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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, 2003
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12B-2 of the Act). Yes No X
--- ---
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,
2003 2002
----------- ------------
ASSETS
Equity investments (cost of
$15,477,516 and $14,941,698 for
June 30, 2003, and December 31,
2002, respectively) $ 7,351,915 $ 4,882,170
Notes receivable (cost of
$13,420 and $13,045 for
June 30, 2003, and December 31,
2002, respectively) 2,684 2,608
---------- ----------
Total investments 7,354,599 4,884,778
Cash and cash equivalents 1,133,516 2,318,947
Prepaid expenses 233,885 262,841
Other receivable 325,835 774,298
Other assets -- 3,265
---------- ----------
Total assets $ 9,047,835 $ 8,244,129
========== ==========
BALANCE SHEETS (unaudited) (continued)
- --------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 58,125 $ 65,445
Due to related parties 101,111 47,611
Other liabilities 4,263 1,977
---------- ----------
Total liabilities 163,499 115,033
Commitments and contingencies
(See Note 8)
Partners' capital:
Limited Partners
(160,000 Units outstanding) 11,415,254 11,411,295
General Partners (2,530,918) (3,282,199)
---------- ----------
Total partners' capital 8,884,336 8,129,096
---------- ----------
Total liabilities
and partners' capital $ 9,047,835 $ 8,244,129
========== ==========
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal
Amount or June 30, 2003 December 31, 2002
Industry Shares at ----------------- -----------------
(1) Investment June 30, Cost Fair Cost Fair
Company Position Date 2003 Basis Value Basis Value
- ------------- -------- ---------- ---------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
9.6% and 5.4% at June 30, 2003, and December 31, 2002, respectively
- -------------------------------------------------------------------
iVillage Inc. Common 1996-
shares 2000 240,375 990,716 355,757 990,716 225,953
WorldRes.com, Inc. Common 1997-
(a) (b) shares 2001 604,392 2,218,124 181,317 2,218,124 181,317
WorldRes.com, Inc. Convertible
(a) (b) note (2) 2002 $284,500 314,653 314,653 303,014 30,301
--------- --------- --------- ---------
3,523,493 851,727 3,511,854 437,571
--------- --------- --------- ---------
Environmental
- -------------
0.0% and 0.0% at June 30, 2003, and December 31, 2002, respectively
- -------------------------------------------------------------------
Triangle
Biomedical Common
Sciences, Inc.(a) shares 1999 4,099 79,792 0 79,792 0
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Triangle Common
Biomedical share
Sciences, Inc.(a) warrants at
$28.00;
expiring
2009 1999 4,099 4,099 0 4,099 0
--------- --------- --------- ---------
83,891 0 83,891 0
--------- --------- --------- ---------
High Tech/Financial
- -------------------
3.1% and 3.4% at June 30, 2003, and December 31, 2002, respectively
- -------------------------------------------------------------------
VenCore Solutions, LLC
LLC (a)(b) units 2002 625,000 625,000 250,000 625,000 250,000
VenCore Solutions, LLC unit
LLC (a)(b) warrants
at $0.001;
expiring
2007 2002 62,500 0 24,975 0 24,975
---------- ---------- ---------- ----------
625,000 274,975 625,000 274,975
---------- ---------- ---------- ----------
Information Technology
- ----------------------
4.8% and 4.5% at June 30, 2003, and December 31, 2002, respectively
- -------------------------------------------------------------------
KeyEye
Communications, Common
Inc. (a)(b) shares 2002 3,142,856 550,000 220,000 550,000 220,000
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Virage, Inc. Common
shares 2002 1,022 1,188 859 1,188 716
White Electronic Common
Designs shares
Corporation 2000 19,125 120,095 201,769 120,095 146,306
--------- --------- --------- ---------
671,283 422,628 671,283 367,022
--------- --------- --------- ---------
Medical/Biotechnology
- ---------------------
61.6% and 41.8% at June 30, 2003, and December 31, 2002, respectively
- ---------------------------------------------------------------------
Acusphere, Inc. Preferred 1995-
(a) shares 2002 690,437 1,536,176 486,758 1,536,176 97,350
Acusphere, Inc. Convertible
(a) note (2) 2003 $292,110 296,712 148,352 -- --
Applied Molecular Common
Evolution, Inc. shares 2001 16,713 224,623 68,858 224,623 34,262
CareCentric Common
Solutions, Inc. shares 1999 47,836 382,875 32,528 382,875 31,093
CellzDirect, Preferred
Inc. (a)(b) shares 2002 970,761 375,000 75,000 375,000 75,000
CollaGenex
Pharmaceuticals, Common
Inc. shares 2001 6,819 54,444 90,420 54,444 64,712
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 1,010,504 1,416,252 261,252
Hemoxymed, Inc.
