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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, 1998
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 (pages 23 to 25) of the
Prospectus of Technology Funding Venture Capital Fund VI, LLC, as
revised June 4, 1998 (accession number 0000950133-98-002220), 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 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 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 1998.
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, 1998, there were 5,640 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,
---------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Total income $ 165,624 341,607 522,715 470,792 480,176
Net operating loss (1,450,097) (1,202,447) (856,975) (1,357,976) (838,981)
Net realized gain from
venture capital limited
partnership investments 108,591 622,207 814,400 1,358,424 --
Net realized (loss) gain from
sales of equity investments (1,535,862) 5,770,758 3,414,575 8,337,512 3,895,971
Realized losses from
investment write-downs (836,249) (53,600) (3,041,310) (399,427) (832,114)
Recovery from investments
previously written off -- -- 8,775 62,231 100,000
Net realized (loss) income (3,713,617) 5,136,918 339,465 8,000,764 2,324,876
Change in net unrealized
fair value:
Equity investments (1,639,131) (4,881,218) (3,647,984) 398,770 (4,240,635)
Secured notes receivable -- -- 309,000 (309,000) 136,000
Net (loss) income (5,352,748) 255,700 (2,999,519) 8,090,534 (1,779,759)
Net realized (loss) income
per Unit (21) 29 2 50 14
Total assets 24,420,151 29,855,568 33,890,281 41,388,167 34,205,502
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 1998, net cash used by operating activities totaled $1,575,282.
The Partnership paid management fees of $313,641 to the Managing
General Partners and reimbursed related parties for operating
expenses of $1,043,957. In addition, $46,081 was paid to the
Individual General Partners as compensation for their services.
Other operating expenses of $316,522 were paid, and interest and
other income of $144,919 was received.
In 1998 the Partnership funded equity investments of $1,134,639
and issued $234,806 in notes receivable primarily to portfolio
companies in the medical/biotechnology and communications
industries. Proceeds from sales of equity investments totaled
$1,292,093 and repayments of convertible and other notes
receivable provided $450,712. The Partnership received $57,669 in
cash distributions from venture capital limited partnership
investments. At December 31, 1998, the Partnership was committed
to fund $146,711 in additional investments as disclosed in Note 8
to the financial statements.
Cash and cash equivalents at December 31, 1998, were $3,160,675.
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
- ---------------------
1998 compared to 1997
- ---------------------
Net loss was $5,352,748 in 1998 compared to net income of $255,700
in 1997. The change was primarily due to a $7,306,620 decrease in
net realized gain from sales of equity investments, a $782,649
increase in realized losses from investment write-downs, and a
$513,616 decrease in net realized gain from venture capital
limited partnership investments. These changes were partially
offset by a $3,242,087 increase in the change in net unrealized
fair value of equity investments.
During 1998, net realized loss from sales of equity investments of
$1,535,862 was substantially attributable to sales of the
Partnership's investments in Geoworks Corporation, Nanodyne
Incorporated, and NetChannel, Inc. During 1997, net realized gain
of $5,770,758 primarily resulted from the sales of shares in
Geoworks Corporation, PolyMedica Industries, Inc., TheraTx, Inc.,
SyStemix, Inc., and Thermo Electron Corporation.
During 1998, the Partnership recorded realized losses from
investment write-downs of $836,249 primarily due to a portfolio
company in the environmental industry. During 1997, write-downs
of $53,600 were attributable to a portfolio company in the
computer systems and software industry.
During 1998 and 1997, the Partnership recorded net realized gains
from venture capital limited partnership investments of $108,591
and $622,207, respectively. These gains represented distributions
from profits of certain venture capital limited partnerships.
During 1998, the decrease in fair value of equity investments of
$1,639,131 was substantially attributable to portfolio companies
in the medical/biotechnology and computers and computer equipment
industries. These decreases were partially offset by increases in
portfolio companies in the environmental industry. In 1997, the
decrease in fair value of $4,881,218 was primarily attributable to
decreases related to stock sales, partially offset by increases in
portfolio companies in the medical/biotechnology and
communications industries.
Total operating expenses were $1,289,606 and $1,166,765 for 1998
and 1997, respectively. As disclosed in Note 2 to the financial
statements, the Managing General Partners re-evaluated allocations
to the Partnership in 1998 and determined that they had not fully
recovered allocable operating expenses, primarily salary,
benefits, and professional fees as permitted by the Partnership
Agreement. As a result, the Partnership was charged $212,420 of
additional operating expenses in 1998, of which $28,599 and
$183,821 related to 1997 and prior years, respectively. If the
additional expense had been recorded in prior years, total
operating expenses would have been $1,077,186 and $1,195,364 for
1998 and 1997, respectively.
Given the inherent risk associated with the business of the
Partnership, the future performance of the portfolio company
investments may significantly impact future 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.
