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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
September 30, December 31,
2004 2003
------------- ------------
ASSETS
Equity investments (cost of
$9,283,586 and $13,836,296 at
September 30, 2004, and
December 31, 2003, respectively) $3,719,418 $ 8,483,394
Cash and cash equivalents 3,443,446 730,944
Restricted cash -- 600,000
Prepaid expenses 161,501 204,932
Other assets 85,820 16,497
Due from related parties, net 2,307,469 233,201
---------- ----------
Total assets $9,717,654 $10,268,968
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 35,244 $ 62,084
Other liabilities 123,222 61,977
---------- ----------
Total liabilities 158,466 124,061
Commitments and contingencies (See Note 6)
Partners' capital:
Limited Partners
(160,000 Units outstanding) 11,000,762 11,580,624
General Partners (1,441,574) (1,435,717)
---------- ----------
Total partners' capital 9,559,188 10,144,907
---------- ----------
Total liabilities and
partners' capital $9,717,654 $10,268,968
========== ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal
Amount or September 30, 2004 December 31, 2003
Industry Shares at ------------------ -----------------
(1) Investment September 30, Cost Fair Cost Fair
Company Position Date 2004 Basis Value Basis Value
- ------------- -------- ---------- ---------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
1.7% and 10.2% at September 30, 2004, and December 31, 2003, respectively
- -------------------------------------------------------------------------
iVillage Inc. Common 1996-
shares 2004 27,500 152,401 165,000 990,716 860,542
WorldRes.com, Inc. Common 1997-
(a) (b) shares 2001 0 0 0 2,218,124 181,317
---------- --------- ---------- ---------
152,401 165,000 3,208,840 1,041,859
---------- --------- ---------- ---------
Environmental
- -------------
0.0% and 0.0% at September 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
- -------------------
4.1% and 2.7% at September 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 $150,000 157,625 63,050 -- --
VenCore Solutions, Bridge
LLC (a)(b) loan 2004 $100,000 101,250 40,500 -- --
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 -- --
---------- --------- ---------- ---------
883,875 396,507 625,000 274,975
---------- --------- ---------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Information Technology
- ----------------------
4.4% and 2.2% at September 30, 2004, and December 31, 2003, respectively
- ------------------------------------------------------------------------
KeyEye
Communications, Preferred 2002-
Inc. (a)(b) shares 2004 5,366,165 1,050,000 420,000 550,000 220,000
---------- --------- ---------- ---------
1,050,000 420,000 550,000 220,000
---------- --------- ---------- ---------
Medical/Biotechnology
- ---------------------
23.0% and 65.4% at September 30, 2004, and December 31, 2003, respectively
- --------------------------------------------------------------------------
Acusphere, Inc. Common
(a) shares 2003 23,575 258,438 147,577 1,840,250 1,105,426
Atherotech, Inc. Preferred
share
warrant
at exercise
price $2.83;
expiring
2010 2003 0 0 0 0 48,000
Atherotech, Inc. Preferred
share
warrant
at exercise
price $2.83
expiring
2010 2004 0 0 0 -- --
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Atherotech, Inc. Preferred
share warrant
at exercise
price $2.83
expiring
2013 2004 0 0 0 -- --
Atherotech, Inc. Preferred
share warrant
at exercise
price $2.83
expiring
2013 2004 46,643 132,000 52,800 -- --
CareCentric Common
Solutions, Inc. shares 1999 47,836 382,875 3,588 382,875 3,630
CellzDirect, Preferred 2002-
Inc. (a)(b) shares 2003 2,029,232 783,882 313,553 540,000 216,000
CollaGenex
Pharmaceuticals, Common
Inc. shares 2001 6,819 54,444 44,664 54,444 75,895
Endocare, Inc. Common 1996-
(b) shares 2004 502,029 1,457,963 685,272 1,416,252 990,542
Applied
NeuroSolutions, Common
Inc. (a) shares 1993 0 -- -- 125,000 4,659
Impres Medical Preferred
Inc. (a) Shares 2004 277,778 250,000 100,000 -- --
LifeCell Common 1992-
Corporation shares 2002 0 -- -- 1,866,336 3,416,571
Natus Medical, Common
Inc. shares 2002 16,225 84,484 112,439 84,484 67,983
Sanarus Medical, Preferred 2000-
Inc. (a) (b) shares 2004 1,465,241 1,779,891 735,876 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
