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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 814-48
TECHNOLOGY FUNDING PARTNERS III, L.P.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-3033783
- ------------------------------ ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1107 Investment Blvd., Suite 180
El Dorado Hills, California 95762
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(916) 941-1400
--------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Act). Yes No X
--- ---
No active market for the units of limited partnership interest ("Units")
exists, and therefore the market value of such Units cannot be
determined.
Forward-Looking Statements
- --------------------------
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
safe harbor for forward-looking statements made by or on behalf of the
Partnership. The Partnership and its representatives may from time to
time make written or oral statements that are "forward-looking,"
including statements contained in this report and other filings with the
Securities and Exchange Commission, and reports to the Partnership's
shareholders and news releases. All statements that express
expectations, estimates, forecasts and projections are forward-looking
statements within the meaning of the Act. In addition, other written or
oral statements, which constitute forward-looking statements, may be made
by or on behalf of the Partnership. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates,"
"projects," "forecasts," "may," "should," variations of such words and
similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance
and involve certain risks, uncertainties and assumptions, which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in or suggested by such
forward-looking statements. The Partnership undertakes no obligation to
update publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.
I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
- --------------
(unaudited)
March 31, December 31,
2004 2003
----------- ------------
ASSETS
Equity investments (cost of $12,995,581
and $13,836,296 for March 31, 2004, and
December 31, 2003, respectively) $ 9,060,711 $ 8,483,394
Cash and cash equivalents 1,780,361 730,944
Restricted cash 600,000 600,000
Prepaid expenses 190,455 204,932
Other assets 5,799 16,497
Due from related parties 39,783 233,201
---------- ----------
Total assets $11,677,109 $10,268,968
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 39,093 $ 62,084
Other liabilities 94,977 61,977
---------- ----------
Total liabilities 134,070 124,061
Commitments and contingencies (See Note 6)
Partners' capital:
Limited Partners 11,583,767 11,580,624
(160,000 Units outstanding)
General Partners (40,728) (1,435,717)
---------- ----------
11,543,039 10,144,907
---------- ----------
Total liabilities and
partners' capital $11,677,109 $10,268,968
========== ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal
Amount or March 31, 2004 December 31, 2003
Industry Shares at ----------------- -----------------
(1) Investment March 31, Cost Fair Cost Fair
Company Position Date 2004 Basis Value Basis Value
- ------------- -------- ---------- ---------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
1.6% and 10.2% at March 31, 2004, and December 31, 2003, respectively
- ---------------------------------------------------------------------
iVillage, Inc. Common 1996-
shares 2000 0 -- -- 990,716 860,542
WorldRes.com, Inc. Common 1997-
(a) (b) shares 2001 604,392 2,218,124 181,317 2,218,124 181,317
---------- --------- ---------- ---------
2,218,124 181,317 3,208,840 1,041,859
---------- --------- ---------- ---------
Environmental
- -------------
0.0% and 0.0% at March 31, 2004, and December 31, 2003, respectively
- --------------------------------------------------------------------
Triangle
Biomedical Common
Sciences, Inc.(a) shares 1999 4,099 79,792 0 79,792 0
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Triangle Common
Biomedical share
Sciences, Inc.(a) warrants at
$28.00;
expiring
2009 1999 4,099 4,099 0 4,099 0
---------- --------- ---------- ---------
83,891 0 83,891 0
---------- --------- ---------- ---------
High Tech/Financial
- -------------------
3.7% and 2.7% at March 31, 2004, and December 31, 2003, respectively
- --------------------------------------------------------------------
VenCore Solutions, LLC
LLC (a)(b) units 2002 625,000 625,000 250,000 625,000 250,000
VenCore Solutions, Bridge
LLC (a)(b) loan 2004 $150,000 150,000 150,000 -- --
VenCore Solutions, LLC unit
LLC (a)(b) warrants
at $0.001;
expiring
2007 2002 62,500 0 24,975 0 24,975
---------- --------- ---------- ---------
775,000 424,975 625,000 274,975
---------- --------- ---------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Information Technology
- ----------------------
1.9% and 2.2% at March 31, 2004, and December 31, 2003, respectively
- --------------------------------------------------------------------
KeyEye
Communications, Common
Inc. (a)(b) shares 2002 3,142,856 550,000 220,000 550,000 220,000
---------- --------- ---------- ---------
550,000 220,000 550,000 220,000
---------- --------- ---------- ---------
Medical/Biotechnology
- ---------------------
68.9% and 65.4% at March 31, 2004, and December 31, 2003, respectively
- ----------------------------------------------------------------------
Acusphere, Inc. Common
(a) shares 2003 167,871 1,840,251 1,331,633 1,840,250 1,105,426
Atherotech, Inc. Preferred
share
warrant
at exercise
price $2.83;
expiring
2010 2003 42,418 0 48,000 0 48,000
Atherotech, Inc. Preferred
share