YEAR 2000
- ---------
Widespread use of computer programs that use two digits rather
than four to store, calculate, and display year values in dates
may cause computer systems to malfunction in the year 2000,
resulting in significant business delays and disruptions.
The Partnership's State of Readiness
- ------------------------------------
Computer services are provided to the Partnership by its Managing
General Partner, Technology Funding Inc. ("TFI".) For several
years, TFI has sought to use Year 2000 compliant storage formats
and algorithms in its internally-developed and maintained systems.
TFI has also completed initial evaluations of computer systems,
software, and embedded technologies. Those evaluations confirmed
that certain components of its network server hardware and
operating systems, voice mail system, e-mail system, and
accounting software may have Year 2000 compliance issues. These
resources and several less-critical components of the systems
environment were all scheduled as part of normal maintenance and
replacement cycles to be replaced or upgraded as Year 2000
compatible components became available from vendors during 1998
and 1999. That program remains on schedule to provide Year 2000
capable systems timely without significant expenditures or
disruption of Partnership operations. However, the risk remains
that TFI may not be able to verify whether Year 2000 compatibility
claims by vendors are accurate, or whether changes undertaken to
achieve Year 2000 compatibility will create other undetected
problems in associated systems. Therefore, TFI anticipates that
Year 2000 compliance testing and maintenance of these systems will
continue as needed into the first quarter of 2000.
As part of Year 2000 evaluation, TFI has also assembled a database
listing its significant suppliers to assess the extent to which it
needs to prepare for any of those parties' potential failure to
remediate their Year 2000 compliance issues. TFI is reviewing
public Year 2000 statements of those suppliers and preparing
questionnaires to be sent to mission-critical vendors whose public
statements were not adequate for assessment. TFI will continue to
monitor its significant suppliers as part of its Year 2000
evaluation. However, there can be no guarantee that the systems
of other companies on which TFI relies will be timely converted,
or that failure to convert will not have a material adverse effect
on the Partnership and its operations. TFI is also working with
the Partnership's portfolio companies to determine the extent to
which their operations are vulnerable to Year 2000 issues. There
can be no guarantee that the systems of portfolio companies in
which the Partnership has invested will be timely converted, or
that failure to convert will not have a material adverse effect on
the Partnership.
The Cost to Address Year 2000 Issues
- ------------------------------------
Expenditures in 1998 related to Year 2000 issues were not material
to the Partnership's financial statements. TFI expects that
additional expenditures for Year 2000 compliance will not be
material to the Partnership.
The Risks Associated with Year 2000 Issues
- ------------------------------------------
Any failure by the portfolio companies in which the Partnership
has invested, or by those portfolio companies' key suppliers or
customers, to anticipate and avoid Year 2000 related problems at
reasonable cost could have a material adverse effect on the value
of and/or the timing of realization of value from the
Partnership's investments. If Year 2000 compliance issues are not
resolved by December 31, 1999, internal system failures or
miscalculations could cause a temporary inability to process
transactions, loss of ability to send or receive e-mail and voice
mail messages, or disruptions in other normal business activities.
Additionally, failure of third parties on whom TFI relies to
remediate their Year 2000 issues timely could result in
disruptions in the Partnership's relationship with its financial
institutions, temporary disruptions in processing transactions,
unanticipated costs, and problems related to the Partnership's
daily operations. While TFI continues to address its internal
Year 2000 issues, until TFI receives and evaluates responses from
a significant number of its suppliers, the overall risks
associated with the Year 2000 issue remain difficult to describe
and quantify. There can be no guarantee that the Year 2000 issue
will not have a material adverse effect on the Partnership and its
operations.
TFI's Contingency Plan
- ----------------------
As part of its normal efforts to assure business continuation in
the event of natural disasters, systems failures, or other
disruptions, TFI has prepared contingency plans including an
extensive Year 2000 contingency plan. Taken together with TFI's
Year 2000 remediation plan, it identifies potential points of
failure, approaches to correcting known Year 2000 problems, dates
by which the preferred corrections are anticipated to be made and
tested, and alternative approaches if the corrections are not
completed timely or are later found to be inadequate. Although
backup systems and contingency approaches have been identified for
most mission-critical systems and vendor dependencies, there
remain some systems for which no good alternative exists, and
there may be some problems that prove more intractable than
currently anticipated.
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 on pages 23 to 25 in the Technology
Funding Venture Capital Fund VI, LLC, Prospectus, revised June 4,
1998 (accession number 0000950133-98-002220), 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
1998, the Partnership incurred management fees of $280,034. 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, 1998. 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 1998, $46,081 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; in March 1999, one of the
three Individual General Partners withdrew from his position and
his Units will be transferred to his successor. 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, 1998
and 1997
Statements of Operations for the years
ended December 31, 1998, 1997 and 1996
Statements of Partners' Capital for the years
ended December 31, 1998, 1997 and 1996
Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
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, 1998.