---------- --------- ---------- ---------
5,184,172 2,195,847 8,089,319 6,664,497
---------- --------- ---------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Retail/Consumer Products
- ------------------------
2.7% and 0.0% at September 30, 2004, and December 31, 2003, respectively
- ------------------------------------------------------------------------
Dakota Arms, Preferred
Inc. (a) (b) shares 2004 285,715 500,001 200,001 -- --
Dakota Holdings, LLC
LLC (a) (b) units 2004 150,000 150,000 60,000 -- --
---------- --------- ---------- ---------
650,001 260,001 -- --
---------- --------- ---------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
3.0% and 2.8% at September 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 - 38.9% and 83.2% at
September 30, 2004, and December 31, 2003,
respectively $9,283,586 $3,719,418 $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 09/30/04 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 September 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 Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ ------
Investment income:
Notes receivable interest $ 5,083 $ 20,648 $ 4,434 $ 42,520
Short-term investment interest 1,366 1,215 8,875 11,144
--------- ---------- --------- ----------
Total investment income 6,449 21,863 13,309 53,664
Investment expenses:
Management fees 29,988 22,983 84,853 62,655
Individual General Partners'
compensation 10,500 15,000 41,125 45,000
Administrative and investor services 320,133 225,092 781,029 1,054,307
Investment operations 74,868 55,611 314,943 274,447
Professional fees 27,584 23,038 59,623 138,181
Computer services 25,469 19,352 79,738 65,597
--------- ---------- --------- ---------
Total investment expenses 488,542 361,076 1,361,311 1,640,187
--------- ---------- --------- ----------
Net investment loss (482,093) (339,213) (1,348,002) (1,586,523)
--------- ---------- --------- ----------
STATEMENTS OF OPERATIONS (unaudited) (continued)
- -----------------------------------------------
Net realized gain from sales
of equity investments 2,389,975 -- 2,975,307 --
Realized loss from write-off of
equity investments -- -- (2,218,124) (200,000)
Realized gains from venture capital
limited partnership investments 21,191 139,408 24,366 214,500
--------- ---------- --------- ----------
Net realized income 2,411,166 139,408 781,549 14,500
--------- ---------- --------- ----------
Decrease (increase) in unrealized
depreciation:
Equity investments (4,340,378) 1,446,789 (19,266) 3,380,716
Notes receivable -- (382) -- (681)
--------- ---------- --------- ----------
Net decrease in unrealized
depreciation (4,340,378) 1,446,407 (19,266) 3,380,035
--------- ---------- --------- ----------
Other income -- 8,020 -- 201,850
--------- --------- --------- ----------
Net (decrease) increase in partners'
capital resulting from
operations $(2,411,305) $ 1,254,622 $ (585,719) $ 2,009,862
========= ========== ========= ==========
Net (decrease) increase in partners'
capital resulting from
operations per Unit $ (14.92) $ .56 $ (3.62) $ .58
========= ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
For the Nine Months Ended June 30,
----------------------------------
2004 2003
-------- --------
Net (decrease) increase in partners'
capital resulting from operations $ (585,719) $ 2,009,862
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 (2,975,307) --
Realized gains from venture capital
limited partnership investments (24,366) (214,500)
Realized loss from write-off of
equity investments 2,218,124 200,000
Net decrease in unrealized
depreciation of equity investments 19,266 (3,380,716)
Net change in operating assets
and liabilities:
Unrealized depreciation of
notes receivable -- 681
Prepaid expenses 43,431 43,433
Other receivables -- 763,253
Restricted Cash 600,000 --
Accrued interest on notes receivable (8,875) (5,478)
Accounts payable and accrued expenses (26,840) (12,976)
Other liabilities 121,245 --
Due from related parties, net (2,074,268) (55,855)
Other changes (69,323) 6,488
--------- ---------
Net cash used by
operating activities (2,762,632) (645,808)
--------- ---------
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
Cash flows from investing activities:
Proceeds from sales of
equity investments 7,539,171 --
Purchase of investments (1,838,403) (714,886)
