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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, 1995
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, 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 4, 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. The Managing General
Partners intend to seek approval from the Management
Committee to exercise this provision.
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
- ------ ---------------------------------------------------
No matter was submitted to a vote of the holders of units of
limited partnership interests ("Units") during 1995.
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, 1995, there were 5,612 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,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Total income $ 470,792 480,176 338,276 713,613 585,734
Net operating loss (1,357,976) (838,981) (1,086,638) (958,185) (1,173,124)
Net realized gain
(loss) from venture capital
limited partnership
investments 1,358,424 -- (74,227) 46,516 (163,585)
Net realized gain from
sales of equity investment 8,337,512 3,895,971 303,085 7,086,510 861,505
Realized losses from
investment write-downs (399,427) (832,114) (740,529) (2,460,003) (1,135,306)
Recovery from investments
previously written off 62,231 100,000 -- -- --
Net realized income (loss) 8,000,764 2,324,876 (1,598,309) 3,714,838 (1,610,510)
Change in net unrealized
fair value:
Equity investments 398,770 (4,240,635) (68,227) 6,149,373 7,409,592
Secured notes receivable (309,000) 136,000 6,000 (142 000) --
Net income (loss) 8,090,534 (1,779,759) (1,660,536) 9,722,211 5,799,082
Net realized income (loss)
per Unit 50 14 (10) 23 (10)
Total assets 41,388,167 34,205,502 36,007,556 39,636,068 29,774,257
Distributions declared (3,565,256) (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 1995, net cash used by operating activities totaled
$598,250. The Partnership paid management fees of
$358,168 to the Managing General Partners and reimbursed
related parties for operating expenses of $480,209 in
1995. In addition, $33,547 was paid to the individual
general partners as compensation for their services.
Other operating expenses of $127,482 were paid, and
interest and other income of $401,156 was received.
Distributions totaling $1,673,084 were paid to Limited and
General Partners.
In 1995, the Partnership issued $533,334 in secured notes
receivable to a portfolio company in the computer systems
and software industry and funded equity investments of
$2,333,499 primarily to portfolio companies in the
industrial/business automation, medical/biotechnology, and
environmental industries. Repayments of convertible and
secured notes receivable in 1995 provided cash of
$125,000. Proceeds from sales of equity investments
totaled $12,840,558, of which $740,419 related to sales
prior to December 31, 1994 but were settled in January
1995. The Partnership also received $713,302 in cash
distributions from venture capital limited partnership
investments. At year end, the Partnership was committed
to fund $873,556 in additional investments and has
outstanding guarantees totaling $2.5 million as discussed
in Note 9 to the financial statements.
During 1995 YES! Entertainment Corporation completed its
initial public offering ("IPO"). Although the
Partnership's holdings in YES! Entertainment Corporation
are subject to selling restrictions, the IPO indicates
potential future liquidity for this investment.
Cash and cash equivalents at December 31, 1995 were
$12,607,605. Cash reserves, interest income on short-term
investments and future proceeds from the sales of equity
investments are expected to be adequate to fund
Partnership operations and future investments through the
next twelve months.
Results of Operations
- ---------------------
1995 compared to 1994
- ---------------------
Net income was $8,090,534 in 1995 compared to a net loss
of $1,779,759 in 1994. The change was primarily due to a
$4,639,405 increase in the change in net unrealized fair
value of equity investments, a $4,441,541 increase in net
realized gain from sales of equity investments, and a
$1,358,424 increase in net realized gain from venture
capital limited partnership investments. These changes
were partially offset by a $497,069 increase in total
operating expenses and a $445,000 decrease in the change
in net unrealized fair value of secured notes receivable.
During 1995, equity investments fair value increased
$398,770. The slight increase was primarily from
portfolio companies in the computer systems and software
industry, substantially offset by decreases related to
portfolio companies in the medical industry and realized
gains and venture capital limited partnership
distributions. In addition, total 1995 realized gains of
$8,337,512 were mostly related to Geoworks and ICU
Medical, Inc. investment sales. In 1994, the decrease in
fair value 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.
Net realized gain from venture capital limited partnership
investments was $1,358,424 in 1995. The gain represents
distributions from profits of two venture capital limited
partnerships. There was no such gain realized in 1994.
Total operating expenses were $1,432,653 in 1995 compared
to $935,584 in 1994. As discussed in Note 3 to the
financial statements, the 1995 actual operating expenses
included additional administrative and investors services
expenses of $798,859. Had the additional expenses been
recorded in prior years, total operating expenses would
have been $703,245 and $1,010,949 for 1995 and 1994,
respectively. The decrease of $307,704 between 1995 and
1994 was primarily due to lower investment operations and
administrative and investor services expenses from lower
overall portfolio activities.
The Partnership recorded a decrease in the change in fair
value of secured notes receivable of $309,000 in 1995
compared to an increase of $136,000 in 1994, based upon
the level of loan loss reserves deemed adequate by the
Managing General Partners at the respective year ends.