warrant
at exercise
price $2.83
expiring
2010 2004 31,813 0 36,000 -- --
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
CareCentric Common
Solutions, Inc. shares 1999 47,836 382,875 3,870 382,875 3,630
CellzDirect, Preferred 2002-
Inc. (a)(b) shares 2003 1,397,896 540,000 216,000 540,000 216,000
CollaGenex
Pharmaceuticals, Common
Inc. shares 2001 6,819 54,444 90,829 54,444 75,895
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 901,814 1,416,252 990,542
Applied
NeuroSolutions, Common
Inc. (a) shares 1993 15,528 125,000 4,503 125,000 4,659
LifeCell Common 1992-
Corporation shares 2002 551,060 1,866,336 4,518,691 1,866,336 3,416,571
Natus Medical, Common
Inc. shares 2002 16,225 84,484 65,225 84,484 67,983
Sanarus Medical, Preferred 2000-
Inc. (a) (b) shares 2001 1,461,159 1,779,483 735,713 1,779,483 735,713
Sanarus Medical, Bridge loan
Inc. (a) (b) warrants at
exercise
price TBD;
expiring
2006 2001 195 195 78 195 78
---------- --------- ---------- ---------
8,089,320 7,952,356 8,089,319 6,664,497
---------- --------- ---------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
2.4% and 2.8% at March 31, 2004, and December 31, 2003, 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 0
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 1,279,246 282,063
---------- --------- ---------- ---------
Total investment - 78.5% and 83.2% at
March 31, 2004, and December 31, 2003,
respectively $12,995,581 $9,060,711 $13,836,296 $8,483,394
========== ========= ========== =========
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Legends and footnotes:
- -- No investment held at end of period.
0 Investment active with a cost basis or fair value of zero.
(a) Equity security acquired in a private placement transaction; resale may be subject to certain
selling restrictions.
(b) Portfolio company is an affiliate of the Partnership; resale may be subject to certain
selling restrictions.
(1) Represents the total fair value of a particular industry segment as a percentage of partners'
capital at 03/31/04 and 12/31/03.
(2) The Partnership has no income-producing equity investments except for a Vencore, LLC
convertible unsecured note receivable. The interest rate on this note during the quarter
ended March 31, 2004 was 10%.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
For the Three Months Ended March 31,
-----------------------------------
2004 2003
-------- ---------
Investment income:
Notes receivable interest $ -- $ 6,255
Short-term investment interest 1,667 5,536
--------- -------
Total investment income 1,667 11,791
Investment expenses:
Management fees 25,672 20,610
Individual General Partners'
compensation 15,625 15,000
Administrative and investor services 309,964 552,355
Investment operations 193,055 163,255
Professional fees 14,552 84,188
Computer services 21,206 22,689
--------- -------
Total investment expenses 580,074 858,097
--------- -------
Net investment loss (578,407) (846,306)
--------- -------
Net realized gain from sales
of equity investments 585,332 --
Realized loss from write-off of
equity investments -- (200,000)
Realized gains from venture capital
limited partnership investments 3,175 71,092
--------- -------
Net realized gain (loss) 588,507 (128,908)
--------- -------
Decrease in unrealized depreciation:
Equity investments 1,328,032 25,536
Notes receivable -- (374)
--------- -------
Net decrease in unrealized
depreciation: 1,328,032 25,162
--------- -------
STATEMENTS OF OPERATIONS (unaudited) (continued)
- -----------------------------------------------
Other income 60,000 193,830
--------- -------
Net increase (decrease) in
partners' capital resulting
from operations $1,398,132 $(756 222)
========= =======
Net increase (decrease) in partners'
capital resulting from operations
per Unit $ .02 $ (4.68)
========= =======
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
For the Three Months Ended March 31,
------------------------------------
2004 2003
--------- ---------
Net increase (decrease) in partners'
capital resulting from operations $1,398,132 $ (756,222)
Adjustments to reconcile net (decrease)
increase in partners' capital resulting
from operations to net cash used by
operating activities:
Net realized gain from sales of
equity investments (585,332) --
Realized gains from venture capital
limited partnership investments (3,175) (71,092)
Realized loss from write-off of
equity investments -- 200,000
Net decrease in unrealized
depreciation of equity investments (1,388,032) (25,536)
Net changes in operating assets
and liabilities:
Unrealized depreciation of
notes receivable -- 374
Prepaid expenses 14,477 14,478
Other receivables -- 580,468
Accrued interest on notes
receivable -- (6,255)
Accounts payable and
accrued expenses (22,991) (4,782)
Due to related parties 193,418 140,794
Other changes, net 13,698 1,733
--------- ---------
Net cash (used) provided by
operating activities (379,805) 73,960
--------- ---------
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
Cash flows from investing activities:
Proceeds from sales of
equity investments 1,576,047 --
Purchase of investments (150,000) --
Distribution from venture capital
limited partnership investments 3,175 71,092
--------- ---------
Net cash provided by investing
activities 1,429,222 71,092
--------- ---------
Net increase in cash and cash
equivalents 1,049,417 145,052
Cash and cash equivalents at
Beginning of year 730,944 2,318,947
--------- ---------
Cash and cash equivalents
at March 31 $1,780,361 $2,463,999
========= =========
The accompanying notes are an integral part of these financial
statements.