Purchase / issuance of
notes receivable (250,000) 284,500
Distribution from venture capital
limited partnership investments 24,366 214,500
--------- ---------
Net cash provided (used) by investing
activities 5,475,134 (215,886)
--------- ---------
Net increase (decrease) in cash and
cash equivalents 2,712,502 (861,694)
Cash and cash equivalents at beginning
of year 730,944 2,318,947
--------- ---------
Cash and cash equivalents
at September 30 $3,443,446 $1,457,253
--------- ---------
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
income and loss for periods presented. 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
September 30, 2004, and December 31, 2003, was $9,970,642 and $15,277,365,
respectively. At September 30, 2004, and December 31, 2003, gross
unrealized depreciation on investments based on cost for federal income tax
purposes was as follows:
September 30, December 31,
2004 2003
------------- ------------
Unrealized appreciation $ 119,731 $ 1,909,100
Unrealized depreciation (6,370,952) (8,703 066)
---------- ---------
Net unrealized depreciation $(6,251,221) $(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 nine months ended
September 30, 2004 and 2003, were as follows:
2004 2003
--------- --------
Management fees $ 84,853 $ 62,655
Individual General Partners'
compensation 41,125 45,000
Reimbursable operating expenses 1,067,734 1,343,261
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 $215,345 due from related parties at September 30, 2004, and
$19,813 due to related parties at September 30, 2003. In addition,
$100,037 was due from other partnerships at September 30, 2004.
Management fees due to the Managing General Partners and included in due
from related parties, net were $9,996 and $16,085 at September 30, 2004,
and December 31, 2003.
As of September 30, 2004, and December 31, 2003, the Partnership has a due
from related party receivable of $2,307,469 and $0, respectively, related
to its investment in Dakota Holdings, LLC. The Partnership has advanced
funds to the company for operations. It is the Managing General Partners'
expectation that this receivable will be converted into additional equity
investments in Dakota Holdings.
Officers of the Managing General Partners occasionally receive stock
options as compensation for serving on the Boards of Directors of portfolio
companies. It is the Managing General Partners' policy that all such
compensation be transferred to the investing partnerships. If the options
are non-transferable, they are not recorded as an asset of the Partnership.
Any profit from the exercise of such options will be transferred if and
when the options are exercised and the underlying stock is sold by the
officers. Any such profit is allocated amongst the Partnership and
affiliated partnerships based upon their proportionate investments in the
portfolio company. At September 30, 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 $12,251.
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 September 30, 2004, the Partnership has recognized
expense of $101,340. 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 September 30, 2004, and December 31, 2003, marketable equity securities
had aggregate costs of $932,640 and $3,378,855, and aggregate fair values
of $439,948 and $4,424,621, respectively. The net unrealized gain at
September 30, 2004, and December 31, 2003, included gross gains of $31,330
and $1,799,905, respectively.
Restricted Securities
- ---------------------
At September 30, 2004, and December 31, 2003, restricted securities had
aggregate costs of $8,350,946 and $10,505,442, respectively, and aggregate
fair values of $3,279,470 and $4,106,774, respectively, representing 85.9
percent and 31.3 percent, respectively, of the net assets of the
Partnership.
Significant purchases, sales and write-offs of equity investments during
the nine months ended September 30, 2004, are as follows:
Applied NeuroSolutions, Inc.
- ----------------------------
In September 2004, the Partnership sold its entire investment in the
company for proceeds of $2,309, realizing a loss of $122,691.
Acusphere, Inc.
- ---------------
In August and September, 2004, the Partnership sold a portion of its
investment in the company for proceeds of $887,849, realizing a loss of
$693,964.