(formerly
Molecular
Geriatrics Common
Corporation)(a) shares 1993 15,528 125,000 1,398 125,000 854
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
LifeCell Common 1992-
Corporation shares 2002 551,060 1,866,336 2,810,406 1,866,336 1,658,690
Natus Medical, Common
Inc. shares 2002 16,225 84,484 73,808 84,484 64,738
Pharmadigm, Preferred 1993-
Inc. (a) (b) shares 2002 771,143 1,170,039 308,457 1,170,039 308,457
Pherin
Pharmaceuticals, Preferred
Inc. (a) shares 1991 -- -- -- 200,000 106,000
Sanarus Medical, Preferred 2000-
Inc. (a) (b) shares 2001 807,508 1,335,000 278,960 1,335,000 697,400
Sanarus Medical, Convertible
Inc. (a) (b) note 2003 $422,776 427,467 85,493 -- --
Sanarus Medical, Bridge loan
Inc. (a) (b) warrants at
exercise
price TBD;
expiring
2006 2001 195 195 39 195 98
---------- ---------- ---------- ----------
9,294,603 5,470,981 8,770,424 3,399,906
---------- ---------- ---------- ----------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
3.7% and 5.0% at June 30, 2003, and December 31, 2002, respectively
- -------------------------------------------------------------------
Columbine Ltd.
Venture Fund II, Partnership
L.P. (a) interests various $750,000 415,224 176,475 415,224 176,475
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Delphi Ltd.
Ventures, L.P. Partnership
(a) interests various $1,000,000 652,842 49,541 652,842 120,633
Medical Science Ltd.
Partners, L.P. Partnership
(a) interests various $500,000 187,222 93,611 187,222 93,611
O,W&W Pacrim Ltd.
Investments Partnership
Limited (a) interests various 200 505 250 505 250
Trinity Ventures Ltd.
IV, L.P. (a) Partnership
interests various $125,008 23,453 11,727 23,453 11,727
---------- ---------- ---------- ----------
1,279,246 331,604 1,279,246 402,696
---------- ---------- ---------- ----------
Total equity investments - 86.7% and 60.1% at
June 30, 2003, and December 31, 2002,
respectively 15,477,516 7,351,915 14,941,698 4,882,170
---------- ---------- ---------- ----------
Notes Receivable, Net
- ---------------------
Avalon Vision Secured
Solutions, note, 16%,
Inc. due 2004 1999 $11,676 13,420 2,684 13,045 2,608
---------- ---------- ---------- ----------
Total notes receivable - 0.0% and 0.0% at
June 30, 2003, and December 31, 2002,
respectively 13,420 2,684 13,045 2,608
---------- ---------- ---------- ----------
Total investment - 82.8% and 60.1% at
June 30, 2003, and December 31, 2002
respectively $15,490,936 $ 7,354,599 $14,954,743 $ 4,884,778
========== ========== ========== ==========
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
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 06/30/03 and 12/31/02.
