Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 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 Boulevard, 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
No active market for the Units of limited partnership interests (Units)
exists, and therefore the market value of such Units cannot be
determined.
Documents incorporated by reference: Portions of the Registrant's Proxy
Statement relating to the Registrant's Meeting of Limited Partners held
on November 8, 2002, are incorporated by reference into Part III of this
Form 10-K where indicated.
PART I
Item 1. BUSINESS
- ------ --------
Technology Funding Partners III, L.P. (the Partnership or the
Registrant) was formed as a Delaware limited partnership on
December 4, 1986. For the period from December 5, 1986, through
March 25, 1987, the Partnership was inactive. The Partnership
filed a registration statement with the Securities and Exchange
Commission on March 25, 1987, and commenced selling Units of
limited partnership interest (Units) in April 1987. On June 2,
1987, the minimum number of Units required to commence
Partnership operations (6,000) had been sold. The offering
terminated with 160,000 Units sold on February 3, 1989. The
Partnership's original contributed capital was $40,040,054,
consisting of $40,000,000 from Limited Partners for 160,000
Units and $40,054 from the General Partners, Technology Funding
Ltd. (TFL) and Technology Funding Inc. (TFI). The General
Partners do not own any Units.
The principal investment objectives of the Partnership are long-
term capital appreciation from venture capital investments in
new and developing companies and preservation of Limited Partner
capital through risk management and active involvement with such
companies (portfolio companies). The Partnership's investments
in portfolio companies primarily consist of equity securities
such as common and preferred shares, but also include debt
convertible into equity securities and warrants and options to
acquire equity securities. Although venture capital investments
offer the opportunity for significant gains, such investments
involve a high degree of business and financial risk that can
result in substantial losses. Among these are the risks
associated with investment in companies in an early stage of
development or with little or no operating history, companies
operating at a loss or with substantial variations in operating
results from period to period, and companies with the need for
substantial additional capital to support expansion or to
achieve or maintain a competitive position. Such companies may
face intense competition, including competition from companies
with greater financial resources, more extensive development,
manufacturing, marketing and service capabilities, and a larger
number of qualified managerial and technical personnel. There
is no ready market for many of the Partnership's investments.
The Partnership's investments in portfolio companies are
generally subject to restrictions on sale because they were
acquired from the issuer in private placement transactions or
because the Partnership is an affiliate of the issuer.
The Partnership was organized as a business development company
under the Investment Company Act of 1940, as amended (the Act),
and operates as a non-diversified investment company, as defined
in the Act. The Partnership's term was extended for a two-year
period to December 31, 1998, pursuant to unanimous approval by
the Management Committee on September 13, 1996. The Partnership
term was further extended to December 31, 2000, with an
amendment by the Management Committee and approved by a majority
of the Limited Partners. On October 25, 2000, the Management
Committee voted to extend the life of the Partnership to
December 31, 2002. On November 8, 2002, the Limited Partners
approved an extension of the Partnership's term to December 31,
2004, and authorized additional one-year extensions to the term
of the Partnership through December 31, 2006. At the March 12,
2004 meeting, the Independent General Partners approved an
extension of the Partnership's term to December 31, 2006.
Item 2. PROPERTIES
- ------ ----------
The Registrant has no material physical properties.
Item 3. LEGAL PROCEEDINGS
- ------ -----------------
In October 2000, Kanematsu Corporation, a creditor of one of the
Partnership's portfolio companies, initiated an arbitration
proceeding against the Partnership, two affiliated partnerships,
and a fourth co-investor. Kanematsu was seeking to recover
$2,000,000, the purchase price in a contract by which the
Partnership and the other entities were alleged to have agreed
to purchase certain debt securities of the portfolio company
from Kanematsu. The Partnership and affiliated partnerships
asserted counterclaims against Kanematsu. On February 12, 2002,
the Partnership, affiliated partnerships and the co-investor
were awarded $4,000,000 and all of Kanematsu's claims were
denied. The Partnership recognized revenue and a receivable of
$666,667 as of February 12, 2002, for its proportionate share of
the award. Kanematsu appealed the order but in early November
2002 paid a forbearance fee of $200,000 in exchange for an
option to settle all liabilities. On November 29, 2002,
Kanematsu agreed to settle for $3,999,999. On February 13,
2003, the Partnership received $774,298, representing its
proportionate share of the settlement, plus accrued interest,
less disputed legal fees. The Partnership recognized the
additional revenue and a receivable of $107,631 at December 31,
2002. In March 2003, the law firm remitted an additional amount
of $193,830 to the Partnership.
From time to time, the Partnership is subject to routine
litigation incidental to the business of the Partnership.
Although there can be no assurances as to the ultimate
disposition of these matters and the proceeding disclosed above,
it is the opinion of the Managing General Partners, based upon
the information available at this time, that the expected
outcome of these matters, individually or in the aggregate, will
not have a material adverse effect on the results of operations
and financial condition of the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matters were voted on by the Limited Partners in 2004.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------ -------------------------------------------------------------
MATTERS
-------
(a) There is no established public trading market for the Units.
(b) At December 31, 2004, there were 5,679 record holders of
Units.
(c) The Registrant, being a partnership, does not pay dividends.
Cash distributions, however, may be made to the partners
pursuant to the Partnership Agreement.
Item 6. SELECTED FINANCIAL DATA
- ------ -----------------------
For the Years Ended and As of December 31,
---------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Total investment income $ 24,586 $ 56,905 $ 115,953 $ 309,810 $ 1,158,257
Net investment loss (2,194,915) (1,956,877) (2,027,322) (1,388,085) (1,667,706)
Net realized gain (loss) from
sales of equity investments 2,863,502 181,132 375,546 1,514,305 10,703,511
Realized gain from
venture capital limited
partnership investments 46,363 291,672 133,884 324,536 587,735
Realized loss from
investment write-offs (2,870,965) (1,370,039) (6,313,008) (1,727,140) (2,392,941)
Realized gain from recovery of
investments previously
written off -- -- 459,375 -- --
Net realized loss on foreign
currency -- -- -- -- (63,370)
Decrease (increase) in
unrealized depreciation:
Equity investments 1,745,305 4,646,626 (7,280,360) 1,046,437 (20,273,430)
Notes receivable -- 10,437 5,142,683 (313,870) (4,839,250)
Other income -- 212,860 774,298 -- --
Net (decrease) increase in
partners' capital resulting
from operations (410,710) 2,015,811 (8,734,904) (543,817) (17,945,451)
Item 6. SELECTED FINANCIAL DATA (continued)
- ------ -----------------------------------
Net (decrease) increase in
partners' capital resulting
from operations per Unit (2.54) 1.06 (54.05) (3.36) (94.91)
Total assets 9,784,715 10,268,968 8,224,129 17,025,262 20,832,769
Distributions declared -- -- -- -- 2,862,928
Item 7. 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. In the absence of readily obtainable
market values, the estimated fair value of the Partnership's
investments may differ significantly from the values that would
have been used had a ready market existed.