CellzDirect, Inc
- ----------------
In August 2004, the Partnership purchased 631,336 Series C Preferred shares
at a cost of $243,882.
Dakota Arms, Inc.
- -----------------
In July 2004, the Partnership purchased 285,715 Series B Preferred shares
at a cost of $500,001.
Dakota Holdings, LLC.
- ---------------------
In July 2004, the Partnership purchased 150,000 LLC Units at a cost of
$150,000.
Endocare, Inc.
- --------------
In May 2004, the Partnership exercised a common stock warrant to purchase
9,100 shares at a cost of $41,711.
Impres Medical, Inc.
- --------------------
In August 2004, the Partnership purchased 277,778 Series B Preferred shares
at a cost of $250,000.
iVillage Inc.
- -------------
In the first quarter of 2004, the Partnership sold its entire investment in
the company for proceeds of $1,576,047 and recorded a realized gain of
$585,332. In May and July 2004, the Partnership repurchased 20,000 and
7,500 shares at a cost of $110,776 and 41,625, respectively.
KeyEye Communications, Inc.
- ---------------------------
In May 2004, the Partnership purchased 2,223,309 Preferred shares at a cost
of $500,000.
LifeCell Corporation
- --------------------
During the third quarter of 2004, the Partnership sold its entire
investment in the company for proceeds of $5,072,966 and recorded a
realized gain of $3,206,630.
Sanarus Medical, Inc.
- ---------------------
In September 2004, the Partnership exercised a Series A Preferred warrant
for 4,082 shares at a cost of $408.
VenCore Solutions, LLC
- ----------------------
In March 2004, the Partnership issued a $150,000 convertible unsecured note
receivable with an interest rate of 10%. In conjunction with the
convertible unsecured note receivable, a Series A warrant was also issued.
In August 2004, the Partnership issued another $100,000 convertible
unsecured note receivable with an interest rate of 10 percent.
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 $24,366 from Dephi
BioVentures, L.P. and Trinity Ventures, which was recorded as a realized
gain.
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 September 30, 2004, and December 31, 2003,
consisted of:
2004 2003
--------- ---------
Demand accounts $2,492,977 $ 707,404
Money market accounts 950,469 623,540
--------- ---------
$3,443,446 $1,330,944
========= =========
Restricted cash $ -- 600,000
Unrestricted cash 3,443,446 730,944
--------- --------
Total $3,443,446 $1,330,944
========= =========
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
September 30, 2004, there were unfunded commitments of $175,000.
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 required the Partnership to secure its
obligation to the bank with a segregated money market account in the amount
of $600,000 (pledged collateral), which was included in restricted cash on
the accompanying balance sheet. In exchange for the guarantee, Atherotech,
Inc. issued the Partnership a warrant with an expiration date of September
8, 2010, for the right to purchase stock at a future date. The terms of
the warrant stated that (a) if the guarantee was in place for less than six
months from the date of the guarantee, the warrant was exercisable for
42,418 of Preferred Series E shares; (b) if the guarantee was in place for
six to nine months from the date of the guarantee, the warrant was
exercisable for an additional 31,813 of Preferred Series E shares; (c) if
the guarantee was in place for more than nine months from the date of the
guarantee, the warrant was 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 was made upon the guarantee, the warrant was
exercisable for a total of 116,649 Preferred Series E shares. Once earned,
the warrants were to be immediately 100 percent vested. The maximum
potential amounts for future payments (undiscounted) that the Partnership
would be required to make under the guarantee was the amount of the pledged
collateral plus accrued interest. The guarantee was to remain in effect as
long as Atherotech's agreement with the bank remained outstanding. If
Atherotech had defaulted on the agreement, the bank would have taken 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.
