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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, 1997
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)
(650) 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 Venture Capital Fund VI, LLC, as revised January
22, 1998, forming a part of the December 5, 1997, Pre-Effective
Amendment No. 1 to the Form N-2 Registration Statement No. 333-23913
dated July 11, 1997, are 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 of
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, 1998,
pursuant to unanimous approval by the Management Committee on
September 13, 1996. The Partnership term was further extended
to December 31, 2000 with an amendment by the General
Partners and approved by a majority of the Limited Partners.
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 December 5, 1997. At that meeting, proxies
submitted by Limited Partners documented that the Limited
Partners elected three individual general partners (93,362
Units voting for, 3,575 Units voting against or abstaining),
elected the two Managing General Partners (93,232 Units
voting for, 3,705 voting against or abstaining), and ratified
the selection of KPMG Peat Marwick LLP as independent
certified accountants (91,517 Units voting for, 1,000 Units
voting against, and 4,420 Units abstaining.) In addition,
the Limited Partners approved an amendment to Section 1.05 of
the Partnership Agreement to extend the term of the
Partnership until December 31, 2000, unless further extended
for one additional two-year period from such date if the
Management Committee determines that such an extension is in
the best interest of the Partnership; there were 85,678 Units
voting in favor and 11,259 Units voting against.
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, 1997, there were 5,638 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,
---------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Total income $ 341,607 522,715 470,792 480,176 338,276
Net operating loss (1,202,447) (856,975) (1,357,976) (838,981) (1,086,638)
Net realized gain
(loss) from venture capital
limited partnership
investments 622,207 814,400 1,358,424 -- (74,227)
Net realized gain from
sales of equity investments 5,770,758 3,414,575 8,337,512 3,895,971 303,085
Realized losses from
investment write-downs (53,600) (3,041,310) (399,427) (832,114) (740,529)
Recovery from investments
previously written off -- 8,775 62,231 100,000 --
Net realized income (loss) 5,136,918 339,465 8,000,764 2,324,876 (1,598,309)
Change in net unrealized
fair value:
Equity investments (4,881,218) (3,647,984) 398,770 (4,240,635) (68,227)
Secured notes receivable -- 309,000 (309,000) 136,000 6,000
Net income (loss) 255,700 (2,999,519) 8,090,534 (1,779,759) (1,660,536)
Net realized income (loss)
per Unit 29 2 50 14 (10)
Total assets 29,855,568 33,890,281 41,388,167 34,205,502 36,007,556
Distributions declared 4,279,267 159,809 3,565,256 1,673,084 --
Distributions declared
per Unit (1) 25 -- 22 10 --
(1) Calculation is based on distributions declared to Limited Partners divided by the weighted
average number of Units outstanding during the year.
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 1997, net cash used by operating activities totaled
$1,270,888. The Partnership paid management fees of $308,826
to the Managing General Partners and reimbursed related
parties for operating expenses of $872,725. In addition,
$43,121 was paid to the Individual General Partners as
compensation for their services. Other operating expenses of
$332,753 were paid, and interest and other income of $286,537
was received. Distributions totaling $4,279,267 were paid to
Limited and General Partners.
In 1997, the Partnership funded equity investments of
$6,825,868 primarily to portfolio companies in the
medical/biotechnology, information technology, and computer
systems and software industries. Proceeds from sales of
equity investments totaled $10,946,242 and the Partnership
received $417,458 in cash distributions from venture capital
limited partnership investments. At December 31, 1997, the
Partnership was committed to fund $15,618 in additional
investments as disclosed in Note 7 to the financial
statements.
Cash and cash equivalents at December 31, 1997, were
$4,304,928. Cash reserves, interest income on short-term
investments and future proceeds from equity investments sales
are expected to be adequate to fund Partnership operations
and future investments through the next twelve months.
Results of Operations
- ---------------------
1997 compared to 1996
- ---------------------
Net income was $255,700 in 1997, compared to a net loss of
$2,999,519 in 1996. The increase in net income was primarily
due to a $2,987,710 decrease in realized losses from
investment write-downs and a $2,356,183 increase in net
realized gain from sales of equity investments. These
increases were partially offset by an additional $1,542,234
decrease in the net unrealized fair value of investments and
secured notes receivable, $230,503 increase in operating
expenses, and a $181,108 decrease in interest and other
income.
During 1997, realized losses from investment write-downs of
$53,600 primarily resulted from a portfolio company in the
computer systems and software industry. During 1996, realized
losses from investment write-downs of $3,041,310 primarily
related to a portfolio company in the computer systems and
software industry.
Net realized gain from sales of equity investments of
$5,770,758 in 1997 primarily resulted from the sales of
shares in Geoworks Corporation, PolyMedica Industries, Inc.,
TheraTx, Inc., Systemix, Inc. and Thermo Electron
Corporation. The 1996 net realized gain of $3,414,575 was
mostly due to sales of Geoworks stock.
The $4,881,218 decrease in the fair value of equity
investments during 1997 was due to a $6,426,314 decrease
related to the stock sales discussed above, partially offset
by increases in portfolio companies in the medical/
biotechnology and communications industries. During 1996,
the decrease in fair value of equity investments of
$3,647,984 was primarily due to portfolio companies in the
medical/biotechnology and computer systems and software
industries. During 1996, the Partnership recorded a $309,000
increase in secured notes receivable value as a result of the
reclassification of secured notes receivable. No such
increase occurred in 1997 as the Partnership had no secured
note loans outstanding during the year.
Total operating expenses were $1,166,765 and $936,262 in 1997
and 1996, respectively. The increase is primarily due to a
higher level of activity required for portfolio management in
1997. Included in 1997 operating expenses are the costs of
the Partnership's relocation of its administrative and
investor service operations to Santa Fe, New Mexico.
Interest and other income decreased to $341,607 in 1997 as
compared to $522,715 in 1996 primarily due to lower cash
balances.
1996 compared to 1995
- ---------------------
Net loss was $2,999,519 in 1996 compared to net income of
$8,090,534 in 1995. The change was primarily due to a
$4,922,937 decrease in net realized gain from sales of equity
investments, a $4,046,754 decrease in the change in net
unrealized fair value of equity investments, a $2,641,883
increase in realized losses from investment write-downs, and
a $544,024 decrease in net realized gain from venture capital
limited partnership investments. These changes were
partially offset by a $618,000 increase in the change in net
unrealized fair value of secured notes receivable, and a
$496,391 decrease in total operating expenses.
