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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 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.
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(Exact name of Registrant as specified in its charter)
DELAWARE 94-3033783
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1107 Investment Boulevard, Suite 180
El Dorado Hills, California 95762
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(Address of principal executive offices) (Zip Code)
(916) 941-1400
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Act). Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
No active market for the Units of limited partnership interests (Units)
exists, and therefore the market value of such Units cannot be
determined.
Documents incorporated by reference: Portions of the Registrant's Proxy
Statement relating to the Registrant's Meeting of Limited Partners held
on November 8, 2002, are incorporated by reference into Part III of this
Form 10-K where indicated.
PART I
Item 1. BUSINESS
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Technology Funding Partners III, L.P. (the Partnership or the
Registrant) was formed as a Delaware limited partnership on
December 4, 1986. For the period from December 5, 1986, through
March 25, 1987, the Partnership was inactive. The Partnership
filed a registration statement with the Securities and Exchange
Commission on March 25, 1987, and commenced selling Units of
limited partnership interest (Units) in April 1987. On June 2,
1987, the minimum number of Units required to commence
Partnership operations (6,000) had been sold. The offering
terminated with 160,000 Units sold on February 3, 1989. The
Partnership's original contributed capital was $40,040,054,
consisting of $40,000,000 from Limited Partners for 160,000
Units and $40,054 from the General Partners, Technology Funding
Ltd. (TFL) and Technology Funding Inc. (TFI). The General
Partners do not own any Units.
The principal investment objectives of the Partnership are long-
term capital appreciation from venture capital investments in
new and developing companies and preservation of Limited Partner
capital through risk management and active involvement with such
companies (portfolio companies). The Partnership's investments
in portfolio companies primarily consist of equity securities
such as common and preferred shares, but also include debt
convertible into equity securities and warrants and options to
acquire equity securities. Although venture capital investments
offer the opportunity for significant gains, such investments
involve a high degree of business and financial risk that can
result in substantial losses. Among these are the risks
associated with investment in companies in an early stage of
development or with little or no operating history, companies
operating at a loss or with substantial variations in operating
results from period to period, and companies with the need for
substantial additional capital to support expansion or to
achieve or maintain a competitive position. Such companies may
face intense competition, including competition from companies
with greater financial resources, more extensive development,
manufacturing, marketing and service capabilities, and a larger
number of qualified managerial and technical personnel. There
is no ready market for many of the Partnership's investments.
The Partnership's investments in portfolio companies are
generally subject to restrictions on sale because they were
acquired from the issuer in private placement transactions or
because the Partnership is an affiliate of the issuer.
The Partnership was organized as a business development company
under the Investment Company Act of 1940, as amended (the Act),
and operates as a non-diversified investment company, as defined
in the Act. The Partnership's term was extended for a two-year
period to December 31, 1998, pursuant to unanimous approval by
the Management Committee on September 13, 1996. The Partnership
term was further extended to December 31, 2000, with an
amendment by the Management Committee and approved by a majority
of the Limited Partners. On October 25, 2000, the Management
Committee voted to extend the life of the Partnership to
December 31, 2002. On November 8, 2002, the Limited Partners
approved an extension of the Partnership's term to December 31,
2004, and authorized additional one-year extensions to the term
of the Partnership through December 31, 2006. At the March 12,
2004, meeting, the Independent General Partners approved an
extension of the Partnership's term to December 31, 2006.
Item 2. PROPERTIES
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The Registrant has no material physical properties.
Item 3. LEGAL PROCEEDINGS
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In October 2000, Kanematsu Corporation, a creditor of one of the
Partnership's portfolio companies, initiated an arbitration
proceeding against the Partnership, two affiliated partnerships,
and a fourth co-investor. Kanematsu 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. On February 13, 2003, the Partnership received
$774,298, representing its proportionate share of the
settlement, plus accrued interest, less disputed legal fees.
The Partnership recognized the additional revenue and receivable
of $107,631 at December 31, 2002. In March 2003, the law firm
remitted an additional amount of $193,830 to the Partnership.
From time to time, the Partnership is subject to routine
litigation incidental to the business of the Partnership.
Although there can be no assurances as to the ultimate
disposition of these matters and the proceeding disclosed above,
it is the opinion of the Managing General Partners, based upon
the information available at this time, that the expected
outcome of these matters, individually or in the aggregate, will
not have a material adverse effect on the results of operations
and financial condition of the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were voted on by the Limited Partners in 2003.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS
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(a) There is no established public trading market for the Units.
(b) At December 31, 2003, there were 5,666 record holders of
Units.
(c) The Registrant, being a partnership, does not pay dividends.
Cash distributions, however, may be made to the partners
pursuant to the Partnership Agreement.
Item 6. SELECTED FINANCIAL DATA
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For the Years Ended and As of December 31,
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2003 2002 2001 2000 1999
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Total investment income $ 56,905 $ 115,953 $ 309,810 $ 1,158,257 $ 110,361
Net investment loss (1,956,877) (2,027,322) (1,388,085) (1,667,706) (1,196,362)
Realized gain from
venture capital limited
partnership investments 291,672 133,884 324,536 587,735 135,893
Net realized gain (loss) from
sales of equity investments 181,132 375,546 1,514,305 10,703,511 (883,446)
Realized loss from
investment write-offs (1,370,039) (6,313,008) (1,727,140) (2,392,941) --
Realized gain from recovery of
investments previously
written off -- 459,375 -- -- --
Net realized loss on foreign
currency -- -- -- (63,370) --
Decrease (increase) in
unrealized depreciation:
Equity investments 4,646,626 (7,280,360) 1,046,437 (20,273,430) 16,105,208
Notes receivable 10,437 5,142,683 (313,870) (4,839,250) --
Other income 212,860 774,298 -- -- --
Net increase (decrease) in
partners' capital resulting
from operations 2,015,811 (8,734,904) (543,817) (17,945,451) 14,161,293
Item 6. SELECTED FINANCIAL DATA (continued)
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Net increase (decrease) in
partners' capital resulting
from operations per Unit (1) 1.06 (54.05) (3.36) (94.91) 68.39
Total assets 10,268,968 8,224,129 17,025,262 20,832,769 38,293,191
Distributions declared -- -- -- 2,862,928 283,627
Distributions declared
per Unit (2) -- -- -- -- --
(1) See Notes 1 and 3 to the Financial Statements for a description of the method of calculation of
net increase (decrease) in partners' capital resulting from operations per Unit.
(2) Calculation is based on distributions declared to Limited Partners divided by the weighted
average number of Units outstanding during the year.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Partnership operates as a business development company under
the Investment Company Act of 1940 and makes venture capital
investments in new and developing companies. The Partnership's
financial condition is dependent upon the success of the portfolio
companies. There is no ready market for many of the Partnership's
investments. It is possible that some of its venture capital
investments may be a complete loss or may be unprofitable and that
others will appear likely to become successful, but may never
realize their potential. The valuation of the Partnership's
investments in securities for which there are no available market
quotes is subject to the estimate of the Managing General Partners
in accordance with the valuation guidance described in Note 1 to
the financial statements. In the absence of readily obtainable
market values, the estimated fair value of the Partnership's
investments may differ significantly from the values that would
have been used had a ready market existed.
For the year ended December 31, 2003, net cash used by operating
activities totaled $1,805,632. The Partnership paid management
fees of $93,121 to the Managing General Partners and reimbursed
related parties for operating expenses of $1,490,306. In
addition, $60,000 was paid to the Individual General Partners as
compensation for their services. Other operating expenses of
$227,027 were paid and had interest income of $64,822.
For the year ended December 31, 2003, the Partnership funded
equity investments of $609,483, primarily to portfolio companies
in the medical/biotechnology, high tech/financial and information
technology industries. Proceeds from sales of equity investments
totaled $535,440 and repayments of notes receivable provided cash
of $0. The Partnership received $291,672 in cash distributions
from venture capital limited partnership investments. At December
31, 2003, there were no unfunded commitments.
