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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
June 30, December 31,
2004 2003
----------- ------------
ASSETS
Equity investments (cost of $11,433,736
and $13,836,296 for June 30, 2004, and
December 31, 2003, respectively) $10,341,946 $ 8,483,394
Cash and cash equivalents 863,301 730,944
Restricted cash 600,000 600,000
Prepaid expenses 175,978 204,932
Other assets 3,313 16,497
Due from related parties, net 10,715 233,201
---------- ----------
Total assets $11,995,253 $10,268,968
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 24,760 $ 62,084
Other liabilities -- 61,977
---------- ----------
Total liabilities 24,760 124,061
Commitments and contingencies (See Note 7)
Partners' capital:
Limited Partners 11,893,148 11,580,624
(160,000 Units outstanding)
General Partners 77,345 (1,435,717)
---------- ----------
11,970,493 10,144,907
---------- ----------
Total liabilities and
partners' capital $11,995,253 $10,268,968
========== ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal
Amount or June 30, 2004 December 31, 2003
Industry Shares at ----------------- -----------------
(1) Investment June 30, Cost Fair Cost Fair
Company Position Date 2004 Basis Value Basis Value
- ------------- -------- ---------- ---------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
0.7% and 10.2% at June 30, 2004, and December 31, 2003, respectively
- --------------------------------------------------------------------
iVillage Inc. Common 1996-
shares 2004 13,650 110,776 86,678 990,716 860,542
WorldRes.com, Inc. Common 1997-
(a) (b) shares 2001 0 0 0 2,218,124 181,317
---------- --------- ---------- ---------
110,776 86,678 3,208,840 1,041,859
---------- --------- ---------- ---------
Environmental
- -------------
0.0% and 0.0% at June 30, 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 June 30, 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 $150,000 153,792 153,792 -- --
VenCore Solutions, LLC unit
LLC (a)(b) warrants
at $0.001;
expiring
2007 2002 62,500 0 24,975 0 24,975
VenCore Solutions, LLC unit
LLC (a)(b) warrants
at $0.001;
expiring
2009 2004 45,000 0 17,982 -- --
---------- --------- ---------- ---------
778,792 446,749 625,000 274,975
---------- --------- ---------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Information Technology
- ----------------------
3.1% and 2.2% at June 30, 2004, and December 31, 2003, respectively
- -------------------------------------------------------------------
KeyEye
Communications, Preferred 2002-
Inc. (a)(b) shares 2004 5,366,165 1,050,000 375,632 550,000 220,000
---------- --------- ---------- ---------
1,050,000 375,632 550,000 220,000
---------- --------- ---------- ---------
Medical/Biotechnology
- ---------------------
76.4% and 65.4% at June 30, 2004, and December 31, 2003, respectively
- ---------------------------------------------------------------------
Acusphere, Inc. Common
(a) shares 2003 167,871 1,840,251 1,074,370 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)
- ------------------------------------
Atherotech, Inc. Preferred
share warrant
at exercise
price $2.83
expiring
2013 2004 42,418 0 48,000 -- --
CareCentric Common
Solutions, Inc. shares 1999 47,836 382,875 3,588 382,875 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 64,099 54,444 75,895
Endocare, Inc. Common 1996-
(b) shares 2004 502,029 1,457,963 629,796 1,416,252 990,542
Applied
NeuroSolutions, Common
Inc. (a) shares 1993 15,528 125,000 3,261 125,000 4,659
LifeCell Common 1992-
Corporation shares 2002 551,060 1,866,336 6,188,403 1,866,336 3,416,571
Natus Medical, Common
Inc. shares 2002 16,225 84,484 103,516 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
---------- --------- ---------- ---------
8,131,031 9,150,824 8,089,319 6,664,497
---------- --------- ---------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
2.4% and 2.8% at June 30, 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 - 86.4% and 83.2% at
June 30, 2004, and December 31, 2003,
respectively $11,433,736 $10,341,946 $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 06/30/04 and 12/31/03.