During 1996, net realized gain from sales of equity
investments of $3,414,575 was substantially attributable to
sales of Geoworks stock. During 1995, net realized gain of
$8,337,512 was mostly due to Geoworks and ICU Medical, Inc.,
investment sales.
During 1996, the decrease in fair value of equity investments
of $3,647,984 was substantially attributable to portfolio
companies in the medical/biotechnology and computer systems
and software industries. These decreases were partially
offset by increases in the Partnership's investments in
venture capital limited partnerships. In 1995, the increase
in fair value of $398,770 was primarily attributable to
increases in portfolio companies in the computer systems and
software industry, substantially offset by decreases in
portfolio companies in the medical/biotechnology industry and
realized gains and venture capital limited partnership
distributions.
During 1996, the Partnership recorded realized losses from
investment write-downs of $3,041,310 mostly due to a
portfolio company in the computer systems and software
industry. During 1995, realized losses of $399,427 were
mainly attributable to portfolio companies in the
retail/consumer products and communications industries.
During 1996 and 1995, the Partnership recorded net realized
gains from venture capital limited partnership investments of
$814,400 and $1,358,424, respectively. These gains
represented distributions from profits of certain venture
capital limited partnerships.
During 1996, the Partnership recorded an increase of $309,000
in net unrealized fair value of secured notes receivable as
notes were reclassified to equity investments resulting in
the transfer of a corresponding loan loss reserve to change
in unrealized fair value of equity investments. During 1995,
the Partnership recorded a decrease in fair value of secured
notes receivable of $309,000 mainly due to secured notes
receivable being placed on non-accrual status.
Total operating expenses were $936,262 and $1,432,653 in 1996
and 1995, respectively. As disclosed in Note 2 to the
financial statements, the 1995 total operating expenses
included additional administrative and investor services
expenses of $798,859. If this amount had been recorded in
prior years, total operating expenses would have been
$703,245 in 1995 compared to $936,263 in 1996. The increase
was primarily due to higher investment operations,
administrative and investor services and computer services
expenses from increased overall portfolio activities.
Total income was $522,715 and $470,792 during 1996 and 1995,
respectively. The slight increase was primarily due to an
increase in short-term investment interest from investment
sale proceeds. Included in the 1995 notes receivable
interest balance of $64,456 was approximately $50,000 in
interest income received related to a previously written off
secured note receivable from a portfolio company in the
medical/biotechnology industry.
The Year 2000
- -------------
The Managing General Partner is currently reviewing the
Partnership's information systems in anticipation of the
potential computer software problems associated with the Year
2000. The Year 2000 issue exists because many computer
software programs use only two digits to identify a year in
the date field and were developed without considering the
impact of the upcoming change in the century. The Managing
General Partner currently expects to complete the necessary
critical software conversion modifications in 1999, and does
not anticipate any material adverse impact on the financial
position or results of operations of the Partnership, as a
result of the Year 2000 issue.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The financial statements of the Registrant are set forth in
Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------ ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None
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
Venture Capital Fund VI, LLC, Prospectus, revised January 22,
1998, forming a part of the December 5, 1997, Pre-Effective
Amendment No. 1 to the Form N-2 Registration Statement No.
333-23913 dated July 11, 1997, which are incorporated herein
by reference.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
As a partnership, the Registrant has no officers or
directors. In 1997, the Partnership incurred management fees
of $334,168. 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, 1997. 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 1997,
$43,121 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 were transferred to
his successor, who was appointed on January 1, 1997. The
Management Committee controls the affairs of the Partnership
pursuant to the Partnership Agreement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Registrant, or its investee companies, have engaged in no
transactions with the Managing General Partners or their
officers and partners other than as described above, in the
notes to the financial statements, or in the Prospectus.
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, 1997
and 1996
Statements of Operations for the years
ended December 31, 1997, 1996 and 1995
Statements of Partners' Capital for the years
ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995
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, 1997.
(c) Financial Data Schedule for the year ended and as of
December 31, 1997 (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,
1997 and 1996, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period
ended December 31, 1997. 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, 1997 and
1996. 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, 1997 and 1996, and the
results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Albuquerque, New Mexico /S/KPMG Peat Marwick LLP
March 25, 1998
BALANCE SHEETS
- --------------
December 31,
----------------------
1997 1996
-------- --------
ASSETS
Equity investments (cost basis of
$23,563,459 and $21,648,281 for 1997
and 1996, respectively) $25,545,207 28,511,247
Cash and cash equivalents 4,304,928 5,317,251
Other assets 5,433 61,783
---------- ----------
Total assets $29,855,568 33,890,281
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 66,748 58,301
Due to related parties 80,533 89,517
Other liabilities 17,009 27,618
---------- ----------
Total liabilities 164,290 175,436
Commitments and contingencies
(Notes 2 and 7)
Partners' capital:
Limited Partners
(Units outstanding of 160,000
for both 1997 and 1996) 27,670,313 26,997,022
General Partners 39,217 (145,143)
Net unrealized fair value
increase from cost of
equity investments 1,981,748 6,862,966
---------- ----------
Total partners' capital 29,691,278 33,714,845
---------- ----------
Total liabilities
and partners' capital $29,855,568 33,890,281
========== =========
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
Income:
Notes receivable
interest $ 55,071 38,839 64,456
Short-term investment
interest 283,411 436,976 343,836
Other income 3,125 46,900 62,500
--------- ------- -------
Total income 341,607 522,715 470,792
Costs and expenses:
Management fees 334,168 412,622 362,568
