Item 1. BUSINESS - ------ --------
Technology Funding Partners III, L.P. (the Partnership or the Registrant) was formed as a Delaware limited partnership on December 4, 1986. For the period from December 5, 1986, through March 25, 1987, the Partnership was inactive. The Partnership filed a registration statement with the Securities and Exchange Commission on March 25, 1987, and commenced selling Units of limited partnership interest (Units) in April 1987. On June 2, 1987, the minimum number of Units required to commence Partnership operations (6,000) had been sold. The offering terminated with 160,000 Units sold on February 3, 1989. The Partnership's original contributed capital was $40,040,054, consisting of $40,000,000 from Limited Partners for 160,000 Units and $40,054 from the General Partners, Technology Funding Ltd. (TFL) and Technology Funding Inc. (TFI). The General Partners do not own any Units.
The principal investment objectives of the Partnership are long-term capital appreciation from venture capital investments in new and developing companies and preservation of Limited Partner capital through risk management and active involvement with such companies (portfolio companies). The Partnership's investments in portfolio companies primarily consist of equity securities such as common and preferred shares, but also include debt convertible into equity securities and warrants and options to acquire equity securities. Although venture capital investments offer the opportunity for significant gains, such investments involve a high degree of business and financial risk that can result in substantial losses. Among these are the risks associated with investment in companies in an early stage of development or with little or no operating history, companies operating at a loss or with substantial variations in operating results from period to period, and companies with the need for substantial additional capital to support expansion or to achieve or maintain a competitive position. Such companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and service capabilities, and a larger number of qualified managerial and technical personnel. There is no ready market for many of the Partnership's investments. The Partnership's investments in portfolio companies are generally subject to restrictions on sale because they were acquired from the issuer in private placement transactions or because the Partnership is an affiliate of the issuer.
The Partnership was organized as a business development company under the Investment Company Act of 1940, as amended (the Act), and operates as a nondiversified investment company, as defined in the Act. The Partnership's term was extended for a two-year period to December 31, 1998, pursuant to unanimous approval by the Management Committee on September 13, 1996. The Partnership term was further extended to December 31, 2000, with an amendment by the Management Committee and approved by a majority of the Limited Partners. On October 25, 2000, the Management Committee voted to extend the life of the Partnership to December 31, 2002. On March 15, 2002, the Individual General Partners recommended a proxy be sent to the Limited Partners requesting an extension of the Partnership's term to December 31, 2003, and to authorize the Partnership's Management Committee to extend the Partnership for up to two one-year additional terms.
Item 2.
Item 2. PROPERTIES - ------ ----------
The Registrant has no material physical properties.
Item 3.
Item 3. LEGAL PROCEEDINGS - ------ -----------------
In October 2000, Kanematsu Corporation, a creditor of one of the Partnership's portfolio companies, initiated an arbitration proceeding against the Partnership, two affiliated partnerships, and a fourth co-investor. Kanematsu was seeking to recover $2,000,000, the purchase price in a contract by which the Partnership and the other entities were alleged to have agreed to purchase certain debt securities of the portfolio company from Kanematsu. The Partnership and affiliated partnerships asserted counterclaims against Kanematsu. On February 12, 2002, the Partnership, affiliated partnerships and the co-investor were awarded $4,000,000 and all of Kanematsu's claims were denied. The award is in full settlement of all claims and counterclaims. Kanematsu has indicated that it will petition for reconsideration and, if necessary, will appeal.
From time to time, the Partnership is subject to routine litigation incidental to the business of the Partnership. Although there can be no assurances as to the ultimate disposition of these matters and the proceeding disclosed above, it is the opinion of the Managing General Partners, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Partnership.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ ---------------------------------------------------
There were no matters submitted to a vote of the Limited Partners during 2001.
PART II
Item 5.
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, 2001, there were 5,661 record holders of Units.
(c) The Registrant, being a partnership, does not pay dividends. Cash distributions, however, may be made to the partners pursuant to the Partnership Agreement.
Item 6.
Item 6. SELECTED FINANCIAL DATA - ------ -----------------------
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ------ ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS -----------------------------------
Financial Condition, Liquidity and Capital Resources - ----------------------------------------------------
The Partnership operates as a business development company under the Investment Company Act of 1940 and makes venture capital investments in new and developing companies. The Partnership's financial condition is dependent upon the success of the portfolio companies. There is no ready market for many of the Partnership's investments. It is possible that some of its venture capital investments may be a complete loss or may be unprofitable and that others will appear likely to become successful, but may never realize their potential. The valuation of the Partnership's investments in securities for which there are no available market quotes is subject to the estimate of the Managing General Partners in accordance with the valuation guidance described in Note 1 to the financial statements. In the absence of readily obtainable market values, the estimated fair value of the Partnership's investments may differ significantly from the values that would have been used had a ready market existed.
