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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 1994
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)
2000 Alameda de las Pulgas, Suite 250
San Mateo, California 94403
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(415) 345-2200
--------------------------------------------------
(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 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 Prospectus dated
February 26, 1988 forming a part of Registration Statement No. 33-
10896 and filed pursuant to Rule 424(c) of the General Rules and
Regulations under the Securities Act of 1933 are incorporated by
reference in Parts I and III hereof. Portions of the Prospectus of
Technology Funding Medical Partners I, L.P., as modified by Cumulative
Supplement No. 4 dated January 4, 1995, forming a part of the May 3,
1993, Pre-Effective Amendment No. 3 to the Form N-2 Registration
Statement No. 33-54002 dated October 30, 1992, is incorporated by
reference in Part III hereof.
PART I
Item 1. BUSINESS
- ------ --------
Technology Funding Partners III, L.P. (hereinafter referred
to as the "Partnership" or the "Registrant") was formed as a
Delaware limited partnership on December 4, 1986 and was
inactive until it commenced the sale of Units in April 1987.
The Partnership was organized as a business development
company under the Investment Company Act of 1940, as amended
(the "Act"), and operates as a nondiversified investment
company as that term is defined in the Act. The
Partnership's principal investment objectives are long term
capital appreciation from venture capital investments in new
and developing companies ("portfolio companies") and
preservation of limited partner capital through risk
management and active involvement with such companies.
Investments in portfolio companies are also described in the
"Introductory Statement" and "Business of the Partnership"
sections of the Prospectus dated February 26, 1988 that forms
a part of Registrant's Form N-2 Registration Statement No.
33-10896 (such Prospectus is hereinafter referred to as the
"Prospectus"), which sections are incorporated herein by
reference. Additional characteristics of the Partnership's
business are discussed in the "Risk Factors" and "Conflicts
of Interest" sections of the Prospectus, which sections are
also incorporated herein by reference. The Partnership's
term was extended for a two-year period to December 31, 1996
pursuant to unanimous approval by the Management Committee on
September 9, 1994. The Partnership's Amended and Restated
Limited Partnership Agreement ("Partnership Agreement")
provides that the Partnership term may be further extended
for an additional two-year period, unless terminated sooner.
Item 2. PROPERTIES
- ------ ----------
The Registrant has no material physical properties.
Item 3. LEGAL PROCEEDINGS
- ------ -----------------
There are no material pending legal proceedings to which the
Registrant is party or of which any of its property is the
subject, other than ordinary routine litigation incidental to
the business of the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
The Annual Meeting of the Limited Partners of the Partnership
was held on September 9, 1994 pursuant to a Notice of Meeting
dated July 11, 1994. At that meeting proxies submitted by
Limited Partners documented that the Limited Partners elected
three individual general partners, elected the two Managing
General Partners, and ratified the selection of KPMG Peat
Marwick LLP as independent certified accountants for the
fiscal year ended December 31, 1994. In addition, the
Limited Partners approved an amendment to the Partnership
Agreement to add a new Section 14.10 which provides that the
Management Committee shall be required to call a meeting only
once every three years of Limited Partners if the only
purpose of the meeting is to seek Limited Partner consent of
existing Managing General Partners and the approval of
existing independent certified public accountants for the
Partnership; there were 81,917 Units voting in favor, 7,911
Units voting against, and 9,605 Units abstaining.
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, 1994, there were 5,598 record holders of
Units.
(c) The Registrant, being a partnership, does not pay
dividends. Cash distributions, however, may be made to
the partners in the Partnership pursuant to the
Registrant's Partnership Agreement.
Item 6. SELECTED FINANCIAL DATA
- ------ -----------------------
For the Years Ended and As of December 31,
------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Total income $ 480,176 338,276 713,613 585,734 1,012,068
Net operating loss (838,981) (1,086,638) (958,185) (1,173,124) (1,132,815)
Net realized (loss)
gain from venture capital
limited partnership
investments -- (74,227) 46,516 (163,585) (98,200)
Net realized gain from
sale of investments 3,895,971 303,085 7,086,510 861,505 --
Realized losses from
investment write-downs (832,114) (740,529) (2,460,003) (1,135,306) (1,209,378)
Recovery from investments
previously written off 100,000 -- -- -- --
Net realized income (loss) 2,324,876 (1,598,309) 3,714,838 (1,610,510) (2,440,393)
Change in net unrealized
fair value:
Equity investments (4,240,635) (68,227) 6,149,373 7,409,592 (226,955)
Secured notes receivable 136,000 6,000 (142,000) -- --
Net (loss) income (1,779,759) (1,660,536) 9,722,211 5,799,082 (2,667,348)
Net realized income (loss)
per Unit 14 (10) 23 (10) (15)
Total assets 34,205,502 36,007,556 39,636,068 29,774,257 24,286,450
Distributions declared (1,673,084) -- (1,998,966) -- --
Refer to the financial statements notes entitled "Summary
of Significant Accounting Policies" and "Allocation of
Profits and Losses" for a description of the method of
calculation of net realized income (loss) per Unit.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------ -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Liquidity and Capital Resources
- -------------------------------
In 1994, net cash used by operations totaled $718,452.
The Partnership paid management fees of $342,443 to the
Managing General Partners and reimbursed related parties
for operating expenses of $680,726 in 1994. In addition,
$42,000 was paid to the individual general partners as
compensation for their services. Other operating expenses
of $203,394 were paid, and interest and other income of
$576,905 was received. The Partnership also paid $26,794
in interest on short-term borrowings.
In 1994, the Partnership issued $902,438 in secured notes
receivable to portfolio companies in the
medical/biotechnology industry and funded equity
investments of $2,613,341 primarily to portfolio companies
in the medical/biotechnology, and computer systems and
software industries. Repayments of notes receivable in
1994 provided cash of $2,923,536 and proceeds from sale of
investments were $5,226,691. The Partnership also
received $85,043 in cash distributions from venture
capital limited partnership investments and $100,000 from
recovery of investments previously written off. At year
end, the Partnership was committed to fund $87,496 in
additional investments and had guaranteed a $2 million
loan. Distributions payable of $1,673,084 at December 31,
1994 will be paid in late March 1995.
During 1994 Crystallume, Geoworks, TheraTx, Inc. and
UroMed Corporation completed their initial public
offerings ("IPOs"). Although certain of the Partnership's
holdings may be subject to selling restrictions, the IPOs
indicate potential future liquidity for these investments.
The Partnership maintains a margin account with a
brokerage firm. At December 31, 1994, the maximum
borrowing capacity, which fluctuates based on collateral
value, was approximately $2,325,000. The maximum and
weighted average amounts outstanding in 1994 were
$1,730,817 and $375,864, respectively. The Partnership
had no outstanding balance at December 31, 1994. The
Partnership's investment in ICU Medical, Inc. is pledged
as collateral.
Cash and cash equivalents at December 31, 1994 were
$4,049,929. Cash reserves, interest income on short-term
investments, future proceeds from the sale of equity
investments and borrowing capacity from the margin account
are expected to be adequate to fund Partnership operations
and future investments through the next twelve months.
Results of Operations
- ---------------------
1994 compared to 1993
- ---------------------
Net loss was $1,779,759 in 1994 compared to $1,660,536 in
1993. The increase was primarily due to a $4,172,408
decline in the change in net unrealized fair value of
equity investments, partially offset by a $3,592,886
increase in net realized gain from sale of investments.