For the year ended December 31, 2004, net cash used by operating
activities totaled $4,327,462. The Partnership paid management
fees of $116,433 to the Managing General Partners and reimbursed
related parties for operating expenses of $5,159,137, which
includes $3,554,210 of advances made to Dakota Arms during 2004.
In addition, $71,125 was paid to the Individual General Partners
as compensation for their services. During 2004, the Partnership
received cash from related parties of $413,994 and interest income
of $5,239. The Partnership also had $600,000 of cash released
from restrictions in 2004.
For the year ended December 31, 2004, the Partnership funded
equity investments of $2,263,403, primarily to portfolio companies
in the medical/biotechnology, retail/consumer products, and
information technology industries. Proceeds from sales of equity
investments totaled $7,685,808. The Partnership received $46,363
in cash distributions from venture capital limited partnership
investments. At December 31, 2004, there was $300,000 of unfunded
commitments.
Cash and cash equivalents at December 31, 2004, were $1,872,250.
At December 31. 2004, there was no restricted cash.
Results of Operations
- ---------------------
2004 compared to 2003
- ---------------------
The net decrease in partners' capital resulting from operations
was $410,710 in 2004 compared to an increase of $2,015,811 in
2003.
Unrealized depreciation on equity investments was $3,667,597 and
$5,352,902 at December 31, 2004 and 2003, respectively. During
the year ended December 31, 2004, the net decrease in unrealized
depreciation of equity investments of $1,745,305 was primarily
attributable to the write-off of WorldRes.com and the sale of
Lifecell Corporation, iVillage Inc. and Acusphere Inc. In 2003,
the net decrease in unrealized depreciation of equity investments
of $4,646,626 was primarily attributable to an increase in the
publicly traded prices of iVillage Inc. and Acusphere, Inc.,
partially offset by write-offs of Pherin Pharmaceuticals, Inc. and
Pharmadigm, Inc.
During 2004, the Partnership recorded no unrealized depreciation
of notes receivable. During 2003, the Partnership recorded an
increase in unrealized depreciation of notes receivable of
$10,437, primarily related to the payment of notes receivable by
Avalon Vision Solutions, Inc.
During 2004, the Partnership recorded a realized loss from
investment write-offs of $2,870,965, which represents the
Partnership's total investment in WorldRes.com, Inc. and Delphi
Ventures L.P. During 2003, the Partnership recorded realized
losses from investment write-offs of $1,370,039, which represents
the Partnership's total investment in Pherin Pharmaceuticals, Inc.
and Pharmadigm, Inc.
During 2004, net realized gain from sales of equity investments
totaled $2,863,502, primarily from the sale of shares of Lifecell
Corporation. During 2003, net realized gain from sales of equity
investments was $181,132, primarily from gains on the sale of
shares of Virage, Inc. and White Electronic Designs Corporation.
At December 31, 2004, no other income was received.
Investment expenses were $2,219,501 and $2,013,782 for 2004 and
2003, respectively.
Interest income was $24,586 and $56,905 for 2004 and 2003,
respectively.
During 2004, the Partnership recorded net realized gains from
venture capital limited partnership investments of $46,363
compared to gains of $291,672 during 2003. The gains represented
distributions from profits of venture capital limited
partnerships.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
2003 compared to 2002
- ---------------------
The net increase in partners' capital resulting from operations
was $2,015,811 in 2003 compared to a decrease of $8,734,904 in
2002.
Unrealized depreciation on equity investments was $5,352,902 and
$10,059,528 at December 31, 2003 and 2002, respectively. During
the year ended December 31, 2003, the net decrease in unrealized
depreciation of equity investments of $4,646,626 was primarily
attributable to an increase in the publicly traded prices of
iVillage Inc. and Acusphere, Inc., partially offset by write-offs
of Pherin Pharmaceuticals, Inc. and Pharmadigm, Inc. In 2002, the
net increase in unrealized depreciation of equity investments of
$7,280,360 was primarily attributable to a decrease in the
publicly traded price of Endocare, Inc. and decreases in the fair
values of portfolio companies in the medical/biotechnology and
communications industries. The increase was partially offset by
the write-off of American OBGYN, Inc. during 2002, which
contributed a net decrease in unrealized depreciation of
$1,013,059 as the depreciation was realized upon write-off.
During 2003, the Partnership recorded an increase in unrealized
depreciation of notes receivable of $10,437, primarily related to
the payment of notes receivable by Avalon Vision Solutions, Inc.
During 2002, the Partnership recorded a decrease in unrealized
depreciation of notes receivable of $5,142,683 primarily related
to the write-off of loans made to Sutmyn Storage Corporation.
Unrealized depreciation of notes receivable was $0 and $10,437 at
December 31, 2003 and 2002, respectively.
During 2003, the Partnership recorded realized losses from
investment write-offs of $1,370,039, which represents the
Partnership's total investment in Pherin Pharmaceuticals, Inc. and
Pharmadigm, Inc. During 2002, the Partnership recorded a realized
loss from investment write-offs of $6,313,008, of which $4,836,806
represents the Partnership's total investment in Sutmyn Storage
Corporation. The fair value of these notes was reduced to zero
during 2000, and it has been determined by the Managing General
Partners that there will be no recovery on the notes as the
company has ceased operations. Remaining write-offs were related
to the Partnership's total investment in American OBGYN, Inc. for
$1,226,202, and loans of $250,000 to Thermatrix Inc. American
OBGYN, Inc. filed for bankruptcy in February 2002, and the
Managing General Partners determined there would be no proceeds
from the liquidation.
During 2003, net realized gain from sales of equity investments
was $181,132, primarily from gains on the sale of shares of
Virage, Inc. and White Electronic Designs Corporation. During
2002, net realized gain from sales of equity investments totaled
$375,546, primarily from the sale of Matrix Pharmaceutical, Inc.
shares.
Other income was $212,860 for the year ended December 31, 2003 and
$774,298 in 2002. In October 2000, Kanematsu Corporation, a
creditor of one of the Partnership's portfolio companies,
initiated an arbitration proceeding against the Partnership, two
affiliated partnerships, and a fourth co-investor. Kanematsu was
seeking to recover $2,000,000, the purchase price in a contract by
which the Partnership and the other entities were alleged to have
agreed to purchase certain debt securities of the portfolio
company from Kanematsu. The Partnership and affiliated
partnerships asserted counterclaims against Kanematsu. On
February 12, 2002, the Partnership, affiliated partnerships and
the co-investor were awarded $4,000,000 and all of Kanematsu's
claims were denied. The Partnership recognized revenue and a
receivable of $666,667 as of February 12, 2002, for its
proportionate share of the award. Kanematsu appealed the order
but in early November 2002 paid a forbearance fee of $200,000 in
exchange for an option to settle all liabilities. On November 29,
2002, Kanematsu agreed to settle for $3,999,999. On February 13,
2003, the Partnership received $774,298, representing its
proportionate share of the settlement, plus accrued interest, less
disputed legal fees. The Partnership recognized the additional
revenue and a receivable of $107,631 at December 31, 2002. In
March 2003, the law firm remitted an additional amount of $193,830
to the Partnership.