For the year ended December 31, 2001, net cash used by operating activities totaled $1,663,254. The Partnership paid management fees of $180,976 to the Managing General Partners and reimbursed related parties for operating expenses of $1,151,438. In addition, $64,545 was paid to the Individual General Partners as compensation for their services. Other operating expenses and interest expense paid totaled $467,280 and $73,404, respectively. Interest income of $274,389 was received.
For the year ended December 31, 2001, the Partnership funded equity investments of $1,809,683, primarily to portfolio companies in the medical/biotechnology and information technology industries, and issued $500,000 in notes receivable to a portfolio company in the environmental industry. Proceeds from sales of equity investments totaled $2,402,744 and repayments of notes receivable were $333. The Partnership received $225,458 in cash distributions from venture capital limited partnership investments. The Partnership repaid $3,000,000 in short-term borrowings.
Cash and cash equivalents at December 31, 2001, were $6,253,950. 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 - ---------------------
2001 compared to 2000 - ---------------------
The net decrease in partners' capital resulting from operations was $543,817 in 2001 compared to a net decrease in partners' capital resulting from operations of $17,945,451 in 2000. The change was primarily due to decreased unrealized depreciation on equity investments and notes receivable, decreased realized loss from impairment write-downs and decreased investment loss, partially offset by a decrease in net realized gain from sales of equity investments.
Unrealized depreciation on equity investments was $2,779,168 and $3,825,605 at December 31, 2001 and 2000, respectively. During the year ended December 31, 2001, the net decrease in unrealized depreciation of equity investments of $1,046,437 was primarily attributable to favorable events and market conditions for portfolio companies in the medical/biotechnology and communications industries. Equity investments sold or written off during 2001 contributed a $1,009,933 net decrease in unrealized depreciation as the depreciation was realized upon sale or write- off. In 2000, the net increase in unrealized depreciation of equity investments of $20,273,430 was primarily attributable to decreases in the value of the Partnership's marketable equity securities and the fair value of the Partnership's investments in restricted securities.
Net realized gain from sales of investments during 2001 totaled $1,514,305 and primarily resulted from gains on the sale of shares of Photon Dynamics, Inc. During 2000, net realized gain from sales of equity investments of $10,703,511 primarily resulted from gains on the sales of shares in Matrix Pharmaceuticals, Inc., Oxford GylcoSciences Plc and White Electronic Designs Corporation.
Unrealized depreciation on notes receivable investments was $5,153,120 and $4,839,250 at December 31, 2001 and 2000, respectively. During 2001, the Partnership recorded an increase in unrealized depreciation of $313,870 primarily related to the decrease in fair value of loans made to a portfolio company in the environmental industry. During 2000, the Partnership recorded an increase in unrealized depreciation of notes receivable of $4,839,250 primarily related to a decrease in the fair value of loans made to Sutmyn Storage Corporation, a portfolio company in the computer equipment, systems and software industry.
During 2001, the Partnership recorded realized losses from impairment write-downs on investments of $1,727,140, which represents the Partnership's total investment in Adesso Healthcare Technology Services, Inc. Adesso ceased operations in the third quarter of 2001. During 2000, the Partnership recorded realized losses from impairment write-downs on investments of $2,392,941, which represents the Partnership's total investment in Biex, Inc. and its equity investment in Thermatrix Inc. Biex, Inc. suspended operations in November 2000 after it was unable to obtain additional funding.
Investment expenses were $1,697,895 and $2,825,963 for 2001 and 2000, respectively. In the second quarter of 2000, the Managing General Partners billed the Partnership an additional $182,297 for investment management expenses incurred by the General Partners in 1998 and 1999, but not previously billed to the Partnership. In the fourth quarter of 2000, the Managing General Partners billed the Partnership an additional $763,117 for operating expenses relating to prior years that had not been fully recovered as permitted by the Partnership Agreement. If these expenses had been billed in prior years, investment expenses for 2000 would have been $1,880,549. The decrease is primarily due to decreased management fees and personnel costs, partially offset by increased professional fees due to the Kanematsu arbitration and increased interest expense.