(c) Financial Data Schedule for the year ended and as of
December 31, 1998 (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,
1998 and 1997, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period
ended December 31, 1998. 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, 1998 and
1997. 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, 1998 and 1997, and the
results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Albuquerque, New Mexico /S/KPMG LLP
March 26, 1999
BALANCE SHEETS
- --------------
December 31,
------------------------
1998 1997
-------- --------
ASSETS
Equity investments (cost basis of
$20,686,838 and $23,563,459 for 1998
and 1997, respectively) $21,029,455 25,545,207
Notes receivable (cost basis of
$202,777 for 1998) 202,777 --
---------- ----------
Total investments 21,232,232 25,545,207
Cash and cash equivalents 3,160,675 4,304,928
Due from related parties 23,135 --
Other assets 4,109 5,433
---------- ----------
Total assets $24,420,151 29,855,568
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses 66,479 66,748
Due to related parties -- 80,533
Other liabilities 15,142 17,009
---------- ----------
Total liabilities 81,621 164,290
Commitments, contingencies, and subsequent
events (Notes 2, 4, and 8)
Partners' capital:
Limited Partners
(Units outstanding of 160,000
for both 1998 and 1997) 24,328,469 27,670,313
General Partners (332,556) 39,217
Net unrealized fair value
increase from cost of
equity investments 342,617 1,981,748
---------- ----------
Total partners' capital 24,338,530 29,691,278
---------- ----------
Total liabilities
and partners' capital $24,420,151 29,855,568
========== ==========
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS
- ------------------------
For the Years Ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
Income:
Notes receivable interest $ 19,640 55,071 38,839
Short-term investment interest 145,385 283,411 436,976
Other income 599 3,125 46,900
--------- --------- ---------
Total income 165,624 341,607 522,715
Costs and expenses:
Management fees 280,034 334,168 412,622
Individual General
Partners' compensation 46,081 43,121 30,806
Operating expenses:
Administrative and
investor services 696,680 608,253 412,656
Investment operations 325,684 328,943 309,143
Computer services 181,617 134,884 134,514
Professional fees 85,625 94,685 79,949
--------- --------- ---------
Total operating expenses 1,289,606 1,166,765 936,262
--------- --------- ---------
Total costs and expenses 1,615,721 1,544,054 1,379,690
--------- --------- ---------
Net operating loss (1,450,097) (1,202,447) (856,975)
Net realized gain from venture
capital limited partnership
investments 108,591 622,207 814,400
Net realized (loss) gain from
sales of equity investments (1,535,862) 5,770,758 3,414,575
Realized losses from
investment write-downs (836,249) (53,600) (3,041,310)
Recovery from investments
previously written off -- -- 8,775
--------- --------- ---------
Net realized (loss) income (3,713,617) 5,136,918 339,465
Change in net unrealized fair value:
Equity investments (1,639,131) (4,881,218) (3,647,984)
Secured notes receivable -- -- 309,000
--------- --------- ---------
Net (loss) income $(5,352,748) 255,700 (2,999,519)
========= ========= =========
Net realized (loss) income
per Unit $ (21) 29 2
========= ========= =========
See accompanying notes to financial statements.
STATEMENTS OF PARTNERS' CAPITAL
- -------------------------------
For the years ended December 31, 1998, 1997 and 1996:
Net Unrealized Fair
Value Increase
(Decrease) From Cost
---------------------------
Limited General Equity Secured Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ------------- -----
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 of equity
investments -- -- (4,881,218) -- (4,881,218)
---------- --------- ---------- ------- ----------
Partners' capital,
December 31, 1997 27,670,313 39,217 1,981,748 -- 29,691,278
Net realized loss (3,341,844) (371,773) -- -- (3,713,617)
Change in net unrealized
fair value of equity
investments -- -- (1,639,131) -- (1,639,131)
---------- --------- ---------- ------- ----------
Partners' capital,
December 31, 1998 $24,328,469 (332,556) 342,617 -- 24,338,530
========== ========= ========== ======= ==========
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS
- ------------------------
For The Years Ended December 31,
-----------------------------------
1998 1997 1996
------ ------ ------
Cash flows from operating
activities:
Interest and other income
received $ 144,919 286,537 456,029
Cash paid to vendors (316,522) (332,753) (189,412)
Cash paid to related parties (1,403,679) (1,224,672) (1,956,180)
--------- ---------- ----------
Net cash used by operating
activities (1,575,282) (1,270,888) (1,689,563)
--------- ---------- ----------
Cash flows from investing
activities:
Notes receivable issued (234,806) -- (678,030)
Purchase of equity investments (1,134,639) (6,825,868) (7,528,174)
Repayments of convertible and
other notes receivable 450,712 -- 62,500
Proceeds from sales of equity
investments 1,292,093 10,946,242 5,600,091
Recovery of investments
previously written off -- -- 170
Distributions from venture
capital limited partnerships 57,669 417,458 507,908
--------- ---------- ----------
Net cash provided (used) by
investing activities 431,029 4,537,832 (2,035,535)