Other changes consisted of a $141,900 increase in total
income, a $130,000 increase in the change in net
unrealized fair value of secured notes receivable, and a
$100,000 increase in recovery from investments previously
written off.
During 1994, the decrease in fair value of equity
investments of $4,240,635 was primarily attributable to
realized gains from investment sales totaling $3,895,971
mainly related to TheraTx, Inc., Telios Pharmaceuticals,
Inc. and UroMed Corporation, partially offset by a fair
value increase in portfolio companies in the computer
systems and software industry and venture capital limited
partnership investments. In 1993, the fair value decrease
was $68,227. In 1993, realized gains of $303,085
primarily related to sales of ChemTrak, Inc., EROX
Corporation, Telios Pharmaceuticals, Inc. and the closed
ICU Medical, Inc. short sales.
Total income was $480,176 and $338,276 in 1994 and 1993,
respectively. The increase was mainly due to an increase
in other notes receivable income of $160,458 related
primarily to loan extension and loan guarantee fees.
The Partnership recorded increases in the change in fair
value of secured notes receivable of $136,000 and $6,000
in 1994 and 1993, respectively. The increase in 1994 was
mainly attributable to the elimination of loan loss
reserves as there were no notes receivable at year end.
The Partnership also received a $100,000 recovery from
notes receivable previously written off related to a
portfolio company in the medical/biotechnology industry.
The change in fair value amounts are included within the
provision for loan losses based upon the level of loan
loss reserves deemed adequate by the Managing General
Partners at the respective year ends. Actual loan losses
are deducted from the loan loss reserve and are reflected
as "Realized losses from investment write-downs" on the
Statements of Operations. Loan recoveries are added to
the loan loss reserve and are reflected as "Recovery from
investments previously written off." There were no loan
losses in 1994, compared to $100,000 in 1993 related to a
portfolio company in the medical/biotechnology industry.
In 1994 and 1993, the Partnership realized losses from
investment write-downs of $832,114 and $740,529,
respectively. Realized losses in 1994 primarily related
to equity investments in portfolio companies in the
medical/biotechnology and microelectronics industries.
Realized losses in 1993 mainly related to equity
investments in the retail/consumer products and
microelectronics industries.
Total operating expenses were $935,584 in 1994 compared to
$1,013,406 in 1993. The decrease was primarily due to
lower investment operations, administrative and investor
services and computer service expenses from lower overall
portfolio activity; partially offset by higher interest
expense.
Given the inherent risk associated with the business of
the Partnership, the future performance of the portfolio
company investments may significantly impact future
operations.
1993 compared to 1992
- ---------------------
Net loss was $1,660,536 in 1993 compared to a net income
of $9,722,211 in 1992. The change was primarily due to a
$6,783,425 decrease in net realized gain from sale of
investments, a $6,217,600 decrease in the change in fair
value of equity investments, and a $341,789 decrease in
notes receivable interest income. These changes were
partially offset by a $1,719,474 decrease in realized
losses from investment write-downs and a $174,470 decrease
in management fees.
Net realized gain from sale of investments was $303,085
for the year ended December 31, 1993 compared to
$7,086,510 in 1992. Net gain in 1993 mostly related to
sales of ChemTrak, Inc., EROX Corporation, Telios
Pharmaceuticals, Inc. and the closed ICU Medical, Inc.
short sales. Net realized gain in 1992 primarily related
to the sale of SyStemix, Inc. ($4,813,596), PolyMedica
Industries, Inc. ($1,609,421) and Telios Pharmaceuticals,
Inc. ($689,185), partially offset by realized losses
related to Phoenix Technologies Ltd. ($73,500).
In 1993, the decrease in fair value of equity investments
was $68,227. In 1992, the increase of $6,149,373 was
primarily due to portfolio companies in the
medical/biotechnology, computer systems and software, and
retail/consumer products industries, partially offset by
decreases in the industrial/business automation industry.
Notes receivable interest income decreased to $245,371 in
1993 from $587,160 in 1992 primarily due to higher average
outstanding notes receivable balances during 1992. A
majority of the 1992 notes were repaid during the fourth
quarter of 1992.
In 1993 and 1992, the Partnership realized losses from
investments write-downs of $740,529 and $2,460,003,
respectively. Realized losses in 1993 primarily related
to equity investments in portfolio companies in the
retail/consumer products and microelectronics industries
and secured notes receivable to a portfolio company in the
medical/biotechnology industries. Realized losses in 1992
related to equity investments in portfolio companies in
the retail/consumer products, medical/biotechnology and
environmental industries.
The Partnership incurred management fees of $369,508 and
$543,978 in 1993 and 1992, respectively. Management fees
were two percent per annum of total limited partners'
capital contributions until June 1992, which marked the
beginning of the sixth year of Partnership operations.
Pursuant to the Partnership Agreement, management fees are
equal to one quarter of one percent of the fair value of
Partnership assets for each quarter, beginning in June
1992.
Total operating expenses were $1,013,406 in 1993 compared
to $1,089,903 in 1992. The decrease is primarily
attributable to lower investment operations expense due to
lower portfolio activities and lower professional fees.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The financial statements of the Registrant are set forth
following Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------ ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
Registrant has reported no disagreements with its
accountants on matters of accounting principles or
practices or financial statement disclosure.
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 the three individual general partners and a
representative from each of Technology Funding Ltd., a
California limited partnership ("TFL"), and its wholly-
owned subsidiary, Technology Funding Inc., a California
corporation ("TFI"). TFL and TFI are the Managing General
Partners. Information concerning the ownership of TFL and
the business experience of the key officers of TFI and the
partners of TFL is incorporated by reference from the
sections entitled "Management of the Partnership" and
"Management of the Partnership - Key Personnel of the
Managing General Partners" in the Prospectus, which are
incorporated herein by reference. Changes in this
information that have occurred since the date of the
Prospectus are included in the Technology Funding Medical
Partners I, L.P. Prospectus, as modified by Cumulative
Supplement No. 4 dated January 4, 1995, forming a part of
the May 3, 1993, Pre-Effective Amendment No. 3 to the Form
N-2 Registration Statement No. 33-54002 dated October 30,
1992 which is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or
directors. In 1994, the Partnership incurred management
fees of $341,573. The fees are designed to compensate the
Managing General Partners for General Partner Overhead
incurred in performing management duties for the
Partnership through December 31, 1994. General Partner
Overhead (as defined in the Partnership Agreement)
includes rent, utilities, and certain salaries and
benefits paid by Managing General Partners. As
compensation for their services, each of the individual
general partners receive $10,000 annually plus $1,000 for
each attended meeting of the Management Committee. In
1994, $42,000 of such fees were paid.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
----------
Not applicable. No Limited Partner beneficially holds
more than 5% 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 three individual general partners each
own eight Units. The Managing General Partners control
the affairs of the Partnership pursuant to the Partnership
Agreement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Registrant has 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.
PART IV
Item 14. 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:
Independent Auditors' Report
Balance Sheets as of December 31, 1994
and 1993
Statements of Operations for the years
ended December 31, 1994, 1993 and 1992
Statements of Partners' Capital for the years
ended December 31, 1994, 1993 and 1992
Statements of Cash Flows for the years
ended December 31, 1994, 1993 and 1992
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
Registrant's Amended and Restated Limited
Partnership Agreement (incorporated by reference
to Exhibit A to Registrant's Prospectus dated
February 26, 1988 included in Registration
Statement No. 33-10896 filed pursuant to Rule
424(b) of the General Rules and Regulations under
the Securities Act of 1933).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant
during the year ended December 31, 1994.