The decrease in 1995 was due to notes receivable being
placed on nonaccrual status. The increase in 1994 was
mainly attributable to the elimination of loan loss
reserves as there were no notes receivable at year end.
In 1995 and 1994, the Partnership realized losses from
investment write-downs of $399,427 and $832,114,
respectively. Realized losses in 1995 mainly related to
equity investments for portfolio companies in the
retail/consumer products and communications industries.
Realized losses in 1994 primarily related to equity
investments in the medical/biotechnology and
microelectronics industries.
Given the inherent risk associated with the business of
the Partnership, the future performance of the portfolio
company investments may significantly impact future
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 sales of equity
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. As discussed above, had the
additional expenses in 1995 been recorded in prior years,
total operating expenses would have been $1,010,949 and
$1,104,302 in 1994 and 1993, respectively. The decrease
was primarily due to lower administrative and investor
services, and investment operations expenses from lower
overall portfolio activity.
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 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 1995, the Partnership incurred management
fees of $362,568. 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, 1995. General Partner
Overhead (as defined in the Partnership Agreement)
includes the General Partners' share of rent and
utilities, and certain salaries and benefits paid by
Managing General Partners in performing their obligations
to the Partnership. As compensation for their services,
each of the individual general partners receive $10,000
annually plus $1,000 and related expenses for each
attended meeting of the Management Committee. In 1995,
$33,547 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 individual general partners each own
eight Units; at December 31, 1995 one of the three
individual general partners had withdrawn from his
position and his Units will be transferred to his
successor. The Managing General Partners control 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.
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, 1995
and 1994
Statements of Operations for the years
ended December 31, 1995, 1994 and 1993
Statements of Partners' Capital for the years
ended December 31, 1995, 1994 and 1993
Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993
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, 1995.
(c) Financial Data Schedule for the year ended and as of
December 31, 1995 (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, 1995 and 1994, and the related statements of
operations, partners' capital, and cash flows for each of the years
in the three-year period ended December 31, 1995. 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 and loans
owned, by correspondence with the individual investee and borrowing
companies, and a physical examination of those securities held by a
safeguarding agent as of December 31, 1995 and 1994. 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, 1995 and
1994, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
San Francisco, California KPMG Peat Marwick LLP
March 22, 1996
BALANCE SHEETS
- --------------
December 31,
----------------------
1995 1994
---- ----
ASSETS
Investments:
Equity investments (cost basis of
$18,043,420 and $19,299,469 for 1995
and 1994, respectively) $28,554,370 29,411,649
Secured notes receivable, net
(cost basis of $533,334
for 1995) 224,334 --
---------- ----------
Total investments 28,778,704 29,411,649
Cash and cash equivalents 12,607,605 4,049,929
Other assets 1,858 743,924
---------- ----------
Total $41,388,167 34,205,502
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 26,378 25,839
Due to related parties 850,679 44,572
Distributions payable 3,565,256 1,673,084
Deferred income 31,250 93,750
Other liabilities 40,431 19,362
---------- ----------
Total liabilities 4,513,994 1,856,607
Commitments, contingencies and
subsequent events (Notes 3, 5 and 9)
Partners' capital:
Limited Partners
(Units outstanding of 160,000
for both 1995 and 1994) 26,660,952 22,269,799
General Partners 11,271 (33,084)
Net unrealized fair value increase
(decrease) from cost:
Equity investments 10,510,950 10,112,180
Secured notes receivable (309,000) --
---------- ----------
Total partners' capital 36,874,173 32,348,895
---------- ----------
Total $41,388,167 34,205,502
========== ==========
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
----------------------------------
1995 1994 1993
---- ---- ----
Income:
Notes receivable
interest $ 64,456 265,500 245,371
Short-term investment
interest 343,836 54,218 92,511
Other notes receivable
income 62,500 160,458 394
------- ------- -------
Total income 470,792 480,176 338,276
Costs and expenses:
Management fees 362,568 341,573 369,508
Individual general
partners' compensation 33,547 42,000 42,000
Operating expenses:
Administrative and
investor services 1,081,782 402,318 433,112
Investment operations 209,642 335,167 373,895
Computer services 84,074 97,244 132,808
Professional fees 57,155 74,061 72,982
Interest expense -- 26 794 609
--------- --------- ---------
Total operating
expenses 1,432,653 935,584 1,013,406
--------- --------- ---------
Total costs and expenses 1,828,768 1,319,157 1,424,914
--------- --------- ---------
Net operating loss (1,357,976) (838,981) (1,086,638)
Net realized gain
(loss) from venture
capital limited
partnership investments 1,358,424 -- (74,227)
Net realized gain from
sales of equity
investments 8,337,512 3,895,971 303,085
Realized losses from
investment write-downs (399,427) (832,114) (740,529)
Recovery from investments
previously written off 62,231 100,000 --
--------- --------- ---------
Net realized income (loss) 8,000,764 2,324,876 (1,598,309)
Change in net unrealized
fair value:
Equity investments 398,770 (4,240,635) (68,227)
Secured notes receivable (309,000) 136,000 6,000
--------- --------- ---------