Cash and cash equivalents at December 31, 2003, were $730,944. At
December 31. 2003, restricted cash was $600,000. Cash reserves,
interest income on short-term investments and future proceeds from
equity investments sales are expected to be adequate to fund
Partnership operations and future investments through the next
twelve months.
Results of Operations
- ---------------------
2003 compared to 2002
- ---------------------
The net increase in partners' capital resulting from operations
was $2,015,811 in 2003 compared to a decrease of $8,734,904 in
2002.
Unrealized depreciation on equity investments was $4,646,626 and
$10,059,528 at December 31, 2003 and 2002, respectively. During
the year ended December 31, 2003, the net decrease in unrealized
depreciation of equity investments of $4,706,626 was primarily
attributable to an increase in the publicly traded prices of
iVillage Inc. and Acusphere, Inc., partially offset by write-offs
of Pherin Pharmaceuticals, Inc. and Pharmadigm, Inc. In 2002, the
net increase in unrealized depreciation of equity investments of
$7,280,360 was primarily attributable to a decrease in the
publicly traded price of Endocare, Inc. and decreases in the fair
values of portfolio companies in the medical/biotechnology and
communications industries. The increase was partially offset by
the write-off of American OBGYN, Inc. during 2002, which
contributed a net decrease in unrealized depreciation of
$1,013,059 as the depreciation was realized upon write-off.
During 2003, the Partnership recorded an increase in unrealized
depreciation of notes receivable of $10,437, primarily related to
the payment of notes receivable by Avalon Vision Solutions, Inc.
During 2002, the Partnership recorded a decrease in unrealized
depreciation of notes receivable of $5,142,683 primarily related
to the write-off of loans made to Sutmyn Storage Corporation.
Unrealized depreciation of notes receivable was $0 and $10,437 at
December 31, 2003 and 2002, respectively.
During 2003, the Partnership recorded realized losses from
investment write-offs of $1,370,039, which represents the
Partnership's total investment in Pherin Pharmaceuticals, Inc. and
Pharmadigm, Inc. During 2002, the Partnership recorded a realized
loss from investment write-offs of $6,313,008, of which $4,836,805
represents the Partnership's total investment in 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. Remaining write-offs were related
to the Partnership's total investment in American OBGYN, Inc. for
$1,226,202, and loans of $250,000 to Thermatrix Inc. American
OBGYN, Inc. filed for bankruptcy in February 2002, and the
Managing General Partners determined there would be no proceeds
from the liquidation.
During 2003, net realized gain from sales of equity investments
was $181,132, primarily from gains on the sale of shares of
Virage, Inc. and White Electronic Designs Corporation. During
2002, net realized gain from sales of equity investments totaled
$375,546, primarily from the sale of Matrix Pharmaceutical, Inc.
shares.
Other income was $218,860 for the year ended December 31, 2003.
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. On February 13, 2003, the
Partnership received $774,298, representing its proportionate
share of the settlement, plus accrued interest, less disputed
legal fees. The Partnership recognized the additional revenue and
receivable of $107,631 at December 31, 2002. In March 2003, the
law firm remitted an additional amount of $193,830 to the
Partnership.
Investment expenses were $2,013,782 and $2,143,275 for 2003 and
2002, respectively. In 2002 the Managing General Partners billed
the Partnership $63,389 and $18,305 for operating expenses
incurred during 2001 and prior years, respectively. Had these
expenses been billed in the prior years the investment expenses
for 2002 and 2001 would have been $2,061,581 and $1,761,284,
respectively. The increase is primarily due to increased
administrative and investor services fees.
During 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. There was no such
recovery in 2003.
Interest income was $56,905 and $115,953 for 2003 and 2002,
respectively. The decrease was primarily the result of secured
notes receivable being placed on non-accrual status.
During 2003, the Partnership recorded net realized gains from
venture capital limited partnership investments of $291,672
compared to gains of $133,884 during 2002. The gains represented
distributions from profits of venture capital limited
partnerships.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
2002 compared to 2001
- ---------------------
The net decrease in partners' capital resulting from operations
was $8,853,126 in 2002 compared to $543,817 in 2001.
Unrealized depreciation on equity investments was $10,059,528 and
$2,779,168 at December 31, 2002 and 2001, respectively. During
the year ended December 31, 2002, the net increase in unrealized
depreciation of equity investments of $7,280,360 was primarily due
to a decrease in the publicly traded price of Endocare, Inc. and
decreases in the fair values of portfolio companies in the
medical/biotechnology and communications industries. The increase
was partially offset by the write-off of American OBGYN, Inc.
during 2002, which contributed a net decrease in unrealized
depreciation of $1,013,059 as the depreciation was realized upon
write-off. In 2001, the net decrease in unrealized depreciation
of equity investments of $1,046,437 was primarily attributable to
favorable events and market conditions for portfolio companies in
the medical/biotechnology and communications industries. Equity
investments sold or written off during 2001 contributed a
$1,009,933 net decrease in unrealized depreciation as the
depreciation was realized upon sale or write-off.
Unrealized depreciation on notes receivable investments was
$10,437 and $5,153,120 at December 31, 2002 and 2001,
respectively. During 2002, the Partnership recorded a decrease in
unrealized depreciation of notes receivable of $5,142,683
primarily related to the write-off of loans made to Sutmyn Storage
Corporation. During 2001, the Partnership recorded an increase in
unrealized depreciation of $313,870 primarily related to the
decrease in fair value of loans made to a portfolio company in the
environmental industry.
During 2002, the Partnership recorded a realized loss from
investment write-offs of $6,313,008, of which $4,836,805
represents the Partnership's total investment in 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. Remaining write-offs were related
to the Partnership's total investment in American OBGYN, Inc. for
$1,226,202, and loans of $250,000 to Thermatrix Inc. American
OBGYN, Inc. filed for bankruptcy in February 2002, and the
Managing General Partners believe there will be no proceeds from
the liquidation. During 2001, the Partnership recorded realized
losses from investment write-offs of $1,727,140, which represents
the Partnership's total investment in Adesso Healthcare Technology
Services Inc. Adesso ceased operations in the third quarter of
2001.
During 2002, net realized gain from sales of equity investments
totaled $375,546, primarily due to gains on the sale of Matrix
Pharmaceutical, Inc. shares. During 2001, net realized gain from
sales of equity investments was $1,514,305, primarily from gains
on the sale of shares of Photon Dynamics, Inc.
Other income was $774,298 for the year ended December 31, 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. 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. On February 13, 2003, the
Partnership received $774,298, representing its proportionate
share of the settlement, plus accrued interest, less disputed
legal fees. The Partnership recognized the additional revenue and
receivable of $107,631 at December 31, 2002. In March 2003, the
law firm remitted an additional amount of $193,830 to the
Partnership.
Investment expenses were $2,143,275 and $1,697,895 for 2002 and
2001, respectively. In 2002, the Managing General Partners billed
the Partnership $63,389 and $18,305 for operating expenses
incurred during 2001 and prior years, respectively. Had these
expenses been billed in the prior years, the investment expenses
for 2002 and 2001 would have been $2,061,581 and $1,761,284,
respectively. The increase is primarily due to increased
administrative and investor services fees.
During 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. There were no
recoveries in 2001.
Interest income was $115,953 and $309,810 for 2002 and 2001,
respectively. The decrease was primarily the result of secured
notes receivable being placed on non-accrual status.