(c) Financial Data Schedule for the year ended and as of
December 31, 1994 (Exhibit 27).
INDEPENDENT AUDITORS' REPORT
----------------------------
The Partners
Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheets of Technology
Funding Partners III, L.P. (a Delaware limited partnership) as of
December 31, 1994 and 1993, and the related statements of
operations, partners' capital, and cash flows for each of the years
in the three-year period ended December 31, 1994. These financial
statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our
procedures included confirmation of certain securities owned by
correspondence with the individual investee companies and a
physical examination of those securities held by a safeguarding
agent as of December 31, 1994 and 1993. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Technology Funding Partners III, L.P. as of December 31, 1994 and
1993, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1994 in
conformity with generally accepted accounting principles.
As explained in Notes 1, 5 and 6, the financial statements include
investments of $29,411,649 and $35,915,316 (91% and 100% of
partners' capital) as of December 31, 1994 and 1993, respectively,
whose values, in certain circumstances, have been estimated by the
Managing General Partners in the absence of readily ascertainable
market values. We have reviewed the procedures used by the
Managing General Partners in arriving at their estimate of value of
such investments and have inspected underlying documentation, and,
in the circumstances, we believe the procedures are reasonable and
the documentation appropriate. However, because of the inherent
uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready
market for the investments existed, and the differences could be
material.
San Francisco, California KPMG Peat Marwick LLP
March 17, 1995
BALANCE SHEETS
- --------------
December 31,
----------------------
1994 1993
---- ----
ASSETS
Investments:
Equity investments (cost basis of
$19,299,469 and $19,577,265 for 1994
and 1993, respectively) $29,411,649 33,930,080
Secured notes receivable, net
(cost basis of $2,121,236
for 1993) -- 1,985,236
---------- ----------
Total investments 29,411,649 35,915,316
Cash and cash equivalents 4,049,929 73,890
Other assets 743,924 18,350
---------- ----------
Total $34,205,502 36,007,556
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 25,839 25,578
Due to related parties 44,572 31,723
Short-term borrowings -- 125,000
Distributions payable 1,673,084 --
Deferred income 93,750 --
Other liabilities 19,362 23,517
---------- ----------
Total liabilities 1,856,607 205,818
Commitments, contingencies and
subsequent events (Notes 3, 5 and 10)
Partners' capital:
Limited Partners
(Units outstanding of 160,000
for both 1994 and 1993) 22,269,799 21,633,959
General Partners (33,084) (49,036)
Net unrealized fair value increase
(decrease) from cost:
Equity investments 10,112,180 14,352,815
Secured notes receivable -- (136,000)
---------- ----------
Total partners' capital 32,348,895 35,801,738
---------- ----------
Total $34,205,502 36,007,556
========== ==========
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
----------------------------------
1994 1993 1992
---- ---- ----
Income:
Notes receivable
interest $ 265,500 245,371 587,160
Short-term investment
interest 54,218 92,511 118,516
Other notes receivable
income 160,458 394 1,938
Other income -- -- 5,999
--------- --------- ---------
Total income 480,176 338,276 713,613
Costs and expenses:
Management fees 341,573 369,508 543,978
Individual general
partners' compensation 42,000 42,000 35,000
Amortization of
organizational costs -- -- 2,917
Operating expenses:
Administrative and
investor services 402,318 433,112 427,822
Investment operations 335,167 373,895 420,049
Computer services 97,244 132,808 128,361
Professional fees 74,061 72,982 113,671
Interest expense 26,794 609 --
--------- --------- ---------
Total operating
expenses 935,584 1,013,406 1,089,903
--------- --------- ---------
Total costs and expenses 1,319,157 1,424,914 1,671,798
--------- --------- ---------
Net operating loss (838,981) (1,086,638) (958,185)
Net realized (loss)
gain from venture
capital limited
partnership investments -- (74,227) 46,516
Net realized gain from
sale of investments 3,895,971 303,085 7,086,510
Realized losses from
investment write-downs (832,114) (740,529) (2,460,003)
Recovery from investments
previously written off 100,000 -- --
--------- --------- ---------
Net realized income (loss) 2,324,876 (1,598,309) 3,714,838
Change in net unrealized
fair value:
Equity investments (4,240,635) (68,227) 6,149,373
Secured notes receivable 136,000 6,000 (142,000)
--------- --------- ---------
Net (loss) income $(1,779,759) (1,660,536) 9,722,211
========= ========= =========
Net realized income
(loss) per Unit $ 14 (10) 23
========= ========= =========
See accompanying notes to financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 1994, 1993 and 1992:
Net Unrealized Fair Value
Increase (Decrease) From Cost
-----------------------------
Limited General Equity Secured Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ------------- -----
Partners' capital,
December 31, 1991 $21,573,031 (105,671) 8,271,669 -- 29,739,029
Distributions (1,958,864) (40,102) -- -- (1,998,966)
Net realized income 3,602,118 112,720 -- -- 3,714,838
Change in net unrealized
fair value:
Equity investments -- -- 6,149,373 -- 6,149,373
Secured notes receivable -- -- -- (142,000) (142,000)
--------- --------- ----------- -------- ----------
Partners' capital,
December 31, 1992 23,216,285 (33,053) 14,421,042 (142,000) 37,462,274
Net realized loss (1,582,326) (15,983) -- -- (1,598,309)
Change in net unrealized
fair value:
Equity investments -- -- (68,227) -- (68,227)
Secured notes receivable -- -- -- 6,000 6,000
---------- --------- ---------- ------- ----------
Partners' capital,
December 31, 1993 21,633,959 (49,036) 14,352,815 (136,000) 35,801,738
Distributions (1,640,000) (33,084) -- -- (1,673,084)
Net realized income 2,275,840 49,036 -- -- 2,324,876
Change in net unrealized
fair value:
Equity investments -- -- (4,240,635) -- (4,240,635)
Secured notes receivable -- -- -- 136,000 136,000
---------- --------- ---------- ------- ----------
Partners' capital,
December 31, 1994 $22,269,799 (33,084) 10,112,180 -- 32,348,895
========== ========= ========== ======= ==========
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For The Years Ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
Cash flows from operations:
Interest and other
income received $ 576,905 264,271 685,187
Cash paid to vendors (203,394) (246,544) (257,188)
Cash paid to related
parties (1,065,169) (1,284,867) (1,247,049)
Interest paid on short-
term borrowings (26,794) (609) --
--------- --------- ---------
Net cash used by
operations (718,452) (1,267,749) (819,050)
--------- --------- ---------
Cash flows from investing
activities:
Secured notes receivable
issued (902,438) (1,100,000) (1,741,439)
Purchase of equity
investments (2,613,341) (3,907,196) (4,644,674)
Repayments of convertible
and secured notes
receivable 2,923,536 605,442 3,397,133
Proceeds from sale of
investments 5,226,691 285,691 8,542,941
Proceeds from securities
sold short, net -- 136,738 --
Recovery of investments
previously written off 100,000 -- --
Distributions from
venture capital
limited partnerships 85,043 245,590 --
--------- --------- ---------
Net cash provided
(used) by investing
activities 4,819,491 (3,733,735) 5,553,961
--------- --------- ---------
Cash flows from financing
activities:
Distributions to Limited and
General Partners -- (1,998,966) --
(Repayments of) proceeds from
short-term borrowings, net (125,000) 125,000 --
--------- --------- ---------
Net cash used by
financing activities (125,000) (1,873,966) --
--------- --------- ---------
Net increase (decrease) in
cash and cash equivalents 3,976,039 (6,875,450) 4,734,911
Cash and cash equivalents
at beginning of year 73,890 6,949,340 2,214,429
--------- --------- ---------
Cash and cash equivalents
at end of year $ 4,049,929 73,890 6,949,340
========= ========= =========
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For the Years Ended December 31,
--------------------------------------
1994 1993 1992
---- ---- ----
Reconciliation of net (loss)
income to net cash
used by operations:
Net (loss) income $(1,779,759) (1,660,536) 9,722,211
Adjustments to reconcile
net (loss) income to
net cash used by
operations:
Net realized loss (gain)
from venture capital
limited partnership
investments -- 74,227 (46,516)
Net realized gain from
sale of investments (3,895,971) (303,085) (7,086,510)
Realized losses from
investment write-downs 832,114 740,529 2,460,003
Recovery from investments
previously written off (100,000) -- --
Change in net unrealized
fair value:
Equity investments 4,240,635 68,227 (6,149,373)
Secured notes
receivable (136,000) (6,000) 142,000
Other, net (20,872) (8,858) (5,400)
Changes in:
Accrued interest on
convertible and secured
notes receivable 23,851 (65,147) (20,109)
Accounts payable and
accrued expenses 261 (31,458) 24,847
Due to/from related
parties 12,849 (83,030) 144,001
Deferred income 93,750 -- --
Other, net 10,690 7,382 (4,204)
--------- --------- ---------
Net cash used by operations $ (718,452) (1,267,749) (819,050)
========= ========= =========
Non-cash investing activities:
Non-cash exercise of warrants $ 156,494 -- --
========= ========= =========
Conversion of equity
investments into
secured notes receivable $ -- -- 29,228
========= ========= =========
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
- ------------
Technology Funding Partners III, L.P., (the "Partnership") 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 a business
development company under the Investment Company Act of 1940, as
amended (the "Act"), and operates as a nondiversified investment
company as that term is 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 also three
individual general partners.