(2) The Partnership has no income-producing equity investments except for convertible notes which
include accrued interest. The interest rate on these notes during the quarter ended June 30,
2003, ranged from 6 to 10 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,
--------------------- ---------------------
2003 2002 2003 2002
------ ------ ------ ------
Investment income:
Notes receivable interest $ 15,617 $ 20,649 $ 21,872 $ 36,563
Short-term investment interest 4,393 19,061 9,929 41,404
--------- ---------- --------- ----------
Total investment income 20,010 39,710 31,801 77,967
Investment expenses:
Management fees 19,062 42,563 39,672 85,126
Individual General Partners'
compensation 15,000 8,121 30,000 21,000
Administrative and investor services 276,860 410,161 829,215 895,557
Investment operations 55,581 36,444 218,836 162,693
Professional fees 30,955 41,121 115,143 80,215
Computer services 23,556 41,032 46,245 76,236
--------- ---------- --------- ----------
Total investment expenses 421,014 579,442 1,279,111 1,320,827
--------- ---------- --------- ----------
Net investment loss (401,004) (539,732) (1,247,310) (1,242,860)
--------- ---------- --------- ----------
STATEMENTS OF OPERATIONS (unaudited) (continued)
- -----------------------------------------------
Net realized gain from sales
of equity investments -- -- -- 375,741
Realized loss from write-off of
equity investments -- -- (200,000) --
Realized gains from venture capital
limited partnership investments 4,000 16,247 75,092 112,558
Realized loss from write-off of note
receivable -- (250,000) -- (250,000)
--------- ---------- --------- ----------
Net realized income (loss) 4,000 (233,753) (124,908) 238,299
--------- ---------- --------- ----------
Decrease (increase) in unrealized
depreciation:
Equity investments 1,908,391 (3,198,648) 1,933,927 (2,889,882)
Notes receivable 75 91 (299) 310,020
--------- ---------- --------- ----------
Net decrease (increase) in
unrealized depreciation 1,908,466 (3,198,557) 1,933,628 (2,579,862)
--------- ---------- --------- ----------
Other income -- -- 193,830 666,667
--------- --------- --------- ----------
Net increase (decrease) in
partners' capital resulting
from operations $1,511,462 $ (3,972,042) $ 755,240 $(2,917,756)
========= ========== ========= ==========
Net increase (decrease) in
partners' capital resulting
from operations per Unit $ 4.70 $ (17.44) $ .02 $ (18.05)
========= ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
For the Six Months Ended June 30,
---------------------------------
2003 2002
--------- ---------
Net increase (decrease) in partners'
capital resulting from operations $ 755,240 $(2,917,756)
Adjustments to reconcile net increase
(decrease) in partners' capital
resulting from operations to net
cash used by operating activities:
Net realized gain from sales of
equity investments -- (375,741)
Realized gains from venture capital
limited partnership investments (75,092) (112,558)
Realized loss from write-off of
equity investments 200,000 --
Realized loss from write-off of
note receivable -- 250,000
Net (decrease) increase in unrealized
depreciation of equity investments (1,933,927) 2,889,882
Net increase (decrease) in unrealized
depreciation of notes receivable 299 (310,020)
Decrease in prepaid expenses 28,956 --
Decrease (increase) in other
receivables 448,463 (666,667)
(Increase) decrease in accrued
interest on notes receivable (21,307) 10,446
Decrease in accounts payable
and accrued expenses (7,320) (23,005)
Increase (decrease) in due to
related parties 53,500 (23,264)
Other changes, net 5,551 2,514
--------- ---------
Net cash used by
operating activities (545,637) (1,229,641)
--------- ---------
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
Cash flows from investing activities:
Proceeds from sales of
equity investments -- 644,775
Purchase of equity investments (714,886) (1,446,463)
Repayment of notes receivable -- 250,000
Distribution from venture capital
limited partnership investments 75,092 25,413
--------- ---------
Net cash used by investing
activities (639,794) (526,275)
--------- ---------
Net decrease in cash and
cash equivalents (1,185,431) (1,755,916)
Cash and cash equivalents at beginning
of year 2,318,947 6,253,950
--------- ---------
Cash and cash equivalents
at June 30 $1,133,516 $4,498,034
========= =========
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 in the United States of
America. These statements should be read in conjunction with the
Annual Report on Form 10-K for the year ended December 31, 2002. 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 of America, which
may not equate to tax accounting. The cost of investments on a tax
basis at June 30, 2003, and December 31, 2002, was $16,964,452 and
$16,102,424, respectively. At June 30, 2003, and December 31, 2002,
gross unrealized depreciation on investments based on cost for federal
income tax purposes was as follows:
June 30, 2003 December 31, 2002
------------- -----------------
Unrealized appreciation $ 1,260,225 $ 264,350
Unrealized depreciation (10,396,364) (11,481 996)
---------- ----------
Net unrealized depreciation $ (9,136,139) $(11,217,646)
========== ==========
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, 2003 and 2002, were as follows:
2003 2002
--------- --------
Management fees $ 39,672 $ 85,126
Individual General Partners'
compensation 30,000 21,000
Operating expenses reimbursed to
related parties 1,061,450 1,000,452
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 $91,915 due to related parties
for such expenses at June 30, 2003, compared to $36,866 due to related
parties at December 31, 2002.