During 2002, the Partnership recorded net realized gains from
venture capital limited partnership investments of $133,884 as
compared to gains of $324,536 during 2001. The gains represented
distributions from profits of venture capital limited
partnerships.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
New Accounting Pronouncements
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In July 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal
activities, such as restructurings, involuntarily terminating
employees, and consolidating facilities initiated after December
31, 2002. The implementation of SFAS No. 146 will not require the
restatement of previously issued financial statements. The
Partnership implemented early adoption of SFAS No. 146 to all
applicable costs associated with exit or disposal activities
incurred during 2003 and 2002. See Note 1 to the financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN
45), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires a guarantor to recognize a liability at
the inception of the guarantee for the fair value of obligations
it has assumed under that guarantee and also requires more
detailed disclosure in its financial statements with respect to
such guarantees. FIN 45 is effective for guarantees issued or
modified after December 31, 2002, and requires additional
disclosure for existing guarantees. The adoption of FIN 45 did
not have a material effect on the Partnership's results of
operation or financial position. The Partnership has provided
additional disclosure with respect to a guarantee by the
Partnership in Note 11 to the Financial Statements.
In December 2003, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 03-4 (SOP 03-4),
"Reporting Financial Highlights and Schedule of Investments by
Nonregistered Investment Partnerships: An Amendment to the Audit
and Accounting Guide 'Audits of Investment Companies' (the Guide)
and AICPA Statement of Position 95-2 (SOP 95-2), 'Financial
Reporting by Nonpublic Investment Partnerships.'" SOP 03-4
provides guidance on the application of certain provisions in the
Accounting Guide and SOP 95-2 that are directed to the reporting
by nonregistered investment partnerships of financial highlights
and the schedule of investments. It amends certain provisions of
the Guide and SOP 95-2 by adapting those provisions to
nonregistered investment partnerships based on their differences
in organizational structures from registered investment companies.
SOP 03-4 is effective for annual financial statements issued for
fiscal years ending after December 15, 2003. The adoption of SOP
03-4 did not have a material effect on the Partnership.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The Partnership is subject to financial market risks, including
changes in interest rates with respect to its investments in debt
securities and interest-bearing cash equivalents as well as
changes in marketable equity security prices. The Partnership
does not use derivative financial instruments to mitigate any of
these risks. The return on the Partnership's investments is
generally not affected by foreign currency fluctuations.
The Partnership does not have a significant exposure to modest
public market price fluctuations as the Partnership primarily
invests in private business enterprises. However, should
significant changes in market equity prices occur, there could be
a longer-term effect on valuations of private companies, which
could affect the carrying value and the amount and timing of gains
realized on these investments. Since there is typically no public
market for the Partnership's investments in private companies, the
valuation of the investments is subject to the estimate of the
Partnership's Managing General Partners. In the absence of a
readily ascertainable market value, the estimated value of the
Partnership's investments in private companies may differ
significantly from the values that would be placed on the
portfolio if a ready market existed. The Partnership's portfolio
also includes common stocks in publicly traded companies. These
investments are directly exposed to equity price risk, in that a
hypothetical 10 percent change in these equity prices would result
in a similar percentage change in the fair value of these
securities. The Partnership's investments also include some debt
securities. Since the debt securities are generally priced at a
fixed rate, changes in interest rates do not directly impact
interest income. The Partnership's debt securities are generally
held to maturity or converted into equity securities of private
companies.
Item 8. FINANCIAL STATEMENTS
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The financial statements of the Registrant are set forth in Item
15.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------ -----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
None
Item 9A. CONTROLS AND PROCEDURES
- ------- -----------------------
The signing officer 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.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
As a partnership, the Registrant has no directors or executive
officers. The Management Committee is responsible for the
management and administration of the Partnership. The members of
the Management Committee consist of two Individual General
Partners and a representative from Technology Funding Ltd., a
California limited partnership (TFL). TFL and its wholly owned
subsidiary, Technology Funding Inc., a California corporation
(TFI) are the Managing General Partners. Reference is made to the
information regarding Individual General Partners and the Managing
General Partners in the Registrant's Proxy Statement related to
the Meeting of Limited Partners held on November 8, 2002, which
information is incorporated herein by reference.
Code of Ethics
- --------------
The Partnership's Code of Ethics applies to the Independent
General Partners as well as Technology Funding corporate officers
and employees. The Independent General Partners review and
approve the Code of Ethics on an annual basis. The Code of Ethics
is attached as an exhibit (see Item 15 - Exhibits) and is also
available on the Partnership's web site, www.techfunding.com. Any
amendments to, or waivers from, any provision of the Code that
applies to any of the Independent General Partners or executive
officers will be disclosed on the web site..
Audit Committee
- ---------------
The Independent General Partners have established an Audit
Committee of the Whole to oversee the accounting and financial
reporting processes on behalf of the Independent General Partners.
The Audit Committee of the Whole currently consists of all of the
Independent General Partners for each Technology Funding
partnership with John Muncaster acting as liaison with the
Managing General Partners. The Independent General Partners are
"independent" as defined by the Securities and Exchange
Commission. The Independent General Partners have determined that
the Audit Committee of the Whole does not currently have any
member that would be considered an "audit committee financial
expert" as that term is defined in Section 407 of the Sarbanes-
Oxley Act of 2002. Given the anticipated termination date for the
Partnership, the Independent General Partners have determined that
the expense and the difficulty of recruiting a financial expert to
serve on the Audit Committee outweigh any benefit to the Fund.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or directors. In
2003, the Partnership incurred management fees of $87,781. The
fees are designed to compensate the Managing General Partners for
General Partner Overhead incurred in performing management duties
for the Partnership. General Partner Overhead (as defined in the
Partnership Agreement) includes the General Partners' share of
rent, utilities, property taxes and the cost of capital equipment
and the general and administrative expenses paid by Managing
General Partners in performing their obligations to the
Partnership. As compensation for their services, each of the
Individual General Partners receive $14,000 annually plus $1,500
for each attended meeting of the Management Committee and
committees thereof. In 2003, $60,000 of such compensation was
paid. The Individual General Partners are reimbursed for all out-
of-pocket expenses relating to attendance of the meetings,
committees or otherwise of the Management Committee.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
Not applicable. No Limited Partner beneficially holds more than 5
percent of the aggregate number of Units held by all Limited
Partners, and neither the Managing General Partners nor any of
their officers, directors or partners own any Units. The
Individual General Partners each own eight Units. The Management
Committee controls the affairs of the Partnership pursuant to the
Partnership Agreement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Registrant, or its investee companies, have engaged in no
transactions with the Managing General Partners or their officers
and partners other than as described above, in the notes to the
financial statements, or in the Prospectus.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------- --------------------------------------
Fees Paid to Independent Public Accountants
- -------------------------------------------
Audit Fees
- ----------
The Partnership paid aggregate fees of approximately $68,926 and
$57,850 to its independent public accountants, Grant Thornton LLP,
for professional services rendered to the Partnership with respect
to audits of the annual financial statements and reviews of the
quarterly financial statements for the years ended December 31,
2003 and 2002, respectively.
Tax Fees
- --------
The Partnership paid aggregate fees of approximately $14,409 and
$6,500 to Grant Thornton LLP for tax-related services rendered to
the Partnership for the years ended December 31, 2003 and 2002,
respectively. These services included preparation of the
Partnership's tax returns.
All Other Fees
- --------------
The Partnership did not pay any fees to Grant Thornton LLP for
services, other than the services referred to above, for the years
ended December 31, 2003 and 2002, respectively.
Audit Committee Pre-Approval Policies and Procedures
- ----------------------------------------------------
The Independent General Partners have established procedures for
the pre-approval of auditing services and non-auditing services to
be performed by the Partnership's independent public accountants.
Such pre-approval can be given as part of the Independent General
Partners' annual approval of the scope of the engagement of the
independent public accountants or on an individual basis.