Net income (loss) $ 8,090,534 (1,779,759) (1,660,536)
========= ========= =========
Net realized income
(loss) per Unit $ 50 14 (10)
========= ========= =========
See accompanying notes to financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 1995, 1994 and 1993:
Net Unrealized Fair Value
Increase (Decrease) From Cost
-----------------------------
Limited General Equity Secured Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ------------- -----
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
Distributions (3,529,603) (35,653) -- -- (3,565,256)
Net realized income 7,920,756 80,008 -- -- 8,000,764
Change in net unrealized
fair value:
Equity investments -- -- 398,770 -- 398,770
Secured notes receivable -- -- -- (309,000) (309,000)
---------- --------- ---------- ------- ----------
Partners' capital,
December 31, 1995 $26,660,952 11,271 10,510,950 (309,000) 36,874,173
========== ========= ========== ======= ==========
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For The Years Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
Cash flows from operating
activities:
Interest and other
income received $ 401,156 576,905 264,271
Cash paid to vendors (127,482) (203,394) (246,544)
Cash paid to related
parties (871,924) (1,065,169) (1,284,867)
Interest paid on short-
term borrowings -- (26,794) (609)
---------- --------- ---------
Net cash used by
operating activities (598,250) (718,452) (1,267,749)
---------- --------- ---------
Cash flows from investing
activities:
Secured notes receivable
issued (533,334) (902,438) (1,100,000)
Purchase of equity
investments (2,333,499) (2,613,341) (3,907,196)
Repayments of convertible
and secured notes
receivable 125,000 2,923,536 605,442
Proceeds from sales of
equity investments 12,840,558 5,226,691 285,691
Proceeds from securities
sold short, net -- -- 136,738
Recovery of investments
previously written off 16,983 100,000 --
Distributions from
venture capital
limited partnerships 713,302 85,043 245,590
---------- --------- ---------
Net cash provided
(used) by investing
activities 10,829,010 4,819,491 (3,733,735)
---------- --------- ---------
Cash flows from financing
activities:
Distributions to Limited
and General Partners (1,673,084) -- (1,998,966)
(Repayments of) proceeds
from short-term
borrowings, net -- (125,000) 125,000
---------- --------- ---------
Net cash used by
financing activities (1,673,084) (125,000) (1,873,966)
---------- --------- ---------
Net increase (decrease) in
cash and cash equivalents 8,557,676 3,976,039 (6,875,450)
Cash and cash equivalents
at beginning of year 4,049,929 73,890 6,949,340
---------- --------- ---------
Cash and cash equivalents
at end of year $12,607,605 4,049,929 73,890
========== ========= =========
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For the Years Ended December 31,
--------------------------------------
1995 1994 1993
---- ---- ----
Reconciliation of net income
(loss) to net cash
used by operating
activities:
Net income (loss) $ 8,090,534 (1,779,759) (1,660,536)
Adjustments to reconcile
net income (loss) to
net cash used by
operating activities:
Net realized (gain) loss
from venture capital
limited partnership
investments (1,358,424) -- 74,227
Net realized gain from
sales of equity
investments (8,337,512) (3,895,971) (303,085)
Realized losses from
investment write-downs 399,427 832,114 740,529
Recovery from investments
previously written off (62,231) (100,000) --
Change in net unrealized
fair value:
Equity investments (398,770) 4,240,635 68,227
Secured notes
receivable 309,000 (136,000) (6,000)
Other, net -- (20,872) (8,858)
Changes in:
Accrued interest on
convertible and secured
notes receivable (7,136) 23,851 (65,147)
Accounts payable and
accrued expenses 539 261 (31,458)
Due to/from related
parties 806,107 12,849 (83,030)
Deferred income (62,500) 93,750 --
Other, net 22,716 10,690 7,382
--------- --------- ---------
Net cash used by operating
activities $ (598,250) (718,452) (1,267,749)
========= ========= =========
Non-cash investing activities:
Non-cash exercise of warrants $ -- 156,494 --
========= ========= =========
Common stock recovered from
equity investment previously
written off $ 45,248 -- --
========= ========= =========
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 generally
three individual general partners; at December 31, 1995, one
individual general partner had withdrawn from his position and a
successor will be designated.
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.
Preparation of Financial Statements and Use of Estimates
- --------------------------------------------------------
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting
principals. This required 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
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The financial statements included non-marketable investments of
$10,818,066 and $12,061,563 (29% and 37% of partners' capital) as of
December 31, 1995 and 1994, respectively, whose values have been
estimated by the Managing General Partners in the absence of readily
ascertainable market values. 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 investments
existed, and the differences could be material. In addition, for
certain publicly traded investments that may not be marketable due to
selling restrictions, the Managing General Partners have applied an
illiquidity discount of 25% in determining fair value as mentioned
below.
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.
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 generally
accepted accounting principles which may not equate to tax
accounting; however, the difference in the total book and cost tax
basis as of December 31, 1995 is not material.
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, 1995, 1994, and
1993 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. Sales 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 and subordinated notes receivable as repayment of these
notes generally 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 gain (loss) 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 sales of equity investments.