(2) The Partnership has no income-producing equity investments except for a VenCore Solutions,
LLC convertible unsecured note receivable. The interest rate on this note during the quarter
ended June 30, 2004, was 10%.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ ------
Investment income:
Notes receivable interest $ 3,793 $ 15,617 $ 3,793 $ 21,872
Short-term investment interest 1,400 4,393 3,067 9,929
--------- ---------- --------- ----------
Total investment income 5,193 20,010 6,860 31,801
Investment expenses:
Management fees 29,193 19,062 54,865 39,672
Individual General Partners'
compensation 15,000 15,000 30,625 30,000
Administrative and investor services 150,932 276,860 460,896 829,215
Investment operations 47,020 55,581 240,075 218,836
Professional fees 17,487 30,955 32,039 115,143
Computer services 33,063 23,556 54,269 46,245
--------- ---------- --------- ----------
Total investment expenses 292,695 421,014 872,769 1,279,111
--------- ---------- --------- ----------
Net investment loss (287,502) (401,004) (865,909) (1,247,310)
--------- ---------- --------- ----------
STATEMENTS OF OPERATIONS (unaudited) (continued)
- -----------------------------------------------
Net realized gain from sales
of equity investments -- -- 585,332 --
Realized loss from write-off of
equity investments (2,218,124) -- (2,218,124) (200,000)
Realized gains from venture capital
limited partnership investments -- 4,000 3,175 75,092
--------- ---------- --------- ----------
Net realized (loss) income (2,218,124) 4,000 (1,629,617) (124,908)
--------- ---------- --------- ----------
Decrease (increase) in unrealized
depreciation:
Equity investments 2,933,080 1,908,391 4,321,112 1,933,927
Notes receivable -- 75 -- (299)
--------- ---------- --------- ----------
Net decrease in unrealized
depreciation 2,933,080 1,908,466 4,321,112 1,933,628
--------- ---------- --------- ----------
Other income -- -- -- 193,830
--------- --------- --------- ----------
Net increase in partners'
capital resulting from
operations $ 427,454 $ 1,511,462 $1,825,586 $ 755,240
========= ========== ========= ==========
Net increase in partners'
capital resulting from
operations per Unit $ 1.93 $ 4.70 $ 1.95 $ .02
========= ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
For the Six Months Ended June 30,
---------------------------------
2004 2003
-------- --------
Net increase in partners'
capital resulting from operations $1,825,586 $ 755,240
Adjustments to reconcile net increase
in partners' capital resulting from
operations to net cash used by
operating activities:
Realized gain from sales of
equity investments (585,332) --
Realized gains from venture capital
limited partnership investments (3,175) (75,092)
Realized loss from write-off of
equity investments 2,218,124 200,000
Net decrease in unrealized
depreciation of equity investments (4,321,112) (1,933,927)
Net change in operating assets
and liabilities:
Unrealized depreciation of
notes receivable -- 299
Prepaid expenses 28,954 28,956
Other receivables -- 448,463
Accrued interest on notes receivable (3,792) (21,307)
Accounts payable and accrued expenses (37,324) (7,320)
Other liabilities (1,977) --
Due from related parties, net 222,486 53,500
Other changes, net 13,184 5,551
--------- ---------
Net cash used by
operating activities (644,378) (545,637)
--------- ---------
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
Cash flows from investing activities:
Proceeds from sales of
equity investments 1,576,047 --
Purchase of investments (802,487) (714,886)
Distribution from venture capital
limited partnership investments 3,175 75,092
--------- ---------
Net cash provided (used) by investing
activities 776,735 (639,794)
--------- ---------
Net increase (decrease) in cash and
cash equivalents 132,357 (1,185,431)
Cash and cash equivalents at beginning
of year 730,944 2,318,947
--------- ---------
Cash and cash equivalents
at June 30 $ 863,301 $1,133,516
--------- ---------
Supplemental disclosure of non-cash
activity:
Amortization of deferred gain
on warrants (See Note 7) $ 60,000 $ --
========= =========
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, 2003. In the opinion of the Managing General
Partners, the accompanying interim financial statements reflect all
adjustments necessary for the fair presentation of the financial position,
results of operations, and cash flows for the interim periods presented.