Management fees due to the Managing General Partners were $9,196 at
June 30, 2003. At December 31, 2002, management fees of $10,745 were
due to the Managing General Partners. These 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, 2003,
the Partnership and affiliated partnerships had an indirect interest in
non-transferable Endocare, Inc., non-transferable Sanarus Medical, Inc.
and White Electronic Designs Corporation options with a fair value of
$61,120.
Retention bonuses were offered to and accepted by key employees of the
Managing General Partners in late 2002. The expense for these bonuses,
which were approved by the Individual General Partners during the
September 2002 Management Committee meeting, was prepaid by the
Partnership in October and December 2002. The amount of prepaid
operating expenses was $272,793. The bonuses, incremented by annual
salary increases, will be paid to those individuals who are still full-
time employees of the Managing General Partners in April 2007. The
expense for the bonus is recognized ratably over the beneficial period,
October 2002 to April 2007. As of June 30, 2003, the Partnership has
recognized expense of $28,956. Upon the resignation of personnel no
adjustment to the retention bonus amount previously paid by the
Partnership to the Managing General Partners shall occur until a
replacement person is hired.
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, 2003, and December 31, 2002, marketable equity securities
had aggregate costs of $3,724,761, and aggregate fair values of
$3,634,405 and $2,226,470, respectively. The net unrealized losses at
June 30, 2003, and December 31, 2002, included gross gains of
$1,066,408 and $75,249, respectively.
Restricted Securities
- ---------------------
At June 30, 2003, and December 31, 2002, restricted securities had
aggregate costs of $11,752,755 and $11,216,937, respectively, and
aggregate fair values of $3,717,510 and $2,655,700, respectively,
representing 41.8 percent and 33.2 percent, respectively, of the net
assets of the Partnership.
Significant purchases, sales and write-offs of equity investments
during the quarter ended June 30, 2003, are as follows:
Acusphere, Inc.
- --------------
In April and June, 2003, the Partnership funded convertible secured
notes of $230,129 and $61,981, respectively. Both notes bear interest
at 10 percent.
Pherin Pharmaceuticals, Inc.
- ---------------------------
The Partnership wrote off its entire investment of $200,000 as of March
31, 2003, after Pherin Pharmaceuticals, Inc. ceased domestic
operations. The Partnership is not expecting any return on its
investment.
Sanarus Medical, Inc.
- --------------------
During May, 2003, the Partnership funded convertible unsecured notes of
$422,776 to Sanarus Medical, Inc. The note bears interest at 6 percent
and matures in May 2004.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
During the six months ending June 30, 2003, the Partnership received
cash distributions of $75,092 which were recorded as realized gains.
The Partnership recorded a $71,092 decrease in fair value primarily as
a result of the above distributions.
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, 2002,
Form 10-K.