Investment expenses were $2,013,782 and $2,143,275 for 2003 and
2002, respectively. In 2002 the Managing General Partners billed
the Partnership $63,389 and $18,305 for operating expenses
incurred during 2001 and prior years, respectively. Had these
expenses been billed in the prior years the investment expenses
for 2002 would have been $2,061,581. The decrease is primarily
due to decreased administrative and investor services fees.
During 2002, the Partnership recovered $459,375 from Thermatrix
Inc. for equity and note receivable investments previously written
off. This was recorded as a realized gain. There was no such
recovery in 2003.
Interest income was $56,905 and $115,953 for 2003 and 2002,
respectively. The decrease was primarily the result of secured
notes receivable being placed on non-accrual status.
During 2003, the Partnership recorded net realized gains from
venture capital limited partnership investments of $291,672
compared to gains of $133,884 during 2002. The gains represented
distributions from profits of venture capital limited
partnerships.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The Partnership is subject to financial market risks, including
changes in interest rates with respect to its investments in debt
securities and interest-bearing cash equivalents as well as
changes in marketable equity security prices. The Partnership
does not use derivative financial instruments to mitigate any of
these risks. The return on the Partnership's investments is
generally not affected by foreign currency fluctuations.
The Partnership does not have a significant exposure to modest
public market price fluctuations as the Partnership primarily
invests in private business enterprises. However, should
significant changes in market equity prices occur, there could be
a longer-term effect on valuations of private companies, which
could affect the carrying value and the amount and timing of gains
realized on these investments. Since there is typically no public
market for the Partnership's investments in private companies, the
valuation of the investments is subject to the estimate of the
Partnership's Managing General Partners. In the absence of a
readily ascertainable market value, the estimated value of the
Partnership's investments in private companies may differ
significantly from the values that would be placed on the
portfolio if a ready market existed. The Partnership's portfolio
also includes common stocks in publicly traded companies. These
investments are directly exposed to equity price risk, in that a
hypothetical 10 percent change in these equity prices would result
in a similar percentage change in the fair value of these
securities. The Partnership's investments also include some debt
securities. Since the debt securities are generally priced at a
fixed rate, changes in interest rates do not directly impact
interest income. The Partnership's debt securities are generally
held to maturity or converted into equity securities of private
companies.
Item 8. FINANCIAL STATEMENTS
- ------ --------------------
The financial statements of the Registrant are set forth in Item
15.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------ -----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
None
Item 9A. CONTROLS AND PROCEDURES
- ------- -----------------------
The signing officer is responsible for establishing and
maintaining disclosure controls and procedures for Technology
Funding Partners III, L.P. Such officer has concluded (based upon
his evaluation of these controls and procedures as of a date
within 90 days of the filing of this report) that Technology
Funding Partners III, L.P.'s disclosure controls and procedures
are effective to ensure that information required to be disclosed
by Technology Funding Partners III, L.P. in this report is
accumulated and communicated to Technology Funding Partners III,
L.P.'s management, including its principal executive officers as
appropriate, to allow timely decisions regarding required
disclosure.
The certifying officer also has indicated that there were no
significant changes in Technology Funding Partners III, L.P.'s
internal controls or other factors that could significantly affect
such controls subsequent to the date of their evaluation, and
there were no corrective actions with regard to significant
deficiencies and material weaknesses.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
As a partnership, the Registrant has no directors or executive
officers. The Management Committee is responsible for the
management and administration of the Partnership. The members of
the Management Committee consist of two Individual General
Partners and a representative from Technology Funding Ltd., a
California limited partnership (TFL). TFL and its wholly owned
subsidiary, Technology Funding Inc., a California corporation
(TFI) are the Managing General Partners. Reference is made to the
information regarding Individual General Partners and the Managing
General Partners in the Registrant's Proxy Statement related to
the Meeting of Limited Partners held on November 8, 2002, which
information is incorporated herein by reference.
Code of Ethics
- --------------
The Partnership's Code of Ethics applies to the Independent
General Partners as well as Technology Funding corporate officers
and employees. The Independent General Partners review and
approve the Code of Ethics on an annual basis. The Code of Ethics
is attached as an exhibit (see Item 15 - Exhibits) and is also
available on the Partnership's web site, www.techfunding.com. Any
amendments to, or waivers from, any provision of the Code that
applies to any of the Independent General Partners or executive
officers will be disclosed on the web site.
Audit Committee
- ---------------
As of December 31, 2004, the Independent General Partners had
established an Audit Committee of the Whole to oversee the
accounting and financial reporting processes on behalf of the
Independent General Partners. The Audit Committee of the Whole
consisted of all of the Independent General Partners for each
Technology Funding partnership with John W. Muncaster acting as
liaison with the Managing General Partners. On March 11, 2005,
the Independent General Partners restructured the Audit Committee
of the Whole. An Audit Committee was established whereby Michael
S. Tempesta, an Independent General Partner, will serve as Audit
Committee Chairman and the remaining two Independent General
Partners will serve as Audit Committee members. The Independent
General Partners are "independent" as defined by the Securities
and Exchange Commission. The Independent General Partners have
determined that the Audit Committee and the Audit Committee of the
Whole did not have any member that would be considered an "audit
committee financial expert" as that term is defined in Section 407
of the Sarbanes-Oxley Act of 2002. Given the anticipated
termination date for the Partnership, the Independent General
Partners have determined that the expense and the difficulty of
recruiting a financial expert to serve on the Audit Committee
outweigh any benefit to the Fund.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or directors. In
2004, the Partnership incurred management fees of $109,147. The
fees are designed to compensate the Managing General Partners for
General Partner Overhead incurred in performing management duties
for the Partnership. General Partner Overhead (as defined in the
Partnership Agreement) includes the General Partners' share of
rent, utilities, property taxes and the cost of capital equipment
and the general and administrative expenses paid by Managing
General Partners in performing their obligations to the
Partnership. As compensation for their services, each of the
Individual General Partners receive $14,000 annually plus $1,500
for each attended meeting of the Management Committee and
committees thereof. In 2004, $71,125 of such compensation was
paid. The Individual General Partners are reimbursed for all out-
of-pocket expenses relating to attendance of the meetings,
committees or otherwise of the Management Committee.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
Not applicable. No Limited Partner beneficially holds more than 5
percent of the aggregate number of Units held by all Limited
Partners, and neither the Managing General Partners nor any of
their officers, directors or partners own any Units. The
Individual General Partners each own eight Units. The Management
Committee controls the affairs of the Partnership pursuant to the
Partnership Agreement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Registrant, or its investee companies, have engaged in no
transactions with the Managing General Partners or their officers
and partners other than as described above, in the notes to the
financial statements, or in the Prospectus.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------- --------------------------------------
Audit Fees
- ----------
The Partnership paid aggregate fees of approximately $72,202 and
$68,926 to its independent public accountants, Grant Thornton LLP,
for professional services rendered to the Partnership with respect
to audits of the annual financial statements and reviews of the
quarterly financial statements for the years ended December 31,
2004 and 2003, respectively.
Tax Fees
- --------
The Partnership paid aggregate fees of approximately $19,778 and
$14,409 to Grant Thornton LLP for tax-related services rendered to
the Partnership for the years ended December 31, 2004 and 2003,
respectively. These services included preparation of the
Partnership's tax returns.