Interest income was $309,810 and $1,158,257 for 2001 and 2000, respectively. The decrease was primarily the result of secured notes receivable being placed on non-accrual status on September 30, 2000.
During 2001, the Partnership recorded net realized gains from venture capital limited partnership investments of $324,536 as compared to gains of $587,735 during 2000. The gains represented distributions from profits of venture capital limited partnerships.
Given the inherent risk associated with the business of the Partnership, the future performance of the portfolio company investments may significantly impact future operations.
2000 compared to 1999 - ---------------------
The net decrease in partners' capital resulting from operations was $17,945,451 in 2000 compared to a net increase in partners' capital resulting from operations of $14,161,293 in 1999. The change was primarily due to increased unrealized depreciation on equity investments and notes receivable, an increase in realized losses from impairment write-downs on investments and increased operating expenses, partially offset by an increase in net realized gain from sales of equity investments, increased interest income and an increase in realized gains from venture capital limited partnership investments.
Unrealized depreciation on equity investments was $3,825,605 at December 31, 2000, compared to unrealized appreciation on equity investments of $16,447,825 at December 31, 1999. During the year ended December 31, 2000, the net decrease in unrealized appreciation of equity investments of $20,273,430 was primarily attributable to a $14,581,596 decrease in fair value of equity investments to reflect unfavorable events and market conditions for the Partnership's public and restricted holdings. Equity investments sold during 2000 resulted in a $3,824,087 decrease in unrealized appreciation as the appreciation was realized upon sale. The remaining decrease is primarily attributable to unfavorable events and market conditions for portfolio companies in the communications, computer and computer equipment, information technology and medical/biotechnology industries. In 1999, the net increase in unrealized appreciation of equity investments of $16,105,208 was primarily attributable to increases in portfolio companies in the medical/biotechnology, communications, information technology, computers and computer equipment, and computer systems and software industries.
Unrealized depreciation on notes receivable investments was $4,839,250 and $0 at December 31, 2000 and 1999, respectively. During 2000, the Partnership recorded an increase in unrealized depreciation of notes receivable of $4,839,250 primarily related to loans made to Sutmyn Storage Corporation, a portfolio company in the computer equipment, systems and software industry.
During 2000, the Partnership recorded realized losses from impairment write-downs on investments of $2,392,941, which represents the Partnership's total investment in Biex, Inc. and its equity investment in Thermatrix Inc. Biex, Inc. suspended operations in November 2000 after it was unable to obtain additional funding. There were no impairment write-downs in 1999.
Investment expenses were $2,825,963 and $1,306,723 for 2000 and 1999, respectively. In the second quarter of 2000, the Managing General Partners billed the Partnership an additional $182,297 for investment management expenses incurred by the General Partners in 1998 and 1999, but not previously billed to the Partnership. In the fourth quarter of 2000, the Managing General Partners billed the Partnership an additional $763,117 for operating expenses relating to prior years that had not been fully recovered as permitted by the Partnership Agreement. If these expenses had been billed in prior years, investment expenses for 2000 and 1999 would have been $1,880,549 and $1,653,930, respectively. In December 2000, the Limited Partners of the Partnership approved an amendment to the Partnership Agreement so that the salary and benefits of a controlling person of a Managing General Partner directly involved in carrying out the business of the Partnership are expenses of the Partnership. This resulted in additional operating expenses in 2000 of $66,137.
During 2000, net realized gain from sales of equity investments of $10,703,511 primarily resulted from gains on the sales of shares in Matrix Pharmaceuticals, Inc., Oxford GylcoSciences Plc and White Electronic Designs Corporation. During 1999, net realized loss from sales of equity investments of $883,446 primarily resulted from losses on the sales of shares in Naiad Technologies, Inc., CardioTech International, Inc., CareCentric Solutions, Inc. and Splash Technology Holdings, Inc., partially offset by gains on the sales of shares in Synopsys, Inc. and Photon Dynamics, Inc.
In 2000, interest income of $1,158,257 was primarily the result of interest earned on secured notes receivable and higher cash balances. During 1999, interest income was $110,361.
During 2000, the Partnership recorded net realized gains from venture capital limited partnership investments of $587,735. During 1999, there were gains of $135,893. The gains represented distributions from profits of venture capital limited partnerships.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------- ----------------------------------------------------------
The Partnership is subject to financial market risks, including changes in interest rates with respect to its investments in debt securities and interest bearing cash equivalents as well as changes in marketable equity security prices. The Partnership does not use derivative financial instruments to mitigate any of these risks. The return on the Partnership's investments is generally not affected by foreign currency fluctuations.