Approved non-auditing services must be disclosed in the
Partnership's periodic public reports. The Independent General
Partners pre-approved all of the non-audit services provided by
the independent public accountants in 2003.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------- ---------------------------------------------------------------
(a) List of Documents filed as part of this Annual Report on Form
10-K
(1) Financial Statements - the following financial
statements are filed as a part of this Report:
Report of Independent Certified Public Accountants as
of and for the years ended December 31, 2003 and 2002
Report of Independent Public Accountants as of and for
the years ended December 31, 2001 and 2000
Balance Sheets as of December 31, 2003
and 2002
Statements of Investments as of
December 31, 2003 and 2002
Statements of Operations for the years
ended December 31, 2003, 2002 and 2001
Statements of Partners' Capital for the years
ended December 31, 2003, 2002 and 2001
Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001
Notes to Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted because they are not
applicable or the required information is included
in the financial statements or the notes thereto.
(3) Exhibits
14.1 Code of Ethics for the Registrant
31.1 Section 302 Sarbanes-Oxley Certifications
32.1 Section 906 Sarbanes-Oxley Certifications
(b) Reports on Form 8-K
(1) On January 8, 2003, the Partnership filed its
Amended and Restated Limited Partnership Agreement
on Form 8-K.
(2) On December 17, 2003, the Partnership filed Form 8-K
pursuant to the SEC's Release No. 34-43069 regarding
Commission Guidance on Mini-Tender Offers.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------
To the Partners of
Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheets of Technology Funding
Partners III, L.P. (a Delaware limited partnership) (the Fund), including
the statement of investments, as of December 31, 2003 and 2002, and the
related statements of operations, partners' capital, and cash flows for
the years then ended. These financial statements are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The financial statements
of Technology Funding Partners III, L.P. for the year ended December 31,
2001, were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements
in their report dated March 15, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
physical inspection of securities owned as of December 31, 2003 and 2002.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our auditS
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Technology
Funding Partners III, L.P. as of December 31, 2003 and 2002, and the
results of its operations, changes in partners' capital, and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Albuquerque, New Mexico /S/GRANT THORNTON LLP
March 12, 2004
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To the Partners of
Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheets of Technology Funding
Partners III, L.P. (a Delaware limited partnership) (the Fund), including
the statements of investments, as of December 31, 2001 and 2000, and the
related statements of operations, partners' capital, and cash flows for
the years then ended. These financial statements are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
physical inspection of securities owned as of December 31, 2001 and 2000.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Technology
Funding Partners III, L.P. as of December 31, 2001 and 2000, and the
results of its operations, changes in partners' capital, and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Los Angeles, California /S/ARTHUR ANDERSEN LLP
March 15, 2002
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH TECHNOLOGY FUNDING VENTURE PARTNERS III,
LP'S FILING ON FORM 10-K FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000.
THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THIS FILING ON FORM 10-K.
BALANCE SHEETS
- --------------
December 31,
------------------------
2003 2002
-------- --------
ASSETS
Equity investments (cost basis of
$13,836,296 and $14,941,698 for 2003
and 2002, respectively) $ 8,483,394 $4,882,170
Notes receivable, net (cost basis
of $0 and $13,045 for 2003
and 2002, respectively) -- 2,608
---------- ---------
Total investments 8,483,394 4,884,778
Cash and cash equivalents 730,944 2,318,947
Restricted cash 600,000 --
Prepaid expenses 204,932 262,841
Other receivable -- 774,298
Other assets 16,497 3,265
Due from related parties 233,201 --
---------- ---------
Total assets 10,268,968 $8,244,129
========== =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 62,084 $ 65,445
Due to related parties -- 47,611
Other liabilities 61,977 1,977
---------- ---------
Total liabilities 124,061 115,033
Commitments and contingencies
See Note 10.
Partners' capital
(160,000 Limited Partner Units
outstanding) 10,144,907 8,129,096
---------- ---------
Total liabilities
and partners' capital $10,268,968 $8,244,129
========== =========
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal
Amount or December 31, 2003 December 31, 2002
Industry Shares at ----------------- -----------------
(1) Investment December 31, Cost Fair Cost Fair
Company Position Date 2003 Basis Value Basis Value
- ------------- -------- ---------- ---------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
10.2% and 5.4% at December 31, 2003 and 2002, respectively
- ----------------------------------------------------------
iVillage Inc. Common 1996-
shares 2000 240,375 990,716 860,542 990,716 225,953
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 0 0 303,014 30,301
--------- --------- --------- ---------
3,208,840 1,041,859 3,511,854 437,571
--------- --------- --------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Environmental
- -------------
0.0% and 0.0% at December 31, 2003 and 2002, respectively
- ---------------------------------------------------------
Triangle
Biomedical Common
Sciences, Inc.(a) shares 1999 4,099 79,792 0 79,792 0
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
- -------------------
2.7% and 3.4% at December 31, 2003 and 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
---------- ---------- ---------- ----------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Information Technology
- ----------------------
2.2% and 4.5% at December 31, 2003 and 2002, respectively
- ---------------------------------------------------------
KeyEye
Communications, Common
Inc. (a)(b) Shares 2002 3,142,856 550,000 220,000 550,000 220,000
Virage, Inc. Common
Shares 2002 0 0 0 1,188 716
White Electronic
Designs Common
Corporation shares 2000 0 0 0 120,095 146,306
--------- --------- --------- ---------
550,000 220,000 671,283 367,022
--------- --------- --------- ---------
Medical/Biotechnology
- ---------------------
65.4% and 41.8% at December 31, 2003 and 2002, respectively
- -----------------------------------------------------------
Acusphere, Inc. Common
(a) shares 2003 167,871 1,840,250 1,105,426 1,536,176 97,350
Applied Molecular Common
Evolution, Inc. shares 2001 0 0 0 224,623 34,262
Atherotech, Inc. Preferred
share
warrant
at exercise
price $2.83;
expiring
2010 2003 42,418 0 48,000 -- --
CareCentric Common
Solutions, Inc. shares 1999 47,836 382,875 3,630 382,875 31,093
CellzDirect, Preferred 2002-
Inc. (a)(b) shares 2003 1,397,896 540,000 216,000 375,000 75,000
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
CollaGenex
Pharmaceuticals, Common
Inc. shares 2001 6,819 54,444 75,895 54,444 64,712
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 990,542 1,416,252 261,252
Applied
NeuroSolutions, Inc.
(formerly
Hemoxymed, Common
Inc.) (a) shares 1993 15,528 125,000 4,659 125,000 854
LifeCell Common 1992-
Corporation shares 2002 551,060 1,866,336 3,416,571 1,866,336 1,658,690
Natus Medical, Common
Inc. shares 2002 16,225 84,484 67,983 84,484 64,738
Pharmadigm, Preferred 1993-
Inc. (a) (b) shares 2002 0 0 0 1,170,039 308,457
Pherin
Pharmaceuticals, Preferred
Inc. (a) shares 1991 0 0 0 200,000 106,000
Sanarus Medical, Preferred 2000-
Inc. (a) (b) shares 2001 1,461,159 1,779,483 735,713 1,335,000 697,400
Sanarus Medical, Bridge loan
Inc. (a) (b) warrants at
exercise
price TBD;
expiring
2006 2001 195 195 78 195 98
---------- ---------- ---------- ----------
8,089,319 6,664,497 8,770,424 3,399,906
---------- ---------- ---------- ----------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
2.8% and 5.0% at December 31, 2003 and 2002, respectively
- ---------------------------------------------------------
Batterson,
Johnson and Ltd.
Wang Limited Partnership
Partnership (a) interests various $500,000 0 0 0 0
Columbine Ltd.
Venture Fund II, Partnership
L.P. (a) interests various $750,000 415,224 176,475 415,224 176,475
Delphi Ltd.