--------- ---------- ----------
Cash flows from financing
activities:
Distributions to Limited
and General Partners -- (4,279,267) (3,565,256)
--------- ---------- ----------
Net cash used by financing
activities -- (4,279,267) (3,565,256)
--------- ---------- ----------
Net decrease in cash and
cash equivalents (1,144,253) (1,012,323) (7,290,354)
Cash and cash equivalents
at beginning of year 4,304,928 5,317,251 12,607,605
--------- ---------- ----------
Cash and cash equivalents
at end of year $3,160,675 4,304,928 5,317,251
========= ========== ==========
STATEMENTS OF CASH FLOWS (continued)
- -----------------------------------
For The Years Ended December 31,
-----------------------------------
1998 1997 1996
------ ------ ------
Reconciliation of net (loss)
income to net cash used by
operating activities:
Net (loss) income $(5,352,748) 255,700 (2,999,519)
Adjustments to reconcile net
(loss) income to net cash
used by operating activities:
Net realized gain from
venture capital limited
partnership investments (108,591) (622,207) (814,400)
Net realized (loss) gain
from sales of equity
investments 1,535,862 (5,770,758) (3,414,575)
Realized losses from
investment write-downs 836,249 53,600 3,041,310
Recovery from investments
previously written off -- -- (8,775)
Change in net unrealized
fair value:
Equity investments 1,639,131 4,881,218 3,647,984
Secured notes receivable -- -- (309,000)
Changes in:
Accrued interest on convertible
and secured notes receivable (20,705) (55,069) (35,436)
Accounts payable and
accrued expenses (269) 8,447 9,423
Due to/from related parties (103,668) (8,984) (761,162)
Deferred income -- -- (31,250)
Other, net (543) (12,835) (14,163)
--------- ---------- ----------
Net cash used by operating
activities $(1,575,282) (1,270,888) (1,689,563)
========= ========== ==========
Non-cash investing activities:
Non-cash exercise of warrants $ -- -- 328,985
========= ========== ==========
Reclassification of secured
notes to equity investments
(subordinated notes receivable) $ -- -- 705,000
========= ========== ==========
Stock distributions to General
Partners $ -- -- 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 withdrew from his position in March 1999 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. 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.
Investments
- -----------
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 $6,797,268 and
$9,080,006 at December 31, 1998 and 1997, 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 $14,232,187 and $16,465,201 at December 31, 1998 and 1997,
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, 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.
Notes Receivable
----------------
The secured and unsecured notes receivable portfolio includes accrued
interest less 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. Secured and unsecured 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.
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. The
difference in the total book and tax cost basis of investments as of
December 31, 1998 is not material.
Net Realized Income (Loss) Per Unit
- -----------------------------------
Net realized income (loss) per Unit is calculated by dividing the number of
Units outstanding of 160,000 at December 31, 1998, 1997, and 1996 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,
-----------------------------------
1998 1997 1996
------ ------ ------
Management fees $280,034 334,168 412,622
Individual General
Partners' compensation 46,081 43,121 30,806
Reimbursable operating expenses:
Administrative and investor
services 519,669 401,967 325,581
Investment operations 272,610 309,431 291,495
Computer services 181,617 127,001 134,514
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 $23,754 and $57,361 at December 31, 1998
and 1997, 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; in March 1999, one of the Individual General Partners
withdrew 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. There were
$46,889 of such expenses due from related parties at December 31, 1998,
compared to $23,172 payable to related parties at December 31, 1997.
The Managing General Partners allocate operating expenses incurred in
connection with the business of the Partnership based on employee hours
incurred. In 1998, operating cost allocations to the Partnership were re-
evaluated. The Managing General Partners determined that they had not
fully recovered allocable operating expenses, primarily salary, benefits,
and professional fees, as permitted by the Partnership Agreement. As a
result, the Partnership was charged additional operating expenses of
$212,420 consisting of $28,599, $43,731,and $140,090 for 1997, 1996 and
prior years, respectively. Had the additional expenses been recorded in
prior years, operating expenses would have been $1,077,186, $1,195,364, and
$979,993 for 1998, 1997, and 1996, 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, 1998, the Partnership had an indirect interest
in non-transferable Conversion Technologies International, Inc., White
Electronic Designs Corporation, Endocare, Inc. and PolyMedica, Inc. options
at an exercise price higher than the current market value. At December 31,
1998, the Partnership had an indirect interest in non-transferable
Thermatrix Inc. options with a fair market value of $8,000.