During 1995 and 1993, there were no realized gains from the non-cash
exercise of warrants.
Reclassifications
- -----------------
Certain 1994 and 1993 balances have been reclassified to conform with
the 1995 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 includes 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,
-------------------------------------
1995 1994 1993
---- ---- ----
Increase in fair value
from cost of marketable
equity securities $ 9,664,198 7,636,254 10,267,228
Increase in fair value from
cost of non-marketable
equity securities 846,752 2,475,926 4,085,587
---------- ---------- ----------
Net unrealized fair
value increase from
cost at end of year 10,510,950 10,112,180 14,352,815
Net unrealized fair
value increase from
cost at beginning of
year 10,112,180 14,352,815 14,421,042
---------- ---------- ----------
Change in net unrealized
fair value of equity
investments $ 398,770 (4,240,635) (68,227)
========== ========== ==========
3. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
For the Years Ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
Management fees $ 362,568 341,573 369,508
Individual general
partners' compensation 33,547 42,000 42,000
Reimbursable operating
expenses:
Administrative and
investor services 1,001,191 271,815 292,325
Investment operations 196,651 325,386 365,196
Computer services 84,074 97,244 132,808
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. The management fees are payable monthly
in arrears. Amounts due to related parties for management fees were
$33,446 and $29,046 at December 31, 1995 and 1994, respectively.
As compensation for their services, each of the individual general
partners receive $10,000 annually plus $1,000 and related expenses
for each management committee meeting attended. The individual
general partners each own 8 Units; at December 31, 1995 one of the
three individual general partners had withdrawn from his position and
his Units will be transferred to his successor.
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. During late 1995, operating cost allocations to
the Partnership were reevaluated. The Managing General Partners
determined that they had not fully recovered allocable overhead as
permitted by the Partnership Agreement. As a result, the Partnership
was charged additional administrative and investor services costs of
$798,859, which was not previously recognized by the Partnership.
This charge consisted of $69,451, $75,365, $90,896 and $563,147
relating to 1995, 1994, 1993 and prior years, respectively. If this
charge had been recorded in prior years, total operating expenses
would have been $703,245, $1,010,949 and $1,104,302 for 1995, 1994,
and 1993, respectively. The decrease of $307,704 between 1995 and
1994 was mostly due to lower investment operations and administrative
and investor services expenses from lower overall portfolio
activities. There were $817,233 and $15,526 of such expenses payable
at December 31, 1995 and 1994, 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, 1995, 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. 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% 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.
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 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, 1995 and 1994, equity investments consisted of:
December 31, 1995 December 31, 1994
Principal ----------------- -----------------
Investment Amount or Cost Fair Cost Fair
Industry/Company Position Date Shares Basis Value Basis Value
- ---------------- -------- ---- ------ ----- ----- ----- -----
Communications
- --------------
Coded Common
Communications shares
Corporation 04/93 72,727 $ 74,909 72,000 198,000 85,891
Coded Common
Communications share
Corporation warrant
at $3.16;
expired
04/95 04/93 72,727 -- -- 2,000 0
P-Com, Inc. Common
shares 11/95 8,672 155,012 172,139 -- --
Computer Systems and Software
- -----------------------------
Geoworks Common
shares 01/92 19,016 -- -- 6,758 115,047
Geoworks Common
shares 08/92 36,883 196,708 691,556 196,708 223,142
Geoworks Common
shares 03/94 38,415 179,267 720,281 179,267 174,308
Geoworks Common
shares 06/94 224,812 917,777 4,215,225 2,167,743 4,061,390
Velocity Series A
Incorporated Preferred
shares 10/94 6,286,325 1,034,337 1,034,337 1,034,337 1,034,337
Velocity Common
Incorporated share
warrant
at $1.00;
expiring
03/00 03/95 12,500 0 0 -- --
Velocity Convertible 08/95-
Incorporated notes (1) 10/95 $125,000 125,000 125,000 -- --
Electronic Design Automation
- ----------------------------
IKOS Systems Common
Inc. shares 03/92 8,294 -- -- 15,866 19,026
Environmental
- -------------
Conversion Series A
Technologies Preferred
International, shares
Inc. 05/95 200,000 500,000 500,000 -- --
Conversion Series A
Technologies Preferred
International, share
Inc. warrant at
$3.00;
expiring
05/00 05/95 24,609 0 0 -- --
Conversion Convertible
Technologies note (1)
International, 09/95-
Inc. 11/95 $62,500 63,338 63,338 -- --
Conversion Common share
Technologies warrant at
International, $4.00;
Inc. expiring
12/98 12/95 31,250 0 0 -- --
TMC, Inc. Series A
Preferred
shares 12/95 50,000 25,000 25,000 -- --
Industrial/Business Automation