Allocation of income and loss to Limited and General Partners is based on
cumulative income and loss. Adjustments, if any, are reflected in the
current quarter balances. The results of operations for such interim
periods are not necessarily indicative of results of operations to be
expected for the full year.
2. Provision for Income Taxes
--------------------------
No provision for income taxes has been made by the Partnership, as the
Partnership is not directly subject to taxation. The partners are to
report their respective shares of Partnership income or loss on their
individual tax returns.
The accompanying financial statements are prepared using accounting
principles generally accepted in the United States of America, which may
not equate to tax accounting. The cost of investments on a tax basis at
June 30, 2004, and December 31, 2003, was $12,116,999 and $15,277,365,
respectively. At June 30, 2004, and December 31, 2003, gross unrealized
depreciation on investments based on cost for federal income tax purposes
was as follows:
June 30, December 31,
2004 2003
------------ ------------
Unrealized appreciation $ 4,561,931 $ 1,909,100
Unrealized depreciation (6,340,772) (8,703 066)
---------- ---------
Net unrealized depreciation $(1,778,841) $(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 six months ended
June 30, 2004 and 2003, were as follows:
2004 2003
--------- --------
Management fees $ 54,865 $ 39,672
Individual General Partners'
compensation 30,625 30,000
Reimbursable operating expenses 701,529 1,061,450
The Partnership reimburses the Managing General Partners for certain
operating expenses incurred in connection with the business of the
Partnership. Reimbursable operating expenses paid by the Managing General
Partners include expenses (other than organizational and offering expenses
and general partner overhead) such as administrative and investor services,
investment operations, and computer services. 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 $6,709 due from related parties at June 30, 2004, and $91,915 due
to related parties at June 30, 2003. In addition, $11,920 was due from
other partnerships at June 30, 2004.
Management fees due to the Managing General Partners and included in due
from related parties, net were $9,731 and $16,085 at June 30, 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 June 30, 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 $13,126.
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 June 30, 2004, the Partnership has recognized expense of
$86,863. Upon the resignation of personnel no adjustment to the retention
bonus amount previously paid by the Partnership to the Managing General
Partners shall occur until a replacement person is hired.
4. Equity Investments
------------------
All investments are valued at fair value as determined in good faith by the
Managing General Partners.
Marketable Equity Securities
- ----------------------------
At June 30, 2004, and December 31, 2003, marketable equity securities had
aggregate costs of $4,207,166 and $3,378,855, and aggregate fair values of
$7,520,658 and $4,424,621, respectively. The net unrealized gain at June
30, 2004, and December 31, 2003, included gross gains of $4,350,754 and
$1,799,905, respectively.
Restricted Securities
- ---------------------
At June 30, 2004, and December 31, 2003, restricted securities had
aggregate costs of $7,226,570 and $10,505,442, respectively, and aggregate
fair values of $2,821,288 and $4,106,774, respectively, representing 62.4
percent and 31.3 percent, respectively, of the net assets of the
Partnership.
Significant purchases, sales and write-offs of equity investments during
the six months ended June 30, 2004, are as follows:
Endocare, Inc.
- --------------
In May 2004, the Partnership exercised a common stock warrant to purchase
9,100 shares at a cost of $41,711.
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. Subsequently in May
2004, the Partnership repurchased 13,650 shares at a cost of $110,776.
KeyEye Communications, Inc.
- ---------------------------
In May 2004, the Partnership purchased 2,223,309 Preferred shares at a cost
of $500,000.
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.
In conjunction with the convertible unsecured note receivable, a Series A
warrant was also issued.