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. Interim Financial Statements
----------------------------
The accompanying unaudited financial statements included herein have
been prepared in accordance with the requirements of Form 10-Q and,
therefore, do not include all information and footnotes which would be
presented were such financial statements prepared in accordance with
generally accepted accounting principles in the United States of
America. These statements should be read in conjunction with the
Annual Report on Form 10-K for the year ended December 31, 2002. In
the opinion of the Managing General Partners, the accompanying interim
financial statements reflect all adjustments necessary for the fair
presentation of the financial position, results of operations, and cash
flows for the interim periods presented. Allocation of income and loss
to Limited and General Partners is based on cumulative income and loss.
Adjustments, if any, are reflected in the current quarter balances.
The results of operations for such interim periods are not necessarily
indicative of results of operations to be expected for the full year.
2. Provision for Income Taxes
--------------------------
No provision for income taxes has been made by the Partnership, as the
Partnership is not directly subject to taxation. The partners are to
report their respective shares of Partnership income or loss on their
individual tax returns.
The accompanying financial statements are prepared using accounting
principles generally accepted in the United States of America, which
may not equate to tax accounting. The cost of investments on a tax
basis at March 31, 2004, and December 31, 2003, was $13,174,022 and
$15,277,365, respectively. At March 31, 2004, and December 31, 2003,
gross unrealized depreciation on investments based on cost for federal
income tax purposes was as follows:
March 31, December 31,
2004 2003
------------ ------------
Unrealized appreciation $ 2,833,935 $ 1,909,100
Unrealized depreciation (7,173,448) (8,703 066)
---------- ---------
Net unrealized depreciation $ (4,339,513) $(6,793,966)
========== =========
New Accounting Pronouncements
- -----------------------------
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.
3. Related Party Transactions
--------------------------
Related party costs are included in investment expenses shown on the
Statements of Operations. Related party expenses for the three months
ended March 31, 2004 and 2003, were as follows:
2004 2003
--------- --------
Management fees $ 25,672 $ 20,610
Individual General Partners'
compensation 15,625 15,000
Reimbursable operating expenses 492,315 787,115
Certain reimbursable expenses have been accrued based upon interim
estimates prepared by the Managing General Partners and are adjusted to
actual costs periodically. There was $27,864 due from related parties
at March 31, 2004 and $113,719 due to related parties at March 31,
2003. In addition $11,920 was due from other partnerships at March 31,
2004.
Management fees due to the Managing General Partners and included in
due to related parties were $8,557 and $16,085 at March 31, 2004, and
December 31, 2003.
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 March 31, 2004,
the Partnership and affiliated partnerships had an indirect interest in
non-transferable Endocare, Inc., non-transferable Sanarus Medical, Inc.
and White Electronic Designs Corporation options with a fair value of
$27,046.
Retention bonuses were offered to and accepted by key employees of the
Managing General Partners in late 2002. The bonuses, incremented by
annual salary increases, will be paid to those individuals who are
still full-time employees of the Managing General Partners in April
2007. The expense for the bonus is recognized ratably over the
beneficial period, October 2002 to April 2007. As of March 31, 2004,
the Partnership has recognized expense of $14,477. Upon the resignation
of personnel no adjustment to the retention bonus amount previously
paid by the Partnership to the Managing General Partners shall occur
until a replacement person is hired.