- ------------------------------
Crystallume Common
shares 03/94 348,611 2,189,411 1,098,631 2,189,411 1,183,173
Crystallume Series A
Preferred
shares 05/95 50 40,000 40,000 -- --
Crystallume Common
shares 05/95 5,000 10,000 14,063 -- --
Crystallume Common
share
warrant
at $3.25;
expiring
05/98 05/95 5,000 0 1,875 -- --
Crystallume Common
shares 08/95 30,000 114,006 84,375 -- --
Crystallume Common
share
warrants
at $2.00;
expiring
08/98 08/95 30,000 0 39,375 -- --
Crystallume Common
shares 10/95 241,866 604,667 680,248 -- --
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 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
Nanodyne, Inc. Series B
Preferred
shares 04/95 42,126 92,150 92,150 -- --
Medical/Biotechnology
- ---------------------
Acusphere, Inc. Series B
Preferred
shares 05/95 125,000 200,000 200,000 -- --
Angenics, Inc. Convertible
note (1) 05/89 $90,000 -- -- 0 0
Angenics, Inc. Convertible
note (1) 07/89 $160,000 -- -- 0 0
Biex, Inc. Series A
Preferred
shares 07/93 128,205 83,333 128,205 83,333 128,205
Biex, Inc. Series B
Preferred
shares 10/94 63,907 63,907 63,907 63,907 63,907
Biex, Inc. Series B
Preferred
share warrant
at $1.00;
expiring
10/99 10/94 23,540 8 0 8 0
Biex, Inc. Series C
Preferred
shares 06/95 83,334 83,334 83,334 -- --
Biex, Inc. Series C
Preferred
shares 12/95 83,333 83,333 83,333 -- --
CareCentric Series A
Solutions, Inc. Preferred
shares 10/95 100,000 150,000 150,000 -- --
CV Therapeutics Series D
Inc. Preferred
shares 03/94 125,000 250,000 250,000 250,000 250,000
CV Therapeutics, Series E
Inc. Preferred
shares 09/95 57,600 114,048 114,048 -- --
CV Therapeutics, Series E
Inc. Preferred
share warrant
at $2.00;
expiring
09/00 09/95 28,800 1,152 1,152 -- --
Everest & Jennings Common
International shares
Ltd. 01/94 592,721 637,520 325,997 637,520 318,884
ICU Medical, Inc. Common
shares 04/92 262,500 -- -- 1,806,000 3,996,562
ICU Medical, Inc. Common
shares 05/92 37,500 -- -- 221,875 570,938
Integra
LifeSciences Common
Corporation shares 08/95 1,811 15,665 11,772 -- --
Lifecell Common
Corporation shares 02/92 252,923 981,891 591,839 981,891 505,846
Lifecell Redeemable
Corporation Series A
Preferred
shares 11/94 12,500 236,146 236,146 250,000 250,000
Lifecell Common
Corporation share
warrant
at $3.54;
expiring
11/96 11/94 12,500 0 0 0 0
Lifecell Common
Corporation shares 11/95 4,906 13,854 11,480 -- --
Matrix Common
Pharmaceuticals, share
Inc. warrant
at $.23;
exercised
01/95 04/90 1,905 -- -- 0 24,422
Matrix
Pharmaceuticals, Common
Inc. shares (2) 01/92 319,728 800,001 5,876,601 800,001 4,172,450
Matrix,
Pharmaceuticals, Common
Inc. shares (2) 01/95 1,905 438 35,014 -- --
Metra Biosystems, Common
Inc. shares 12/95 9,697 162,425 173,382 -- --
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
Oculon Corporation Series III
Senior
Preferred
shares 01/94 106,796 -- -- 0 0
Oxford Glyco- Common
Systems Group PLC shares 08/93 266,934 499,963 213,547 499,963 499,963
Paradigm Series A
Biosciences, Inc. Preferred
shares 04/93 161,290 198,000 198,000 198,000 198,000
Paradigm Series A
Biosciences, Inc. Preferred
shares 12/94 107,526 135,332 135,332 135,332 135,332
Paradigm Convertible
Biosciences, Inc. note (1) 10/95 $51,250 52,272 52,272 -- --
Paradigm Series B
Biosciences, Inc. Preferred
share
warrant
at $2.50;
expiring
10/00 10/95 5,125 0 0 -- --
Pharmos Common 04/95 &
Corporation shares 11/95 60,331 45,248 88,083 -- --
PHERIN Corporation Series B
Preferred
shares 08/91 200,000 200,000 200,000 200,000 200,000
PolyMedica Common
Industries, Inc. shares 03/92 438,365 1,673,904 2,590,737 1,673,904 1,808,256
Sensor Common
Medics share
Corporation warrant
at $3.60;
expiring
05/97 05/90 134,722 15,000 15,000 15,000 15,000
Spectrascan Class A
Imaging Preferred
Services, Inc. shares 12/94 75,000 225,000 225,000 225,000 225,000
Spectrascan Class B
Imaging Preferred
Services, Inc. shares 12/94 31,404 94,211 94,211 94,211 94,211
Spectrascan Class C
Imaging Preferred
Services, Inc. shares 12/94 42,035 906,991 1,063,906 906,991 1,064,507
Spectrascan Class A
Imaging Common
Services, Inc. shares 12/94 12,611 0 37,833 0 37,920
SyStemix, Common
Inc. shares 08/91 61,972 415,957 957,467 415,957 1,070,566
SyStemix, Common
Inc. shares 01/92 5,014 91,396 77,466 91,396 86,617
Telios Common
Pharmaceuticals, shares
Inc. 03/92 90,559 -- -- 50,000 17,025
TheraTx, Inc. Common
shares (2) 06/94 70,043 105,064 867,132 121,564 1,588,443
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
Aprex Corporation Series E
Preferred
shares 12/91 6,250 -- -- 1,575 1,575
Aprex Corporation Common
shares 08/92 1,167 -- -- 0 0
Aprex Corporation Common
shares 08/93 3,580 -- -- 0 0
Aprex Corporation Series F
Preferred 08/93 -
shares 09/93 142,500 -- -- 35,905 35,905
Retail/Consumer Products
- ------------------------
Bridgestone Series A
Management Preferred
Group, Inc. shares 05/94 16,259 0 0 0 0
PETsMART, Inc. Common
shares 12/95 324 10,368 9,817 -- --
YES! Series B
Entertainment Preferred
Corporation shares 01/93 450,000 -- -- 300,000 225,000
YES! Common
Entertainment shares 06/95 33,333 99,999 162,748 -- --
Corporation
Venture Capital Limited Partnership Investments
- -----------------------------------------------
Alta IV, L.P. Ltd.