5. Notes Receivable
----------------
Activity from January 1 through June 30 consisted of:
2003 2002
-------- --------
Balance at January 1 $2,608 $212,928
Repayments of notes receivable -- (250,000)
Write-off of notes receivable -- (250,000)
Change in interest receivable 375 (16,652)
Net (increase) decrease in unrealized
depreciation of notes receivable (299) 310,020
----- -------
Balance at June 30 $2,684 $ 6,296
===== =======
The interest rate on the note receivable at June 30, 2003, was 16
percent. The note is due in 2004.
6. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at June 30, 2003, and December 31, 2002,
consisted of:
2003 2002
--------- ---------
Demand accounts $ 118,101 $ 42,153
Money-market accounts 1,015,415 2,276,794
--------- ---------
$1,133,516 $2,318,947
========= =========
7. Other Receivables
-----------------
As of June 30, 2003, other receivables consists of an advance made to
Dakota Heritage, LLC (DHL). On behalf of DHL, the Partnership had
advanced $325,835 to Dakota Arms, Inc. (DAI), a wholly-owned
subsidiary of DHL. An agreement is in place for the Partnership, an
affiliated partnership and an outside party, to invest $700,000,
$50,000 and $500,000, respectively, in DHL. This provides the
Partnership and the affiliated partnership a 51% majority ownership in
DHL which is expected to own 81% of DAI upon completion of the
transaction. When the investment closes, the advance will be repaid.
8. 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, 2003, the
Partnership had unfunded equity commitments of $374,165.
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. The
Partnership recognized revenue and a receivable of $666,667 as of
February 12, 2002, for its proportionate share of the award. Kanematsu
immediately filed a petition to vacate the award, and on October 9,
2002, the United States District Court issued an order confirming the
arbitration award. Kanematsu appealed the order but in early November
2002 paid a forbearance fee of $200,000 in exchange for an option to
settle all liabilities. On November 29, 2002, Kanematsu agreed to
settle for $3,999,999. A decision on the allocation of the proceeds
between the Partnership, affiliates and co-investor was reached in
January 2003; however, a dispute regarding the legal fees arose. The
Partnership received $774,298 on February 13, 2003, which represented
its proportionate share of the settlement, less disputed legal fees,
plus accrued interest. The Partnership recognized the additional
revenue and receivable of $107,631 at December 31, 2002. In March
2003, the law firm remitted $193,830, the remaining amount of the award
to the Partnership. The fee dispute has not been resolved.
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.
9. Financial Highlights
--------------------
For The Six Months Ended June 30,
---------------------------------
2003 2002
------ ------
(all amounts on a per Unit basis)
Net asset value,
beginning of period $39.69 $85.06
Loss from investment
operations:
Net investment loss (0.04) (7.69)
Net realized and unrealized gain
(loss) on investments 0.06 (10.36)
----- -----
Total from investment operations 0.02 (18.05)
----- -----
Net asset value, end of period $39.71 $67.01
===== =====
Total return 0.06% (21.22)%
Ratios to average net assets:
Net investment loss (0.10)% (10.11)%
Expenses 20.14% 10.86%
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. The net asset values shown above
assume the Partnership is in liquidation. Upon liquidation, the
General Partners would contribute capital equal to the amount of the
Limited Partners deficit. As of June 30, 2003 and 2002, the General
Partners have a negative capital balance of $2,530,918 and $3,224,026.
Upon liquidation, the General Parnters would not be required to
contribute cash to the Partnership, as the net asset value is greater
than the General Partners' negative capital balance. 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, 2002. 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, 2003, net cash used by operating
activities totaled $545,637. The Partnership paid management fees of
$45,876 to the Managing General Partners and reimbursed related parties
for investment expenses of $1,001,746. In addition, $30,000 was paid to
the Individual General Partners as compensation for their services.
Interest income and other income of $10,494 and $774,298 was received,
respectively. Other investment expenses of $252,807 were paid.
Cash and cash equivalents at June 30, 2003, were $1,113,516. 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 increase in partners' capital resulting from operations was
$1,511,462 for the quarter ended June 30, 2003, as compared to a net
decrease in partners' capital resulting from operations of $3,972,042
for the quarter ended June 30, 2002.