All Other Fees
- --------------
The Partnership did not pay any fees to Grant Thornton LLP for
services, other than the services referred to above, for the years
ended December 31, 2004 and 2003, respectively.
Audit Committee Pre-Approval Policies and Procedures
- ----------------------------------------------------
The Independent General Partners have established procedures for
the pre-approval of auditing services and non-auditing services to
be performed by the Partnership's independent public accountants.
Such pre-approval can be given as part of the Independent General
Partners' annual approval of the scope of the engagement of the
independent public accountants or on an individual basis.
Approved non-auditing services must be disclosed in the
Partnership's periodic public reports. The Independent General
Partners pre-approved all of the non-audit services provided by
the independent public accountants in 2004.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------- ---------------------------------------------------------------
(a) List of Documents filed as part of this Annual Report on Form
10-K
(1) Financial Statements - the following financial
statements are filed as a part of this Report:
Report of Independent Registered Public Accounting Firm
as of December 31, 2004 and 2003 and for the three years
in the period ended December 31, 2004.
Balance Sheets as of December 31, 2004 and 2003
Statements of Investments as of December 31, 2004 and 2003
Statements of Operations for the years
ended December 31, 2004, 2003 and 2002
Statements of Partners' Capital for the years
ended December 31, 2004, 2003 and 2002
Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002
Notes to Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted because they are not
applicable or the required information is included
in the financial statements or the notes thereto.
(3) Exhibits
14.1 Code of Ethics for the Registrant
31.1 Section 302 Sarbanes-Oxley Certifications
32.1 Section 906 Sarbanes-Oxley Certifications
(b) Reports on Form 8-K
(1) 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------
To the Partners of
Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheets of Technology Funding
Partners III, L.P. (a Delaware limited partnership) (the Fund), including
the statement of investments, as of December 31, 2004 and 2003, and the
related statements of operations, partners' capital, and cash flows for
each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform an
audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. Our procedures
included physical inspection of securities owned as of December 31, 2004
and 2003. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Technology
Funding Partners III, L.P. as of December 31, 2004 and 2003, and the
results of its operations, changes in partners' capital, and its cash
flows for the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United
States of America.
Albuquerque, New Mexico /S/GRANT THORNTON LLP
March 11, 2005
BALANCE SHEETS
- --------------
December 31,
------------------------
2004 2003
-------- --------
ASSETS
Equity investments (cost basis of
$8,425,775 and $13,836,296 for 2004
and 2003, respectively) $ 4,758,178 $ 8,483,394
Cash and cash equivalents 1,872,250 730,944
Restricted cash -- 600,000
Prepaid expenses 147,024 204,932
Due from related parties, net 2,997,390 233,201
Other assets 9,873 16,497
---------- ----------
Total assets $ 9,784,715 $10,268,968
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 42,604 $ 62,084
Other liabilities 7,914 61,977
---------- ----------
Total liabilities 50,518 124,061
Commitments and contingencies
See Note 9
Partners' capital
(160,000 Limited Partner Units
outstanding) 9,734,197 10,144,907
---------- ----------
Total liabilities
and partners' capital $ 9,784,715 $10,268,968
========== ==========
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF INVESTMENTS
- -------------------------
Principal
Amount or December 31, 2004 December 31, 2003
Industry Shares at ----------------- -----------------
(1) Investment December 31, Cost Fair Cost Fair
Company Position Date 2004 Basis Value Basis Value
- ------------- -------- ---------- ---------- ----- ----- ----- -----
Equity Investments
- ------------------
Communications
- --------------
1.7% and 10.2% at December 31, 2004 and 2003, respectively
- -----------------------------------------------------------
iVillage Inc. Common 1996-
shares 2004 27,500 $ 152,401 $ 169,950 $ 990,716 $ 860,542
WorldRes.com, Inc. Common 1997-
(a) (b) shares 2001 604,392 0 0 2,218,124 181,317
--------- --------- --------- ---------
152,401 169,950 3,208,840 1,041,859
--------- --------- --------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Environmental
- -------------
0.0% and 0.0% at December 31, 2004 and 2003, respectively
- ---------------------------------------------------------
Triangle
Biomedical Common
Sciences, Inc.(a) shares 1999 4,099 79,792 -- 79,792 --
Triangle Common
Biomedical share
Sciences, Inc.(a) warrants at
$28.00;
expiring
2009 1999 4,099 4,099 -- 4,099 --
--------- --------- --------- ---------
83,891 -- 83,891 --
--------- --------- --------- ---------
High Tech/Financial
- -------------------
5.2% and 2.7% at December 31, 2004 and 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 425,000 444,347 177,738 -- --
Vencore Solutions, LLC unit
LLC (a)(b) warrants
at $0.001
expiring
2007 2002 62,500 -- 24,975 -- 24,975
Vencore Solutions, LLC unit
LLC (a)(b) warrants
at $0.001
expiring
2009 2004 127,500 -- 50,949 -- --
---------- ---------- ---------- ----------
1,069,347 503,662 625,000 274,975
---------- ---------- ---------- ----------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Information Technology
- ----------------------
4.3% and 2.2% at December 31, 2004 and 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
- ---------------------
27.1% and 65.4% at December 31, 2004 and 2003, respectively
- -----------------------------------------------------------
Acusphere, Inc. Common
(a) shares 2003 -- -- -- 1,840,250 1,105,426
Atherotech, Inc. Preferred
share
warrant
at exercise
price $2.83;
expiring
2010 2004 159,067 -- 52,800 -- 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 2,029,232 783,882 313,553 540,000 216,000
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
CollaGenex
Pharmaceuticals, Common
Inc. shares 2001 6,819 54,444 50,051 54,444 75,895
Endocare, Inc. Common 1996-
(b) shares 2004 502,029 1,457,963 1,255,066 1,416,252 990,542
Applied
NeuroSolutions, Inc.
(formerly
Hemoxymed, Common
Inc.) (a) shares 1993 -- -- -- 125,000 4,659
Impres Medical Preferred
Inc. (a) shares 2004 227,778 250,000 100,000 -- --
LifeCell Common 1992-
Corporation shares 2002 -- -- -- 1,866,336 3,416,571
Natus Medical, Common
Inc. shares 2002 16,225 84,484 129,800 84,484 67,983
Sanarus Medical, Preferred 2000-
Inc. (a) (b) shares 2001 1,465,241 1,779,888 735,876 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
---------- ---------- ---------- ----------
4,793,731 2,640,812 8,089,319 6,664,497
---------- ---------- ---------- ----------
Retail/Consumer Products
- ------------------------
7.8% and 0.0% at December 31, 2004 and 2003, respectively
- ---------------------------------------------------------
Dakota Arms Preferred
Inc. (a) (b) Shares 2004 285,715 500,001 500,001 -- --
Dakota Holdings LLC
LLC (a) (b) units 2004 150,000 150,000 262,500 -- --
--------- --------- --------- ---------
650,001 762,501 -- --
--------- --------- --------- ---------
STATEMENTS OF INVESTMENTS (continued)
- ------------------------------------
Venture Capital Limited Partnership Investments
- -----------------------------------------------
2.7% and 2.8% at December 31, 2004 and 2003, respectively
- ---------------------------------------------------------
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 --
Medical Science Ltd.