Ventures, L.P. Partnership
(a) interests various $1,000,000 652,842 0 652,842 120,633
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
---------- ---------- ---------- ----------
1,279,246 282,063 1,279,246 402,696
---------- ---------- ---------- ----------
Total equity investments - 83.2% and 60.1% at
December 31, 2003 and 2002, respectively 13,836,296 8,483,394 14,941,698 4,882,170
---------- ---------- ---------- ----------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Notes Receivable, Net
- ---------------------
Avalon Vision Secured
Solutions, note, 16%,
Inc. due 2004 1999 $11,676 0 0 13,045 2,608
---------- ---------- ---------- ----------
Total notes receivable - 0% and 0.2% at
December 31, 2003 and 2002, respectively 0 0 13,045 2,608
---------- ---------- ---------- ----------
Total investment - 83.2% and 60.3% at
December 31, 2003 and 2002, respectively $13,836,296 $ 8,483,394 $14,954,743 $ 4,884,778
========== ========== ========== ==========
Legends and footnotes:
- -- No investment held at end of period.
0 Investment active with a cost basis or fair value of zero.
(a) Equity security acquired in a private placement transaction; resale may be subject to certain
selling restrictions.
(b) Portfolio company is an affiliate of the Partnership; resale may be subject to certain
selling restrictions.
(1) Represents the total fair value of a particular industry segment as a percentage of partners'
capital at 12/31/03 and 12/31/02.
(2) The Partnership has no income-producing equity investments.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
----------------------------------
2003 2002 2001
---- ---- ----
Investment income:
Notes receivable interest $ 44,125 $ 49,819 $ 60,873
Short-term investment interest 12,780 66,134 244,962
Other operating income -- -- 3,975
--------- --------- ---------
Total investment income 56,905 115,953 309,810
Investment expenses:
Management fees 87,781 152,636 172,640
Individual General
Partners' compensation 60,000 64,500 64,545
Administrative and
investor services 1,265,638 1,401,601 758,411
Investment operations 357,264 255,646 179,822
Computer services 87,908 134,144 152,104
Professional fees 155,191 134,748 296,969
Interest expense -- -- 73,404
--------- --------- ---------
Total investment expenses 2,013,782 2,143,275 1,697,895
--------- --------- ---------
Net investment loss (1,956,877) (2,027,322) (1,388,085)
--------- --------- ---------
Net realized gain from
sales of equity investments 181,132 375,546 1,514,305
Realized gain from venture capital
limited partnership investments 291,672 133,884 324,536
Realized loss from investment
write-offs (1,370,039) (6,313,008) (1,727,140)
Realized gain from recovery of
investments previously
written off -- 459,375 --
--------- --------- ---------
Net realized (loss) income (897,235) (5,344,203) 111,701
--------- --------- ---------
STATEMENTS OF OPERATIONS (continued)
- -----------------------------------
For the Years Ended December 31,
----------------------------------
2003 2002 2001
---- ---- ----
Decrease (increase) in unrealized
depreciation:
Equity investments 4,646,626 (7,280,360) 1,046,437
Notes receivable 10,437 5,142,683 (313,870)
--------- --------- ---------
Net decrease (increase) in
unrealized depreciation 4,657,063 (2,137,677) 732,567
--------- --------- ---------
Other income 212,860 774,298 --
--------- --------- ---------
Net increase (decrease) in
partners' capital resulting
from operations $2,015,811 $(8,734,904) $ (543,817)
========= ========= =========
Net increase (decrease) in
partners' capital resulting
from operations per Unit $ 1.06 $ (54.05) $ (3.36)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 2003, 2002 and 2001:
Limited General
Partners Partners Total
-------- -------- -----
Partners' capital,
January 1, 2001 $20,597,228 $(3,189,411) $17,407,817
Net investment loss (1,374,205) (13,880) (1,388,085)
Net realized income 110,584 1,117 111,701
Net decrease in
unrealized depreciation 725,242 7,325 732,567
---------- --------- ----------
Partners' capital,
December 31, 2001 20,058,849 (3,194,849) 16,864,000
Net investment loss (2,007,049) (20,273) (2,027,322)
Net realized loss (5,290,760) (53,443) (5,344,203)
Net increase in
unrealized depreciation (2,116,300) (21,377) (2,137,677)
Other income 766,555 7,743 774,298
---------- --------- ----------
Partners' capital,
December 31, 2002 11,411,295 (3,282,199) 8,129,096
Net investment loss -- (1,956,877) (1,956,877)
Net realized income (loss) 78,024 (975,259) (897,235)
Net (increase) decrease in
unrealized depreciation (119,426) 4,776,489 4,657,063
Other Income 210,731 2,129 212,860
---------- --------- ----------
Partners' capital,
December 31, 2003 $11,580,624 $(1,435,717) $10,144,907
========== ========= ==========
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For The Years Ended December 31,
-----------------------------------
2003 2002 2001
------ ------ ------
Net increase (decrease) in
partners' capital resulting
from operations $2,015,811 $(8,734,904) $ (543,817)
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 (181,132) (375,546) (1,514,305)
Realized gain from venture
capital limited partnership
investments (291,672) (133,884) (324,536)
Realized loss from
investment write-offs 1,370,039 6,313,008 1,727,140
Realized gain from recovery
of investments previously
written off -- (459,375) --
Net (decrease) increase in
unrealized depreciation:
Equity investments (4,646,626) 7,280,360 (1,046,437)
Notes receivable (10,437) (5,142,683) 313,870
Amortization of prepaid
Expenses 57,909 -- --
Decrease (increase) in accrued
interest on notes receivable 37,119 (2,318) (35,421)
Decrease (increase) in other
receivable, net 774,298 (774,298) --
Increase in restricted cash (600,000) -- --
Decrease (increase) in prepaid
expenses -- (262,841) --
Increase in due from related
Parties (233,201) -- --
(Decrease) increase in accounts
payable and accrued expenses (3,361) (44,129) 5,862
Decrease in due to related
parties (47,611) (2,100) (267,693)
Other changes, net (46,768) (365) 22,083
--------- --------- ----------
Net cash used by operating
activities (1,805,632) (2,339,075) (1,663,254)
--------- --------- ----------
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For The Years Ended December 31,
-----------------------------------
2003 2002 2001
------ ------ ------
Cash flows from investing
activities:
Notes receivable issued -- -- (500,000)
Purchase of equity investments (609,483) (2,996,463) (1,809,683)
Repayments of notes receivable -- 250,000 333
Proceeds from recovery
of investments previously
written off -- 459,375 --
Proceeds from sales of equity
investments 535,440 644,775 2,402,744
Distributions from venture
capital limited partnerships 291,672 46,385 225,458
--------- --------- ----------
Net cash provided (used) by
investing activities 217,629 (1,595,928) 318,852
--------- --------- ----------
Cash flows from financing
activities:
Repayment of proceeds from
short-term borrowings -- -- (3,000,000)
--------- --------- ----------
Net cash used by financing
activities -- -- (3,000,000)
--------- --------- ----------
Net increase (decrease) in cash
and cash equivalents (1,588,003) (3,935,003) (4,344,402)
Cash and cash equivalents
at beginning of year 2,318,947 6,253,950 10,598,352
--------- --------- ----------
Cash and cash equivalents
at end of year $ 730,944 $ 2,318,947 $ 6,253,950
========= ========= ==========
The accompanying notes are an integral part of these financial
statements.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
- ------------
Technology Funding Partners III, L.P., (the Partnership or the Registrant)
is a limited partnership organized under the laws of the State of Delaware
on December 4, 1986, to make venture capital investments in new and
developing companies. The Partnership elected to be treated as a business
development company under the Investment Company Act of 1940, as amended
(the Act), and operates as a non-diversified investment company, as defined
in the Act. The Managing General Partners are Technology Funding Ltd.
(TFL) and Technology Funding Inc. (TFI), a wholly owned subsidiary of TFL.
