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. 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 that term is 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.
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 is seeking to recover $2,000,000, the purchase price in a contract by which the Partnership and the other entities are alleged to have agreed to purchase certain debt securities of the portfolio company from Kanematsu. The Partnership and affiliated partnerships have asserted counterclaims against Kanematsu. An arbitrator has been selected and a hearing has been scheduled. The Partnership intends to defend its position vigorously in this arbitration. It is the Managing General Partners' belief that the Partnership will ultimately prevail in this matter, although there can be no assurance in this regard. Accordingly, the Partnership has not accrued any liability associated with the arbitration proceeding.
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 - ------ ---------------------------------------------------
A meeting of the Limited Partners of the Partnership was held on December 8, 2000. At that meeting, the Limited Partners elected three Individual General Partners to serve as members of the Partnership's Management Committee each for a three- year term: G. Whitney Baines, Ph.D. (155,207 Units voting for, 4,793 Units voting against or abstaining), A. Logan Craft (155,253 Units voting for, 4,747 Units voting against or abstaining) and Michael S. Tempesta, Ph.D. (155,067 Units voting for, 4,933 Units voting against or abstaining). Two Managing General Partners were also elected to serve as members of the Partnership's Management Committee each for a three-year term: Technology Funding Inc. (154,845 Units voting for, 5,155 voting against or abstaining) and Technology Funding Limited (154,801 Units voting for, 5,199 voting against or abstaining). The Limited Partners also ratified the selection of Arthur Andersen LLP as independent public accountants (154,630 Units voting for, 1,248 Units voting against and 4,122 Units abstaining). In addition, the Limited Partners approved: (1) an amendment to Article 2, Section (m) of 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 (130,530 Units voting for, 21,604 Units voting against and 7,866 Units abstaining), (2) an amendment to Article 1.03 of the Partnership Agreement to clarify that the Partnership's investment objective is to maximize long-term capital appreciation for the Limited Partners up to and including the final day of the Partnership's operations prior to dissolution (146,965 Units voting for, 7,322 Units voting against and 5,713 Units abstaining), and (3) an amendment to Article 5.04 of the Partnership Agreement to clarify the Limited Partners' right to vote under the Investment Company Act of 1940, as amended (149,371 Units voting for, 4,964 Units voting against and 5,665 Units abstaining).
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, 2000, there were 5,656 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, 2000, net cash used by operating activities totaled $2,118,612. The Partnership paid management fees of $377,279 to the Managing General Partners and reimbursed related parties for operating expenses of $1,643,556. The Partnership also received investment sales proceeds of $72,496 from an affiliated partnership. In addition, $46,129 was paid to the Individual General Partners as compensation for their services. Other operating expenses of $441,193 were paid and interest income of $317,049 was received.
For the year ended December 31, 2000, the Partnership funded equity investments of $2,014,052, primarily to portfolio companies in the computer systems and software, medical/biotechnology and communications industries, and issued $4,000,000 in notes receivable to a portfolio company in the computer systems and software industry. Proceeds from sales of equity investments totaled $16,867,191 and repayments of notes receivable were $8,482. The Partnership received $220,868 in cash distributions from venture capital limited partnership investments. Tax distributions to General Partners totaled $2,862,928 and the Partnership received $3,000,000 in proceeds from short-term borrowings.
Cash and cash equivalents at December 31, 2000, were $10,598,352, $3,000,000 of which was pledged as collateral for short-term borrowings. The Partnership's short-term borrowing of $3,000,000 accrues interest at a commercial financial institution's prime rate, which was 9.5% at December 31, 2000, and is due on March 31, 2001. 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. On October 25, 2000, the Management Committee voted to extend the life of the Partnership to December 31, 2002.
Results of 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 revisions to the valuation methodology as discussed in Note 1 to the financial statements. 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. Based on events at the portfolio company, the Managing General Partners believe the notes and accrued interest totaling $4,836,805 have a fair value of $0.