Individual General
Partners' compensation 43,121 30,806 33,547
Operating expenses:
Administrative and
investor services 608,253 412,656 1,081,782
Investment operations 328,943 309,143 209,642
Computer services 134,884 134,514 84,074
Professional fees 94,685 79,949 57,155
--------- --------- ---------
Total operating
expenses 1,166,765 936,262 1,432,653
--------- --------- ---------
Total costs and expenses 1,544,054 1,379,690 1,828,768
--------- --------- ---------
Net operating loss (1,202,447) (856,975) (1,357,976)
Net realized gain
from venture
capital limited
partnership investments 622,207 814,400 1,358,424
Net realized gain from
sales of equity
investments 5,770,758 3,414,575 8,337,512
Realized losses from
investment write-downs (53,600) (3,041,310) (399,427)
Recovery from investments
previously written off -- 8,775 62,231
--------- --------- ---------
Net realized income 5,136,918 339,465 8,000,764
Change in net unrealized
fair value:
Equity investments (4,881,218) (3,647,984) 398,770
Secured notes receivable -- 309,000 (309,000)
--------- --------- ---------
Net income (loss) $ 255,700 (2,999,519) 8,090,534
========= ========= =========
Net realized income
per Unit $ 29 2 50
========= ========= =========
See accompanying notes to financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 1997, 1996 and 1995:
Net Unrealized Fair Value
Increase (Decrease) From Cost
---------------------------------
Limited General Equity Secured Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ------------- -----
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
Distributions -- (159,809) -- -- (159,809)
Net realized income 336,070 3,395 -- -- 339,465
Change in net unrealized
fair value:
Equity investments -- -- (3,647,984) -- (3,647,984)
Secured notes receivable -- -- -- 309,000 309,000
---------- --------- ---------- ------- ----------
Partners' capital,
December 31, 1996 26,997,022 (145,143) 6,862,966 -- 33,714,845
Distributions (3,960,000) (319,267) -- -- (4,279,267)
Net realized income 4,633,291 503,627 -- -- 5,136,918
Change in net unrealized
fair value:
Equity investments -- -- (4,881,218) -- (4,881,218)
---------- --------- ---------- ------- ----------
Partners' capital,
December 31, 1997 $27,670,313 39,217 1,981,748 -- 29,691,278
========== ========= ========== ======= ==========
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For The Years Ended December 31,
-----------------------------------
1997 1996 1995
------- ------- -------
Cash flows from operating
activities:
Interest and other
income received $ 286,537 456,029 401,156
Cash paid to vendors (332,753) (189,412) (127,482)
Cash paid to related
parties (1,224,672) (1,956,180) (871,924)
---------- ---------- ---------
Net cash used by
operating activities (1,270,888) (1,689,563) (598,250)
---------- ---------- ---------
Cash flows from investing
activities:
Secured notes receivable
issued -- (678,030) (533,334)
Purchase of equity
investments (6,825,868) (7,528,174) (2,333,499)
Repayments of convertible
and secured notes
receivable -- 62,500 125,000
Proceeds from sales of
equity investments 10,946,242 5,600,091 12,840,558
Recovery of investments
previously written off -- 170 16,983
Distributions from
venture capital
limited partnerships 417,458 507,908 713,302
---------- ---------- ---------
Net cash provided
(used) by investing
activities 4,537,832 (2,035,535) 10,829,010
---------- ---------- ---------
Cash flows from financing
activities:
Distributions to Limited
and General Partners (4,279,267) (3,565,256) (1,673,084)
---------- ---------- ---------
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
Net cash used by
financing activities (4,279,267) (3,565,256) (1,673,084)
---------- ---------- ---------
Net (decrease) increase in
cash and cash equivalents (1,012,323) (7,290,354) 8,557,676
Cash and cash equivalents
at beginning of year 5,317,251 12,607,605 4,049,929
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 4,304,928 5,317,251 12,607,605
========== ========== ==========
Reconciliation of net
income (loss) to net
cash used by operating
activities:
Net income (loss) $ 255,700 (2,999,519) 8,090,534
Adjustments to reconcile net
income (loss) to net cash
used by operating
activities:
Net realized gain
from venture capital
limited partnership
investments (622,207) (814,400) (1,358,424)
Net realized gain from
sales of equity
investments (5,770,758) (3,414,575) (8,337,512)
Realized losses from
investment write-downs 53,600 3,041,310 399,427
Recovery from investments
previously written off -- (8,775) (62,231)
Change in net unrealized
fair value:
Equity investments 4,881,218 3,647,984 (398,770)
Secured notes
receivable -- (309,000) 309,000
Changes in:
Accrued interest on
convertible and secured
notes receivable (55,069) (35,436) (7,136)
Accounts payable and
accrued expenses 8,447 9,423 539
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
Due to/from related
parties (8,984) (761,162) 806,107
Deferred income -- (31,250) (62,500)
Other, net (12,835) (14,163) 22,716
---------- ---------- ----------
Net cash used by operating
activities $(1,270,888) (1,689,563) (598,250)
============ ============ ============
Non-cash investing
activities:
Non-cash exercise
of warrants $ -- 328,985 --
========== ========== ==========
Reclassification of secured
notes to equity investments
(subordinated notes
receivable) $ -- 705,000 --
========== ========== ==========
Common stock recovered from
equity investment
previously written off $ -- -- 45,248
========== ========== ==========
Stock distributions to
General Partners (See
Note 2) $ -- 159,809 --
========== ========== ==========
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; one Individual General Partner had
withdrawn from his position and a successor was appointed on January 1,
1997.
For the period from December 5, 1986, through March 25, 1987, the
Partnership was inactive. The Partnership filed a registration
statement with the Securities and Exchange Commission on March 25,
1987, and commenced selling units of limited partnership interest
("Units") in April, 1987. On June 2, 1987, the minimum number of Units
required to commence Partnership operations (6,000) had been sold. The
offering terminated with 160,000 Units sold on February 3, 1989. The
Partnership was scheduled to be dissolved on December 31, 1996, but the
term was extended for a two-year period to December 31, 1998, pursuant
to unanimous approval by the Management Committee on September 13,
1996. The Partnership's term was further extended to December 31, 2000
with an amendment by the General Partners approved by a majority of the
Limited Partners.
Preparation of Financial Statements and Use of Estimates
- --------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates. Estimates are used when accounting for investments,
change in unrealized fair value of investments, liabilities and
contingencies. Because of the inherent uncertainty of valuation, the
estimated fair value of investments may differ significantly from the
values that would have been used had a ready market for investments
existed, and the differences could be material.