There are three Individual General Partners. The Individual General
Partners and a representative from TFL constitute the Management Committee,
which is responsible for the management and administration of the
Partnership.
For the period from December 5, 1986, through March 25, 1987, the
Partnership was inactive. The Partnership filed a registration statement
with the Securities and Exchange Commission on March 25, 1987, and
commenced selling Units of limited partnership interest (Units) in April
1987. On June 2, 1987, the minimum number of Units required to commence
Partnership operations (6,000) had been sold. The offering terminated with
160,000 Units sold on February 3, 1989. The Partnership's original
contributed capital was $40,040,054, consisting of $40,000,000 from Limited
Partners for 160,000 Units and $40,054 from General Partners. The General
Partners do not own any Units. The Partnership was scheduled to be
dissolved on December 31, 1996, but the term was extended for a two-year
period to December 31, 1998, pursuant to unanimous approval by the
Management Committee on September 13, 1996. The Partnership term was
further extended to December 31, 2000, with an amendment by the Management
Committee and approved by a majority of the Limited Partners. On October
25, 2000, the Management Committee voted to extend the life of the
Partnership to December 31, 2002. On November 8, 2002, the Limited
Partners approved an extension of the Partnership's term to December 31,
2004, and authorized the Partnership's Management Committee to extend the
Partnership for up to two one-year additional terms. At the March 12, 2004,
meeting, the Management Committee approved an extension of the
Partnership's term to December 31, 2006.
Preparation of Financial Statements and Use of Estimates
- --------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates include the
estimate of fair value of investments, liabilities and contingencies.
Because of the inherent uncertainty of valuation, the estimated fair value
of investments may differ significantly from the values that would have
been used had a ready market for investments existed, and the differences
could be material.
Investments
- -----------
Investments are carried at fair value.
Equity Investments
------------------
The Management Committee has the authority to establish valuation
procedures and periodically apply such procedures to the Partnership's
investment portfolio. In fulfilling this responsibility, the Managing
General Partners under the direction of the Management Committee
periodically update and revise the valuation procedures used to determine
fair value in order to reflect new events, changing market conditions, more
experience with investee companies or additional information, any of which
may require the revision of previous estimating procedures.
Unrestricted publicly traded securities are valued at the closing sales
price or bid price that is available on a national securities exchange or
over-the-counter market. Valuation discounts of 5 percent to 50 percent
are applied to publicly traded securities subject to resale restrictions
resulting from Rule 144 or contractual lock-ups, such as those commonly
associated with underwriting agreements or knowledge of material non-public
information.
The fair value of all other investments is determined in good faith by the
Managing General Partners under the direction of the Management Committee
after consideration of available relevant information. There is no ready
market for the Partnership's investments in private companies or
unregistered securities of public companies. Fair value is generally
defined as the amount the Partnership could reasonably expect to receive
for an investment in an orderly disposition based on a current sale.
Significant factors considered in the estimation of fair value include the
inherent illiquidity of and lack of marketability associated with venture
capital investments in private companies or unregistered securities, the
investee company's enterprise value established in the last round of
venture financing, changes in market conditions since the last round of
venture financing or since the last reporting period, the value of a
minority interest in the investee company, contractual restrictions on
resale typical of venture financing instruments, the investee company's
financial position and ability to obtain any necessary additional
financing, the investee company's performance as compared to its business
plan, and the investee company's progress towards initial public offering.
The values determined for the Partnership's investments in these securities
are based upon available information at the time the good faith valuations
are made and do not necessarily represent the amount which might ultimately
be realized, which could be higher or lower than the reported fair value.
At December 31, 2003 and 2002, the investment portfolio included private
company investments totaling $2,738,167 and $1,991,752, respectively, whose
fair values were established in good faith by the Managing General Partners
under the direction of the Management Committee in the absence of readily
ascertainable market values. In addition, investments in publicly traded
securities which have been subjected to a discount for legal or contractual
restrictions as determined by the Management Committee amounted to $990,542
and $261,252 at December 31, 2003 and 2002, respectively. Because of the
inherent uncertainty in the valuation, the values may differ significantly
from the values that would have been used had a ready market for the
securities existed, and the differences could be material.
Venture capital limited partnership investments are valued based on the
fair value of the underlying investments. Limited partnership
distributions that are a return of capital reduce the cost basis of the
Partnership's investment. Distributions from limited partnership
cumulative earnings are reflected as realized gains by the Partnership.
In the case of an other-than-temporary decline in fair value below cost
basis, an appropriate reduction in the cost basis is recognized as a
realized loss with the new cost basis being adjusted to equal the fair
value of the investment. Cost basis adjustments are reflected as "Realized
loss from investment write-offs" or "Net realized loss from venture capital
limited partnership investments" on the Statements of Operations.
Sales of equity investments are recorded on the trade date. The basis on
which cost is determined in computing realized gains or losses is specific
identification.
Notes Receivable
- ----------------
The fair value of notes receivable is determined in good faith by the
Managing General Partners under the direction of the Management Committee.
Fair value is generally defined as the amount the Partnership could
reasonably expect to receive for the notes and accrued interest on the
valuation date. The values determined for the Partnership's notes
receivable are based upon available information at the time the good faith
valuations are made and do not necessarily represent the amount which might
ultimately be realized which could be higher or lower than the reported
fair value. When the Managing General Partners' assessment of fair value
indicates that future collectibility of interest or principal is in doubt,
notes are placed on non-accrual status.
Cash, Cash Equivalents and Restricted Cash
- ------------------------------------------
Cash, cash equivalents and restricted cash are principally comprised of
cash invested in demand accounts and money market instruments and are
stated at cost plus accrued interest. The Partnership considers all money
market and short-term investments with an original maturity of three months
or less to be cash equivalents.
Net Increase (Decrease) in Partners' Capital Resulting from Operations Per
- --------------------------------------------------------------------------
Unit
- ----
Net increase (decrease) in partners' capital resulting from operations per
Unit is calculated by dividing the weighted average number of Units
outstanding of 160,000 for the years ended December 31, 2003, 2002 and
2001, into the total net increase (decrease) in partners' capital resulting
from operations allocated to the Limited Partners. The Managing General
Partners contributed 0.1 percent of total Limited Partner capital
contributions and did not receive any Partnership Units.
Provision for Income Taxes
- --------------------------
No provision for income taxes has been made by the Partnership as the
Partnership is not directly subject to taxation. The partners are to
report their respective shares of Partnership income or loss on their
individual tax returns.
The accompanying financial statements are prepared using accounting
principles generally accepted in the United States which may not equate to
tax accounting. The cost of investments on a tax basis at December 31,
2003 and 2002, was $15,277,365 and $16,102,424, respectively. At December
31, 2003 and 2002, gross unrealized depreciation on investments based on
cost for federal income tax purposes were as follows:
December 31, December 31,
2003 2002
------------ ------------
Unrealized appreciation $ 1,909,100 $ 264,350
Unrealized depreciation (8,703,066) (11,481,996)
--------- ----------
Net unrealized depreciation $(6,793,966) $(11,217,646)
========= ==========
New Accounting Pronouncements
- -----------------------------
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities, such as restructurings,
involuntarily terminating employees, and consolidating facilities initiated
after December 31, 2002. The implementation of SFAS No. 146 will not
require the restatement of previously issued financial statements. The
Partnership implemented early adoption of SFAS No. 146 to all applicable
costs associated with exit or disposal activities incurred during 2003 and
2002. (See Note 2).
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
a guarantor to recognize a liability at the inception of the guarantee for
the fair value of obligations it has assumed under that guarantee and also
requires more detailed disclosure in its financial statements with respect
to such guarantees. FIN 45 is effective for guarantees issued or modified
after December 31, 2002, and requires additional disclosure for existing
guarantees. The adoption of FIN 45 did not have a material effect on the
Partnership's results of operation or financial position. The Partnership
has provided additional disclosure with respect to a guarantee by the
Partnership in Note 11 to the Financial Statements.