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. On February 3, 1989, the offering terminated with 160,000
units sold. The Partnership was scheduled to be dissolved on
December 31, 1994, but the term was extended for a two-year period to
December 31, 1996 pursuant to unanimous approval by the Management
Committee on September 4, 1994. The Partnership's term may be
further extended for an additional two-year period, unless terminated
sooner.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents are principally comprised of cash invested
in money market instruments and commercial paper 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.
Organizational Costs
- --------------------
Organizational costs of $35,000 are amortized over 60 months, using
the straight-line method.
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.
Since the accompanying financial statements are prepared using
generally accepted accounting principles which may not equate to tax
accounting, the Partnership's total tax basis in investments was
higher than the reported total cost basis of $19,299,469 by
$1,596,210 as of December 31, 1994.
Net Realized Income (Loss) Per Unit
- -----------------------------------
Net realized income (loss) per Unit is calculated by dividing the
number of Units outstanding (160,000) at December 31, 1994, 1993, and
1992 into total net realized income (loss) allocated to Limited
Partners. The Managing General Partners contributed an amount equal
to 0.1% of total Limited Partner capital contributions and did not
receive any Partnership Units.
Investments:
- -----------
The Partnership's method of accounting for investments, in
accordance with generally accepted accounting principles, is the fair
value basis used for investment companies. The fair value of
Partnership investments is their initial cost basis with changes as
noted below:
Equity Investments
------------------
The fair value for publicly-traded equity investments (marketable
equity securities) is based upon the five-day-average closing sales
price or bid/ask price that is available on a national securities
exchange or over-the-counter market. Certain publicly-traded equity
investments may not be marketable due to selling restrictions. For
publicly-traded equity investments with selling restrictions, an
illiquidity discount of 25% is applied when determining the fair
value. Sale of equity investments are recorded on the trade date.
The basis on which cost is determined in computing realized gains or
losses is generally specific identification.
Other equity investments, which are not publicly traded, are
generally valued utilizing pricing obtained from the most recent
round of third party financings. Valuation is determined quarterly
by the Managing General Partners. Included in equity investments are
convertible or subordinated notes receivable as repayment of these
notes may occur through conversion into equity investments.
Venture capital limited partnership investments are initially
recorded at cost and reduced for distributions that are a return of
capital. Distributions from limited partnership cumulative earnings
are reflected as realized gains by the Partnership.
Equity and venture capital limited partnership investments with
temporary changes in fair value result in increases or decreases to
the unrealized fair value of equity investments. The cost basis does
not change. In the case of an other than temporary decline in value
below cost basis, an appropriate reduction in the cost basis is
recognized as a realized loss with the fair value being adjusted to
match the new cost basis. Adjustments to fair value basis are
reflected as "Change in net unrealized fair value of equity
investments." Cost basis adjustments are reflected as "Realized
losses from investment write-downs" or "Net realized (loss) gain from
venture capital limited partnership investments" on the Statements of
Operations.
Secured Notes Receivable, Net
-----------------------------
The secured notes receivable portfolio includes accrued interest less
the discount related to warrants and the allowance for loan losses.
The portfolio approximates fair value through inclusion of an
allowance for loan losses. Allowance for loan losses is reviewed
quarterly by the Managing General Partners and is adjusted to a level
deemed adequate to cover possible losses inherent in notes and
unfunded commitments. Notes receivable are placed on nonaccrual
status when, in the opinion of the Managing General Partners, the
future collectibility of interest or principal is in doubt.
In conjunction with the secured notes granted to portfolio companies,
the Partnership has received warrants to purchase certain shares of
capital stock of the borrowing companies. The cost basis of the
warrants and the resulting discount has been estimated by the
Managing General Partners to be 1% of the principal balance of the
original notes made to the borrowing companies. The discount is
amortized to interest income on a straight-line basis over the term
of the loan. Warrants received in conjunction with convertible notes
are not assigned any additional costs. These warrants are included
in the equity investment portfolio.
Nonrefundable fees received in connection with loan fundings are
deferred and amortized to interest income over the contractual life
of the loan using the effective interest method or the straight-line
method if it is not materially different. Direct loan origination
costs mainly consist of third-party costs and generally are
reimbursed by portfolio companies.
Non-cash Exercise of Warrants
- -----------------------------
Periodically, the Partnership may acquire stock through the non-cash
exercise of warrants. During 1994, realized gains resulting from the
non-cash exercise of warrants totaled $156,494. This amount is
included in net realized gain from sale of investments. During 1993
and 1992, there were no realized gains from the non-cash exercise of
warrants.
Reclassifications
- -----------------
Certain 1993 and 1992 balances have been reclassified to conform with
the 1994 financial statement presentation.
2. Change in Net Unrealized Fair Value of Equity Investments
---------------------------------------------------------
In accordance with the accounting policy as stated in Note 1, the
Statements of Operations include a line item entitled "Change in net
unrealized fair value of equity investments." The table below
discloses details of the changes:
For the Years Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
Increase in fair value
from cost of marketable
equity securities $ 7,636,254 10,267,228 9,161,745
Increase in fair value from
cost of non-marketable
equity securities 2,475,926 4,085,587 5,259,297
---------- ---------- ----------
Net unrealized fair
value increase from
cost at end of year 10,112,180 14,352,815 14,421,042
Net unrealized fair
value increase from
cost at beginning of
year 14,352,815 14,421,042 8,271,669
---------- ---------- ----------
Change in net unrealized
fair value of equity
investments $(4,240,635) (68,227) 6,149,373
========== ========== ==========
3. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
For the Years Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
Management fees $341,573 369,508 543,978
Individual general
partners' compensation 42,000 42,000 35,000
Amortization of organi-
zational costs -- -- 2,917
Reimbursable operating
expenses:
Investment operations 325,386 365,196 405,238
Administrative and
investor services 271,815 292,325 278,563
Computer services 97,244 132,808 128,271
Management fees are equal to six percent of the total limited
partners' capital contributions for the first year of Partnership
operations, four percent for the second year, two percent for the
third, fourth and fifth years and one quarter of one percent of the
fair value of Partnership assets for each quarter in the sixth and
subsequent years. June 1992 was the beginning of the sixth year of
Partnership operations. 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. The
management fees are payable monthly in arrears. Amounts due to
related parties for management fees were $29,046 and $29,916 at
December 31, 1994 and 1993, respectively.