The Partnership does not have a significant exposure to modest public market price fluctuations as the Partnership primarily invests in private business enterprises. However, should significant changes in market equity prices occur, there could be a longer-term effect on valuations of private companies, which could affect the carrying value and the amount and timing of gains realized on these investments. Since there is typically no public market for the Partnership's investments in private companies, the valuation of the investments is subject to the estimate of the Partnership's Managing General Partners. In the absence of a readily ascertainable market value, the estimated value of the Partnership's investments in private companies may differ significantly from the values that would be placed on the portfolio if a ready market existed. The Partnership's portfolio also includes common stocks in publicly traded companies. These investments are directly exposed to equity price risk, in that a hypothetical ten percent change in these equity prices would result in a similar percentage change in the fair value of these securities. The Partnership's investments also include some debt securities. Since the debt securities are generally priced at a fixed rate, changes in interest rates do not directly impact interest income. The Partnership's debt securities are generally held to maturity or converted into equity securities of private companies.
Item 8.
Item 8. FINANCIAL STATEMENTS - ------ --------------------
The financial statements of the Registrant are set forth in Item 14.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ------ ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE -----------------------------------
None
PART III
Item 10.
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. Reference is made to the information regarding Individual General Partners and the Managing General Partners in the Registrant's Proxy Statement related to the Meeting of Limited Partners held on December 8, 2000, which information is incorporated herein by reference.
Item 11.
Item 11. EXECUTIVE COMPENSATION - ------- ----------------------
As a partnership, the Registrant has no officers or directors. In 2001, the Partnership incurred management fees of $172,640. The fees are designed to compensate the Managing General Partners for General Partner Overhead incurred in performing management duties for the Partnership. General Partner Overhead (as defined in the Partnership Agreement) includes the General Partners' share of rent, utilities, property taxes and the cost of capital equipment and the general and administrative expenses paid by Managing General Partners in performing their obligations to the Partnership. As compensation for their services, each of the Individual General Partners receive $10,000 annually plus $1,000 and related expenses for each attended meeting of the Management Committee and committees thereof. In 2001, $64,545 of such fees and expenses were paid.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- --------------------------------------------------------------
Not applicable. No Limited Partner beneficially holds more than 5 percent of the aggregate number of Units held by all Limited Partners, and neither the Managing General Partners nor any of their officers, directors or partners own any Units. The Individual General Partners each own eight Units. The Management Committee controls the affairs of the Partnership pursuant to the Partnership Agreement.
Item 13.
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.
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:
Report of Independent Public Accountants as of and for the years ended December 31, 2001 and 2000 Independent Auditors' Report for the year ended December 31, 1999 Balance Sheets as of December 31, 2001 and 2000 Statements of Investments as of December 31, 2001 and 2000 Statements of Operations for the years ended December 31, 2001, 2000 and 1999 Statements of Partners' Capital for the years ended December 31, 2001, 2000 and 1999 Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 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
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the year ended December 31, 2001.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ----------------------------------------
To the Partners of Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheets of Technology Funding Partners III, L.P. (a Delaware limited partnership) (the Fund), including the statements of investments, as of December 31, 2001 and 2000, and the related statements of operations, partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included physical inspection of securities owned as of December 31, 2001 and 2000. 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 audit provides 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, 2001 and 2000, and the results of its operations, changes in partners' capital, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
Los Angeles, California /S/ARTHUR ANDERSEN LLP March 15, 2002
INDEPENDENT AUDITORS' REPORT ----------------------------
The Partners Technology Funding Partners III, L.P.:
We have audited the accompanying statements of operations, partners' capital, and cash flows of Technology Funding Partners III, L.P. (a Delaware limited partnership) for the year ended December 31, 1999. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Technology Funding Partners III, L.P. for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America.