In September of 1996, the Partnership made a tax distribution of 29,269
Thermatrix 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, 1998, and December 31, 1997, equity investments consisted of:
December 31, 1998 December 31, 1997
Principal ----------------- ------------------
Investment Amount or Cost Fair Cost Fair
Industry/Company Position Date Shares Basis Value Basis Value
- ---------------- -------- ---- ------ ----- ----- ----- -----
Communications
- --------------
NetChannel, Escrowed
Inc. sales
proceeds 06/98 $161,983 $161,983 161,983 -- --
NetChannel, Series B
Inc. Preferred
shares 10/96 615,431 -- -- 321,749 325,000
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
NewsEDGE Common
Corporation shares 05/98 3,677 46,882 36,542 -- --
US WEST Series D
Media Group Preferred
shares 02/97 220 10,447 20,361 10,447 13,339
Women.com Networks Series A
(formerly Wire Preferred
Networks, Inc.) shares 02/96 159,300 215,055 524,097 215,055 484,272
Women.com Networks Series B
(formerly Wire Preferred
Networks, Inc.) shares 02/96 194,642 437,945 640,372 437,945 591,712
Women.com Networks Series C
(formerly Wire Preferred
Networks, Inc.) shares 07/97 71,576 217,593 235,486 217,593 217,593
Women.com Networks Series D
(formerly Wire Preferred
Networks, Inc.) shares 06/98 121,581 400,001 400,001 -- --
Computers and Computer Equipment
- --------------------------------
White Electronic
Designs Corporation
(formerly
Electronic Common
Designs, Inc.) shares 03/94-11/98 822,983 2,958,084 959,608 2,958,084 2,030,786
Splash Technology Common
Holdings, Inc. Shares 11/97 5,000 198,812 37,250 198,812 106,250
Computer Systems and Software
- -----------------------------
Geoworks Common
Corporation shares 06/94 65,110 -- -- 389,801 594,454
Geoworks Common
Corporation shares 02/97 50,000 -- -- 956,250 456,500
Photon Dynamics, Common
Inc. shares 07/96 50,000 300,000 258,450 300,000 152,000
Velocity Common
Inc. share
warrant
at $1.00;
expiring
03/00 03/95 12,500 0 0 0 0
Velocity Subordinated 08/95-
Inc. notes (1) 08/97 $1,550,000 0 0 0 0
Versant Common
Corporation shares 05/97 1,493 13,250 3,416 13,250 20,275
Electronic Design Automation
- ----------------------------
Cadence Design Common
Systems, Inc. shares 07/96 24,000 313,439 674,400 313,439 560,640
Synopsys, Inc. Common
shares 02/97 14,000 560,005 735,000 560,005 515,760
Environmental
- -------------
Conversion Common
Technologies shares
International,
Inc. 05/96 69,180 0 692 500,000 65,721
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 0 0 2,767
Conversion Series A
Technologies Preferred
International, shares 08/97-
Inc. 04/98 26,460 0 2,365 236,250 236,250
Naiad Technologies,Series A
Inc. Preferred
shares 12/95 50,000 25,000 162,500 25,000 162,500
Naiad Technologies,Series B
Inc. Preferred
Shares 11/96 110,102 220,204 357,832 220,204 357,832
Naiad Technologies,Series C
Inc. Preferred
Shares 11/97 49,230 159,998 159,998 159,998 159,998
Thermatrix Inc. Common
shares 06/96 65,970 346,338 203,860 346,338 80,028
Industrial/Business Automation
- ------------------------------
Nanodyne Series B
Incorporated Preferred
shares 07/93 228,571 -- -- 500,000 342,857
Nanodyne Series B
Incorporated Preferred
shares 01/94 37,264 -- -- 81,515 55,896
Nanodyne Series B
Incorporated Preferred
shares 04/95 42,126 -- -- 92,150 63,189
Nanodyne Series C
Incorporated Preferred
shares 10/97 40,585 -- -- 60,268 60,878
Nanodyne Common share
Incorporated warrants at
$1.20;
expiring
10/02 10/97 22,829 -- -- 609 6,849
PRI Automation, Common
Inc. shares 02/98-09/98 73 1,740 1,868 -- --
Information Technology
- ----------------------
WorldRes, Inc. Series B
Preferred
shares 01/97 221,894 750,002 821,008 750,002 821,008
WorldRes, Inc. Series X
warrant at a
price TBD;
expiring Aggregate
10/02 10/97 $ 28,125 28 0 28 0
WorldRes, Inc. Series C
Preferred
shares 12/97 139,358 515,625 515,625 515,625 515,625
WorldRes, Inc. Convertible
note
interest 10/97 $140,625 -- -- 2,528 2,528
Medical/Biotechnology
- ---------------------
Acusphere, Inc. Series B
Preferred
shares 05/95 125,000 200,000 412,500 200,000 375,000
Acusphere, Inc. Series C
Preferred
shares 05/96 163,551 350,000 539,718 350,000 490,653
Acusphere, Inc. Series D