Equity 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 equity
investments is their initial cost basis with changes as noted below:
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 and for
those securities, an illiquidity discount of up to 33% is applied when
determining the fair value; the actual discount percentage is based on
the type and length of the restrictions. Investments valued under this
method were $9,080,006 and $16,424,731 at December 31, 1997 and 1996,
respectively.
All investments which are not publicly traded are valued at fair market
value as determined by the Managing General Partners in the absence of
readily ascertainable market values. Investments valued under this
method were $16,465,201 and $12,086,516 at December 31, 1997 and 1996,
respectively. Generally, investments in privately held companies are
valued at original cost unless there is clear evidence of a change in
fair value, such as a recent round of third-party financings or events
that, in the opinion of the Managing General Partners, indicate a
change in value.
Convertible and subordinated notes receivable are stated at cost plus
accrued interest, which is equivalent to fair value, and are included
in equity investments as repayment of these notes generally occurs
through conversion into equity investments.
Venture capital limited partnership investments are initially recorded
at cost and are valued based on the fair value of the underlying
investments. Limited partnership distributions that are a return of
capital reduce the cost basis of the Partnership's investment.
Distributions from limited partnership cumulative earnings are
reflected as realized gains by the Partnership.
Where, in the opinion of the Managing General Partners, events indicate
that the fair value of equity and venture capital investments and
convertible and subordinated notes receivable may not be recoverable,
then a write down to estimated fair value is recorded. Temporary
changes in fair value result in increases or decreases to the
unrealized fair value of equity investments. Adjustments to fair value
basis are reflected as "Change in net unrealized fair value of equity
investments." 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. Cost basis adjustments are reflected as
"Realized losses from investment write-downs" or "Net realized loss
from venture capital limited partnership investments" on the Statements
of Operations.
Sales of equity investments are recorded on the trade date. The basis
on which cost is determined in computing realized gains or losses is
specific identification.
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.
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 lower
than the reported total cost basis of $23,563,459 by $541,405 as of
December 31, 1997.
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, 1997, 1996, and
1995 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.
2. Related Party Transactions
--------------------------
Included in costs and expenses are related party costs as follows:
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
------- ------- -------
Management fees $334,168 412,622 362,568
Individual General
Partners' compensation 43,121 30,806 33,547
Reimbursable operating
expenses:
Administrative and
investor services 401,967 325,581 1,001,191
Investment operations 309,431 291,495 196,651
Computer services 127,001 134,514 84,074
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
$57,361 and $32,019 at December 31, 1997 and 1996, respectively.
As compensation for their services, each of the Individual General
Partners receives $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 were transferred to his successor, who was appointed on January
1, 1997.
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. There were $23,172 and $57,498 of such expenses
payable at December 31, 1997 and 1996, respectively. 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 and
$729,408 relating to 1995 and prior years, respectively.
Effective November 1, 1997, TFL assigned its California office lease to
Technology Funding Property Management LLC (TFPM), an entity that is
affiliated to the Managing General Partner. Under the terms of a rent
agreement, TFPM charges the Partnership for its share of office rent
and related overhead costs. These amounts are included in
administrative and investor service costs.
Under the terms of a computer service agreement, Technology
Administrative Management, a division of TFL, charges the Partnership
for its share of computer support costs. These amounts are included in
computer services expenses.
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, 1997, the Partnership
had an indirect interest in non-transferable Conversion Technologies
International, Inc., Electronic Designs, Inc., and Endocare, Inc.
options at an exercise price higher than the current market value.
In September of 1996, the Partnership made a tax distribution of 29,269
Theramatrix, Inc., common shares to the General Partners; the shares
had a fair value of $159,809 resulting in a realized gain of $6,147.
3. 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.
4. Equity Investments
------------------
At December 31, 1997, and December 31, 1996, equity investments consisted of:
December 31, 1997 December 31, 1996
Principal ----------------- ------------------
Investment Amount or Cost Fair Cost Fair
Industry/Company Position Date Shares Basis Value Basis Value
- ---------------- -------- ---- ------ ----- ----- ----- -----
Communications
- --------------
NetChannel, Series B
Inc. Preferred
shares 10/96 615,431 $321,749 325,000 321,749 321,749
NetChannel, Series B
Inc. Preferred
share
warrant at
$1.10;
exercised
01/97 10/96 295,454 -- -- 3,250 3,250
NetChannel, Series B
Inc. Preferred
shares 01/97 615,431 149,204 325,000 -- --
NetChannel, Series B
Inc. Preferred
shares 03/97 738,517 179,045 389,999 -- --
NetChannel, Convertible
Inc. note (1) 05/97 $146,622 151,980 151,980 -- --
NetChannel, Series B
Inc. Preferred
shares 05/97 415,604 182,866 219,474 -- --
NetChannel, Convertible
Inc. note (1) 09/97 $243,750 249,549 249,549 -- --
NetChannel, Series X Pref.
Inc. Preferred Warrant E
exercise
price TBD, Aggregate
expiration Purchase price
TBD 09/97 $ 30,479 0 0
NetChannel, Series X Pref.