During 2000, the Partnership recorded realized losses from impairment write-downs on investments of $2,392,941, which represents the Partnership's total investments in Biex, Inc. and Thermatrix Inc. Biex, Inc. suspended operations in November 2000 after it was unable to obtain additional funding. Thermatrix Inc.'s existing equity has no value under the reorganization plan approved by the bankruptcy court in December 2000. There were no impairment write-downs in 1999.
Operating expenses were $2,407,969 and $987,624 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, operating expenses for 2000 and 1999 would have been $1,462,555 and $1,334,831, 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.
Given the inherent risk associated with the business of the Partnership, the future performance of the portfolio company investments may significantly impact future operations.
1999 compared to 1998 - ---------------------
The net increase in partners' capital resulting from operations was $14,161,293 in 1999 compared to a net decrease in partners' capital resulting from operations of $5,352,748 in 1998. The change was primarily due to an increase in unrealized appreciation of equity investments, a decrease in realized losses from impairment write-downs on investments, a decrease in net realized losses from sales of equity investments, and decreased operating expenses.
Unrealized appreciation on equity investments was $16,447,825 and $342,617 at December 31, 1999 and 1998, respectively. During 1999, the increase in unrealized appreciation 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. In 1998, the decrease in unrealized appreciation 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.
During 1999, there were no impairment write-downs. During 1998, the Partnership recorded realized losses from impairment write- downs on investments of $836,249 primarily due to a portfolio company in the environmental industry.
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. 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.
Total operating expenses were $987,624 and $1,289,606 for 1999 and 1998, 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 which related to prior years. In 2000, the Managing General Partners billed the Partnership an additional $945,414 for investment management expenses consisting of $347,207, $229,879 and $368,328 for 1999, 1998 and prior years, respectively, that were incurred by the General Partners but not previously billed to the Partnership. If the additional expense had been recorded in prior years, total operating expenses would have been $1,334,831 and $1,307,065 for 1999 and 1998, respectively.
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 AND SUPPLEMENTARY DATA - ------ -------------------------------------------
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 2000, the Partnership incurred management fees of $371,865. 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, 2000. 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 2000, $46,129 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% 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 year ended December 31, 2000 Independent Auditors' Report as of December 31, 1999 and for the years ended December 31, 1999 and 1998 Balance Sheets as of December 31, 2000 and 1999 Statements of Investments as of December 31, 2000 and 1999
Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Statements of Partners' Capital for the years ended December 31, 2000, 1999 and 1998 Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 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
A report on Form 8-K was filed by the Registrant on November 13, 2000, to report the appointment of Arthur Andersen LLP as the Partnership's independent public accountants. No financial statements were filed.
(c) Financial Data Schedule for the year ended and as of December 31, 2000 (Exhibit 27).
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ----------------------------------------
To the Partners of Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheet of Technology Funding Partners III, L.P. (a Delaware limited partnership) (the Fund), including the statement of investments, as of December 31, 2000, and the related statements of operations, partners' capital, and cash flows for the year 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 audit.
We conducted our audit 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, 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, 2000, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
Los Angeles, California /S/ARTHUR ANDERSEN LLP March 16, 2001
INDEPENDENT AUDITORS' REPORT ----------------------------
The Partners Technology Funding Partners III, L.P.:
We have audited the accompanying balance sheet of Technology Funding Partners III, L.P. (a Delaware limited partnership), including the statement of investments, as of December 31, 1999, and the related statements of operations, partners' capital, and cash flows for each of the years in the two-year period 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 audits.
We conducted our audits 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. Our procedures included confirmation of certain securities and notes 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, 1999. 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, 1999, and the results of its operations and its cash flows for each of the years in the two- year period 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) 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 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 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.
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.
Reclassifications - -----------------
Certain reclassifications have been made to prior-year balances to conform to the current year presentation.
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. The valuation procedures were revised and approved by the Management Committee in the year ended December 31, 2000.