Preferred
shares 11/97 52,083 156,250 171,874 156,250 156,250
Acusphere, Inc. Series E
Preferred
shares 10/98 27,576 91,001 91,001 -- --
ADESSO Specialty Series C
Services Preferred
Organization shares
Inc. 01/97 177,420 1,100,004 1,490,328 1,100,004 1,490,328
ADESSO Specialty Series D
Services Preferred
Organization shares
Inc. 12/97 19,524 164,002 164,002 164,002 164,002
Avalon Imaging, Series D
Inc. Preferred
shares 12/98 75,690 90,071 90,071 -- --
Biex, Inc. Series A
Preferred
shares 07/93 128,205 83,333 320,513 83,333 320,513
Biex, Inc. Series B
Preferred
shares 10/94 63,907 63,907 159,768 63,907 159,768
Biex, Inc. Series B
Preferred
share warrant
at $1.00;
expiring
10/99 10/94 23,540 8 35,310 8 35,310
Biex, Inc. Series C
Preferred
shares 06/95 83,334 83,334 208,335 83,334 208,335
Biex, Inc. Series C
Preferred
shares 12/95 83,333 83,333 208,333 83,333 208,333
Biex, Inc. Series C
Preferred
shares 04/96 83,333 83,333 208,333 83,333 208,333
Biex, Inc. Series D
Preferred
shares 08/96 111,115 166,673 277,788 166,673 277,788
Biex, Inc. Series D
Preferred
shares 03/97 44,446 66,669 111,115 66,669 111,115
Biex, Inc. Series E
Preferred
shares 08/97 13,333 33,334 33,333 33,334 33,333
Biex, Inc. Series E
Preferred
warrant
at $2.50;
expiring
10/03 10/98 35,250 0 0 -- --
Cardiac Common
Pathways shares
Corporation 06/91 7,134 72,267 29,164 72,267 46,728
CardioTech Common
International, shares
Inc. 06/96 195,600 397,788 293,400 397,788 528,120
CareCentric Series A
Solutions, Inc. Preferred
shares 10/95 100,000 150,000 105,000 150,000 98,838
CareCentric Series B
Solutions, Inc. Preferred
shares 09/96 188,499 282,749 197,924 282,749 186,310
CareCentric Series C
Solutions, Inc. Preferred
shares 12/97 77,627 81,508 81,508 81,508 81,508
CareCentric Common
Solutions, share
Inc. warrant
at $.15;
expiring
12/02 12/97 38,813 34,932 34,932 34,932 34,932
CareCentric Convertible
Solutions, Inc. notes (1)
04/98-6/98 $96,250 102,327 102,327 -- --
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 33,724 508,819 159,346 508,819 306,214
Endocare, Inc. Common
shares 08/96 7,500 22,500 14,910 22,500 26,850
Endocare, Inc. Common
share
warrant
at $3.00;
expiring
08/01 08/96 112,500 0 0 0 48,938
Endocare, Inc. Common
shares 01/97 52,500 183,750 104,370 183,750 187,950
Endocare, Inc. Common
shares 01/97 249,000 622,500 495,012 622,500 844,314
Endocare, Inc. Common
shares 04/98 71,429 250,002 142,001 -- --
Hybridon, Inc. Common
shares 03/98 1,205 42,161 1,832 -- --
LifeCell Common
Corporation shares 02/92 242,623 974,824 1,052,499 974,824 1,162,164
LifeCell Common
Corporation shares 11/95 4,906 13,854 21,282 13,854 23,500
LifeCell Common
Corporation shares 08/96 12,500 38,750 54,225 38,750 59,875
LifeCell Common
Corporation shares 12/96 5,818 15,361 25,238 15,361 27,868
LifeCell Common
Corporation shares 03/97 1,601 4,148 6,945 4,148 7,669
LifeCell Common
Corporation shares 03/97 83,612 216,637 362,709 216,637 400,501
Matrix Common
Pharmaceutical, shares
Inc. 01/92 319,728 800,001 851,436 800,001 1,090,272
Matrix Common
Pharmaceutical, shares
Inc. 01/95 1,905 438 5,073 438 6,496
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
OraVax, Common
Inc. shares 04/98 1,921 2,659 772 -- --
Oxford Common
GlycoSciences Plc shares 08/93 106,772 499,963 447,054 499,963 373,708
Pharmadigm, Series A
Inc. Preferred
shares 04/93 161,290 198,000 390,322 198,000 354,838
Pharmadigm, Series A
Inc. Preferred
shares 12/94 107,526 135,332 260,213 135,332 236,557
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 2,275 0 1,083
Pharmadigm, Series B
Inc. Preferred
shares 05/96 68,889 137,779 166,711 137,779 151,556
Pharmadigm, Series C
Inc. Preferred
shares 06/97 126,000 274,428 274,428 274,428 274,428
Pharmadigm, Series C
Inc. Preferred
share
warrant
at $2.20;
expiring
06/00 06/97 8,820 2,772 3,704 2,772 2,772
Pharmadigm, Series D
Inc. Preferred
shares 06/98 82,438 199,500 199,500 -- --
Pharmos Common 04/95 &
Corporation shares 11/95 60,331 45,248 95,444 45,248 121,266
Pherin Series B
Pharmaceuticals, Preferred
Inc. shares 08/91 200,000 200,000 400,000 200,000 400,000
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
Retail/Consumer Products
- ------------------------
Glynlyon, Inc.