WorldRes.com, Inc.
- ------------------
In June 2004, the Partnership wrote off its entire investment in
WorldRes.com for a realized loss of $2,218,124. In 2003, WorldRes.com and
three large European hotel chains created a joint venture, WorldRes Europe,
to market European hotels online. WorldRes.com and WorldRes Europe are in
the process of selling the consumer Web site, PlacestoStay.com, and most of
the company's operations will now be based in Europe. Proceeds from the
transaction are expected to be used to restructure the company and pay its
vendors and existing noteholders. The Partnership expects no return on its
investment.
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. Subsequent Events
-----------------
In July 2004, the Partnership sold 90,513 shares in LifeCell Corporation,
for total gross proceeds of $861,207, with an expected realized gain of
$554,656. As of August 11, 2004, the closing market price for LifeCell was
$8.60 per share, as compared with $11.23 at June 30, 2004. In August 2004,
the Partnership sold 39,191 shares of Acusphere Inc., for total gross
proceeds of $237,243, with an expected realized gain of $40,661.
6. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at June 30, 2004, and December 31, 2003,
consisted of:
2004 2003
--------- ---------
Demand accounts $ 837,668 $ 707,404
Money market accounts 625,633 623,540
--------- ---------
$1,463,301 $1,330,944
========= =========
Restricted cash $ 600,000 600,000
Unrestricted cash 863,301 730,944
--------- --------
Total $1,463,301 $1,330,944
========= =========
7. Commitments and Contingencies
-----------------------------
From time to time the Partnership becomes a party to financial instruments
with off-balance-sheet risk in the normal course of its business.
Generally, these instruments are commitments for future equity investment
fundings, equipment financing commitments, or accounts receivable lines of
credit that are outstanding but not currently fully utilized by a borrowing
company. As they do not represent current outstanding balances, these
unfunded commitments are not recognized in the financial statements. At
June 30, 2004, there were unfunded commitments of $251,250.
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 six
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
six to nine 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 nine 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 a total of 116,649 Preferred Series E shares. Once earned, the
warrants are immediately 100% vested. 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. The Partnership recorded this transaction as a
deferred gain for the fair value of the warrants earned to be recognized
over the estimated life of the guarantee. In August 2004, Atherotech, Inc.
retired the line of credit, and the bank released the Partnership's
guarantee. The deferred gain has been fully recognized.
8. Financial Highlights
--------------------
For The Six Months Ended June 30,
---------------------------------
2004 2003
------ ------
(all amounts on a per Unit basis)
Net asset value, beginning of period $72.87 $39.69
Loss from investment operations:
Net investment loss (0.64) (0.04)
Net realized and unrealized
gain (loss) on investments 2.59 0.06
----- -----
Total from investment operations 1.95 0.02
----- -----
Net asset value, end of period $74.82 $39.71
===== =====
Total return 2.68% 0.06%
Ratios to average net assets:
Net investment loss (0.86)% (0.10)%
Expenses 7.39% 20.14%
Pursuant to the Partnership Agreement, net profit shall be allocated first
to those Partners with deficit capital account balances until such deficits
have been eliminated. The net asset values shown above assume the
Partnership is in liquidation. Upon liquidation, the General Partners
would contribute capital equal to the amount of the Limited Partners
deficit. As of June 30, 2004, the General Partners capital balance was
positive. As of December 31, 2003, the General Partners have a negative
capital balance of $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 six months ended June 30, 2004, net cash provided by operating
activities totaled $644,378. The Partnership paid management fees of
$29,049 to the Managing General Partners and reimbursed related parties for
investment expenses of $483,819. In addition, $30,625 was paid to the
Individual General Partners as compensation for their services. Interest
income of $3,068 was received. Other investment expenses of $103,953 were
paid.
During the six months ended June 30, 2004, the Partnership funded no equity
investments, but issued a $150,000 note receivable. At June 30, 2004, the
Partnership had unfunded commitments of $251,250.