In December 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 03-4 (SOP 03-4), "Reporting Financial
Highlights and Schedule of Investments by Non-registered Investment
Partnerships: An Amendment to the Audit and Accounting Guide 'Audits of
Investment Companies' (the Guide) and AICPA Statement of Position 95-2 (SOP
95-2), 'Financial Reporting by Nonpublic Investment Partnerships.'" SOP
03-4 provides guidance on the application of certain provisions in the
Accounting Guide and SOP 95-2 that are directed to the reporting by non-
registered investment partnerships of financial highlights and the schedule
of investments. It amends certain provisions of the Guide and SOP 95-2 by
adapting those provisions to non-registered investment partnerships based
on their differences in organizational structures from registered
investment companies. SOP 03-4 is effective for annual financial statements
issued for fiscal years ending after December 15, 2003. The adoption of
SOP 03-4 did not have a material effect on the Partnership.
2. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party costs in 2003, 2002 and 2001 were
as follows:
For the Years Ended December 31,
-----------------------------------
2003 2002 2001
------ ------ ------
Management fees $ 87,781 $ 152,636 $172,640
Individual General
Partners' compensation 60,000 64,500 64,545
Reimbursable operating expenses:
Administrative, investor
services and professional
fees 1,206,965 1,301,051 581,337
Investment operations 352,674 236,917 158,640
Computer services 87,908 134,144 152,104
Management fees are equal to one quarter of one percent of the fair value
of Partnership assets for each quarter. Management fees compensate the
Managing General Partners solely for General Partner Overhead (as defined
in the Partnership Agreement) incurred in supervising the operation and
management of the Partnership and the Partnership's investments.
Management fees due to the Managing General Partners were $16,085 and
$10,745 and were included in due to related parties at December 31, 2003
and 2002, respectively.
As compensation for their services, each of the Individual General Partners
receives $14,000 annually plus $1,500 for attendance at each meeting of the
Management Committee or committee thereof. The Individual General Partners
are reimbursed for all out-of-pocket expenses relating to attendance of the
meetings, committees or otherwise of the Management Committee. The
Individual General Partners each own eight Units.
The Partnership reimburses the Managing General Partners for operating
expenses incurred in connection with the business of the Partnership.
Reimbursable operating expenses include expenses (other than Organizational
and Offering and General Partner Overhead) such as investment operations,
administrative and investor services, and computer services. Amounts due to
related parties for such expenses totaled $113,719 and $36,866 at December
31, 2003 and 2002, respectively.
The Managing General Partners allocate operating expenses incurred in
connection with the business of the Partnership based on employee hours
incurred. In 2002 the Managing General Partners billed the Partnership
$63,389, $10,460 and $7,845 for operating expenses incurred during 2001,
2000 and prior years, respectively.
Under the terms of a computer service agreement, Technology Administrative
Management, a division of TFL, charges the Partnership for its share of
computer support costs. These amounts are included in computer services
expenses.
The Partnership has a receivable of $334,938 from an affiliated Partnership
for the funding of an investment that was allocated between the
Partnerships.
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, and is being amortized over the remaining expected employment
period. During 2003 and 2002, the partnership recognized $57,909 and
$9,952 as operating expense related to the amortization of retention
bonuses. 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. 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.
Officers of the Managing General Partners occasionally receive stock
options as compensation for serving on the Boards of Directors of portfolio
companies. It is the Managing General Partners' policy that all such
compensation be transferred to the investing partnerships. If the options
are non-transferable, they are not recorded as an asset of the Partnership.
Any profit from the exercise of such options will be transferred if and
when the options are exercised and the underlying stock is sold by the
officers. Any such profit is allocated amongst the Partnership and
affiliated partnerships based upon their proportionate investments in the
portfolio company. At December 31, 2003, the Partnership and affiliated
partnerships had an indirect interest in non-transferable Endocare, Inc.,
Sanarus Medical, Inc. and White Electronic Designs Corporation options with
a fair value of $33,147.
3. Allocation of Profits and Losses
--------------------------------
In accordance with the Partnership Agreement (see Note 1), net profits and
losses of the Partnership are allocated based on the beginning-of-year
partners' capital balances as follows:
(a) Profits:
(i) First, to those partners with deficit capital account
balances until such deficits have been eliminated; then
(ii) Second, to the partners as necessary to offset net decrease
in partners' capital resulting from operations previously
allocated under (b)(ii) below and sales commissions; then
(iii) Third, 75 percent to the Limited Partners as a group in
proportion to the number of Units held, 5 percent to the
Limited Partners in proportion to the Unit Months of each
Limited Partner, and 20 percent to the Managing General
Partners. Unit months are the number of half months a Unit
would be outstanding if held from the date the original holder
of such Unit was deemed admitted into the Partnership until
the termination of the offering of Units.
(b) Losses:
(i) First, to the partners as necessary to offset the net profit
previously allocated to the partners under (a)(iii) above; then
(ii) 99 percent to the Limited Partners and 1 percent to the Managing
General Partners.
Losses allocable to Limited Partners in excess of their capital account
balances will be allocated to the Managing General Partners. Net profits
thereafter, otherwise allocable to those Limited Partners, are allocated to
the Managing General Partners to the extent of such losses.
Losses from unaffiliated venture capital limited partnership investments
are allocated pursuant to section (b) above. Gains are allocated 99
percent to Limited Partners and 1 percent to the Managing General Partners.
In no event are the Managing General Partners allocated less than 1 percent
of the net realized profit or loss of the Partnership.
4. Equity Investments
------------------
All investments are valued at fair value as determined in good faith by the
Managing General Partners.
Marketable Equity Securities
- ----------------------------
At December 31, 2003 and 2002, marketable equity securities had aggregate
costs of $3,378,855 and $3,724,761, respectively, and aggregate fair values
of $4,424,621 and $2,226,470, respectively. The net unrealized gain at
December 31, 2003, and the net unrealized loss at December 31, 2002,
included gross gains of $1,799,905 and $75,249, respectively.
Restricted Securities
- ---------------------
At December 31, 2003 and 2002, restricted securities had aggregate costs of
$10,505,442 and $11,216,937, respectively, and aggregate fair values of
$4,106,774 and $2,655,700, respectively, representing 31.3 percent and 33.2
percent, respectively, of the net assets of the Partnership.
Significant purchases, sales and write-offs of equity investments during
2003 are as follows:
Acusphere, Inc.
- ---------------
In April and June of 2003, the Partnership funded convertible secured notes
of $230,129 and $61,981, respectively. In September 2003, Acusphere shares
were subject to a reverse split, which converted the Partnership's 690,437
Preferred shares and convertible notes receivable into 167,871 common
shares with a cost value of $1,840,251. On October 8, 2003, Acusphere
conducted an initial public offering, which priced at $14 per share. The
Partnership's Acusphere shares are subject to a 180-day lock-up period.
Applied Molecular Evolution, Inc.
- ---------------------------------
In December 2003, the Partnership sold its entire investment in the company
for proceeds of $295,472 and realized a gain of $70,849.
Atherotech, Inc.
- ----------------
In September 2003, the Partnership guaranteed a $600,000 line of credit for
Atherotech, depositing that amount in a segregated bank account.
Atherotech, Inc. has issued the Partnership a warrant, with the right to
purchase stock at a future date, which will expire September 8, 2010. See
Notes 8 and 11.
Avalon Vision Solutions, Inc.
- -----------------------------
In December 2003, the Partnership received $8,401 from Avalon Vision
Solutions, Inc. to retire its notes receivable, including accrued interest.
The Partnership recorded a realized loss of $5,973.
CellzDirect, Inc.
- -----------------
In October 2003, the Partnership purchased 427,135 Series B Preferred
shares at a total cost of $165,000.