Partnership
interests various $1,000,000 146,698 320,846 160,906 695,322
Batterson, Ltd.
Johnson, and Partnership
Wang L.P. interests various $500,000 283,389 289,257 259,865 341,449
Columbine Ltd.
Venture Fund II, Partnership
L.P. interests various $750,000 653,769 543,787 653,769 625,531
Delphi Ltd.
Ventures, L.P. Partnership
interests various $1,000,000 652,842 909,699 652,842 1,366,621
Medical Science Ltd.
Partners, L.P. Partnership
interests various $500,000 437,225 601,028 444,109 644,888
OW & W Pacrim Ltd.
Investments Partnership
Limited interests various $125,000 125,000 123,803 125,000 125,045
Trinity Ventures Ltd.
IV, L.P. Partnership
interests various $85,943 70,640 65,081 57,569 54,136
---------- ---------- ---------- ----------
Total equity investments $18,043,420 28,554,370 19,299,469 29,411,649
========== ========== ========== ==========
- -- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(1) Convertible notes include accrued interest.
Interest rates on convertible notes ranged from 6% to 12%.
(2) Common stockholders have a right to purchase one Preferred share for each share of common
stock held, subject to certain conditions.
Marketable Equity Securities
- ----------------------------
At December 31, 1995 and 1994, marketable equity securities had
aggregate costs of $8,296,440 and $9,713,832, respectively, and
aggregate fair values of $17,960,638 and $17,350,086,
respectively. The net unrealized gain at December 31, 1995 and
1994 included gross gains of $11,735,816 and $10,000,499,
respectively.
Acusphere, Inc.
- ---------------
In May 1995, the Partnership invested in Acusphere, Inc. by
purchasing 125,000 Series B Preferred shares at a total cost of
$200,000.
Aprex Corporation
- -----------------
In June 1995, Aprex Corporation filed for Chapter 11 protection
under the U.S. Bankruptcy Code. In the third quarter of 1995,
the company was acquired by a third party; the purchase price was
used to pay off senior debt holders. As a result, the
Partnership has written off the remaining cost basis of its
equity investment totaling $40,000.
Biex, Inc.
- ----------
In June and December 1995, the Partnership made additional
investments in Biex, Inc. by purchasing 166,667 Series C
Preferred shares at a total cost of $166,667.
CareCentric Solutions, Inc.
- --------------------------
In October 1995, the Partnership made an investment in
CareCentric Solutions, Inc. by purchasing 100,000 Series A
Preferred shares at a total cost of $150,000.
Coded Communications
- --------------------
During 1995, the Managing General Partners determined that there
had been an other than temporary decline in value of the
Partnership's investment. As a result, the Partnership realized
a loss of $125,091. The Partnership also recorded a decrease in
fair value of $13,891 to reflect the unrestricted market value at
December 31, 1995.
Conversion Technologies International, Inc.
- -------------------------------------------
In May 1995, the Partnership invested in Conversion Technologies
International, Inc. by purchasing 200,000 Series A Preferred
shares and received a warrant to purchase Series A Preferred
shares at a total cost of $500,000. During the second half of
1995, the Partnership also issued $62,500 in convertible notes to
the company.
Crystallume
- -----------
In May 1995, the Partnership made an additional investment in
Crystallume by purchasing 50 Series A Preferred shares and
received 5,000 common shares and a common stock warrant at a
total cost of $50,000.
In August 1995, the Partnership issued $300,000 in convertible
notes and received a common stock warrant; the Partnership also
purchased 30,000 additional common shares for $114,006. Then in
October 1995, the Partnership purchased an additional 241,866
common shares at a total cost of $604,667, which consisted of
$300,000 in cash and the conversion of the August 1995 notes plus
accrued interest.