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% to 50% 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, 2000 and December 31, 1999, the investment portfolio included investments totaling $2,649,487 and $13,227,472, 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 $3,142,431 and $7,478,875 at December 31, 2000 and December 31, 1999, 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 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, 2000 and 1999, was $14,390,779 and $19,866,978, respectively. At December 31, 2000 and 1999, gross unrealized appreciation and depreciation on investments based on cost for federal income tax purposes were as follows:
Net Increase (Decrease) in Partners' Capital Resulting from Operations - --------------------------------------------------------------------- Per Unit - --------
Net increase (decrease) 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, 2000, 1999 and 1998, into the total net increase (decrease) in partners' capital resulting from operations allocated to the Limited Partners. The Managing General Partners contributed 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:
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 $21,344 and $26,758 and were included in due to related parties at December 31, 2000 and 1999, 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. There was $296,060 due to related parties at December 31, 2000, compared to $21,106 due from related parties for operating expenses at December 31, 1999.
The Partnership recorded a receivable from an affiliated partnership for proceeds from equity investment sales of $72,496 at December 31, 1999. These monies were received in the first quarter of 2000.
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 relating to prior years. In 2000, the Managing General Partners billed the Partnership an additional $945,414 for investment management expenses consisting of $347,207, $229,879 and $368,328 for 1999, 1998 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, operating expenses would have been $1,462,555, $1,334,831 and $1,307,065 for 2000, 1999 and 1998, 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.
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. Effective December 31, 1998, TFPM was acquired by TFL. Under the terms of a rent agreement, TFL charges the Partnership for its share of office rent and related overhead costs on a cost recovery basis. In 2000 and 1999, these costs totaled $65,904 and $35,838, respectively, and 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. Any such profit is allocated amongst the Partnership and affiliated partnerships based upon their proportionate investments in the portfolio company. At December 31, 2000, the Partnership had an indirect interest in non-transferable Thermatrix Inc. options at an exercise price higher than the current market value. At December 31, 2000, the Partnership and affiliated partnerships had an indirect interest in non-transferable Endocare, Inc. and White Electronic Designs Corporation options with a fair market value of $161,425.
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% 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 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 ------------------
All investments are valued at fair value as determined in good faith by the Managing General Partners. See Note 1-Investments.
Marketable Equity Securities - ----------------------------
At December 31, 2000 and 1999, marketable equity securities had aggregate costs of $3,545,904 and $8,032,948, respectively, and aggregate fair values of $2,791,543 and $14,819,273, respectively. The net unrealized loss at December 31, 2000, included gross gains of $1,159,436 and the net unrealized gain at December 31, 1999, included gross gains of $7,005,352.
Restricted Securities - ---------------------
At December 31, 2000 and 1999, restricted securities had aggregate market values of $7,406,253 and $21,823,134, respectively, representing 42.5% and 57.1%, respectively, of the net assets of the Partnership.
Significant purchases and sales of equity investments during 2000 are as follows:
Acusphere, Inc. - ---------------
In February 2000, the Partnership funded a convertible note to the company in the amount of $299,137, with an interest rate of 8% and a maturity date of December 31, 2000.
In April 2000, the note, together with interest, was converted into 63,928 Series F Preferred shares.
Adesso Healthcare Technology Services, Inc. (formerly ADESSO Specialty - ---------------------------------------------------------------------- Services Organization, Inc.) - ---------------------------
In March 2000, the Partnership purchased 7,726 Series E Preferred shares for $129,797.
In December 2000, the Partnership funded a bridge loan in the amount of $315,268 with an interest rate of 9.5% and a maturity date of January 12, 2002.
Biex, Inc. - ----------
The company was unable to complete a round of financing in November 2000 and suspended operations and laid off all employees. As a result, the Partnership recorded a realized loss from impairment write-downs on investments of $1,046,604, its entire investment in the company. As of January 2001, an offer to purchase the company was being negotiated; however, proceeds from the sale were expected to satisfy only a majority of the company's creditors with nothing remaining for equity investors.
Cadence Design Systems, Inc. - ----------------------------
In December 2000, the Partnership sold its entire investment in the company for proceeds of $682,587 and realized a gain of $369,148.