Cash, cash equivalents and restricted cash at June 30, 2004, were
$1,463,301. 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 $427,454
for the quarter ended June 30, 2004, as compared to a net increase in
partners' capital resulting from operations of $1,511,462 for the quarter
ended June 30, 2003.
Net unrealized depreciation on equity investments was $1,091,790 and
$5,357,902 at June 30, 2004, and December 31, 2003, respectively. During
the quarter ended June 30, 2004, the net decrease in unrealized
depreciation of equity investments of $2,933,080 was primarily due to the
publicly traded price of LifeCell Corporation. During the quarter ended
June 30, 2003, the net decrease in unrealized depreciation of equity
investments of $1,908,391 was attributable to increases in the publicly
traded market prices of companies in the medical and communication
industries, partially offset by a decrease in the fair value of a privately
held portfolio company in the medical industry.
There was no net realized gain from sales of equity investments for the
quarter ended June 30, 2004. There was also no gain in the same quarter in
2003.
Investment expenses were $292,695 for the quarter ended June 30, 2004,
compared to $421,014 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 June 30, 2004, the Partnership recorded no net
realized gains from venture capital limited partnership investments.
During the same period in 2003, there were gains of $4,000. The gains
represented distributions from profits of venture capital limited
partnership investments.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
Current six months compared to corresponding six months in the
- --------------------------------------------------------------
preceding year
- --------------
Net increase in partners' capital resulting from operations was $1,825,586
for the six months ended June 30, 2004, compared to a net increase in
partners' capital resulting from operations of $755,240 for the six months
ended June 30, 2003.
Net unrealized depreciation on equity investments was $1,091,790 and
$5,352,902 at June 30, 2004 and December 31, 2003, respectively. During
the six months ended June 30, 2004, the net decrease in unrealized
depreciation of equity investments of $4,321,112 was primarily the result
of increases in the publicly traded market price of companies in the
medical and communication industries, partially offset by a decrease in the
fair value of a private portfolio company in the medical industry. During
the six months ended June 30, 2003, the net decrease in unrealized
depreciation of equity investments of $1,933,927 was primarily the result
of increases in the publicly traded market price of companies in the
medical and communication industries, partially offset by a decrease in the
fair value of a private portfolio company in the medical industry.
Other income of $193,830 was recognized during the six months ended June
30, 2003. This other income was the result of a settlement between
Kanematsu Corporation, a creditor of one of the Partnership's portfolio
companies, and the Partnership. No suck income was recognized in 2004.
Net realized gain from sales of equity investments was $585,332 and $0 for
the six months ended June 30, 2004 and 2003, respectively. The gain in 2004
resulted from the sale of iVillage Inc.
During the six months ended June 30, 2003, the Partnership wrote off its
investment of $200,000 in Pherin Pharmaceuticals, Inc. During the same
period in 2004, the Partnership wrote off its entire investment of
$2,218,124 in WorldRes.com, Inc.
Investment expenses were $872,769 for the six months ended June 30, 2004,
compared to $1,279,111 for the same period in 2003. The decrease was
primarily due to decreased professional fees and investor and
administrative services, partially offset by increased management fees.
During the six months ended June 30, 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 $75,092. The
gains represented distributions from 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) A report on Form 8-K was filed by the Partnership during the
quarter ended June 30, 2004. Pursuant to the Securities and
Exchange Commission's Release No. 34-43069, "Commission Guidance
on Mini-Tender Offers and Limited Partnership Tender Offers,"
effective July 31, 2000, the Partnership is obligated to respond
to such offers with a recommendation to the Limited Partners. On
July 2, 2004, the Partnership filed the letter sent to Limited
Partners regarding a mini-tender offer for Limited Partnership
units under Item 5, Other Events.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING PARTNERS III, L.P.
By: TECHNOLOGY FUNDING INC.
TECHNOLOGY FUNDING LTD.
Managing General Partners
Date: August 12, 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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