Albuquerque, New Mexico /S/KPMG LLP March 29, 2000
BALANCE SHEETS - --------------
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF INVESTMENTS - -------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS - ------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF PARTNERS' CAPITAL - -------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS - ------------------------
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS - -----------------------------
1. Summary of Significant Accounting Policies ------------------------------------------
Organization - ------------
Technology Funding Partners III, L.P., (the Partnership or the Registrant) is a limited partnership organized under the laws of the State of Delaware on December 4, 1986, to make venture capital investments in new and developing companies. The Partnership elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the Act), and operates as a nondiversified investment company, as defined in the Act. The Managing General Partners are Technology Funding Ltd. (TFL) and Technology Funding Inc. (TFI), a wholly owned subsidiary of TFL. There are three Individual General Partners. The Individual General Partners and a representative from each of the Managing General Partners constitute the Management Committee, which is responsible for the management and administration of the Partnership.
For the period from December 5, 1986, through March 25, 1987, the Partnership was inactive. The Partnership filed a registration statement with the Securities and Exchange Commission on March 25, 1987, and commenced selling Units of limited partnership interest (Units) in April 1987. On June 2, 1987, the minimum number of Units required to commence Partnership operations (6,000) had been sold. The offering terminated with 160,000 Units sold on February 3, 1989. The Partnership's original contributed capital was $40,040,054, consisting of $40,000,000 from Limited Partners for 160,000 Units and $40,054 from General Partners. The General Partners do not own any Units. The Partnership was scheduled to be dissolved on December 31, 1996, but the term was extended for a two-year period to December 31, 1998, pursuant to unanimous approval by the Management Committee on September 13, 1996. The Partnership term was further extended to December 31, 2000, with an amendment by the Management Committee and approved by a majority of the Limited Partners. On October 25, 2000, the Management Committee voted to extend the life of the Partnership to December 31, 2002. On March 15, 2002, the Individual General Partners recommended a proxy be sent to the Limited Partners requesting an extension of the Partnership's term to December 31, 2003, and to authorize the Partnership's Management Committee to extend the Partnership for up to two one-year additional terms.
Preparation of Financial Statements and Use of Estimates - --------------------------------------------------------
The accompanying financial statements have been prepared on the accrual basis of accounting. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the estimate of fair value of investments, liabilities and contingencies. Because of the inherent uncertainty of valuation, the estimated fair value of investments may differ significantly from the values that would have been used had a ready market for investments existed, and the differences could be material.
Investments - -----------
Investments are carried at fair value.
Equity Investments ------------------
The Management Committee has the authority to establish valuation procedures and periodically apply such procedures to the Partnership's investment portfolio. In fulfilling this responsibility, the Managing General Partners under the direction of the Management Committee periodically update and revise the valuation procedures used to determine fair value in order to reflect new events, changing market conditions, more experience with investee companies or additional information, any of which may require the revision of previous estimating procedures.
Unrestricted publicly traded securities are valued at the closing sales price or bid price that is available on a national securities exchange or over-the-counter market. Valuation discounts of 5 percent to 50 percent are applied to publicly traded securities subject to resale restrictions resulting from Rule 144 or contractual lock-ups, such as those commonly associated with underwriting agreements or knowledge of material non-public information.
The fair value of all other investments is determined in good faith by the Managing General Partners under the direction of the Management Committee after consideration of available relevant information. There is no ready market for the Partnership's investments in private companies or unregistered securities of public companies. Fair value is generally defined as the amount the Partnership could reasonably expect to receive for an investment in an orderly disposition based on a current sale. Significant factors considered in the estimation of fair value include the inherent illiquidity of and lack of marketability associated with venture capital investments in private companies or unregistered securities, the investee company's enterprise value established in the last round of venture financing, changes in market conditions since the last round of venture financing or since the last reporting period, the value of a minority interest in the investee company, contractual restrictions on resale typical of venture financing instruments, the investee company's financial position and ability to obtain any necessary additional financing, the investee company's performance as compared to its business plan, and the investee company's progress towards initial public offering. The values determined for the Partnership's investments in these securities are based upon available information at the time the good faith valuations are made and do not necessarily represent the amount which might ultimately be realized, which could be higher or lower than the reported fair value.
At December 31, 2001 and December 31, 2000, the investment portfolio included investments totaling $3,211,993 and $2,649,487, respectively, whose fair values were established in good faith by the Managing General Partners under the direction of the Management Committee in the absence of readily ascertainable market values. In addition, investments in publicly traded securities which have been subjected to a discount for legal or contractual restrictions as determined by the Management Committee amounted to $4,419,116 and $3,142,431 at December 31, 2001 and December 31, 2000, respectively. Because of the inherent uncertainty in the valuation, the values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
Venture capital limited partnership investments are valued based on the fair value of the underlying investments. Limited partnership distributions that are a return of capital reduce the cost basis of the Partnership's investment. Distributions from limited partnership cumulative earnings are reflected as realized gains by the Partnership.