Inc. Preferred Warrant E
exercise
price TBD, Aggregate
expiration Purchase price
TBD 09/97 $ 30,479 0 0
US West Series D
Media Group Preferred
shares 02/97 220 10,447 13,339 -- --
Wire Networks, Series A
Inc. Preferred
shares 02/96 159,300 215,055 484,272 215,055 215,055
Wire Networks, Series B
Inc. Preferred
shares 02/96 194,642 437,945 591,712 437,945 437,945
Wire Networks, Convertible
Inc. note (1) 11/96 $206,795 -- -- 208,691 208,691
Wire Networks, Series C
Inc. Preferred
shares 07/97 71,576 217,593 217,593 -- --
Computers and Computer Equipment
- --------------------------------
Electronic Common
Designs, Inc. shares 03/94 348,611 2,189,411 1,034,616 2,189,411 980,386
Electronic Common
Designs, Inc. shares 05/95 5,000 10,000 16,300 10,000 17,190
Electronic Common
Designs, Inc. share
warrant
at $3.25;
expiring
05/98 05/95 5,000 0 37 0 705
Electronic Common
Designs, Inc. shares 08/95 30,000 114,006 97,800 114,006 103,140
Electronic Common
Designs, Inc. share
warrants
at $2.00;
expiring
08/98 08/95 30,000 0 28,350 0 32,355
Electronic Common
Designs, Inc. shares 10/95 241,866 604,667 788,483 604,667 831,535
Electronic Common
Designs, Inc. Shares 11/96 20,000 40,000 65,200 40,000 68,760
Splash Technology Common
Holdings, Inc. Shares 11/97 5,000 198,812 106,250 -- --
Computer Systems and Software
- -----------------------------
Geoworks Common
shares 03/94 38,415 -- -- 179,267 970,939
Geoworks Common
shares 06/94 65,110 389,801 594,454 420,853 2,823,091
Geoworks Common
shares 07/96 10,000 -- -- 200,000 252,750
Geoworks Common
shares 09/96 15,000 -- -- 298,125 379,125
Geoworks Common
shares 02/97 50,000 956,250 456,500 -- --
Informix Software, Common
Inc. shares 03/96 1,095 -- -- 36,956 23,077
Photon Dynamics Common
shares 07/96 50,000 300,000 152,000 300,000 413,750
Velocity Common
Incorporated share
warrant
at $1.00;
expiring
03/00 03/95 12,500 0 0 0 0
Velocity Subordinated 08/95-
Incorporated notes (1) 10/95 $125,000 0 0 0 0
Velocity Subordinated 11/95-
Incorporated notes (1) 09/96 $1,371,400 0 0 0 0
Velocity Subordinated
Incorporated notes (1) 08/97 $53,600 0 0 -- --
Versant Object Common
Technology shares 05/97 1,493 13,250 20,275 -- --
Electronic Design Automation
- ----------------------------
Cadence Design Common
Systems, Inc. shares 07/96 24,000 313,439 560,640 313,439 465,301
Synopsys, Inc. Common
shares 07/96 7,000 -- -- 238,569 313,600
Synopsys, Inc. Common
shares 02/97 14,000 560,005 515,760 -- --
Environmental
- -------------
Conversion Common
Technologies shares
International,
Inc. 05/96 69,180 500,000 65,721 500,000 119,024
Conversion Class A
Technologies warrant
International, at $5.85;
Inc. expiring
05/01 05/96 31,250 0 0 0 0
Conversion Common share
Technologies warrant
International, at $5.28;
Inc. expiring
05/00 05/96 17,293 0 2,767 0 0
Conversion Series A
Technologies Private
International, Placement
Inc. Units (3) 08/97 1.875 187,500 187,500 -- --
Conversion Series A
Technologies Private
International, Placement
Inc. Units (3) 09/97 .4875 48,750 48,750 -- --
Naiad Technologies,Series A
Inc. Preferred
shares 12/95 50,000 25,000 162,500 25,000 100,000
Naiad Technologies,Series B
Inc. Preferred
Shares 11/96 110,102 220,204 357,832 220,204 220,204
Naiad Technologies,Series C
Inc. Preferred
Shares 11/97 49,230 159,998 159,998 -- --
Thermatrix, Inc. Common
shares 06/96 65,970 346,338 80,028 346,338 394,484
Industrial/Business Automation
- ------------------------------
Nanodyne, Inc. Series B
Preferred
shares 07/93 228,571 500,000 342,857 500,000 500,000
Nanodyne, Inc. Series B
Preferred
shares 01/94 37,264 81,515 55,896 81,515 81,515
Nanodyne, Inc. Series B
Preferred
shares 04/95 42,126 92,150 63,189 92,150 92,150
Nanodyne, Inc. Series C
Preferred
shares 10/97 40,585 60,268 60,878 -- --
Nanodyne, Inc. Common share
warrants at
$1.20
expiring
10/02 10/97 22,829 609 6,849 -- --
Information Technology
- ----------------------
WorldRes, Inc. Series B
Preferred
shares 01/97 221,894 750,002 821,008 -- --
WorldRes, Inc. Series X
warrant at a
price TBD,
expiring Aggregate
10/02 10/97 $ 28,125 28 0 -- --
WorldRes, Inc. Series C
Preferred
shares 12/97 139,358 515,625 515,625 -- --
WorldRes, Inc. Convertible
note
interest 10/97 $140,625 2,528 2,528 -- --
Medical/Biotechnology
- ---------------------
Acusphere, Inc. Series B
Preferred
shares 05/95 125,000 200,000 375,000 200,000 267,500
Acusphere, Inc. Series C
Preferred
shares 05/96 163,551 350,000 490,653 350,000 350,000
Acusphere, Inc. Series D
Preferred
shares 11/97 52,083 156,250 156,250 -- --
ADESSO Specialty Series C
Services Preferred
Organization, shares
Inc. 01/97 177,420 1,100,004 1,490,328 -- --
ADESSO Specialty Series D
Services Preferred
Organization, shares
Inc. 12/97 19,524 164,002 164,002 -- --
Affymetrix, Inc. Common
shares 07/96 20,000 -- -- 225,000 401,760
Biex, Inc. Series A
Preferred
shares 07/93 128,205 83,333 320,513 83,333 192,308
Biex, Inc. Series B
Preferred
shares 10/94 63,907 63,907 159,768 63,907 95,861
Biex, Inc. Series B
Preferred
share warrant
at $1.00;
expiring
10/99 10/94 23,540 8 35,310 8 11,770
Biex, Inc. Series C
Preferred
shares 06/95 83,334 83,334 208,335 83,334 125,001
Biex, Inc. Series C
Preferred
shares 12/95 83,333 83,333 208,333 83,333 125,000