(formerly
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 0 1,533 99,999 55,199
Venture Capital Limited Partnership Investments
- -----------------------------------------------
Alta IV, Limited Ltd.
Partnership Partnership
interests various $1,000,000 146,698 123,215 146,698 209,729
Batterson, Ltd.
Johnson, and Partnership
Wang Limited interests
Partnership various $500,000 280,634 180,888 280,991 264,412
Columbine Ltd.
Venture Fund II, Partnership
L.P. interests various $750,000 653,769 690,760 653,769 794,113
Delphi Ltd.
Ventures, L.P. Partnership
interests various $1,000,000 652,842 278,901 652,842 315,250
Medical Science Ltd.
Partners, L.P. Partnership
interests various $500,000 318,583 383,845 366,266 572,975
O,W&W Pacrim Ltd.
Investments Partnership
Limited interests various $87,650 87,650 37,107 87,650 87,650
Trinity Ventures Ltd.
IV, L.P. Partnership
interests various $117,195 15,628 48,494 7,814 69,486
---------- ---------- ---------- ----------
Total equity investments $20,686,838 21,029,455 23,563,459 25,545,207
========== ========== ========== ==========
- -- 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 12%.
Marketable Equity Securities
- ----------------------------
At December 31, 1998 and 1997, marketable equity securities had aggregate
costs of $9,045,454 and $9,469,098, respectively, and aggregate fair values
of $6,797,268 and $9,080,006, respectively. The net unrealized losses at
December 31, 1998 and 1997, included gross gains of $911,588 and
$1,898,488, respectively.
Acusphere, Inc.
- ---------------
In October 1998, the Partnership made an additional investment in the
company by purchasing 27,576 Series E Preferred shares for $91,001. The
pricing of this round, in which third parties participated, indicated an
increase in fair value of $102,189 for the Partnership's existing
investment.
Avalon Imaging, Inc.
- --------------------
In December 1998, the Partnership purchased 75,690 Series D Preferred
shares for $90,071.
CareCentric Solutions, Inc.
- ---------------------------
In the second quarter of 1998, the Partnership issued $96,250 in
convertible notes receivable to the company.
Conversion Technologies International, Inc.
- -------------------------------------------
In December 1998, the Partnership wrote off the cost basis of its
investment in the company and realized a loss of $736,250. This was based
upon the opinion of the Managing General Partners that the operating status
of the company indicated a permanent decline in value.
Endocare, Inc.
- --------------
In April 1998, the Partnership purchased 71,429 common shares for $250,002
in a private placement. At December 31, 1998, the Partnership recorded a
$601,761 decrease in the fair value of its total investment in the company
based on the publicly traded market price of the company's common shares.
Geoworks Corporation
- --------------------
In November 1998, the Partnership sold its remaining investment in the
company for total proceeds of $610,866 and realized a loss of $735,185.
Nanodyne Incorporated
- ---------------------
In December 1998, the Partnership sold its entire investment in the company
for total proceeds of $138,751 and realized a loss of $595,791
NetChannel, Inc.
- ----------------
In June 1998, America Online, Inc., completed its acquisition of the
company. The Partnership recorded a realized loss of $201,349 on the
completion of the sale transaction. Proceeds of $469,533 and $450,712 were
received from the sale of the Partnership's preferred shares and repayment
of convertible and other notes receivable. An amount of $161,983 in future
sale proceeds will remain in escrow through December 1999 pending final
resolution of the sale.
Neurex Corporation
- ------------------
In 1998, the Partnership sold its entire investment in the company for
total proceeds of $72,943 and realized a loss of $3,538.
Oxford GlycoSciences Plc
- -------------------------
The company completed its initial public offering on the London Stock
Exchange in April 1998 at 280 pence per common share. The Partnership's
preferred shares were converted to 106,772 common shares.
Pharmadigm, Inc.
- ----------------
In June 1998, the Partnership made an additional investment in the company
by purchasing 82,438 Series D Preferred shares for $199,500. The pricing
of this round, in which third parties participated, indicated a $76,419
increase in the fair value of the Partnership's total investment.
