This was recorded as a realized gain. During the
same quarter in 2001, there were no recoveries.
For the quarters ended September 30, 2002 and 2001, interest income was
$20,706 and $60,247, respectively.
Total investment expenses were $327,206 for the quarter ended September
30, 2002, compared to $364,893 for the same period in 2001.
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 nine months compared to corresponding nine months in the preceding
- --------------------------------------------------------------------------
year
- -----
Net decrease in partners' capital resulting from operations was $4,173,153
for the nine months ended September 30, 2002, compared to a net decrease
of $1,942,747 for the same period in 2001.
During the nine months ended September 30, 2002, realized loss from
investment write offs total $5,086,806. The fair value of notes
receivable and accrued interest due from Sutmyn Storage Corporation in the
amount of $4,836,806 was reduced to zero during 2000 and it has been
determined by the Managing General Partners that there will be no recovery
on the notes as the company has ceased operations; therefore the cost of
these notes should be written off. The Partnership wrote off a $250,000
investment in a note receivable from Thermatrix Inc. which was
subsequently recovered and realized as a gain. During the nine months
ended September 30, 2001, realized loss from investment write offs totaled
$1,727,140. This amount related to the write off of investments in Adesso
Healthcare Technology Services, Inc.
Net unrealized depreciation on notes receivable was $6,529 and $5,153,120
at September 30, 2002 and December 31, 2001, respectively. During the
nine months ended September 30, 2002, the net decrease in unrealized
depreciation of notes receivable of $5,146,591 was mainly attributable to
the write off of notes receivable from Sutmyn Storage Corporation. During
the nine months ended September 30, 2001, the Partnership recorded a
$307,400 decrease in the fair value of notes receivable issued to
Thermatrix Inc.
Net unrealized depreciation on equity investments was $7,095,477 and
$2,779,168 at September 30, 2002 and December 31, 2001, respectively.
During the nine months ended September 30, 2002, the Partnership recorded
an increase in net unrealized depreciation on equity investments of
$4,316,309 compared to a decrease in net unrealized depreciation of
$771,546 during 2001. The increase in 2002 was primarily attributable to
decreases in the fair values of private portfolio companies in the
medical/biotechnology industry along with decreases in the publicly-traded
prices of companies in the communications and medical/biotechnology
industries. The change in 2001 was primarily attributable to an increase
in the publicly-traded price of Endocare, Inc. and the write off of Adesso
Healthcare Technology Services, partially offset by a decrease in
publicly-traded price of Matrix Pharmaceutical, Inc. and decreases in the
fair values of portfolio companies in the medical/biotechnology and
information technology industries.
Other income was $666,667 for the nine months ended September 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 immediately
filed a petition to vacate the award, and on October 9, 2002 the original
award was upheld by the Federal District Court. Kanematsu has filed an
appeal seeking to overturn the court's confirmation of the arbitration
decision. 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.
Total investment expenses were $1,648,033 and $1,259,447 for the nine
months ended September 30, 2002 and 2001, respectively. The increase was
primarily due to increased administrative and personnel costs and investor
monitoring activity partially offset by decreased interest expense and
professional fees.
For the nine months ended September 30, 2002, net realized gain from
equity investment sales of $375,741 was primarily related to the sale of
Matrix Phamaceuticals, Inc. Net realized gain from sales of equity
investments of $34,834 for the nine months ended September 30, 2001,
primarily related to the sale of Efficient Networks, Inc.
During the nine months ended September 30, 2002, the Partnership recovered
$459,375 from Thermatrix Inc. for equity and note receivable investments
previously written off. This was recorded as a realized gain. During the
same period in 2001 there were no recoveries.
During the nine months ended September 30, 2002 and 2001, interest income
was $98,673 and $284,460, respectively. The decrease was primarily the
result of secured notes receivable being placed on non-accrual status.
During the nine months ended September 30, 2002, the Partnership recorded
net realized gains from venture capital limited partnership investments of
$130,948. During the same period in 2001, there were gains of $260,400.
The gains represent distributions from profits of venture capital limited
partnership investments.
Item 4. Procedures and Controls
The undersigned is responsible for establishing and maintaining disclosure
controls and procedures for Technology Funding Partners III, L.P. Such
officer has concluded (based upon his evaluation of these controls and
procedures as of a date within 90 days of the filing of this report) that
Technology Funding Partners III, L.P.'s disclosure controls and procedures
are effective to ensure that information required to be disclosed by
Technology Funding Partners III, L.P. in this report is accumulated and
communicated to Technology Funding Partners III, L.P.'s management,
including its principal executive officers as appropriate, to allow timely
decisions regarding required disclosure.
The certifying officer also has indicated that there were no significant
changes in Technology Funding Partners III, L.P.'s internal controls or
other factors that could significantly affect such controls subsequent to
the date of their evaluation, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
CERTIFICATION
-------------
I, Charles R. Kokesh, President, Chief Executive Officer, Chief Financial
Officer and Chairman of Technology Funding Inc. and Managing General
Partner of Technology Funding Limited, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Technology
Funding Partners III, L.P.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by
others within the entity, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 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
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) On July 30, 2002, the Partnership filed its Amended and Restated
Limited Partnership Agreement on Form 8-K.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING PARTNERS III, L.P.
By: TECHNOLOGY FUNDING INC.
TECHNOLOGY FUNDING LTD.
Managing General Partners
Date: November 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
CERTIFICATION
-------------
In connection with the Technology Funding Partners III, L.P. (the
Partnership) Quarterly Report on Form 10-Q for the period ending September
30, 2002, as filed with the Securities and Exchange Commission (the
Report), I Charles, R. Kokesh, President, Chief Executive Officer, Chief
Financial Officer and Chairman of Technology Funding Inc. and Managing
General Partner of Technology Funding Limited, certify, pursuant to 18
U.S.C. Section 1350, as added Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 15(d)
of the Securities Exchange Act of 1934; and
2. To my knowledge, the information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Partnership as of and for the period
covered by the Report.
Date: November 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
Technology Funding Partners III, L.P. 11/13/2002 4:26 PM
(a Delaware limited partnership)
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