CareCentric Solutions, Inc. (formerly Simione Central Holdings, Inc.) - ---------------------------------------------------------------------
In March 2000, the company's shareholders approved a one-for-five reverse stock split in order to meet requirements to maintain the company's listing on the Nasdaq National Market.
CollaGenex Pharmaceuticals, Inc. - --------------------------------
In December 2000, the Partnership sold its entire investment in the company for proceeds of $15,139 and realized a loss of $92,961.
CV Therapeutics, Inc. - ---------------------
In September 2000, the Partnership net exercised a common share warrant for 2,880 shares at $20.00 each and received 1,974 common shares with a cost basis of $39,538. The Partnership realized a gain of $39,538 on the warrant exercise.
During 2000, the Partnership sold 9,905 common shares for proceeds of $372,052 and realized a gain of $252,527.
Efficient Networks, Inc. - ------------------------
In December 2000, the Partnership purchased 15,000 common shares in the company for $306,875.
Illinois Superconductor Corporation - -----------------------------------
In January 2000, the Partnership sold 5,810 common shares in the company for proceeds of $7,815 and realized a loss of $80,032.
Inhale Therapeutic Systems, Inc. - --------------------------------
In March 2000, the Partnership sold its entire investment in the company for proceeds of $203,348 and realized a gain of $133,459.
Matrix Pharmaceutical, Inc. - ---------------------------
During the first quarter of 2000, the Partnership sold 290,000 common shares in the company for proceeds of $4,530,536 and realized a gain of $3,804,918.
Nanophase Technologies Corporation - ----------------------------------
In March 2000, the Partnership received a distribution of 14,557 shares from Batterson, Johnson and Wang Limited Partnership.
In December 2000, the Partnership sold its entire investment in the company for proceeds of $175,486 and realized a loss of $75,622.
Oxford GlycoSciences Plc - ------------------------
During the first quarter of 2000, the Partnership sold 106,722 common shares in the company for proceeds of $4,052,250 and realized a gain of $3,552,521.
Pharmadigm, Inc. - ----------------
In March 2000, the company completed a new round of financing at a lower valuation. The Partnership did not participate in this round.
Pharmos Corporation - -------------------
In January 2000, the Partnership sold its entire investment in the company for proceeds of $187,762 and realized a gain of $142,514.
Photon Dynamics, Inc. - ---------------------
The Partnership purchased 12,500 common shares in December 2000 for $344,188.
Sanarus Medical, Inc. - ---------------------
In February 2000, the Partnership purchased 260,000 Series A Preferred shares in the company for $390,000.
Thermatrix Inc. - ---------------
The common and preferred shares of the company have no value under the reorganization plan approved by the bankruptcy court in December 2000. As a result, the Partnership recorded a realized loss from impairment write- downs on investments of $1,346,338, its entire investment in the company.
White Electronic Designs Corporation - ------------------------------------
During the first quarter of 2000, the Partnership sold its entire investment in the company for proceeds of $6,496,284 and realized a gain of $3,538,200.
In November 2000, an officer of the Managing General Partners of the Partnership exercised options for 19,125 common shares in the company at a total cost of $50,681. The shares were then transferred to the Partnership.
Women.Com Networks, Inc. - ------------------------
In the fourth quarter of 2000, the Partnership purchased 332,471 common shares for $155,045. The Partnership sold 166,925 common shares in December 2000 for proceeds of $19,646 and realized a loss of $753,846.
On February 5, 2001, iVillage, Inc. and Women.com entered into an agreement to join forces. Ivillage, Inc. will issue shares of its own stock valued at $27,000,000 to Women.com shareholders. In addition, a major investor in Women.com has agreed to invest $20,000,000 in the new company and will own about 30% of iVillage, Inc.