4. Equity Investments
------------------
All investments are valued at fair value as determined in good faith by
the Managing General Partners.
Marketable Equity Securities
- ----------------------------
At March 31, 2004, and December 31, 2003, marketable equity securities
had aggregate costs of $2,388,139 and $3,378,855, and aggregate fair
values of $4,678,615 and $4,424,621, respectively. The net unrealized
gain at March 31, 2004, and December 31, 2003, included gross gains of
$2,688,740 and $1,799,905, respectively.
Restricted Securities
- ---------------------
At March 31, 2003, and December 31, 2002, restricted securities had
aggregate costs of $10,607,442 and $10,505,442, respectively, and
aggregate fair values of $4,382,096 and $4,106,774, respectively,
representing 37.5 percent and 31.3 percent, respectively, of the net
assets of the Partnership.
Significant purchases, sales and write-offs of equity investments
during the quarter ended March 31, 2004, are as follows:
iVillage, Inc.
- -------------
The Partnership sold its entire investment in the company for proceeds
of $1,576,047 and recorded a realized gain of $585,332.
VenCore Solutions, LLC
- ----------------------
In March 2004, the Partnership issued a $150,000 convertible unsecured
note receivable with an interest rate of 10%. The note is due in
October 2004.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
The Partnership received a cash distribution of $3,175, which was
recorded as a realized gain. The Partnership did not record a decrease
in fair value primarily as a result of the above distribution.
Other Equity Investments
- ------------------------
Other significant changes reflected in the Statements of Investments
relate to market value fluctuations for publicly traded portfolio
companies or changes in the fair value of private companies as
determined in accordance with the policy described in Note 1 to the
financial statements included in the Partnership's December 31, 2003,
Form 10-K.
5. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at March 31, 2004, and December 31, 2003,
consisted of:
2004 2003
--------- ---------
Demand accounts $1,755,776 $ 707,404
Money market accounts 624,585 623,540
--------- ---------
$2,380,361 $1,330,944
========= =========
Restricted cash $ 600,000 600,000
Unrestricted cash 1,780,361 730,944
--------- --------
Total $2,380,361 $1,330,994
========= =========
6. Commitments and Contingencies
-----------------------------
From time to time the Partnership becomes a party to financial
instruments with off-balance-sheet risk in the normal course of its
business. Generally, these instruments are commitments for future
equity investment fundings, equipment financing commitments, or
accounts receivable lines of credit that are outstanding but not
currently fully utilized by a borrowing company. As they do not
represent current outstanding balances, these unfunded commitments are
not recognized in the financial statements. At March 31, 2004, there
were unfunded commitments of $797,475.
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. As of March, 2004, the guarantee is still in
place.
7. Financial Highlights
--------------------
For The Three Months Ended March 31,
------------------------------------
2004 2003
------ ------
(all amounts on a per Unit basis)
Net asset value, beginning of period $71.87 $30.20
Loss from investment operations:
Net investment loss (0.01) (4.04)
Net realized and unrealized
Gain (loss) on investments 0.03 (0.64)
----- -----
Total from investment operations 0.02 (4.68)
----- -----
Net asset value, end of period $71.89 $25.52
===== =====
Total return 0.03% (15.49)%
Ratios to average net assets:
Net investment loss (0.01)% (14.49)%
Expenses 5.04% 19.25%
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 March 31, 2004 and December 31, 2003,
the General Partners have a negative capital balance of $40,728 and
$3,289,760. Upon liquidation, the General Partners would not be
required to contribute cash to the Partnership, as the net asset value
is greater than the General Partners' negative capital balance. Net
asset value has been calculated in accordance with this provision of
the Partnership Agreement.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Partnership operates as a business development company under the
Investment Company Act of 1940 and makes venture capital investments in
new and developing companies. The Partnership's financial condition is
dependent upon the success of the portfolio companies. There is no
ready market for many of the Partnership's investments. It is possible
that some of its venture capital investments may be a complete loss or
may be unprofitable and that others will appear likely to become
successful, but may never realize their potential. The valuation of
the Partnership's investments in securities for which there are no
available market quotes is subject to the estimate of the Managing
General Partners in accordance with the valuation guidance described in
Note 1 to the financial statements included in the Partnership's Form
10-K for the year ended December 31, 2003. In the absence of readily
obtainable market values, the estimated fair value of the Partnership's
investments may differ significantly from the values that would have
been used had a ready market existed.