In the case of an other-than-temporary decline in fair value below cost basis, an appropriate reduction in the cost basis is recognized as a realized loss with the new cost basis being adjusted to equal the fair value of the investment. Cost basis adjustments are reflected as "Realized losses from impairment 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 fair value of notes receivable is determined in good faith by the Managing General Partners under the direction of the Management Committee. Fair value is generally defined as the amount the Partnership could reasonably expect to receive for the notes and accrued interest on the valuation date. The values determined for the Partnership's notes receivable are based upon available information at the time the good faith valuations are made and do not necessarily represent the amount which might ultimately be realized which could be higher or lower than the reported fair value. When the Managing General Partners' assessment of fair value indicates that future collectability of interest or principal is in doubt, notes are placed on nonaccrual status.
Cash and Cash Equivalents - -------------------------
Cash and cash equivalents are principally comprised of cash invested in demand accounts and money market instruments and are stated at cost plus accrued interest. The Partnership considers all money market and short- term investments with an original maturity of three months or less to be cash equivalents.
Provision for Income Taxes - --------------------------
No provision for income taxes has been made by the Partnership as the Partnership is not directly subject to taxation. The partners are to report their respective shares of Partnership income or loss on their individual tax returns.
The accompanying financial statements are prepared using accounting principles generally accepted in the United States which may not equate to tax accounting. The cost of investments on a tax basis at December 31, 2001 and 2000, was $13,827,531 and $14,390,779, respectively. At December 31, 2001 and 2000, gross unrealized depreciation on investments based on cost for federal income tax purposes were as follows:
Net (Decrease) Increase in Partners' Capital Resulting from Operations - --------------------------------------------------------------------- Per Unit - --------
Net (decrease) increase in partners' capital resulting from operations per Unit is calculated by dividing the weighted average number of Units outstanding of 160,000 for the years ended December 31, 2001, 2000 and 1999, into the total net (decrease) increase in partners' capital resulting from operations allocated to the Limited Partners. The Managing General Partners contributed 0.1 percent of total Limited Partner capital contributions and did not receive any Partnership Units.
2. Related Party Transactions --------------------------
Included in costs and expenses are related party costs as follows:
Management fees are equal to one quarter of one percent of the fair value of Partnership assets for each quarter. Management fees compensate the Managing General Partners solely for General Partner Overhead (as defined in the Partnership Agreement) incurred in supervising the operation and management of the Partnership and the Partnership's investments. Management fees due to the Managing General Partners were $13,008 and $21,344 and were included in due to related parties at December 31, 2001 and 2000, respectively.
As compensation for their services, each of the Individual General Partners receives $10,000 annually plus $1,000 and related expenses for each meeting of the Management Committee or committee thereof. The Individual General Partners each own eight Units.
The Partnership reimburses the Managing General Partners for operating expenses incurred in connection with the business of the Partnership. Reimbursable operating expenses include expenses (other than Organizational and Offering and General Partner Overhead) such as investment operations, administrative and investor services, and computer services. Amounts due to related parties for such expenses totaled $36,703 and $296,060 at December 31, 2001 and 2000, respectively.
The Managing General Partners allocate operating expenses incurred in connection with the business of the Partnership based on employee hours incurred. In 2000, the Managing General Partners billed the Partnership an additional $945,414 for investment management expenses consisting of $347,207 and $598,207 for 1999 and prior years, respectively, that were incurred by the General Partners but not previously billed to the Partnership. Had the additional expenses been recorded in prior years, investment expenses would have been $1,880,549 and $1,653,930 for 2000 and 1999, respectively.
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. Any such profit is allocated amongst the Partnership and affiliated partnerships based upon their proportionate investments in the portfolio company. At December 31, 2001, the Partnership and affiliated partnerships had an indirect interest in non-transferable Endocare, Inc. and White Electronic Designs Corporation options with a fair value of $244,376.
3. Allocation of Profits and Losses --------------------------------
In accordance with the Partnership Agreement (see Note 1), net profits and losses of the Partnership are allocated based on the beginning-of-year partners' capital balances as follows:
(a) Profits:
(i) First, to those partners with deficit capital account balances until such deficits have been eliminated; then
(ii) Second, to the partners as necessary to offset net decrease in partners' capital resulting from operations previously allocated under (b)(ii) below and sales commissions; then
(iii) Third, 75 percent to the Limited Partners as a group in proportion to the number of Units held, 5 percent to the Limited Partners in proportion to the Unit Months of each Limited Partner, and 20 percent to the Managing General Partners. Unit months are the number of half months a Unit would be outstanding if held from the date the original holder of such Unit was deemed admitted into the Partnership until the termination of the offering of Units.