White Electronic Designs Corporation (formerly Electronic Designs, Inc.)
- ------------------------------------------------------------------------
In October 1998, Electronic Designs, Inc. merged with Bowmar Instruments
Corporation and became White Electronic Designs Corporation. The
Partnership received 822,983 shares in the new company.
Women.com Networks (formerly Wire Networks, Inc.)
- -----------------------------------------------
In February 1998, the company changed its name from Wire Networks, Inc. to
Women.com Networks. In June 1998, the Partnership made an additional
investment in the company by purchasing 121,581 Series D Preferred shares
for $400,001. The pricing of this round, in which third parties
participated, indicated a $106,378 increase in the fair value of the
Partnership's total investment.
In January 1999, the company and Hearst New Media & Technology, a wholly
owned unit of the Hearst Corporation, announced the formation of a joint
venture which will be a leading online community for women on the Web.
YES! Entertainment Corporation
- ------------------------------
In December 1998, the Partnership wrote off the cost basis of its
investment in the company and realized a loss of $99,999. This was based
upon the opinion of the Managing General Partners that the operating status
of the company indicated a permanent decline in value.
Venture Capital Limited Partnerships
- ------------------------------------
The Partnership made additional investments totaling $7,812 in venture
capital limited partnerships during the year ended December 31, 1998. The
Partnership received cash distributions of $57,669 from Alta IV, Limited
Partnership, Batterson, Johnson and Wang, Limited Partnership, Delphi
Ventures, L.P., and Trinity Ventures IV, L.P. The Partnership also
received stock distributions of PRI Automation, Inc., Hybridon, Inc.,
Neurex Corporation, NewsEDGE Corporation and OraVax, Inc. with fair values
of $1,740, $42,161, $5,522, $46,882 and $2,659, respectively.
Distributions totaling $108,591 were recorded as realized gains and
distributions totaling $48,042 were recorded as returns of capital.
The Partnership recorded a $530,179 decrease in fair value as a result of a
net decrease in the fair value of the underlying investments of the
partnerships, caused, in part, by distributions received from the
partnerships.
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. Portions of the
Partnership's Conversion Technologies International, Inc., White Electronic
Designs Corporation, and Thermatrix Inc. investments are restricted.
In January 1999, the Partnership sold its entire investment in Synopsys,
Inc. for proceeds of $812,000 and realized a gain of $251,995. Subsequent
to December 31, 1998, the Partnership's Endocare, Inc. investment increased
to $1,880,681 as a result of an increase in the publicly traded market
price at March 22, 1999. The Partnership's investment in WorldRes, Inc.
increased to $2,185,576 as a result of the pricing of a March 1999 round of
financing in which third parties participated. The Partnership's LifeCell
Corporation and Matrix Pharmaceutical, Inc. investments decreased to
$1,360,358 and $579,667, respectively, as a result of decreases in the
publicly traded market prices at March 22, 1999.
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,
----------------------------------
1998 1997 1996
------ ------ ------
(Decrease) increase in fair value
from cost of marketable equity
securities $(2,248,186) (389,092) 4,890,039
Increase in fair value from cost of
non-marketable equity securities 2,590,803 2,370,840 1,972,927
--------- --------- ----------
Net unrealized fair value increase
from cost at end of year 342,617 1,981,748 6,862,966
Net unrealized fair value increase
from cost at beginning of year 1,981,748 6,862,966 10,510,950
--------- --------- ----------
Change in net unrealized fair value
of equity investments $(1,639,131) (4,881,218) (3,647,984)
========= ========= ==========
6. Notes Receivable
----------------
Activity from January 1 through December 31, 1998 consisted of:
1998
------
Balance, beginning of year $ --
Secured notes receivable issued 35,962
Unsecured notes receivable issued 198,844
Repayments of secured notes receivable (35,962)
Increase in accrued interest 3,933
-------
Balance, end of year $202,777
=======
The interest rate on notes receivable at December 31, 1998, was 9.5%.
There was no activity in the loan loss allowance in 1998. There was no
notes receivable activity in 1997.
7. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 1998 and 1997 consisted of:
1997 1996
------ ------
Demand accounts $ 55,472 60,609
Money-market accounts 3,105,203 4,244,319
--------- ---------
Total $3,160,675 4,304,928
========= =========
8. 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, 1998, unfunded
investment commitments to portfolio companies and venture capital limited
partnerships totaled $146,711.
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 29, 1999 By:
--------------------------------
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
--------- -------- ----
President, Chief March 29, 1999
- ------------------------ Executive Officer,
Charles R. Kokesh Chief Financial Officer
and Chairman of
Technology Funding Inc.
and Managing General
Partner of Technology
Funding Ltd.
The above represents the Board of Directors of Technology Funding Inc. and
the General Partners of Technology Funding Ltd.