Partners, L.P. Partnership
(a) interests various $500,000 187,222 72,801 187,222 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
---------- ---------- ---------- ----------
626,404 261,253 1,279,246 282,063
---------- ---------- ---------- ----------
Total investments - 48.9% and 83.2% at
December 31, 2004 and 2003, respectively $ 8,425,775 $ 4,758,178 $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 12/31/04 and 12/31/03.
(2) The Partnership has no income-producing equity investments.
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
----------------------------------
2004 2003 2002
---- ---- ----
Investment income:
Notes receivable interest $ 19,347 $ 44,125 $ 49,819
Short-term investment interest 5,239 12,780 66,134
--------- --------- ---------
Total investment income 24,586 56,905 115,953
Investment expenses:
Management fees 109,147 87,781 152,636
Individual General
Partners' compensation 71,125 60,000 64,500
Administrative and
investor services 1,330,864 1,265,638 1,401,601
Investment operations 513,022 357,264 255,646
Computer services 105,963 87,908 134,144
Professional fees 89,380 155,191 134,748
--------- --------- ---------
Total investment expenses 2,219,501 2,013,782 2,143,275
--------- --------- ---------
Net investment loss (2,194,915) (1,956,877) (2,027,322)
--------- --------- ---------
Net realized gain from
sales of equity investments 2,863,502 181,132 375,546
Realized gain from venture capital
limited partnership investments 46,363 291,672 133,884
Realized loss from investment
write-offs (2,870,965) (1,370,039) (6,313,008)
Realized gain from recovery of
investments previously
written off -- -- 459,375
--------- --------- ---------
Net realized income (loss) 38,900 (897,235) (5,344,203)
--------- --------- ---------
STATEMENTS OF OPERATIONS (continued)
- -----------------------------------
For the Years Ended December 31,
----------------------------------
2004 2003 2002
---- ---- ----
Decrease (increase) in unrealized
depreciation:
Equity investments 1,745,305 4,646,626 (7,280,360)
Notes receivable -- 10,437 5,142,683
--------- --------- ---------
Net decrease (increase) in
unrealized depreciation 1,745,305 4,657,063 (2,137,677)
--------- --------- ---------
Other income -- 212,860 774,298
--------- --------- ---------
Net (decrease) increase in
partners' capital resulting
from operations $ (410,710) $ 2,015,811 $(8,734,904)
========= ========= =========
Net (decrease) increase in
partners' capital resulting
from operations per Unit $ (2.54) $ 1.06 $ (54.05)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 2004, 2003 and 2002:
Limited General
Partners Partners Total
-------- -------- -----
Partners' capital,
January 01, 2002 $20,058,849 $(3,194,849) $16,864,000
Net investment loss (2,007,049) (20,273) (2,027,322)
Net realized loss (5,290,760) (53,443) (5,344,203)
Net increase in
unrealized depreciation (2,116,300) (21,377) (2,137,677)
Other income 766,555 7,743 774,298
---------- --------- ----------
Partners' capital,
December 31, 2002 11,411,295 (3,282,199) 8,129,096
Net investment loss -- (1,956,877) (1,956,877)
Net realized income (loss) 78,024 (975,259) (897,235)
Net (increase) decrease in
unrealized depreciation (119,426) 4,776,489 4,657,063
Other Income 210,731 2,129 212,860
---------- --------- ----------
Partners' capital,
December 31, 2003 $11,580,624 $(1,435,717) $10,144,907
Net investment loss (2,172,966) (21,949) (2,194,915)
Net realized income 38,511 389 38,900
Net decrease in
unrealized depreciation 1,727,852 17,453 1,745,305
---------- --------- ----------
Partners' capital,
December 31, 2004 $11,174,021 $(1,439,824) $ 9,734,197
========== ========= ==========
The accompanying notes are an integral part of these financial
statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For The Years Ended December 31,
-----------------------------------
2004 2003 2002
------ ------ ------
Net (decrease) increase in
partners' capital resulting
from operations $ (410,710) $ 2,015,811 $(8,734,904)
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 (2,863,502) (181,132) (375,546)
Realized gain from venture
capital limited partnership
investments (46,363) (291,672) (133,884)
Realized loss from
investment write-offs 2,870,965 1,370,039 6,313,008
Realized gain from recovery
of investments previously
written off -- -- (459,375)
Net (decrease) increase in
unrealized depreciation:
Equity investments (1,745,305) (4,646,626) 7,280,360
Notes receivable -- (10,437) (5,142,683)
Net changes in operating assets and
liabilities:
Accrued interest on notes
receivable (19,347) 37,119 (2,318)
Other receivable, net -- 774,298 (774,298)
Restricted cash 600,000 (600,000) --
Prepaid expenses 57,908 57,909 (262,841)
Due from related parties, net (2,764,189) (233,201) --
Accounts payable and accrued
expenses (19,480) (3,361) (44,129)
Due to related parties -- (47,611) (2,100)
Other assets and liabilities,
net 12,561 (46,768) (365)
--------- --------- ----------
Net cash used by operating
activities (4,327,462) (1,805,632) (2,339,075)
--------- --------- ----------
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For The Years Ended December 31,
-----------------------------------
2004 2003 2002
------ ------ ------
Cash flows from investing
activities:
Purchase of equity investments (2,263,403) (609,483) (2,996,463)
Repayments of notes receivable -- -- 250,000
Proceeds from recovery
of investments previously
written off -- -- 459,375
Proceeds from sales of equity
investments 7,685,808 535,440 644,775
Distributions from venture
capital limited partnerships 46,363 291,672 46,385
--------- --------- ----------
Net cash provided (used) by
investing activities 5,468,768 217,629 (1,595,928)
--------- --------- ----------
Cash flows from financing
activities: -- -- --
--------- --------- ----------
Net increase (decrease) in cash
and cash equivalents 1,141,306 (1,588,003) (3,935,003)
Cash and cash equivalents
at beginning of year 730,944 2,318,947 6,253,950
--------- --------- ----------
Cash and cash equivalents
at end of year $1,872,250 $ 730,944 $ 2,318,947
========= ========= ==========
Supplemental disclosure of non-cash
activity:
Amortization of deferred gain on
Warrants (See Note 9) $ 60,000 -- --
========== ========== ===========
The accompanying notes are an integral part of these financial
statements.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
- ------------
Technology Funding Partners III, L.P., (the Partnership or the Registrant)
is a limited partnership organized under the laws of the State of Delaware
on December 4, 1986, to make venture capital investments in new and
developing companies. The Partnership elected to be treated as a business
development company under the Investment Company Act of 1940, as amended
(the Act), and operates as a non-diversified investment company, as defined
in the Act. The Managing General Partners are Technology Funding Ltd.
(TFL) and Technology Funding Inc. (TFI), a wholly owned subsidiary of TFL.
There are three Individual General Partners. The Individual General
Partners and a representative from TFL constitute the Management Committee,
which is responsible for the management and administration of the
Partnership.