The Partnership recorded an increase in the change in fair value
of $6,721 to reflect the publicly-traded market price of its
common stock and warrant investments at December 31, 1995; a
portion of the investment fair value was adjusted to reflect a
25% discount for restricted securities.
CV Therapeutics, Inc.
- ---------------------
In September 1995, the Partnership made an additional investment
in CV Therapeutics, Inc. by purchasing 57,600 Series E Preferred
shares and receiving a warrant to purchase 28,800 Series E
Preferred shares at a total cost of $115,200.
GeoWorks
- --------
During 1995, the Partnership sold 575,000 common shares of
GeoWorks for total proceeds of $6,913,918 and realized a gain of
$5,657,194. The Partnership recorded an increase in the change
in fair value of $2,309,899 at December 31, 1995 to reflect the
market price for its remaining unrestricted shares; the change
included a decrease of $1,955,414 due to the sale mentioned
above.
Subsequent to year end, the Partnership sold 150,000 common share
of Geoworks for total proceeds of $3,813,125 and realized a gain
of $3,119,492.
ICU Medical, Inc.
- -----------------
In December 1995, the Partnership sold all of its holdings in the
company for total proceeds of $4,294,575 and realized a gain of
$2,266,700.
IKOS Systems Inc.
- -----------------
During the first quarter of 1995, the Partnership sold all of its
holdings in the company for total proceeds of $24,882 and a
realized gain of $9,016.
Integra LifeSciences Corporation/Telios Pharmaceuticals, Inc.
- -------------------------------------------------------------
In August 1995, Telios Pharmaceuticals, Inc. ("Telios") was
acquired by Integra LifeSciences Corporation ("Integra") as part
of a plan of reorganization approved by the U.S. Bankruptcy
Court. The Partnership's common shares were exchanged for 1,811
shares of marketable, unrestricted Integra common stock.
Accordingly, the Partnership recorded a realized loss of $34,335
to reflect the fair value of Integra shares received. The
Partnership also recorded a decrease in fair value of $5,253 to
reflect Integra's market price at December 31, 1995.
Lifecell Corporation
- --------------------
In November 1995, Lifecell Corporation declared a stock dividend
and the Partnership received 4,906 common shares. The
Partnership recorded a $83,619 increase in the change in fair
value to reflect market value for all unrestricted common shares
at December 31, 1995.
Matrix Pharmaceuticals, Inc.
- ----------------------------
In January 1995, the Partnership cash exercised its warrant to
purchase 1,905 common shares, resulting in a recorded cost basis
of $438. The Partnership also recorded an increase in fair value
of $1,714,305 to reflect the unrestricted market value at
December 31, 1995.
Nanodyne, Inc.
- --------------
In April 1995, the Partnership converted $87,158 in notes issued
in 1994 and $4,992 in accrued interest into 42,126 Series B
Preferred shares.
Oxford GlycoSystems Group PLC
- -----------------------------
In March 1995, the company had a new round of equity financing in
which the Partnership did not participate. The pricing of this
round indicated a decrease in fair value of $286,416 for the
Partnership's existing investments.
Paradigm Biosciences, Inc.
- --------------------------
In October 1995, the Partnership issued $51,250 in convertible
notes to the company and received a warrant to purchase 5,125
Series B Preferred shares at $2.50 per share.
Pharmos Corporation/Oculon Corporation
- --------------------------------------
In 1995, Oculon Corporation ("Oculon") was acquired by Pharmos
Corporation ("Pharmos"). The Partnership's Series II Senior
Preferred shares were canceled while the Series III Senior
Preferred shares were exchanged for 60,331 shares of marketable,
unrestricted Pharmos common stock. The Partnership recorded the
$45,248 cost basis of the Pharmos stock as a recovery from Oculon
investments previously written off. An increase in fair value of
$42,835 reflected Pharmos stock unrestricted market value at
December 31, 1995.
TMC, Inc.
- ---------
In December 1995, the Partnership made an investment in TMC, Inc.
by purchasing 50,000 Series A Preferred shares at a total cost of
$25,000.
TheraTx, Inc.
- -------------
In January 1995, the Partnership sold 11,000 common shares of
TheraTx, Inc. for total proceeds of $214,665 and realized a gain
of $198,165. The Partnership also received proceeds of $127,750
from sales prior to December 31, 1994, which have been settled.
The Partnership recorded a decrease in unrealized fair value of
$704,811 at December 31, 1995; a portion was realized related to
the sale mentioned above, with the remainder due to a decrease in
market value of the remaining, unrestricted shares at December
31, 1995.
UroMed Corporation
- ------------------
In January 1995, the Partnership sold its remaining holdings in
the company for total proceeds of $341,315 and realized a gain of
$245,906. The Partnership also received proceeds of $218,660
from sales prior to December 31, 1994, which have been settled.
Velocity Incorporated
- ---------------------
During the second half of 1995, the Partnership issued $125,000
in convertible notes to the company.