(b) Losses:
(i) First, to the partners as necessary to offset the net profit previously allocated to the partners under (a)(iii) above; then
(ii) 99 percent to the Limited Partners and 1 percent to the Managing General Partners.
Losses allocable to Limited Partners in excess of their capital account balances will be allocated to the Managing General Partners. Net profits thereafter, otherwise allocable to those Limited Partners, are allocated to the Managing General Partners to the extent of such losses.
Losses from unaffiliated venture capital limited partnership investments are allocated pursuant to section (b) above. Gains are allocated 99 percent to Limited Partners and 1 percent to the Managing General Partners.
In no event are the Managing General Partners allocated less than 1 percent of the net realized profit or loss of the Partnership.
4. Equity Investments ------------------
All investments are valued at fair value as determined in good faith by the Managing General Partners.
Marketable Equity Securities - ----------------------------
At December 31, 2001 and 2000, marketable equity securities had aggregate costs of $3,296,350 and $3,545,904, respectively, and aggregate fair values of $2,127,440 and $2,791,543, respectively. The net unrealized losses at December 31, 2001 and 2000 included gross gains of $283,368 and $1,159,436, respectively.
Restricted Securities - ---------------------
At December 31, 2001 and 2000, restricted securities had aggregate fair values of $8,428,044 and $7,406,253, respectively, representing 50.0 percent and 42.5 percent, respectively, of the net assets of the Partnership.
Significant purchases, sales and write-downs of equity investments during 2001 are as follows:
Acusphere, Inc. - ---------------
In June 2001, the Partnership purchased 21,277 shares of Series I Preferred stock for $101,066.
Adesso Healthcare Technology Services, Inc. - -------------------------------------------
The company ceased operations during the third quarter and the Partnership is not expecting any return on its investment. Preferred shares and convertible notes of $1,727,140 were written off as of September 30, 2001.
Efficient Networks, Inc. - ------------------------
In January 2001, the Partnership sold its entire investment in the company for proceeds of $344,989 and realized a gain of $38,114.
Matrix Pharmaceutical, Inc. - ---------------------------
In October 2001, the Partnership purchased 263,966 common shares on the open market for $184,008. Subsequent to December 31, 2001, the Partnership sold its entire position in the company for $640,817 and realized a gain of $381,988.
IVillage Inc. (formerly Women.com Networks, Inc.) - -------------------------------------------------
Effective June 18, 2001, iVillage Inc. acquired Women.com Networks, Inc. In connection with this transaction, the Partnership's Women.com shares were exchanged for 240,375 iVillage common shares. The Partnership realized a gain of $765 on the sale of fractional shares.
Photon Dynamics, Inc. - ---------------------
In December 2001, the Partnership sold its entire investment in the company for proceeds of $2,051,556 and realized a gain of $1,482,368.
Sanarus Medical, Inc. - ---------------------
In April 2001, the Partnership issued a convertible bridge loan for $195,000 to the company.
In July 2001, the company converted the $195,000 note to 112,978 shares of Series B Preferred stock and paid the Partnership $3,590 for the accrued interest. Also in July 2001, the Partnership purchased 434,530 shares of Series B Preferred stock for $750,000.
WorldRes, Inc. - --------------
In March 2001, the Partnership purchased 170,000 Preferred shares in the company for $510,000. The company effected a conversion of all preferred stock to common stock on March 21, 2001. Each of the Partnership's preferred shares was converted to one common share.
Venture Capital Limited Partnership Investments - -----------------------------------------------
The Partnership received stock distributions of Applied Molecular Evolution, Inc., CollaGenex Pharmaceuticals, Inc. and Virage, Inc. with fair values totaling $289,744, of which $54,449 were recorded as returns of capital and the remainder as realized gains. The Partnership also received cash distributions of $225,458, $7,305 of which were recorded as returns of capital and the remainder as realized gains.
The Alta IV Limited Partnership was terminated on December 31, 2000 and the Partnership received its final liquidating distribution of $7,305 in June 2001 and realized a loss of $128,912.