7. Financial Highlights
--------------------
For The Nine Months
Ended September 30,
---------------------
2004 2003
------ ------
(all amounts on a per Unit basis)
Net asset value, beginning of period $72.38 $71.31
Loss from investment operations:
Net investment loss (8.34) 0
Net realized and unrealized
gain on investments 4.72 0.58
----- -----
Total from investment operations (3.62) 0.58
----- -----
Net asset value, end of period $68.75 $71.89
===== =====
Total return (5.01)% .81%
Ratios to average net assets:
Net investment loss (11.82)% 0%
Expenses 12.06% 14.32%
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. Upon liquidation, the General Partners would
contribute capital equal to the amount of the General Partners deficit. As
of September 30, 2004 and December 31, 2003, the General Partners have a
negative capital balance, after adjustment, of $1,441,574 and $1,435,717,
respectively. Net asset value has been calculated in accordance with the
provisions of the Partnership Agreement, assuming liquidation.
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 nine months ended September 30, 2004, net cash provided by
operating activities totaled $2,762,632. The Partnership paid management
fees of $58,772 to the Managing General Partners and reimbursed related
parties for investment expenses of $745,306. In addition, $41,125 was paid
to the Individual General Partners as compensation for their services.
Interest income of $4,434 was received. Other investment expenses of
$1,921,863 were paid.
During the nine months ended September 30, 2004, the Partnership funded
$1,838,403 of equity investments, and issued $250,000 of notes receivable.
At September 30, 2004, the Partnership had unfunded commitments of
$175,000.
Cash, cash equivalents and restricted cash at September 30, 2004, were
$3,443,446. Cash reserves, interest income on short-term investments, and
future proceeds from equity investment sales are expected to be adequate to
fund Partnership operations and future investments through the next twelve
months.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
- -----------------------------------------------------------------------
Net decrease in partners' capital resulting from operations was $2,411,305
for the quarter ended September 30, 2004, compared to a net increase in
partners' capital resulting from operations of $1,254,622 for the quarter
ended September 30, 2003.
Net unrealized depreciation on equity investments was $5,564,168 and
$5,357,902 at September 30, 2004, and December 31, 2003, respectively.
During the quarter ended September 30, 2004, the net decrease in unrealized
depreciation of equity investments of $4,340,378 was primarily due to the
sale of shares in LifeCell Corporation. During the quarter ended September
30, 2003, the net decrease in unrealized depreciation of equity investments
of $1,446,789 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 a net realized gain of $2,389,975 from sales of equity
investments for the quarter ended September 30, 2004. There was no gain in
the same quarter in 2003.
Investment expenses were $488,542 for the quarter ended September 30, 2004,
compared to $361,076 for the same period in 2003. The increase was
primarily due to increased professional fees and investment monitoring and
administrative services, partially offset by decreased computer services
fees.
During the quarter ended September 30, 2004, the Partnership recorded
$21,191 in net realized gains from venture capital limited partnership
investments. During the same period in 2003, there were gains of $139,408.
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.
Current nine months compared to corresponding nine months in the
- ----------------------------------------------------------------
preceding year
- --------------
Net decrease in partners' capital resulting from operations was $585,719
for the nine months ended September 30, 2004, compared to a net increase in
partners' capital resulting from operations of $2,009,862 for the nine
months ended September 30, 2003.
Net unrealized depreciation on equity investments was $5,564,168 and
$5,352,902 at September 30, 2004 and December 31, 2003, respectively.
During the nine months ended September 30, 2004, the net decrease in
unrealized depreciation of equity investments of $19,266 was primarily the
result of the sale of shares in 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 nine months ended
September 30, 2003, the net decrease in unrealized depreciation of equity
investments of $3,380,716 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 $201,850 was recognized during the nine months ended
September 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 such income was recognized in
2004.
Net realized gain from sales of equity investments was $2,975,307 and $0
for the nine months ended September 30, 2004 and 2003, respectively. The
gain in 2004 resulted from the sale of LifeCell Corporation and iVillage
Inc.
During the nine months ended September 30, 2003, the Partnership wrote off
its $200,000 investment 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 $1,361,311 for the nine months ended September 30,
2004, compared to $1,640,187 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 nine months ended September 30, 2004, the Partnership recorded
net realized gains from venture capital limited partnership investments of
$24,366. During the same period in 2003, there were gains of $214,500. 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: November 22, 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) 11/22/2004 12:56 PM
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