YES! Entertainment Corporation
- ------------------------------
In June 1995, the company completed its initial public offering
("IPO"). Prior to the IPO, the company effected a 1-for-15
reverse stock split. The Partnership's Series B Preferred shares
were converted into 33,333 common shares. The Managing General
Partners determined that there has been an other than temporary
decline in value of the Partnership's investment; as a result, a
realized loss of $200,001 was recorded. In addition, the loss
takes into consideration the fact that the stock will be
restricted for another one and one half years.
At December 31, 1995, the Partnership recorded an increase in the
change in fair value of $137,749 to reflect the publicly-traded
market price of its investments; a portion of the investment fair
value was adjusted to reflect a 25% discount for restricted
securities.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
The Partnership recorded a cost basis increase of $15,503 in
venture capital limited partnership investments in 1995. The
increase was a result of additional contributions of $48,438,
partially offset by returns of capital in the form of stock and
cash distributions of $31,459 and $1,476, respectively. The
Partnership recorded a fair value decrease of $999,491 as a
result of cash and stock distributions from the profits of
certain venture capital limited partnership investments,
partially offset by a net increase in the fair value of the
underlying investments.
In 1995, the Partnership received a cash distribution of $1,476
and common stock distributions of Abaxis, Inc., OraVax, Inc. and
PETsMART, Inc. shares with fair values of $14,208, $6,883 and
$10,368, respectively. These distributions represented returns of
capital. In addition, the Partnership received cash distributions
totaling $711,826 and common stock distributions of Abaxis, Inc.,
Metra Biosystems, Inc., P-Com, Inc. and UroMed Coporation shares
with fair values of $40,715, $162,425, $155,012 and $288,446,
respectively; these distributions were from profits and are
recorded as realized gains from venture capital limited
partnership investments.
During 1995, the Partnership sold all its common stock
distributions from Abaxis, Inc., OraVax, Inc. and UroMed
Corporation for total proceeds of $310,784 and realized a loss of
$39,468.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations or the elimination of a discount relating to selling
restrictions for publicly-traded portfolio companies.
The Partnership also received proceeds of $394,009 in January
1995 from sales of Powersoft Corporation prior to December 31,
1994, upon settlement.
6. Secured Notes Receivable, Net
-----------------------------
At December 31, 1995, secured notes receivable consisted of:
1995
----
Secured notes receivable (cost basis) $ 533,334
Allowance for loan losses (309,000)
-------
Total secured notes receivable,
net (fair value) $ 224,334
=======
The secured note receivable interest rate at December 31, 1995
was 12%.
Changes in the allowance for loan losses were as follows:
1995 1994
---- ----
Balance, beginning of year $ -- 136,000
------- -------
Increase (decrease) in
provision for loan losses 309,000 (236,000)
Recovery of previous write-offs:
Medical/Biotechnology -- 100,000
------- -------
Change in net unrealized fair value of
secured notes receivable 309,000 (136,000)
------- -------
Balance, end of year $ 309,000 --
======= =======
The increase (decrease) 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.
Notes with a total cost basis of $533,334 were on nonaccrual
status at December 31, 1995 due to uncertainties related to a
borrower's financial condition. The Managing General Partners
continue to monitor the progress of this company. The fair value
at December 31, 1995 was based on the Managing General Partner's
estimate of collectibility of these notes.
The principal balance of $533,334 is scheduled to be repaid in
1996. The Managing General Partners may at times need to
restructure notes by either extending maturity dates or
converting notes to equity investments to increase the ultimate
collectibility of investments to the Partnership.
7. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 1995 and 1994 consisted
of:
1995 1994
---- ----
Demand accounts $ 20,911 3,059
Money-market accounts 12,586,694 4,046,870
---------- ---------
Total $12,607,605 4,049,929
========== =========
8. Distributions Payable
---------------------
The Managing General Partners declared distributions for Unit
holders as of December 31, 1995, based upon Partnership
performance during 1995. Unnegotiated distribution checks, if
any, after a reasonable amount of time are recorded as other
liabilities on the Balance Sheets. The December 31, 1995
distributions payable of $3,565,256 will be paid to Limited and
General Partners in late March 1996.
9. 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, 1995, the Partnership had unfunded commitments as follows:
Accounts Receivable line of credit $ 91,666
Equity investments 742,833
Venture capital limited partnership
investments 39,057
-------
Total $873,556
=======
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 guaranteed for a two-year period a
$2 million loan between a financial institution and a portfolio
company in the medical/biotechnology industry. The Partnership
had 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. During 1995, $62,500
was recorded as other income. The Partnership also agreed to
guarantee a $500,000 line of credit between a financial
institution and a portfolio company in the computer systems and
software industry. While the Partnership expects the portfolio
companies to repay the loan or line of credit, if the portfolio
companies fail to do so, the Partnership may be liable up to the
guarantee amounts.
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 22, 1996 By: /s/Debbie A. Wong
--------------------------------
Debbie A. Wong
Controller
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 22, 1996
- ------------------------ Executive Officer
Charles R. Kokesh and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Gregory T. George Group Vice March 22, 1996
- -------------------------- President of Technology
Gregory T. George Funding 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.