Pharmadigm, Inc.
- ----------------
In December 2003, the Partnership wrote off its entire investment in
Pharmadigm, Inc., realizing a loss of $1,170,039. The Partnership expects
no return on its investment after the company's two lead investors forced a
cramdown in the last round of financing and other investors, including the
Partnership, elected not to participate.
Pherin Inc.
- -----------
In March 2003, the Partnership wrote off its entire investment of $200,000
after the company ceased domestic operations. The Partnership does not
expect any return on its investment.
Sanarus Medical Inc.
- --------------------
In May 2003, the Partnership funded a convertible secured note of $422,776
to Sanarus Medical, Inc. In October 2003, the Partnership's note plus
accrued interest totaling $433,950, was converted into 639,819 Series C
Preferred shares. The Partnership acquired an additional 13,832 Series C
Preferred shares for $9,406.
Virage, Inc.
- ------------
In October 2003, the Partnership sold its entire investment in the company
for proceeds of $1,124 and realized a loss of $64.
White Electronic Designs Corporation
- ------------------------------------
In October 2003, the Partnership sold its entire investment in the company
for proceeds of $230,443 and realized a gain of $110,348.
WorldRes.com, Inc.
- ------------------
During the third quarter of 2003, WorldRes.com, Inc. repaid a convertible
note issued by the Partnership. The Partnership received $314,653, which
includes accrued interest on the note.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
During 2003, the Partnership received cash distributions of $291,672, which
were recorded as realized gains. The Partnership did not receive any stock
distributions in the year ended December 31, 2003.
In the year ended December 31, 2003, the Partnership recorded a $120,634
decrease in fair value primarily as a result of the above distributions and
a net decrease in the fair value of the underlying investments of the
partnerships.
Other Equity Investments
- ------------------------
Other significant changes reflected in the Statements of Investments relate
to market value fluctuations for publicly traded portfolio companies or
changes in the fair value of private companies as determined in accordance
with the policy described in Note 1 to the financial statements.
5. Net Decrease (Increase) in Unrealized Depreciation of Equity
-------------------------------------------------------------
Investments
-----------
In accordance with the accounting policy as stated in Note 1, the
Statements of Operations includes a line item entitled "Net decrease
(increase) in unrealized depreciation of equity investments." The table
below discloses details of the changes:
For the Years Ended December 31,
----------------------------------
2003 2002 2001
------ ------ ------
Unrealized appreciation
(depreciation) from cost of
marketable equity securities $ 1,045,766 $(1,498,291) $(1,168,910)
Unrealized depreciation from
cost of non-marketable equity
securities (6,458,668) (8,561,237) (1,610,258)
---------- ---------- ---------
Unrealized depreciation from
cost at end of year (5,412,902) (10,059,528) (2,779,168)
Unrealized depreciation from cost
at beginning of year (10,059,528) (2,779,168) (3,825,605)
---------- ---------- ---------
Net decrease (increase) in
unrealized depreciation of
equity investments $ 4,646,626 $(7,280,360) $ 1,046,437
========== ========== =========
6. Notes Receivable
----------------
Activity from January 1 through December 31 consisted of:
2003 2002
------ ------
Balance, beginning of year $ 2,608 $ 212,928
Notes receivable written off (16,628) (5,086,806)
Repayments of notes receivable (4,334) (250,000)
Change in accrued interest 7,917 (16,197)
Net decrease in unrealized
depreciation of notes receivable 10,437 5,142,683
--------- ---------
Balance, end of year $ 0 $ 2,608
========= =========
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 $250,000 from
Thermatrix Inc. 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.
7. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 2003 and 2002, consisted of:
2003 2002
------ ------
Demand accounts $ 707,404 $ 42,153
Money market accounts 623,540 2,276,794
--------- ---------
Total $1,330,944 $2,318,947
========= =========
Restricted cash $ 600,000 --
Unrestricted cash 730,944 2,318,947
--------- --------
Total $1,330,994 $2,318,947
========= =========
8. Restricted Cash
---------------
In September 2003, the Partnership guaranteed a $600,000 line of credit for
Atherotech, depositing that amount in a segregated bank account. See Notes
4 and 11.
9. 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.
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. On February 13,
2003, the Partnership received $774,298, representing its proportionate
share of the settlement, plus accrued interest, less disputed legal fees.
The Partnership recognized the additional revenue and receivable of
$107,631 at December 31, 2002. In March 2003, the law firm remitted an
additional amount of $193,830 to the Partnership.
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.
In September 2003, the Partnership guaranteed a line of credit (agreement)
for Atherotech, Inc. with a bank. Atherotech, Inc. is a portfolio company
of an affiliated partnership under which the Partnership has common
control. The terms of the guarantee require the Partnership to secure its
obligation to the bank with a segregated money market account in the amount
of $600,000 (pledged collateral), which is included in restricted cash on
the accompanying balance sheet. In exchange for the guarantee, Atherotech,
Inc. has issued the Partnership a warrant, with the right to purchase stock
at a future date, which will expire September 8, 2010. The terms of the
warrant state that (a) if the guarantee is in place for less than 6 months
from the date of the guarantee, the warrant is exercisable for 42,418 of
Preferred Series E shares; (b) if the guarantee is in place for 6 to 9
months from the date of the guarantee, the warrant is exercisable for an
additional 31,813 of Preferred Series E shares; (c) if the guarantee is in
place for more than 9 months from the date of the guarantee, the warrant is
exercisable for an additional 42,418 of Preferred Series E shares; and (d)
if at any time prior to the termination date any demand for payment is made
upon the guarantee, the warrant is exercisable for an additional 42,418
Preferred Series E shares. The maximum potential amounts for future
payments (undiscounted) that the Partnership would be required to make
under the guarantee is the amount of the pledged collateral plus accrued
interest. The guarantee is to remain in effect as long as Atherotech's
agreement with the bank remains outstanding. In the event of Atherotech's
default on the agreement, the bank would take the pledged collateral and
accrued interest, as security for the performance of Atherotech's
obligation.
10. Financial Highlights
--------------------
For The Years Ended December 31,
-----------------------------------
2003 2002 2001
------ ------ ------
(all amounts on a per Unit basis)
Net asset value,
beginning of period $54.92 $84.34 $88.79
Loss from investment
operations:
Net investment loss -- (7.75) (8.59)
Net realized and unrealized
gain (loss) on investments 1.06 (46.29) 5.23
----- ----- -----
Total from investment operations 1.06 (54.05) (3.36)
----- ----- -----
Net asset value, end of period $55.98 $30.29 $85.43
===== ===== =====
Total return 1.92% (64.08)% (3.79)%
Ratios to average net assets:
Net investment loss 0% (13.53)% (9.86)%
Expenses 22.70% 23.37% 12.18%
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 December 31, 2003, the General Partners have a negative
capital balance of $1,435,717. Net asset value has been calculated in
accordance with this provision of the Partnership Agreement.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING PARTNERS III, L.P.
By: TECHNOLOGY FUNDING INC.
TECHNOLOGY FUNDING LTD.
Managing General Partners
Date: March 15, 2004 By: /s/Charles R. Kokesh
--------------------------------
Charles R. Kokesh
President, Chief Executive Officer
Chief Financial Officer and
Chairman of Technology Funding Inc.
and Managing General Partner of
Technology Funding Ltd.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/Charles R. Kokesh President, Chief March 15, 2004
- ------------------------ Executive Officer,
Charles R. Kokesh Chief Financial Officer
and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
The above represents a majority of the Board of Directors of Technology
Funding Inc. and the General Partners of Technology Funding Ltd.
Technology Funding Partners III, L.P. 3:44 PM 03/16/04
(a Delaware limited partnership)
Page 1 of 47
Technology Funding Partners III, L.P.
(a Delaware limited partnership)