Net unrealized depreciation on equity investments was $8,125,601 and
$10,033,992 at June 30 and March 31, 2003, respectively. During the
quarter ended June 30, 2003, the net decrease in unrealized
depreciation of equity investments of $1,908,391 was attributable to
increases in the publicly traded market prices of companies in the
medical and communication industries, partially offset by a decrease in
the fair value of a privately held portfolio company in the medical
industry. During the quarter ended June 30, 2002, the net decrease in
unrealized depreciation of equity investments of $3,198,648 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.
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 2003.
Investment expenses were $421,014 for the quarter ended June 30, 2003,
compared to $579,442 for the same period in 2002. The decrease was
primarily due to decreased professional fees, management fees and
investment monitoring and administrative services.
During the quarter ended June 30, 2003, the Partnership recorded net
realized gains from venture capital limited partnership investments of
$4,000. During the same period in 2002, there were gains of $16,247.
The gains represented distributions from profits of venture capital
limited partnership investments.
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 year
- --------------
Net increase in partners' capital resulting from operations was
$755,240 for the six months ended June 30, 2003, as compared to a net
decrease in partners' capital resulting from operations of $2,917,756
for the six months ended June 30, 2002.
Net unrealized depreciation on equity investments was $8,125,601 and
$10,059,528 at June 30, 2003 and December 31, 2002, respectively.
During the six months ended June 30, 2003, the net decrease in
unrealized depreciation of equity investments of $1,933,927 was
primarily the result of increases in the publicly traded market price
of companies in the medical and communication industries, partially
offset by a decrease in the fair value of a private portfolio company
in the medical industry. During the six months ended June 30, 2002,
the net decrease in unrealized depreciation of equity investments of
$2,889,882 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.
Other income of $193,830 and $666,667 was recognized during the six
months ended June 30, 2003 and 2002, respectively. This was the result
of a settlement between Kanematsu Corporation, a creditor of one of the
Partnership's portfolio companies, and the Partnership. See Note 8.
Net realized gain from sales of equity investments was $0 and $375,741
for the six months ended June 30, 2003 and 2002, respectively. The
gain in 2002 resulted from the sales of Matrix Pharmaceutical, Inc.
common shares.
Net unrealized depreciation on notes receivable was $10,736 and $10,437
at June 30, 2003 and December 31, 2002, respectively. During the six
months ended June 30, 2003, the net increase in unrealized depreciation
of notes receivable was $299. 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.
During the six months ended June 30, 2003, the Partnership wrote off
its investment of $200,000 in Pherin Pharmaceuticals, Inc. During the
same period in 2002, there were no write-offs.
Investment expenses were $1,279,111 for the six months ended June 30,
2003, compared to $1,320,827 for the same period in 2002. The decrease
was primarily due to decreased management fees, partially offset by
increased professional fees.
During the six months ended June 30, 2003, the Partnership recorded net
realized gains from venture capital limited partnership investments of
$75,092. During the same period in 2002, there were gains of $112,558.
The gains represented distributions from profits of venture capital
limited partnership investments.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
Item 3. 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 other than changes needed to
maintain adequate separation of duties and responsibilities of
personnel in the ordinary course of business, 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 Ltd., 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: August 11, 2003 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.
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) A report on Form 8-K was filed by the Partnership during the
quarter ended March 31, 2003. Pursuant to Article 6 of the
Partnership Agreement for Technology Funding Partners III, An
Aggressive Growth Fund, L.P., the Partnership Agreement had been
amended. The corrected Amended and Restated Limited Partnership
Agreement is included in the 8-K filed on January 8, 2003.
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: August 11, 2003 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.
CERTIFICATION
-------------
In connection with the Technology Funding Partners III, L.P. (the
Partnership) Quarterly Report on Form 10-Q for the period ending June
30, 2003, 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 Ltd., 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: August 11, 2003 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.