As compensation for their services, each of the individual general
partners receive $10,000 annually plus $1,000 for each management
committee meeting attended. In 1994, 1993 and 1992, such fees were
$42,000, $42,000 and $35,000, respectively. The three individual
general partners each own 8 Units.
The Partnership reimburses the Managing General Partners for
operating expenses incurred in connection with the business of the
Partnership. Reimbursable operating expenses include all expenses
other than organizational and offering expenses and General Partner
Overhead. There were $15,526 and $1,807 of such expenses payable at
December 31, 1994 and 1993, respectively.
Under the terms of a computer service agreement, the Partnership
recognized charges from Technology Administrative Management, a
division of TFL, for its share of computer support costs. These
amounts are included in computer services expense.
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. At
December 31, 1994, the Partnership had an indirect interest in non-
transferable PolyMedica options at an exercise price higher than the
current market value.
4. Allocation of Profits and Losses
--------------------------------
Net realized profit and loss 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 loss
previously allocated under (b)(ii) below and sales
commissions; then
(iii)Third, 75% to the Limited Partners as a group in
proportion to the number of Units held, 5% to the
Limited Partners in proportion to the Unit Months of
each Limited Partner, and 20% to the Managing General
Partners.
(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% to the Limited Partners and 1% 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,
with net profits thereafter otherwise allocable to those Limited
Partners being 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 first to offset previously allocated losses pursuant to
(b)(i) above, and then 99% to Limited Partners and 1% to the Managing
General Partners.
In no event are the Managing General Partners allocated less than 1%
of the net realized profit or loss of the Partnership.
5. Equity Investments
------------------
At December 31, 1994 and 1993, equity investments consisted of:
December 31, 1994 December 31, 1993
Principal ----------------- -----------------
Investment Amount or Cost Fair Cost Fair
Industry/Company Position Date Shares Basis Value Basis Value
- ---------------- -------- ---- ------ ----- ----- ----- -----
Communications
- --------------
Coded Common
Communications shares 04/93 72,727 $198,000 85,891 198,000 336,362
Corporation
Coded Common
Communications share
Corporation warrants
at $3.16;
expiring
04/95 04/93 72,727 2,000 0 2,000 102,272
Computer Systems and Software
- -----------------------------
Geoworks Warrants for
common shares
at $1.25;
expired
07/94 07/89 100,000 -- -- 0 0
Geoworks Series B
Preferred
shares 12/89 400,000 -- -- 500,000 1,600,000
Geoworks Series C
Preferred
shares 06/90 166,667 -- -- 250,001 666,668
Geoworks Common
shares 01/92 19,016 6,758 115,047 6,758 12,677
Geoworks Series D
Preferred
shares 07/92 84,577 -- -- 507,462 507,462
Geoworks Common
shares 08/92 36,883 196,708 223,142 196,708 24,589
Geoworks Convertible
notes (1) 04/93 -
06/93 $364,105 -- -- 381,743 381,743
Geoworks Warrants
for common
shares at
$.50;
expiring
04/98 04/93 45,513 -- -- 0 0
Geoworks Warrants
for common
shares at
$.50;
expiring
06/98 06/93 45,513 -- -- 0 0
Geoworks Convertible
note (1) 11/93 $371,535 -- -- 376,324 376,324
Geoworks Warrants
for common
shares at
$.50;
expiring
11/98 11/93 41,519 -- -- 0 0
Geoworks Common
shares 03/94 38,415 179,267 174,308 -- --
Geoworks Common
shares 06/94 780,796 2,167,743 4,061,390 -- --
Velocity Convertible
Incorporated note (1) 09/93 $125,000 -- -- 128,472 128,472
Velocity Warrants
Incorporated for common
shares at
$.25;
expiring
09/98 09/93 50,000 -- -- 0 0
Velocity Convertible
Incorporated note (1) 11/93 $62,500 -- -- 63,490 63,490
Velocity Warrants
Incorporated for common
shares at
$.25;
expiring
11/98 11/93 25,000 -- -- 0 0
Velocity Convertible
Incorporated note (1) 12/93 $62,500 -- -- 62,917 62,917
Velocity Warrants
Incorporated for common
shares at
$.25;
expiring
12/98 12/93 25,000 -- -- 0 0
Velocity Series A
Incorporated Preferred
shares 10/94 6,286,325 1,034,337 1,034,337 -- --
Electronic Design Automation
- ----------------------------
IKOS Systems Common
Inc. shares 03/92 8,294 15,866 19,026 17,318 15,037
Industrial/Business Automation
- ------------------------------
Crystallume Series D
Preferred
shares 05/90 2,398 -- -- 1,202,855 3,627
Crystallume Series D
Preferred
shares 06/90 598 -- -- 300,000 904
Crystallume Series
A, B, C, D
F, G and H
Preferred
shares 03/93 1,401,467 -- -- 621,132 2,119,456
Crystallume Common
shares 03/94 348,611 2,189,411 1,183,173 -- --
Nanodyne, Inc. Series B
Preferred
shares 07/93 228,571 500,000 500,000 500,000 500,000
Nanodyne, Inc. Series B
Preferred
shares 01/94 37,264 81,515 81,515 -- --
Nanodyne, Inc. Convertible
note (1) 05/94 $64,692 68,635 68,635 -- --
Nanodyne, Inc. Convertible
note (1) 10/94 $22,466 22,907 22,907 -- --
Oxford Glyco- Common
Systems shares 08/93 266,934 499,963 499,963 499,963 499,963
Medical/Biotechnology
- ---------------------
Angenics, Inc. Convertible
note (1) 05/89 $90,000 0 0 0 0
Angenics, Inc. Convertible
note (1) 07/89 $160,000 0 0 149,765 149,765
Biex, Inc. Series A
Preferred
shares 07/93 128,205 83,333 128,205 83,333 83,333
Biex, Inc. Series B
Preferred
shares 10/94 63,907 63,907 63,907 -- --
Biex, Inc. Warrants for
Series B
Preferred
shares at
$1.00;
expiring
10/97 10/94 23,540 8 0 -- --
CV Therapeutics Series D
Inc. Preferred
shares 03/94 125,000 250,000 250,000 -- --
Everest & Jennings Common
International shares 01/94 592,721 637,520 318,884 -- --
Ltd.
ICU Medical, Inc. Common
shares 04/92 262,500 1,806,000 3,996,562 1,806,000 4,245,937
ICU Medical, Inc. Common
shares 05/92 37,500 221,875 570,938 221,875 606,563
Lifecell Common
Corporation shares 02/92 252,923 981,891 505,846 981,891 2,442,975
Lifecell Redeemable
Corporation Series A
Preferred
shares 11/94 12,500 250,000 250,000 -- --
Lifecell Warrants
Corporation for common
shares at
$3.26
through
11/95; $3.54
through
11/96 11/94 12,500 0 0 -- --
Matrix Warrants
Pharmaceuticals, for common
Inc. shares at
$.23;
expiring
04/95 04/90 1,905 0 24,422 0 14,495
Matrix Common
Pharmaceuticals, shares 01/92 319,728 800,001 4,172,450 800,001 3,317,178
Inc.