Biex, Inc. Series C
Preferred
shares 04/96 83,333 83,333 208,333 83,333 125,000
Biex, Inc. Series D
Preferred
shares 08/96 111,115 166,673 277,788 166,673 166,673
Biex, Inc. Series D
Preferred
shares 03/97 44,446 66,669 111,115 -- --
Biex, Inc. Series E
Preferred
shares 08/97 13,333 33,334 33,333 -- --
Cardiac Common
Pathways shares
Corporation 06/91 7,134 72,267 46,728 -- --
CardioTech Common
International, shares
Inc. 06/96 195,600 397,788 528,120 410,197 423,597
CareCentric Series A
Solutions, Inc. Preferred
shares 10/95 100,000 150,000 98,838 150,000 170,000
CareCentric Series B
Solutions, Inc. Preferred
shares 09/96 188,499 282,749 186,310 282,749 282,749
CareCentric Series C
Solutions, Inc. Preferred
shares 12/97 77,627 81,508 81,508 -- --
CareCentric Common
Solutions, share
Inc. warrant
at $.15;
expiring
12/02 12/97 38,813 34,932 34,932 -- --
CV Therapeutics, Common
Inc. share
warrant
at $20.00;
expiring
09/00 09/95 2,880 1,152 0 1,152 0
CV Therapeutics, Common
Inc. shares Various 33,724 508,819 306,214 508,819 155,160
Endocare, Inc. Common
shares 08/96 7,500 22,500 26,850 22,500 18,090
Endocare, Inc. Common
share
warrant
at $3.00;
expiring
08/01 08/96 112,500 0 48,938 0 45,225
Endocare, Inc. Convertible
note (1) 08/96 $562,500 -- -- 594,500 594,500
Endocare, Inc. Common
shares 01/97 52,500 183,750 187,950 -- --
Endocare, Inc. Common
shares 01/97 249,000 622,500 844,314 -- --
EndoVascular Common
Technologies,Inc. shares 12/96 462 -- -- 4,216 4,331
Gilead Sciences, Common
Inc. shares 07/96 20,000 -- -- 347,500 508,500
Lifecell Common
Corporation shares 02/92 242,623 974,824 1,162,164 974,824 749,221
Lifecell Redeemable
Corporation Series A
Preferred
shares 11/94 12,500 -- -- 220,785 220,785
Lifecell Common
Corporation shares 11/95 4,906 13,854 23,500 13,854 15,150
Lifecell Common
Corporation shares 08/96 12,500 38,750 59,875 38,750 38,600
Lifecell Common
Corporation shares 12/96 5,818 15,361 27,868 15,361 17,966
Lifecell Common
Corporation shares 03/97 1,601 4,148 7,669 -- --
Lifecell Common
Corporation shares 03/97 83,612 216,637 400,501 -- --
Matrix Common
Pharmaceuticals, shares (2)
Inc. 01/92 319,728 800,001 1,090,272 800,001 1,878,402
Matrix Common
Pharmaceuticals, shares (2)
Inc. 01/95 1,905 438 6,496 438 11,192
Matrix Common
Pharmaceuticals, shares
Inc. 09/96 133,000 -- -- 998,476 781,375
Molecular Common
Geriatrics shares
Corporation 09/93 23,585 125,000 47,170 125,000 47,170
Neurex Common
Corporation shares 09/96 3,379 70,959 45,448 70,959 53,304
Oxford Glyco- Common
Systems Group PLC shares 08/93 266,934 499,963 373,708 499,963 232,233
Pharmadigm, Series A
Inc. Preferred
shares 04/93 161,290 198,000 354,838 198,000 322,580
Pharmadigm, Series A
Inc. Preferred
shares 12/94 107,526 135,332 236,557 135,332 215,052
Pharmadigm, Series B
Inc. Preferred
share
warrant
at $2.50;
expiring
10/00 10/95 5,125 0 0 0 0
Pharmadigm, Series B
Inc. Preferred
share
warrant
at $2.00;
expiring
02/01 02/96 5,416 0 1,083 0 0
Pharmadigm, Series B
Inc. Preferred
shares 05/96 68,889 137,779 151,556 137,779 137,779
Pharmadigm, Series C
Inc. Preferred
shares 06/97 126,000 274,428 274,428 -- --
Pharmadigm, Series C
Inc. Preferred
share
warrant
at $2.20;
expiring
06/00 06/97 8,820 2,772 2,772 -- --
Pharmos Common 04/95 &
Corporation shares 11/95 60,331 45,248 121,266 45,248 85,790
Pherin Series B
Pharmaceuticals, Preferred
Inc. shares 08/91 200,000 200,000 400,000 200,000 400,000
PolyMedica Common
Industries, Inc. shares 03/92 411,800 -- -- 1,168,705 1,539,308
Spectrascan Class A
Health Preferred
Services, Inc. shares 12/94 75,000 225,000 225,000 225,000 225,000
Spectrascan Class B
Health Preferred
Services, Inc. shares 12/94 31,404 94,211 94,211 94,211 94,211
Spectrascan Class C
Health Preferred
Services, Inc. shares 12/94 42,035 906,991 1,063,906 906,991 1,063,906
Spectrascan Class A
Health Common
Services, Inc. shares 12/94 12,611 0 37,833 0 37,833
SyStemix, Common
Inc. shares 08/91 57,585 -- -- 386,511 880,878
SyStemix, Common
Inc. shares 09/96 340 -- -- 5,333 5,201
SyStemix Common
Inc. shares 10/96 3,335 -- -- 53,431 51,015
TheraTx, Inc. Common
shares (2) 06/94 60,000 -- -- 90,000 654,180
Thermo Electron Common
Corporation shares 06/96 25,245 -- -- 351,482 961,552
Retail/Consumer Products
- ------------------------
Bridgestone Series A
Management Preferred
Group, Inc. shares 05/94 16,259 0 0 0 0
YES! Common
Entertainment shares
Corporation 06/95 33,333 99,999 55,199 99,999 167,823
Venture Capital Limited Partnership Investments
- -----------------------------------------------
Alta IV, L.P. Ltd.
Partnership
interests various $1,000,000 146,698 209,729 146,698 351,656
Batterson, Ltd.
Johnson, and Partnership
Wang L.P. interests various $500,000 280,991 264,412 281,873 385,726
Columbine Ltd.
Venture Fund II, Partnership
L.P. interests various $750,000 653,769 794,113 653,769 835,375
Delphi Ltd.
Ventures, L.P. Partnership
interests various $1,000,000 652,842 315,250 652,842 744,938
Medical Science Ltd.
Partners, L.P. Partnership
interests various $500,000 366,266 572,975 366,266 702,126
OW & W Pacrim Ltd.
Investments Partnership
Limited interests various $87,650 87,650 87,650 125,000 125,000
Trinity Ventures Ltd.