In the year ended December 31, 2001, the Partnership recorded a $626,734 decrease in fair value primarily as a result of the above distributions and a net decrease in the fair value of the underlying investments of the partnerships.
Other Equity Investments - ------------------------
Other significant changes reflected in the Statements of Investments relate to market value fluctuations for publicly-traded portfolio companies or changes in the fair value of private companies as determined in accordance with the policy described in Note 1 to the financial statements.
Subsequent Events - -----------------
Subsequent to December 31, 2001, the fair value of the Partnership's investment in Lifecell Corporation increased by $466,909 as a result of an increase in the publicly traded price on March 15, 2002.
American OBGYN, Inc., a portfolio company of the Partnership, filed for Chapter 11 bankruptcy on February 14, 2002.
Thermatrix Inc., a portfolio company of the Partnership, is negotiating the sale of the entire company to Selas Fluid Processing. It is unknown what the Partnership will receive for it's investment.
5. Net Increase (Decrease) in Unrealized (Depreciation) Appreciation of -------------------------------------------------------------------- Equity Investments ------------------
In accordance with the accounting policy as stated in Note 1, the Statements of Operations includes a line item entitled "Net increase (decrease) in unrealized (depreciation) appreciation of equity investments." The table below discloses details of the changes:
6. Notes Receivable ----------------
Activity from January 1 through December 31 consisted of:
The interest rate on notes receivable at December 31, 2001, ranged from 12 percent to 50 percent. All notes and accrued interest are due on demand with the exception of $12,303, due 2004.
7. Cash and Cash Equivalents -------------------------
Cash and cash equivalents at December 31, 2001 and 2000, consisted of:
8. Short-Term Borrowings ---------------------
In December 2000, the Partnership borrowed $3,000,000 from a commercial financial institution. The Partnership pledged $3,000,000 in cash as collateral for the note. The note and accrued interest were repaid on March 31, 2001. Interest expense totaled $73,404.
9. Distributions -------------
There were no distributions in 2001. In the first quarter of 2000, a tax distribution was declared and paid to the General Partners totaling $1,238,366. In the second quarter of 2000, a tax distribution was declared and paid to the General Partners totaling $1,624,562.
10. Commitments and Contingencies -----------------------------
From time to time the Partnership becomes a party to financial instruments with off-balance-sheet risk in the normal course of its business. Generally, these instruments are commitments for future equity investment fundings, equipment financing commitments, or accounts receivable lines of credit that are outstanding but not currently fully utilized by a borrowing company. As they do not represent current outstanding balances, these unfunded commitments are not recognized in the financial statements. At December 31, 2001, there were no such unfunded commitments.
In October 2000, Kanematsu Corporation, a creditor of one of the Partnership's portfolio companies, initiated an arbitration proceeding against the Partnership, two affiliated partnerships, and a fourth co- investor. Kanematsu was seeking to recover $2,000,000, the purchase price in a contract by which the Partnership and the other entities were alleged to have agreed to purchase certain debt securities of the portfolio company from Kanematsu. The Partnership and affiliated partnerships asserted counterclaims against Kanematsu. On February 12, 2002, the Partnership, affiliated partnerships and the co-investor were awarded $4,000,000 and all of Kanematsu's claims were denied. The award is in full settlement of all claims and counterclaims. Kanematsu has indicated that it will petition for reconsideration and, if necessary, will appeal.
From time to time, the Partnership is subject to routine litigation incidental to the business of the Partnership. Although there can be no assurances as to the ultimate disposition of these matters and the proceeding disclosed above, it is the opinion of the Managing General Partners, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Partnership.
11. Financial Highlights --------------------
SIGNATURES ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING PARTNERS III, L.P.
By: TECHNOLOGY FUNDING INC. TECHNOLOGY FUNDING LTD. Managing General Partners
Date: March 20, 2002 By: /s/Charles R. Kokesh -------------------------------- Charles R. Kokesh President, Chief Executive Officer Chief Financial Officer and Chairman of Technology Funding Inc. and Managing General Partner of Technology Funding Ltd.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date --------- -------- ----
/s/Charles R. Kokesh President, Chief March 20, 2002 - ------------------------ Executive Officer, Charles R. Kokesh Chief Financial Officer and Chairman of Technology Funding Inc. and Managing General Partner of Technology Funding Ltd.
The above represents a majority of the Board of Directors of Technology Funding Inc. and the General Partners of Technology Funding Ltd.