Medical Composite Series C
Technology, Inc. Preferred
shares 03/92 153,846 -- -- 500,000 500,000
Medical Composite Convertible
Technology, Inc. notes (1) 01/93-
07/93 $127,173 -- -- 137,191 137,191
Medical Composite Warrants for
Technology, Inc. Series C
Preferred
shares at
$3.25;
expiring
01/98 - 01/93 -
07/98 07/93 9,781 -- -- 0 0
Molecular Series B
Geriatrics Preferred
Corporation shares 09/93 250,000 125,000 125,000 125,000 125,000
Oculon Corporation Series II
Senior
Preferred
shares 06/92 400,000 0 0 350,000 350,000
Oculon Corporation Series III
Senior
Preferred
shares 01/94 106,796 0 0 -- --
Paradigm Series A
Biosciences, Inc. Preferred
shares 04/93 161,290 198,000 198,000 198,000 198,000
Paradigm Warrants for
Biosciences, Inc. Series A
Preferred
shares at
$1.24;
expiring
04/98 04/93 107,526 -- -- 2,000 2,000
Paradigm Series A
Biosciences, Preferred
Inc. shares 12/94 107,526 135,332 135,332 -- --
PHERIN Corporation Series B
Preferred
shares 08/91 200,000 200,000 200,000 200,000 700,000
PolyMedica Common
Industries, Inc. shares 03/92 438,365 1,673,904 1,808,256 1,673,904 2,270,008
Sensor Warrants for
Medics Common shares
Corporation at $3.60;
expiring
05/97 05/90 134,722 15,000 15,000 15,000 15,000
Sleep Series B
Physiology Preferred
Services shares 04/90 416,667 -- -- 0 0
Sleep Warrants for
Physiology Common shares
Services at $.20;
expiring
10/95 10/90 184,275 -- -- 0 0
Sleep Series C
Physiology Preferred
Services shares 08/91 166,429 -- -- 0 0
Spectrascan Class A
Imaging Series B
Services, Preferred
Inc. shares 07/88 90,470 -- -- 750,000 750,000
Spectrascan Class A
Imaging Series C
Services, Preferred
Inc. shares 08/89 12,063 -- -- 100,002 100,002
Spectrascan Warrants for
Imaging Preferred
Services, shares at
Inc. $8,29;
expiring
10/95 10/90 30,157 -- -- 25,000 25,000
Spectrascan Senior
Imaging subordinated
Services, note (1) 12/90 $28,569 -- -- 23,938 23,938
Inc.
Spectrascan Warrants for
Imaging Common shares
Services, at $8.29;
Inc. expiring
7/96 07/91 2,585 -- -- 0 0
Spectrascan Warrants for
Imaging Common shares
Services, at $8.29;
Inc. expiring
09/97 09/92 7,051 -- -- 585 585
Spectrascan Class A
Imaging Preferred
Services, Inc. shares 12/94 75,000 225,000 225,000 -- --
Spectrascan Class B
Imaging Preferred
Services, Inc. shares 12/94 31,404 94,211 94,211 -- --
Spectrascan Class C
Imaging Preferred
Services, Inc. shares 12/94 42,092 906,991 1,064,507 -- --
Spectrascan Class A
Imaging Common
Services, Inc. shares 12/94 12,640 0 37,920 -- --
SyStemix, Common
Inc. shares 08/91 61,972 415,957 1,070,566 415,957 1,115,496
SyStemix, Common
Inc. shares 01/92 5,014 91,396 86,617 91,396 90,252
Telios Common
Pharmaceuticals, shares 03/92 90,559 50,000 17,025 939,317 2,898,866
Inc.
Telios Common
Pharmaceuticals, shares 10/93 20,774 -- -- 112,959 105,179
Inc.
TheraTx, Inc. Series C
Preferred
shares 08/91 500,000 -- -- 250,000 815,289
TheraTx, Inc. Warrants for
Series C
Preferred
shares at
$.50;
expiring
01/97 01/92 120,000 -- -- 5,000 135,669
TheraTx, Inc. Series D
Preferred
shares 06/92 153,320 -- -- 250,000 250,000
TheraTx, Inc. Common
shares 06/94 81,043 121,564 1,588,443 -- --
UroMed Series C
Corporation Preferred
shares 10/92 66,794 -- -- 175,000 500,955
UroMed Common
Corporation shares 03/94 59,942 95,409 277,232 -- --
Microelectronics
- ----------------
Aprex Corporation Series D
Preferred
shares 12/90 10,000 2,520 2,520 10,000 10,000
Aprex Corporation Series E
Preferred
shares 12/91 6,250 1,575 1,575 6,250 6,250
Aprex Corporation Common
shares 08/92 1,167 0 0 0 1,167
Aprex Corporation Common
shares 08/93 3,580 0 0 3,580 3,580
Aprex Corporation Series F
Preferred 08/93 -
shares 09/93 142,500 35,905 35,905 142,500 142,500
Retail/Consumer Products
- ------------------------
Bridgestone Series A
Management Preferred
Group, Inc. shares 05/94 16,259 0 0 -- --
EROX Corporation Common
shares 01/93 110,000 -- -- 110,000 167,750
Yes! Series B
Entertainment Preferred
Corporation shares 01/93 450,000 300,000 225,000 300,000 517,500
Venture Capital Limited Partnership Investments
- -----------------------------------------------
Alta IV, L.P. Ltd.
Partnership
interests various $1,000,000 160,906 695,322 829,893 1,001,085
Batterson, Ltd.
Johnson, and Partnership
Wang L.P. interests various $475,000 259,865 341,449 225,418 212,807
Columbine Ltd.
Venture Fund II, Partnership
L.P. interests various $750,000 653,769 625,531 503,769 459,542
Delphi Ltd.
BioVentures, L.P. Partnership
interests various $1,000,000 652,842 1,366,621 681,366 1,296,688
Medical Science Ltd.
Partners, L.P. Partnership
interests various $500,000 444,109 644,888 444,109 602,004
OW & W Pacrim Ltd.
Investments Partnership
Limited interests various $125,000 125,000 125,045 83,750 83,784
Trinity Ventures Ltd.
IV, L.P. Partnership
interests various $62,504 57,569 54,136 38,373 54,784
---------- ---------- ---------- ----------
Total equity investments $19,299,469 29,411,649 19,577,265 33,930,080
========== ========== ========== ==========
- -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(1) Convertible and subordinated notes include accrued interest.
Interest rates on convertible notes range from 8% to 10.5%.
Marketable Equity Securities
- ----------------------------
At December 31, 1994 and 1993, marketable equity securities had
aggregate costs of $9,713,832 and $6,787,654, respectively, and
aggregate fair values of $17,350,086 and $17,054,882,
respectively. The net unrealized gain at December 31, 1994 and
1993 included gross gains of $10,000,499 and $10,270,653,
respectively.
Angenics, Inc.
- --------------
During 1994, all assets collateralizing the note were sold.
Based on expected net proceeds to the Partnership after payments
to other secured creditors, the Managing General Partners
determined that collection of the convertible notes receivable is
unlikely and accordingly recorded a realized loss of $149,765.