For the period from December 5, 1986, through March 25, 1987, the
Partnership was inactive. The Partnership filed a registration statement
with the Securities and Exchange Commission on March 25, 1987, and
commenced selling Units of limited partnership interest (Units) in April
1987. On June 2, 1987, the minimum number of Units required to commence
Partnership operations (6,000) had been sold. The offering terminated with
160,000 Units sold on February 3, 1989. The Partnership's original
contributed capital was $40,040,054, consisting of $40,000,000 from Limited
Partners for 160,000 Units and $40,054 from General Partners. The General
Partners do not own any Units. The Partnership was scheduled to be
dissolved on December 31, 1996, but the term was extended for a two-year
period to December 31, 1998, pursuant to unanimous approval by the
Management Committee on September 13, 1996. The Partnership term was
further extended to December 31, 2000, with an amendment by the Management
Committee and approved by a majority of the Limited Partners. On October
25, 2000, the Management Committee voted to extend the life of the
Partnership to December 31, 2002. On November 8, 2002, the Limited
Partners approved an extension of the Partnership's term to December 31,
2004, and authorized the Partnership's Management Committee to extend the
Partnership for up to two one-year additional terms. At the March 12, 2004
meeting, the Management Committee approved an extension of the
Partnership's term to December 31, 2006.
Preparation of Financial Statements and Use of Estimates
- --------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates include the
estimate of fair value of investments, liabilities and contingencies.
Because of the inherent uncertainty of valuation, the estimated fair value
of investments may differ significantly from the values that would have
been used had a ready market for investments existed, and the differences
could be material.
Investments
- -----------
Investments are carried at estimated fair value as determined below.
Equity Investments
------------------
The Management Committee has the authority to establish valuation
procedures and periodically apply such procedures to the Partnership's
investment portfolio. In fulfilling this responsibility, the Managing
General Partners under the direction of the Management Committee
periodically update and revise the valuation procedures used to determine
fair value in order to reflect new events, changing market conditions, more
experience with investee companies or additional information, any of which
may require the revision of previous estimating procedures.
Unrestricted publicly traded securities are valued at the closing sales
price or bid price that is available on a national securities exchange or
over-the-counter market. Valuation discounts of 5 percent to 50 percent
are applied to publicly traded securities subject to resale restrictions
resulting from Rule 144 or contractual lock-ups, such as those commonly
associated with underwriting agreements or knowledge of material non-public
information.
The fair value of all other investments is determined in good faith by the
Managing General Partners under the direction of the Management Committee
after consideration of available relevant information. There is no ready
market for the Partnership's investments in private companies or
unregistered securities of public companies. Fair value is generally
defined as the amount the Partnership could reasonably expect to receive
for an investment in an orderly disposition based on a current sale.
Significant factors considered in the estimation of fair value include the
inherent illiquidity of and lack of marketability associated with venture
capital investments in private companies or unregistered securities, the
investee company's enterprise value established in the last round of
venture financing, changes in market conditions since the last round of
venture financing or since the last reporting period, the value of a
minority interest in the investee company, contractual restrictions on
resale typical of venture financing instruments, the investee company's
financial position and ability to obtain any necessary additional
financing, the investee company's performance as compared to its business
plan, and the investee company's progress towards initial public offering.
The values determined for the Partnership's investments in these securities
are based upon available information at the time the good faith valuations
are made and do not necessarily represent the amount which might ultimately
be realized, which could be higher or lower than the reported fair value.
At December 31, 2004 and 2003, the investment portfolio included private
company investments totaling $2,888,464 and $2,738,167, respectively, whose
fair values were established in good faith by the Managing General Partners
under the direction of the Management Committee in the absence of readily
ascertainable market values. In addition, investments in publicly traded
securities which have been subjected to a discount for legal or contractual
restrictions as determined by the Management Committee amounted to
$1,225,073 and $990,542 at December 31, 2004 and 2003, respectively.
Because of the inherent uncertainty in the valuation, the values may differ
significantly from the values that would have been used had a ready market
for the securities existed, and the differences could be material.
Venture capital limited partnership investments are valued based on the
fair value of the underlying investments. Limited partnership
distributions that are a return of capital reduce the cost basis of the
Partnership's investment. Distributions from limited partnership
cumulative earnings are reflected as realized gains by the Partnership.
In the case of an other-than-temporary decline in fair value below cost
basis, an appropriate reduction in the cost basis is recognized as a
realized loss with the new cost basis being adjusted to equal the fair
value of the investment. Cost basis adjustments are reflected as "Realized
loss from investment write-offs" or "Net realized loss from venture capital
limited partnership investments" on the Statements of Operations.
Sales of equity investments are recorded on the trade date. The basis on
which cost is determined in computing realized gains or losses is specific
identification.
Notes Receivable
- ----------------
The fair value of notes receivable is determined in good faith by the
Managing General Partners under the direction of the Management Committee.
Fair value is generally defined as the amount the Partnership could
reasonably expect to receive for the notes and accrued interest on the
valuation date. The values determined for the Partnership's notes
receivable are based upon available information at the time the good faith
valuations are made and do not necessarily represent the amount which might
ultimately be realized which could be higher or lower than the reported
fair value. When the Managing General Partners' assessment of fair value
indicates that future collectibility of interest or principal is in doubt,
notes are placed on non-accrual status.
Cash, Cash Equivalents and Restricted Cash
- ------------------------------------------
Cash, cash equivalents and restricted cash are principally comprised of
cash invested in demand accounts and money market instruments and are
stated at cost plus accrued interest. The Partnership considers all money
market and short-term investments with an original maturity of three months
or less to be cash equivalents.
Net (Decrease) Increase in Partners' Capital Resulting from Operations Per
- --------------------------------------------------------------------------
Unit
- ----
Net (decrease) increase in partners' capital resulting from operations per
Unit is calculated by dividing the weighted average number of Units
outstanding of 160,000 for the years ended December 31, 2004, 2003 and
2002, into the total net (decrease) increase in partners' capital resulting
from operations allocated to the Limited Partners. The Managing General
Partners contributed 0.1 percent of total Limited Partner capital
contributions and did not receive any Partnership Units.
Provision for Income Taxes
- --------------------------
No provision for income taxes has been made by the Partnership as the
Partnership is not directly subject to taxation. The partners are to
report their respective shares of Partnership income or loss on their
individual tax returns.
The accompanying financial statements are prepared using accounting
principles generally accepted in the United States which may not equate to
tax accounting. The cost of investments on a tax basis at December 31,
2004 and 2003, was $10,850,363 and $15,277,360, respectively. At December
31, 2004 and 2003, gross unrealized depreciation on investments based on
cost for federal income tax purposes were as follows:
December 31, December 31,
2004 2003
------------ ------------
Unrealized appreciation $ 266,699 $ 1,909,100
Unrealized depreciation (6,358,884) (8,703,066)
--------- ---------
Net unrealized depreciation $(6,092,185) $(6,793,966)
========= =========
2. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party costs in 2004, 2003 and 2002 were
as follows:
For the Years Ended December 31,
-----------------------------------
2004 2003 2002
------ ------ ------
Management fees $ 109,147 $ 87,781 $152,636
Individual General
Partners' compensation 71,125 60,000 64,500
Reimbursable operating expenses:
Administrative, investor
services and professional
fees 1,420,244 1,420,829 1,536,349
Investment operations 513,022 357,264 255,646
Computer services 105,963 87,908 134,144
Management fees are equal to one quarter of one percent of the fair value
of Partnership assets for each quarter. Management fees compensate the
Managing General Partners solely for General Partner Overhead (as defined
in the Partnership Agreement) incurred in supervising the operation and
management of the Partnership and the Partnership's investments.