During the three months ended March 31, 2004, net cash provided by
operating activities totaled $379,805. The Partnership paid management
fees of $31,012 to the Managing General Partners and reimbursed related
parties for investment expenses of $279,080. In addition, $15,625 was
paid to the Individual General Partners as compensation for their
services. Interest income of $1,667 was received. Other investment
expenses of $55,755 were paid.
During the three months ended March 31, 2004, the Partnership funded no
equity investments, but issued a $150,000 note receivable. At March 31,
2004, the Partnership had unfunded commitments of $797,475.
Cash and cash equivalents at March 31, 2004, were $1,780,361. Cash
reserves, interest income on short-term investments, and future
proceeds from equity investment sales are expected to be adequate to
fund Partnership operations and future investments through the next
twelve months.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
- -----------------------------------------------------------------------
Net increase in partners' capital resulting from operations was
$1,398,132 for the three months ended March 31, 2004, as compared to a
net decrease in partners' capital resulting from operations of $756,222
for the three months ended March 31, 2003.
Other income of $60,000 and $193,830 was recognized during the quarters
ended March 31, 2004 and 2003, respectively.
Net unrealized depreciation on equity investments was $3,934,870 and
$5,352,902 at March 31, 2004, and December 31, 2003, respectively.
During the quarter ended March 31, 2004, the net decrease in unrealized
depreciation of equity investments of $1,382,032 was primarily due to
the publicly traded price of LifeCell Corporation. During the quarter
ended March 31, 2003, the net decrease in unrealized depreciation of
equity investments of $25,536 was primarily the result of an increase
in the publicly traded market price of Endocare, Inc. and the write-off
of Pherin Pharmaceuticals, Inc., partially offset by decreases in the
publicly traded market prices of companies in the medical and
communication industries.
There was no net unrealized depreciation on notes receivable at March
31, 2004, and $10,437 at December 31, 2003. During the quarter ended
March 31, 2004, the net increase in unrealized depreciation of notes
receivable was $0. During the quarter ended March 31, 2003, the net
decrease in unrealized depreciation of notes receivable of $10,811 was
primarily attributable to an increase in the fair value of notes issued
to Thermatrix Inc.
During the quarter ended March 31, 2004, there were no write-offs.
During the same period in 2003, the Partnership wrote off its
investment of $200,000 in Pherin Pharmaceuticals, Inc.
Net realized gain from sales of equity investments was $585,332 and $0
for the quarters ended March 31, 2004 and 2003, respectively. The gain
in 2004 resulted from the sale of iVillage, Inc.
Investment expenses were $580,074 for the quarter ended March 31, 2004,
compared to $858,097 for the same period in 2003. The decrease was
primarily due to decreased professional fees and investment monitoring
and administrative services, partially offset by increased management
fees.
During the quarter ended March 31, 2004, the Partnership recorded net
realized gains from venture capital limited partnership investments of
$3,175. During the same period in 2003, there were gains of $71,092.
The gains represented distributions from profits of venture capital
limited partnership investments.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
Item 4. Controls and Procedures
The undersigned is responsible for establishing and maintaining
disclosure controls and procedures for Technology Funding Partners III,
L.P. Such officer has concluded (based upon his evaluation of these
controls and procedures as of a date within 90 days of the filing of
this report) that Technology Funding Partners III, L.P.'s disclosure
controls and procedures are effective to ensure that information
required to be disclosed by Technology Funding Partners III, L.P. in
this report is accumulated and communicated to Technology Funding
Partners III, L.P.'s management, including its principal executive
officers as appropriate, to allow timely decisions regarding required
disclosure.
The certifying officer also has indicated that there were no
significant changes in Technology Funding Partners III, L.P.'s internal
controls or other factors that could significantly affect such controls
subsequent to the date of their evaluation other than changes needed to
maintain adequate separation of duties and responsibilities of
personnel in the ordinary course of business, and there were no
corrective actions with regard to significant deficiencies and material
weaknesses.
I. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K were filed by the Partnership during the
quarter ended March 31, 2004.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING PARTNERS III, L.P.
By: TECHNOLOGY FUNDING INC.
TECHNOLOGY FUNDING LTD.
Managing General Partners
Date: May 13, 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.
Technology Funding Partners III, L.P.
(a Delaware limited partnership)
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