Aprex Corporation
- -----------------
Based on the Managing General Partners' opinion, there has been
an other than temporary decline in Partnership investment value.
Accordingly, a write-down of $122,330 was recorded in late 1994.
Biex, Inc.
- ----------
In October 1994, the Partnership purchased 63,907 Series B
Preferred shares in the company at a total cost of $63,907. The
purchase price consisted of $31,395 in cash and the conversion of
a note issued in June 1994, including interest, of $32,512. The
Partnership also received warrants to purchase 23,540 Series B
Preferred shares at an exercise price of $1.00 per share. The
pricing of the Series B financing in which other investors
participated indicated an increase in fair value of $44,872 for
the Partnership's existing investments.
Crystallume
- -----------
During the first quarter of 1994, the Partnership granted a
convertible note of $65,000 to the company. In March 1994,
Crystallume completed its initial public offering (IPO) at an
initial offering price of $5.40 per common share. In conjunction
with the IPO, the Partnership's convertible note, accrued
interest, and preferred stock holdings converted into 348,611
common shares. The Partnership recorded an unrealized fair value
decrease of $1,006,238 to reflect the market value of $1,183,173
at December 31, 1994. The market value reflects a 25% discount
for restricted stock. The Managing General Partners continue to
believe the company is capable of a higher future value.
CV Therapeutics, Inc.
- ---------------------
In March 1994, the Partnership invested in CV Therapeutics, Inc.
by purchasing 125,000 Series D Preferred shares at a total cost
of $250,000.
EROX Corporation
- ----------------
During the first quarter of 1994, the Partnership sold all of its
holdings in the company for total proceeds of $193,437 and a
realized gain of $83,437.
Everest & Jennings International Ltd./Medical Composite
- --------------------------------------------------------
Technology, Inc.
- ----------------
In January 1994, Medical Composite Technology, Inc. ("MCT") was
acquired by Everest & Jennings International Ltd. ("E & J"). The
Partnership's Series C Preferred shares in MCT as well as
convertible notes including accrued interest were exchanged for
592,721 shares of unrestricted E & J common stock while the
warrants for the Series C Preferred shares were canceled. The
Partnership recorded a decrease in fair value of $318,636 to
reflect the market value at December 31, 1994.
Geoworks
- --------
In June 1994, Geoworks completed its IPO at $6.00 per share.
This enabled the Partnership to record an unrealized fair value
increase of $672,944 which reflected the market value of
$4,573,887 at December 31, 1994. The market value reflects a 25%
discount for restricted stock.
Various transactions occurred prior to the IPO. In February
1994, the Partnership exchanged a $364,105 convertible note
receivable for 64,443 shares of Series E Preferred stock and
received repayment of the outstanding interest balance. In March
1994, the Partnership purchased 51,219 shares of common stock for
$179,267. In April 1994, the company had a three-for-four
reverse stock split. In conjunction with the IPO, the
Partnership's $371,535 convertible note, accrued interest, and
preferred stock holdings converted into 635,530 common shares.
In addition, the Partnership net exercised its warrants and
received 145,266 common shares and recorded a realized gain of
$156,494 on the transaction.
Lifecell Corporation
- --------------------
During the first quarter of 1994, the Partnership along with
other Lifecell investors, settled a lawsuit previously filed by
the company's minority shareholders. The settlement required the
Partnership to transfer 28,688 shares of the company's common
stock to the minority shareholders. The Partnership recorded a
fair value decrease of $1,937,129, which consisted of a $248,868
decrease related to the settlement and a decrease in fair value
of $1,688,261 for the remaining unrestricted shares at December
31, 1994.
In November 1994, the Partnership made an additional investment
in the company by purchasing 12,500 Redeemable Series A Preferred
shares and receiving 12,500 common share warrants at a total cost
of $250,000.
Nanodyne, Inc.
- --------------
In January 1994, the Partnership made an additional investment in
the company by purchasing 37,264 Series B Preferred shares at a
total cost of $81,515. In May and October 1994, the Partnership
also funded convertible notes totaling $87,158.
Oculon Corporation
- ------------------
In late 1994, the company suspended its clinical trials due to
unexpected negative test results on its lead compound. As a
result of this outcome, the Managing General Partners have
determined that there has been a decline in value of the
Partnership's investment. Accordingly, the Partnership has
written off its investment of $460,000 of which $350,000 was
outstanding as of January 1, 1994.
Paradigm Biosciences, Inc.
- --------------------------
In December 1994, the Partnership exercised its warrants to
purchase 107,526 Series A Preferred shares. The total recorded
cost basis and fair value of $135,332 included the cash exercise
price of $133,332 at $1.24 per share and the warrant cost basis
of $2,000.
PHERIN Corporation
- ------------------
Based on the Managing General Partners' reassessment of a prior
round of financing, the Partnership has valued the investment at
cost resulting in a fair value decrease of $500,000.
PolyMedica Industries, Inc.
- ---------------------------
In October 1994, PolyMedica Industries, Inc. declared a 5% stock
dividend and the Partnership received an additional 20,875 common
shares. The Partnership recorded a decrease in fair value of
$461,752 to reflect the market value at December 31, 1994.
Sleep Physiology Services
- -------------------------
In December 1994, Sleep Physiology Services was acquired by a
third party. Equity investors did not receive any value from the
acquisition; however, the Partnership received proceeds totaling
$100,000 for notes receivable which had been previously written
off. Additional proceeds may be received after December 31,
1994, which will be recorded as recoveries from investments when
received.
Spectrascan Imaging Services, Inc.
- ----------------------------------
In December 1994, the Partnership purchased 75,000 Class A
Preferred shares from the company at a total cost of $225,000.
In addition, it converted 75% of its secured notes receivable and
subordinated notes receivable (including a subordinated note of
$37,285 issued in August 1994), plus interest, into 31,404 Class
B Preferred shares, and the remaining 25% into 1,242 Class C
Preferred shares. The currently owned Class A Series B and Class
A Series C Preferred shares were converted into 40,850 Class C
Preferred shares. The Partnership also received 12,611 Class A
Common shares based on its ownership percentage in the newly
issued Class C Preferred shares. All existing warrants were
canceled.
The December 1994 Class A Preferred share financing round, in
which new investors participated, resulted in an increase in the
change in fair value of $195,436 for the Partnership's
investments.
Telios Pharmaceuticals, Inc.
- ----------------------------
A significant portion of the Partnership's holdings (502,774
shares) were sold in early 1994 for a realized gain of $864,844.
In late 1994, the company announced unsatisfactory clinical trial
results which generated a decline in value in the Managing
General Partners' opinion. Accordingly, the Partnership has
recorded a $98,567 realized loss on the 90,559 shares remaining.
TheraTx, Inc.
- -------------
During 1994, the Partnership sold a portion of its investment in
the company for $3,096,852 resulting in total realized gains of
$2,594,797. The Partnership also recorded an increase in fair
value of $770,921, mainly related to the increase in value of the
remaining unrestricted, marketable shares at December 31, 1994,
partially offset by the gain realized from the sale mentioned
above.
In May 1994, the Partnership received 19,116 common warrants in
conjunction with a note receivable funding. During the same
month, the company announced a common stock three-for-one reverse
split. In June 1994, TheraTx, Inc. completed its IPO.
Immediately prior to the IPO, the Partnership cash exercised both
its common and preferred warrants and received 46,372 common
shares; a cost basis of $123,623 was recorded for these shares.