Management fees due to the Managing General Partners were $8,799 and
$16,085 and were included in due from related parties, net at December 31,
2004 and 2003, respectively.
As compensation for their services, each of the Individual General Partners
receives $14,000 annually plus $1,500 for attendance at each meeting of the
Management Committee or committee thereof. The Individual General Partners
are reimbursed for all out-of-pocket expenses relating to attendance of the
meetings, committees or otherwise of the Management Committee. The
Individual General Partners each own eight Units.
The Partnership reimburses the Managing General Partners for operating
expenses incurred in connection with the business of the Partnership.
Reimbursable operating expenses include expenses (other than Organizational
and Offering and General Partner Overhead) such as investment operations,
administrative and investor services, and computer services. Amounts due
from related parties for such expenses totaled $548,021 and $113,719 at
December 31, 2004 and 2003, respectively.
The Managing General Partners allocate operating expenses incurred in
connection with the business of the Partnership based on employee hours
incurred. In 2002 the Managing General Partners billed the Partnership
$81,694 for operating expenses incurred during 2001 and prior years.
Under the terms of a computer service agreement, Technology Administrative
Management, a division of TFL, charges the Partnership for its share of
computer support costs. These amounts are included in computer services
expenses.
Retention bonuses were offered to and accepted by key employees of the
Managing General Partners in late 2002. The expense for these bonuses,
which were approved by the Individual General Partners during the September
2002 Management Committee meeting, was prepaid by the Partnership in
October and December 2002. The amount of prepaid operating expenses was
$272,793, and is being amortized over the remaining expected employment
period. During 2004, 2003 and 2002, the partnership recognized $57,908
$57,909 and $9,952 as operating expense related to the amortization of
retention bonuses. The bonuses, incremented by annual salary increases,
will be paid to those individuals who are still full-time employees of the
Managing General Partners in April 2007. Upon the resignation of personnel
no adjustment to the retention bonus amount previously paid by the
Partnership to the Managing General Partners shall occur until a
replacement person is hired.
Officers of the Managing General Partners occasionally receive stock
options as compensation for serving on the Boards of Directors of portfolio
companies. It is the Managing General Partners' policy that all such
compensation be transferred to the investing partnerships. If the options
are non-transferable, they are not recorded as an asset of the Partnership.
Any profit from the exercise of such options will be transferred if and
when the options are exercised and the underlying stock is sold by the
officers. Any such profit is allocated amongst the Partnership and
affiliated partnerships based upon their proportionate investments in the
portfolio company. At December 31, 2004, the Partnership and affiliated
partnerships had an indirect interest in non-transferable Endocare, Inc.,
Sanarus Medical, Inc. and White Electronic Designs Corporation options with
a fair value of $15,851.
As of December 31, 2004 and 2003, the Partnership has a due from related
party receivable of $3,554,210 and $0, respectively, related to its
investment in Dakota Holdings, LLC and Dakota Arms, Inc. The Partnership
has advanced funds to the company for operations. It is the Managing
General Partners' expectation that all or a portion of this receivable will
be converted into additional equity investments in Dakota Holdings or
otherwise paid in cash.
3. Allocation of Profits and Losses
--------------------------------
In accordance with the Partnership Agreement (see Note 1), net profits and
losses of the Partnership are allocated based on the beginning-of-year
partners' capital balances as follows:
(a) Profits:
(i) First, to those partners with deficit capital account
balances until such deficits have been eliminated; then
(ii) Second, to the partners as necessary to offset net decrease
in partners' capital resulting from operations previously
allocated under (b)(ii) below and sales commissions; then
(iii) Third, 75 percent to the Limited Partners as a group in
proportion to the number of Units held, 5 percent to the
Limited Partners in proportion to the Unit Months of each
Limited Partner, and 20 percent to the Managing General
Partners. Unit months are the number of half months a Unit
would be outstanding if held from the date the original holder
of such Unit was deemed admitted into the Partnership until
the termination of the offering of Units.
(b) Losses:
(i) First, to the partners as necessary to offset the net profit
previously allocated to the partners under (a)(iii) above; then
(ii) 99 percent to the Limited Partners and 1 percent to the Managing
General Partners.
Losses allocable to Limited Partners in excess of their capital account
balances will be allocated to the Managing General Partners. Net profits
thereafter, otherwise allocable to those Limited Partners, are allocated to
the Managing General Partners to the extent of such losses.
Losses from unaffiliated venture capital limited partnership investments
are allocated pursuant to section (b) above. Gains are allocated 99
percent to Limited Partners and 1 percent to the Managing General Partners.
In no event are the Managing General Partners allocated less than 1 percent
of the net realized profit or loss of the Partnership.
4. Equity Investments
------------------
All investments are valued at fair value as determined in good faith by the
Managing General Partners.
Marketable Equity Securities
- ----------------------------
At December 31, 2004 and 2003, marketable equity securities had aggregate
costs of $2,132,167 and $3,378,855, respectively, and aggregate fair values
of $1,608,462 and $4,424,621, respectively. The net unrealized gain at
December 31, 2004 and 2003, respectively, included gross gains of $62,865
and $1,799,905, respectively.
Restricted Securities
- ---------------------
At December 31, 2004 and 2003, restricted securities had aggregate costs of
$6,293,608 and $10,457,441, respectively, and aggregate fair values of
$3,149,716 and $4,058,773, respectively, representing 32.2 percent and 31.3
percent, respectively, of the net assets of the Partnership.
Significant purchases, sales and write-offs of equity investments during
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, September and October 2004, the Partnership sold its entire
investment in the company for proceeds of $1,034,480, realizing a loss of
$805,770.
Atherotech, Inc.
- -----------------
In September 2004, the Partnership received Preferred share warrants in
conjunction with a loan guarantee. The Partnership received 159,067 shares
at an estimated fair value of $132,000, prior to discount.
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, August and October 2004, the Partnership issued a $150,000,
$100,000 and $175,000 convertible unsecured note receivable, respectively,
with an interest rate of 10%. In conjunction with the convertible
unsecured note receivables, Series A warrants were 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
- -----------------------------------------------
During 2004, the Partnership received cash distributions of $46,363, which
were recorded as realized gains. The Partnership did not receive any stock
distributions in the year ended December 31, 2004.
In the year ended December 31, 2004, the Partnership recorded a $20,810
decrease in fair value primarily as a result of the above distributions and
a net decrease in the fair value of the underlying investments of the
partnerships.