Venture Capital Limited Partnerships - ------------------------------------
The Partnership received cash distributions totaling $220,868 from Alta IV Limited Partnership, Batterson, Johnson and Wang Limited Partnership, Medical Science Partners, L.P. and O,W&W Pacrim Investments Limited, $51,113 of which were recorded as returns of capital and the remaining recorded as realized gains. The Partnership received stock distributions of Blaze Software, Inc., Epoch Pharmaceuticals Inc., Flamel Technologies S. A. and Nanophase Technologies Corporation with fair values totaling $486,335. Distributions totaling $417,980 were recorded as realized gains and distributions totaling $68,355 were recorded as returns of capital.
The Partnership recorded a $617,021 increase in unrealized appreciation as a result of a net increase in the fair value of the underlying investments of the partnerships.
Other Equity Investments - ------------------------
Other significant changes reflected above 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.
Subsuquent Events - -----------------
Subsequent to December 31, 2000, the fair value of the Partnership's investment in Endocare, Inc. decreased by $785,607 as a result of a decrease in the publicly traded market price on March 16, 2001.
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, 2000, ranged from 16% to 50%. All notes and accrued interest are due on demand.
During 2000, the Partnership issued notes receivable totaling $4,000,000 to Sutmyn Storage Corporation, a portfolio company in the computer equipment industry. In determining fair value, the Managing General Partners gave consideration to deterioration in the company's performance during the quarter ended September 30, 2000, as a result of business, technical, financing and legal challenges, the company's financial position at September 30, 2000 and its ability to obtain critical additional financing. As a result, the Partnership recorded a $4,836,805 increase in unrealized depreciation of notes and interest receivable. The note was placed on non- accrual status on September 30, 2000; interest income through September 30, 2000, totaled $836,805. There has been no improvement in the company's prospects and the Managing General Partners believe the fair value of the notes and accrued interest continues to be zero at December 31, 2000. Because of the inherent uncertainties involved in predicting the outcome of the company's ability to obtain additional financing, the estimated fair value at December 31, 2000 may differ significantly from a value that would have been used had the outcome of the company's efforts been known, and the difference could be material.
7. Cash and Cash Equivalents -------------------------
Cash and cash equivalents at December 31, 2000 and 1999, consisted of:
8. Short-Term Borrowings ---------------------
In December 2000, the Partnership borrowed $3,000,000 from a commercial financial institution. The note bears interest at the lenders' prime rate, which was 9.5% at December 31, 2000. Payment of all accrued unpaid interest is due monthly and all outstanding principal plus any remaining accrued unpaid interest are due on March 31, 2001. The Partnership has pledged $3,000,000 in cash as collateral for the note.
9. Distributions -------------
In the first quarter of 2000, a tax distribution was declared and paid to the General Partners totaling $1,238,366.
In April 2000, a tax distribution was declared and paid to the General Partners totaling $1,624,562.
10. Commitments and Contingencies -----------------------------
The Partnership is a party to financial instruments with off-balance-sheet risk in the normal course of its business. Generally, these instruments are commitments for future equity investment fundings, venture capital limited partnership investments, equipment financing commitments, or accounts receivable lines of credit that are outstanding but not currently fully utilized by a borrowing company. As they do not represent current outstanding balances, these unfunded commitments are properly not recognized in the financial statements. At December 31, 2000, there were no unfunded investment commitments to portfolio companies and venture capital limited partnerships.
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 is seeking to recover $2,000,000, the purchase price in a contract by which the Partnership and the other entities are alleged to have agreed to purchase certain debt securities of the portfolio company from Kanematsu. The Partnership and affiliated partnerships have asserted counterclaims against Kanematsu. An arbitrator has been selected and a hearing has been scheduled. The Partnership intends to defend its position vigorously in this arbitration. It is the Managing General Partners' belief that the Partnership will ultimately prevail in this matter, although there can be no assurance in this regard. Accordingly, the Partnership has not accrued any liability associated with the arbitration proceeding.
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.
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. Managing General Partner
Date: March 30, 2001 By: /s/Charles R. Kokesh -------------------------------- Charles R. Kokesh President and Chief Executive Officer
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 30, 2001 - ------------------------ 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.