IV, L.P. Partnership
interests various $109,382 7,814 69,486 7,656 46,124
---------- ---------- ---------- ----------
Total equity investments $23,563,459 25,545,207 21,648,281 28,511,247
========== ========== ========== ==========
- -- 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 and subordinated notes ranged from 8% to 16%.
(2) Common stockholders have a right to purchase one Preferred share for each share of common
stock held, subject to certain conditions.
(3) Each private placement unit consists of 10,000 premium preferred shares with a
stated value of $10.00 per share.
Marketable Equity Securities
- ----------------------------
At December 31, 1997 and 1996, marketable equity securities had
aggregate costs of $9,469,098 and $11,534,692, respectively, and
aggregate fair values of $9,080,006 and $16,424,731, respectively.
The net unrealized loss and gain at December 31, 1997 and 1996,
included gross gains of $1,898,488 and $7,523,038, respectively.
Acusphere, Inc.
- ---------------
In November 1997, the Partnership made an additional investment in the
company by purchasing 52,083 Series D Preferred shares for $156,250.
The pricing of this round, in which third parties participated,
indicated an increase in fair value of $248,153 for the Partnerships'
existing investment.
ADESSO Specialty Services Organization, Inc.
- --------------------------------------------
In January 1997, the Partnership invested in the company by purchasing
177,420 Series C Preferred shares for $1,100,004.
In December 1997, the Partnership made an additional investment in the
company by purchasing 19,524 Series D Preferred shares for $164,002.
The pricing of this round, in which third parties participated,
indicated a $390,324 increase in fair value for the Partnership's
existing investment.
Affymetrix, Inc.
- ----------------
In January 1997, the Partnership sold its entire investment in the
company for total proceeds of $577,481 and realized a gain of
$352,481.
Biex, Inc.
- ----------
In March 1997, the Partnership made an additional investment in the
company by purchasing 44,446 Series D Preferred shares for $66,669.
In August 1997, the Partnership purchased 13,333 Series E Preferred
shares for $33,334. The pricing of this round in which third parties
participated, indicated a fair value increase of $621,213 for the
Partnership's existing investment.
CareCentric Solutions, Inc.
- ---------------------------
In December 1997, the Partnership made an additional investment in the
company by purchasing 77,627 Series C Preferred shares and a warrant
for 38,813 common shares for a total cost of $116,440. The pricing of
this round, in which third parties participated, indicated a $167,601
decrease in the fair value of the Partnership's existing investment.
Conversion Technologies International, Inc.
- -------------------------------------------
In August and September of 1997, the Partnership made an additional
investment in the company of $236,250 by purchasing 1.875 and .4875
units of the Series A private placement. Each unit consists of 10,000
premium preferred shares with a stated value of $10 per share.
Endocare, Inc.
- --------------
In January 1997, the Partnership made an additional investment in the
company by purchasing 52,500 common shares for $183,750. In addition,
the Partnership converted its $562,500 note receivable, including
accrued interest of $60,000, into 249,000 common shares at a total
cost of $622,500. At December 31, 1997, the Partnership recorded an
increase in fair value of $238,487 to reflect the publicly-traded
market price of its investments, net of a discount for restricted
shares.
Geoworks Corporation
- --------------------
In January 1997, the Partnership sold 110,000 common shares of the
company for total proceeds of $2,737,410 and realized a gain of
$2,028,966. Then in February 1997, the Partnership purchased 50,000
common shares of the company for $956,250 on the open market. At
December 31, 1997, the Partnership recorded a decrease in the change
in fair value of $3,032,563 to reflect the publicly-traded market
price of its investments; $2,197,585 of the decrease was due to the
sale mentioned above.
Gilead Sciences, Inc.
- ---------------------
In January 1997, the Partnership sold its entire investment in the
company for total proceeds of $622,480 and realized a gain of
$274,980.
Lifecell Corporation
- --------------------
In March 1997, the Partnership received a stock dividend of 1,601
common shares. A cost basis of $4,148 was allocated to these shares
from the Partnership's existing Series A Preferred share investment.
In addition, the company redeemed its Series A Preferred shares by
converting the Partnership's 12,500 Series A Preferred shares into
83,612 common shares. At December 31, 1997, the Partnership recorded
an increase in the change in fair value of $639,855 to reflect the
publicly-traded market price of its investments.
Matrix Pharmaceuticals, Inc.
- ----------------------------
In October 1997, the Partnership sold 133,000 common shares for
proceeds of $517,129 and realized a loss of $481,347. At December 31,
1997 the Partnership recorded a $792,826 decrease in the fair value of
its remaining investment based on the publicly-traded market price of
the shares.
Naiad Technologies, Inc.
- ------------------------
In November 1997, the Partnership made an additional investment in the
company by purchasing 49,230 Series C Preferred shares for $159,998.
The pricing of this round, in which third parties participated,
indicated an increase in fair value of $200,128 for the Partnership's
existing investment.
Nanodyne, Inc.
- --------------
In October 1997, the Partnership made an additional investment in the
company by purchasing 40,585 Series C Preferred shares and 22,829
common share warrants for $60,877. The pricing of this round, in
which third parties participated, indicated a $204,873 decrease in the
fair value of the Partnership's existing investment.
NetChannel, Inc.
- ----------------
In January 1997, the Partnership cash exercised its Series B Preferred
share warrant for $324,999 and received 295,454 Series B Preferred
shares. In March 1997, the Partnership issued a $325,000 convertible
note receivable to the company. The Partnership also received an
additional 354,545 Series B Preferred shares as a result of an
adjustment to the warrant exercise price.
In May 1997, the company effected a 1-to-2.083 stock split. As a
result, the Partnership received an additional 1,023,926 Series B
Preferred shares. The Partnership also purchased 415,604 Series B
Preferred shares by converting $178,378 of the notes receivable
discussed above including accrued interest of $4,488 for a total cost
of $182,866. The remaining note principal of $146,622 was reissued as
a new note. In September 1997, the Partnership funded bridge notes
totaling $243,750. In addition, the Partnership is entitled to
receive warrants to purchase 25% of the number of shares issued upon
conversion of the bridge note at an exercise price equal to the
conversion price. At December 31, 1997, the Partnership recorded an
increase in the change in fair value of $426,609 for the above
transactions.