Other Equity Investments
- ------------------------
Other significant changes reflected in the Statements of Investments relate
to market value fluctuations for publicly traded portfolio companies or
changes in the fair value of private companies as determined in accordance
with the policy described in Note 1 to the financial statements.
5. Net Decrease (Increase) in Unrealized Depreciation of Equity
-------------------------------------------------------------
Investments
-----------
In accordance with the accounting policy as stated in Note 1, the
Statements of Operations includes a line item entitled "Net decrease
(increase) in unrealized depreciation of equity investments." The table
below discloses details of the changes:
For the Years Ended December 31,
----------------------------------
2004 2003 2002
------ ------ ------
Unrealized (depreciation)
appreciation from cost of
marketable equity securities $ (523,705) $ 1,045,766 $(1,498,291)
Unrealized depreciation from
cost of non-marketable equity
securities (3,143,892) (6,398,668) (8,561,237)
Unamortized deferred gain (Note 9) -- (60,000) --
---------- ---------- ---------
Unrealized depreciation from
cost at end of year, net of
unamortized deferred gain (3,667,597) (5,412,902) (10,059,528)
Unrealized depreciation from cost
at beginning of year, net of
unamortized deferred gain (5,412,902) (10,059,528) (2,779,168)
---------- ---------- ---------
Net decrease (increase) in
unrealized depreciation of
equity investments $ 1,745,305 $ 4,646,626 $(7,280,360)
========== ========== =========
6. Notes Receivable
----------------
Activity from January 1 through December 31 consisted of:
2004 2003
------ ------
Balance, beginning of year $ -- $ 2,608
Notes receivable written off -- (16,628)
Repayments of notes receivable -- (4,334)
Change in accrued interest -- 7,917
Net decrease in unrealized
depreciation of notes receivable -- 10,437
--------- ---------
Balance, end of year $ -- $ 0
========= =========
In September 2002, notes receivable and accrued interest due from Sutmyn
Storage Corporation in the amount of $4,836,806 were written off. The fair
value of these notes was reduced to zero during 2000 and it has been
determined by the Managing General Partners that there will be no recovery
on the notes as the company has ceased operations.
7. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 2004 and 2003, consisted of:
2004 2003
------ ------
Demand accounts $1,871,598 $ 707,404
Money market accounts 652 623,540
--------- ---------
Total $1,872,250 $1,330,944
========= =========
Restricted cash $ -- 600,000
Unrestricted cash 1,872,250 730,944
--------- --------
Total $1,872,250 $1,330,994
========= =========
8. Restricted Cash
---------------
In September 2003, the Partnership guaranteed a $600,000 line of credit for
Atherotech, depositing that amount in a segregated bank account. See Notes
4 and 9.
9. Commitments and Contingencies
-----------------------------
From time to time the Partnership becomes a party to financial instruments
with off-balance-sheet risk in the normal course of its business.
Generally, these instruments are commitments for future equity investment
fundings, equipment financing commitments, or accounts receivable lines of
credit that are outstanding but not currently fully utilized by a borrowing
company. As they do not represent current outstanding balances, these
unfunded commitments are not recognized in the financial statements.
In October 2000, Kanematsu Corporation, a creditor of one of the
Partnership's portfolio companies, initiated an arbitration proceeding
against the Partnership, two affiliated partnerships, and a fourth co-
investor. Kanematsu was seeking to recover $2,000,000, the purchase price
in a contract by which the Partnership and the other entities were alleged
to have agreed to purchase certain debt securities of the portfolio company
from Kanematsu. The Partnership and affiliated partnerships asserted
counterclaims against Kanematsu. On February 12, 2002, the Partnership,
affiliated partnerships and the co-investor were awarded $4,000,000 and all
of Kanematsu's claims were denied. The Partnership recognized revenue and
a receivable of $666,667 as of February 12, 2002, for its proportionate
share of the award. Kanematsu appealed the order but in early November
2002 paid a forbearance fee of $200,000 in exchange for an option to settle
all liabilities. On November 29, 2002, Kanematsu agreed to settle for
$3,999,999. On February 13, 2003, the Partnership received $774,298,
representing its proportionate share of the settlement, plus accrued
interest, less disputed legal fees. The Partnership recognized the
additional revenue and a receivable of $107,631 at December 31, 2002. In
March 2003, the law firm remitted an additional amount of $193,830 to the
Partnership.
From time to time, the Partnership is subject to routine litigation
incidental to the business of the Partnership. Although there can be no
assurances as to the ultimate disposition of these matters and the
proceeding disclosed above, it is the opinion of the Managing General
Partners, based upon the information available at this time, that the
expected outcome of these matters, individually or in the aggregate, will
not have a material adverse effect on the results of operations and
financial condition of the Partnership.
In September 2003, the Partnership guaranteed a line of credit (agreement)
for Atherotech, Inc. with a bank. Atherotech, Inc. is a portfolio company
of an affiliated partnership under which the Partnership has common
control. The terms of the guarantee 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. had issued the Partnership a warrant, with the right to purchase stock
at a future date, which was to expire September 8, 2010. The terms of the
warrant stated 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 was to remain in effect as long as Atherotech's
agreement with the bank remained 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, recognized over the estimated
life of the guarantee. As of December 31, 2003, there was a deferred gain
of $60,000. 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 as of December 31, 2004.
10. Financial Highlights
--------------------
For The Years Ended December 31,
-----------------------------------
2004 2003 2002
------ ------ ------
(all amounts on a per Unit basis)
Net asset value,
beginning of period $72.38 $71.32 $125.37
Loss from investment
operations:
Net investment loss (13.58) -- (7.75)
Net realized and unrealized
gain (loss) on investments 11.04 1.06 (46.30)
----- ----- -----
Total from investment operations (2.54) 1.06 (54.05)
----- ----- -----
Net asset value, end of period $69.84 $72.38 $71.32
===== ===== =====
Total return (3.51) 1.48% (43.11)%
Ratios to average net assets:
Net investment loss (19.10)% 0% (7.88)%
Expenses 19.51% 17.52% 13.62%
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 General Partners
deficit. As of December 31, 2004, 2003 and 2002 the General Partners had a
negative capital balance of $1,439,824, $1,435,177 and $3,282,199,
respectively. Net asset value has been calculated in accordance with this
provision of the Partnership Agreement.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING PARTNERS III, L.P.
By: TECHNOLOGY FUNDING INC.
TECHNOLOGY FUNDING LTD.
Managing General Partners
Date: March 23, 2005 By: /s/Charles R. Kokesh
--------------------------------
Charles R. Kokesh
President, Chief Executive Officer
Chief Financial Officer and
Chairman of Technology Funding Inc.
and Managing General Partner of
Technology Funding Ltd.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/Charles R. Kokesh President, Chief March 23, 2005
- ------------------------ Executive Officer,
Charles R. Kokesh Chief Financial Officer
and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
The above represents a majority of the Board of Directors of Technology
Funding Inc. and the General Partners of Technology Funding Ltd.
Technology Funding Partners III, L.P. 2:21 PM 03/23/05
(a Delaware limited partnership)
Page 1 of 3
Technology Funding Partners III, L.P.
(a Delaware limited partnership)