The Partnership's existing preferred stock holdings were
converted into 217,774 shares of common stock. The Partnership
sold 54,103 common shares into the offering for total proceeds of
$603,789 resulting in a realized gain of $442,349. Then in
December 1994, the Partnership sold an additional 129,000 common
shares for $2,493,063 resulting in a realized gain of $2,152,445.
Approximately $128,000 of the sales price was an unsettled trade
at December 31, 1994 and was included in "Other Assets" on the
Balance Sheet.
UroMed Corporation
- ------------------
In March 1994, UroMed Corporation completed its IPO. As a
result, the Partnership's preferred stock holdings were converted
into 109,942 shares of unrestricted common stock with a cost
basis of $174,993. Then in December 1994, the Partnership sold
50,000 common shares for $253,969 resulting in a realized gain of
$174,385. Approximately $219,000 of the sales price was an
unsettled trade at December 31, 1994 and was included in "Other
Assets" on the Balance Sheet. The Partnership recorded a
decrease in fair value of $223,723, a portion of which was
realized from the sale mentioned above, with the remainder
related to the decrease in the value of the remaining
unrestricted, marketable shares at December 31, 1994.
Velocity Incorporated
- ---------------------
During the first nine months of 1994, the Partnership issued
$250,000 in convertible notes to the company and received various
warrants to purchase common shares. Then, in late 1994, the
Partnership made an additional $500,000 investment. This
investment, together with all the existing convertible notes,
including interest, were used to purchase 6,286,325 Series A
Preferred shares with a total cost basis of $1,034,337. All
existing warrants were canceled as part of the conversion.
YES! Entertainment
- -------------------
In May 1994, the company completed a new round of equity
financing in which the Partnership did not participate. The
investment fair value has been adjusted to reflect the valuation
from this round of financing.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
The Partnership recorded a cost basis decrease of $452,618 in
venture capital limited partnership investments during 1994. The
decrease was a result of distributions of cash totaling $85,043
and stock with a fair value of $632,264, partially offset by
additional contributions of $264,689. The Partnership recorded a
change in fair value increase of $594,916 due to a net increase
in the fair value of the underlying investments of certain
venture capital limited partnerships, partially offset by the
effects described above.
The stock distributions mentioned above were for Powersoft
Corporation, ChemTrak, Inc. and Illinois Superconductor common
shares. These shares were subsequently sold in late 1994 for
$654,282 and total realized gains of $22,018. Approximately
$394,000 of the sales price was an unsettled trade at December
31, 1994 and was included in "Other Assets" on the Balance Sheet.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations and the elimination of a discount relating to
selling restrictions for publicly-traded portfolio companies.
6. Secured Notes Receivable, Net
-----------------------------
At December 31, 1994 and 1993, secured notes receivable consisted
of:
1994 1993
---- ----
Secured notes receivable $ -- 2,082,108
Accrued interest -- 58,725
Unamortized discount related to warrants -- (19,597)
--------- ---------
Total secured notes receivable,
net (cost basis) -- 2,121,236
Allowance for loan losses -- (136,000)
--------- ---------
Total secured notes receivable,
net (fair value) $ -- 1,985,236
========= =========
During 1994, all outstanding notes were repaid or converted into
equity investments.
In 1994, the Partnership received a loan extension fee of
$125,000, which was recorded as other notes receivable income.
Changes in the allowance for loan losses were as follows:
1994 1993
---- ----
Balance, beginning of year $ 136,000 142,000
------- -------
(Decrease) increase in
provision for loan losses (236,000) 94,000
Secured notes receivable write-offs:
Medical/biotechnology -- (100,000)
Recoveries of previous write-offs:
Medical/Biotechnology 100,000 --
------- -------
Change in net unrealized fair value of
secured notes receivable (136,000) (6,000)
------- -------
Balance, end of year $ -- 136,000
======= =======
The (decrease) increase in provision for loan losses is comprised
of realized loan losses, net of recognized recoveries, and the
change in net unrealized fair value based upon the level of loan
loss reserves deemed adequate by the Managing General Partners.
The allowance for loan losses is adjusted based upon changes to
the portfolio size and risk profile. Although the allowance for
loan losses is established by evaluating individual debtor
repayment ability, the allowance represents the Managing General
Partners' assessment of the portfolio as a whole.
In 1994, the Partnership recovered secured notes receivable
totaling $100,000 related to Sleep Physiology Services as
discussed in Note 5.
7. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 1994 and 1993 consisted
of:
1994 1993
---- ----
Demand accounts $ 3,059 18,059
Money-market accounts 4,046,870 55,831
--------- ------
Total $4,049,929 73,890
========= ======
8. Short-term Borrowings
---------------------
The Partnership maintains a margin account with a brokerage firm.
At December 31, 1994, the borrowing capacity, which fluctuates
based on collateral value, was approximately $2,325,000. The
maximum and weighted average amounts outstanding on this account
during 1994 were $1,730,817 and $375,864, respectively. In 1993,
the maximum and weighted average amounts were $225,000 and
$9,246, respectively. The Partnership had no outstanding balance
at December 31, 1994. The year-end and weighted average interest
rates during 1994 were 9% and 6.85%, respectively. In 1993, the
year-end and weighted average interest rates were both 6.5%.
Interest expense of $26,794 and $601 were recorded in 1994 and
1993, respectively. The Partnership's investment in ICU Medical,
Inc. is pledged as collateral.
9. Distributions Payable
---------------------
The Managing General Partners declared distributions for Unit
holders as of December 31, 1994, based upon Partnership
performance during 1994. Unnegotiated distribution checks, if
any, after a reasonable amount of time are recorded as other
liabilities on the Balance Sheets. The December 31, 1994
distributions payable of $1,673,084 will be paid to Limited and
General Partners in late March 1995.
10. Commitments and Contingencies
-----------------------------
The Partnership is 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, venture capital limited partnership
investments, 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
properly not recognized in the financial statements. At December
31, 1994, the Partnership had unfunded commitments of $87,496 for
venture capital limited partnership investments.
The Partnership uses the same credit policies in making these
commitments and conditional obligations as it does for on-
balance-sheet instruments. Commitments to extend financing are
agreements to lend to a company as long as there are no
violations of any conditions established in the contract. The
credit lines generally have fixed termination dates or other
termination clauses. Since many of the commitments are expected
to expire without being fully drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
All convertible and secured note commitments funded require
collateral specified in the agreements.
In July 1994, the Partnership agreed to guarantee for a two-year
period a $2 million loan between a financial institution and a
portfolio company in the medical/biotechnology industry. The
Partnership has received a guarantee fee of $125,000, which is
recorded as deferred income and is being amortized into other
notes receivable income over the two-year period. While the
Partnership expects the portfolio company to repay the loan to
the financial institution, if the portfolio company fails to do
so, the Partnership may be liable up to the guarantee amount.
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.
Managing General Partner
Date: March 17, 1995 By: /s/Frank R. Pope
--------------------------------
Frank R. Pope
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below 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 17, 1995
- ------------------------ Executive Officer
Charles R. Kokesh and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Frank R. Pope Executive Vice March 17, 1995
- ------------------------ President, Chief
Frank R. Pope Financial Officer,
Secretary and a
Director of Technology
Funding Inc. and a
General Partner of
Technology Funding Ltd.
/s/Gregory T. George Group Vice President March 17, 1995
- -------------------------- of Technology Funding
Gregory T. George Inc. and a General
Partner of Technology
Funding Ltd.
The above represents a majority of the Board of Directors of
Technology Funding Inc. and a majority of the General Partners of
Technology Funding Ltd.