Oxford Glyco Systems Group PLC
- ------------------------------
The Company had an additional round of financing in 1997 in which the
Partnership did not participate. The pricing of this round, in which
third parties participated, indicated a $141,475 increase in the fair
value of the Partnership's investment.
Pharmadigm, Inc.
- ----------------
In June 1997, the Partnership made an additional investment of
$277,200 in the company by purchasing 126,000 Series C Preferred
shares and received a warrant to purchase 8,820 Series C Preferred
shares. The pricing of this round, in which third parties
participated, indicated a fair value increase of $68,623 for the
Partnership's existing investment.
PolyMedica Industries, Inc.
- ---------------------------
During the first quarter of 1997, the Partnership sold 42,700 common
shares of the company for total proceeds of $254,004 and realized a
gain of $132,820. In addition, the Partnership received 2,625 common
shares for the option exercise price of $14,109 as a result of an
officer exercising his option for the benefit of the Partnership. (See
Note 2 for additional information.)
Then in the second quarter of 1997, the Partnership sold its remaining
investments, including the shares received from the option exercise,
for total proceeds of $2,211,689 and realized a gain of $1,150,059.
Splash Technology Holdings, Inc.
- --------------------------------
In November 1997, the Partnership purchased 5,000 common shares on the
open market for $198,812. At December 31, 1997 the Partnership
recorded a $92,562 decrease in fair value based on the publicly-traded
market price of the shares.
Synopsys, Inc.
- --------------
During the first quarter of 1997, the Partnership purchased 21,000
common shares of the company on the open market for $840,009 as well
as sold 14,000 common shares for total proceeds of $629,975 and
realized a gain of $111,402. At December 31, 1997, the Partnership
recorded a decrease in the change in fair value of $119,276 to reflect
the publicly-traded market price of its investments.
SyStemix, Inc.
- --------------
In January 1997, the Partnership sold its entire investment in the
company for total proceeds of $1,178,532 and realized a gain of
$733,257.
TheraTx, Inc.
- -------------
During the first quarter of 1997, the Partnership sold its entire
investment in the company for total proceeds of $997,467 and realized
a gain of $907,467.
Thermo Electron Corporation
- ---------------------------
During 1997, the Partnership purchased 1,073 common shares for
$41,100.
In November 1997, the Partnership sold its entire investment in the
company for proceeds of $995,858 and realized a gain of $603,276.
Wire Networks, Inc.
- -------------------
In July 1997, the Partnership converted its $206,795 note receivable,
including accrued interest of $10,798, into 71,576 Series C Preferred
shares at a total cost of $217,593. The pricing of this round in
which third parties participated, indicated a fair value increase of
$422,984 for the Partnerships existing investment.
WorldRes, Inc.
- --------------
In January 1997, the Partnership invested in the company by purchasing
221,894 Series B Preferred shares for $750,002.
In October 1997, the Partnership issued $140,625 in convertible notes
receivable to the company and purchased Series X Preferred shares
warrants with an aggregate exercise price of $28,125 for $28. In
December 1997, the Partnership converted the October 1997 note into
38,007 Series C Preferred shares and purchased 101,351 additional
Series C Preferred shares for $375,000.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
The Partnership made an additional investment of $7,813 and redeemed
shares of $37,345 in venture capital limited partnerships during the
year ended December 31, 1997. The Partnership recorded a fair value
decrease of $839,256 as a result of a net decrease in fair value of
the underlying investments and stock distributions from venture
capital limited partnership investments.
During 1997, the Partnership received stock distributions of Diatide,
Inc., US West Media Group, Cardiac Pathways Corporation, Informix
Software, Inc., and Versant Object Technology, Inc. with fair values
of $99,046, $58,110, $72,267, $7,963 and $13,250, respectively. The
Partnership also received cash distributions from Alta IV, OW & W
Pacrim, Delphi Ventures and Batterson, Johnson and Wang totaling
$417,458 during 1997. Distributions totaling $622,207 were recorded
as realized gains from venture capital limited partnership investments
and distributions totaling $45,887 were recorded as returns of
capital.
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.
5. 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,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
(Decrease) increase in
fair value from cost of
marketable equity
securities $ (389,092) 4,890,039 9,664,198
Increase in fair value from
cost of non-marketable
equity securities 2,370,840 1,972,927 846,752
--------- ---------- ----------
Net unrealized fair
value increase from
cost at end of year 1,981,748 6,862,966 10,510,950
Net unrealized fair
value increase from
cost at beginning of
year 6,862,966 10,510,950 10,112,180
--------- ---------- ----------
Change in net unrealized
fair value of equity
investments $(4,881,218) (3,647,984) 398,770
========= ========== ==========
6. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 1997 and 1996, consisted of:
1997 1996
-------- --------
Demand accounts $ 60,609 13,494
Money-market accounts 4,244,319 5,303,757
--------- ---------
Total $4,304,928 5,317,251
========= =========
7. 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, 1997, unfunded investment commitments to venture
capital limited partnerships' totaled $15,618.
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 1995, the Partnership jointly guaranteed with two affiliated
partnerships, a $2,000,000 line of credit between a financial
institution and a portfolio company in the computer systems and
software industry, of which the Partnership's share was $500,000. In
October 1996, the $2,000,000 guarantee was reduced to $1,000,000 as
the Partnership, together with an affiliated entity, assumed
$1,000,000 of the financial institution's line of credit; the
Partnership wrote off its share in 1996, realizing a loss of $506,364.
The Partnership remained a joint guarantor of the remaining
$1,000,000. In November 1997, the portfolio company failed to repay
the line of credit and an affiliated partnership repaid the entire
obligation at no cost to the Partnership.
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 25, 1998 By: /s/Michael Brenner
--------------------------------
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 25, 1998
- ------------------------ Executive Officer,
Charles R. Kokesh Chief Financial Officer
and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
/s/Gregory T. George Group Vice March 25, 1998
- -------------------------- President of Technology
Gregory T. George Funding Inc. and a
General Partner of
Technology Funding Ltd.
The above represents the Board of Directors of Technology Funding Inc.
and the General Partners of Technology Funding Ltd.