<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 814-48
TECHNOLOGY FUNDING PARTNERS III, L.P.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-3033783
- ------------------------------ ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 Alameda de las Pulgas, Suite 250
San Mateo, California 94403
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(415) 345-2200
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
No active market for the units of limited partnership interest ("Units")
exists, and therefore the market value of such Units cannot be
determined.
<PAGE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Equity investments (cost basis
of $23,295,570 and $18,043,420 for
1996 and 1995, respectively) $32,565,697 28,554,370
Secured notes receivable, net (cost
basis of $533,334 for 1995) -- 224,334
---------- ----------
Total investments 32,565,697 28,778,704
Cash and cash equivalents 5,346,952 12,607,605
Restricted cash 506,158 --
Other assets 4,656 1,858
---------- ----------
Total $38,423,463 41,388,167
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 42,915 26,378
Due to related parties 54,665 850,679
Distributions payable -- 3,565,256
Deferred income -- 31,250
Other liabilities 35,528 40,431
---------- ----------
Total liabilities 133,108 4,513,994
Commitments, contingencies and subsequent events
(Notes 2, 3 and 6)
Partners' capital:
Limited Partners
(Units outstanding of 160,000
in both 1996 and 1995) 29,143,688 26,660,952
General Partners (123,460) 11,271
Net unrealized fair value increase
(decrease) from cost:
Equity investments 9,270,127 10,510,950
Secured notes receivable -- (309,000)
---------- ----------
Total partners' capital 38,290,355 36,874,173
---------- ----------
Total $38,423,463 41,388,167
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Secured and convertible notes
receivable interest $ 9,132 5,397 13,871 63,327
Short-term investment interest 91,039 91,577 373,021 219,748
Other income 15,650 15,625 46,900 46,875
--------- --------- --------- ---------
Total income 115,821 112,599 433,792 329,950
Costs and expenses:
Management fees 108,513 92,252 317,704 262,230
Individual General Partners'
compensation 8,017 9,994 22,678 26,494
Operating expenses:
Administrative and investor services 101,443 69,420 331,622 221,553
Investment operations 47,052 44,350 230,224 150,699
Professional fees 18,149 5,900 57,152 47,245
Computer services 27,042 22,022 86,700 60,239
--------- --------- --------- ---------
Total operating expenses 193,686 141,692 705,698 479,736
--------- --------- --------- ---------
Total costs and expenses 310,216 243,938 1,046,080 768,460
--------- --------- --------- ---------
Net operating loss (194,395) (131,339) (612,288) (438,510)
Net realized gain from sales
of equity investments 162,091 3,590,402 3,750,444 6,068,931
Net realized gain from venture capital
limited partnership investments -- 401,801 399,599 401,801
Realized losses from investment
write-downs -- (34,335) (1,038,546) (399,427)
Recoveries from investments previously
written off -- 16,983 8,605 59,565
--------- --------- --------- ---------
Net realized (loss) income (32,304) 3,843,512 2,507,814 5,692,360
Change in net unrealized
fair value:
Equity investments (4,757,832) (618,244) (1,240,823) 1,943,916
Secured notes receivable -- -- 309,000 --
--------- --------- --------- ---------
Net (loss) income $(4,790,136) 3,225,268 1,575,991 7,636,276
========= ========= ========= =========
Net realized income per Unit $ -- 24 16 35
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF PARTNERS' CAPITAL
- ------------------------------
<TABLE>
<CAPTION>
For the nine months ended September 30, 1996:
Net Unrealized Fair Value
Increase (Decrease) From Cost
-----------------------------
Limited General Equity Secured Notes
Partners Partners Investments Receivable Total
-------- -------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
Partners' capital,
December 31, 1995 $26,660,952 11,271 10,510,950 (309,000) 36,874,173
Distributions -- (159,809) -- -- (159,809)
Net realized income 2,482,736 25,078 -- -- 2,507,814
Change in net unrealized
fair value:
Equity investments -- -- (1,240,823) -- (1,240,823)
Secured notes receivable -- -- -- 309,000 309,000
---------- --------- ---------- ------- ----------
Partners' capital,
September 30, 1996 $29,143,688 (123,460) 9,270,127 -- 38,290,355
========== ========= ========== ======= ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
--------------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 392,075 277,069
Cash paid to vendors (154,557) (189,245)
Cash paid to related parties (1,701,201) (631,978)
---------- ---------
Net cash used by operating
activities (1,463,683) (544,154)
---------- ---------
Cash flows from investing activities:
Secured notes receivable issued (171,666) --
Purchase of equity investments (6,721,386) (1,653,603)
Repayments of convertible and
secured notes receivable 62,500 125,000
Proceeds from sales of
equity investments 5,011,889 8,496,503
Recoveries of investments
previously written off -- 16,983
Distributions from venture capital
limited partnerships 93,107 74,116
---------- ---------
Net cash (used) provided by
investing activities (1,725,556) 7,058,999
---------- ---------
Cash flows from financing activities:
Distributions to Limited and General
Partners (3,565,256) (1,673,084)
---------- ---------
Net cash used by financing
activities (3,565,256) (1,673,084)
---------- ---------
Net (decrease) increase in cash and
restricted cash (6,754,495) 4,841,761
Cash and restricted cash at beginning
of year 12,607,605 4,049,929
---------- ---------
Cash and restricted cash at September 30 $ 5,853,110 8,891,690
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
--------------------------------------
1996 1995
---- ----
<S> <C> <C>
Reconciliation of net income to net
cash used by operating activities:
Net income $ 1,575,991 7,636,276
Adjustments to reconcile net income
to net cash used by operating activities:
Net realized gain from sales of
equity investments (3,750,444) (6,068,931)
Net realized gain from venture capital
limited partnership investments (399,599) (401,801)
Recoveries from investments previously
written off (8,605) (59,565)
Realized losses from investment
write-downs 1,038,546 399,427
Change in net unrealized fair value:
Equity investments 1,240,823 (1,943,916)
Secured notes receivable (309,000) --
Changes in:
Other assets (2,798) (65,980)
Due to/from related parties (796,014) 12,244
Other changes, net (52,583) (51,908)
--------- ---------
Net cash used by operating activities $(1,463,683) (544,154)
========= =========
Non-cash investing activities:
Non-cash exercise of warrants $ 336,482 --
========= =========
Reclassification of secured notes to
equity investments (subordinated notes
receivable) $ 705,000 --
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. General
-------
In the opinion of the Managing General Partners, the Balance Sheets as
of September 30, 1996, and December 31, 1995, and the related Statement
of Partners' Capital for the nine months ended September 30, 1996,
Statements of Operations for the three and nine months ended September
30, 1996 and 1995, and Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995, reflect all adjustments which are
necessary for a fair presentation of the financial position, results of
operations and cash flows for such periods. These statements should be
read in conjunction with the Annual Report on Form 10-K for the year
ended December 31, 1995. The following notes to financial statements
for activity through September 30, 1996, supplement those included in
the Annual Report on Form 10-K. Allocation of income and loss to
Limited and General Partners is based on cumulative income and loss.
Adjustments, if any, are reflected in the current quarter balances.
Certain 1995 account balances have been reclassified to conform with the
1996 financial statement presentation.
2. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party expenses for the nine months
ended September 30, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Management fees $317,704 262,230
Reimbursable operating expenses 564,805 355,498
Individual General Partners'
compensation 22,678 26,494
</TABLE>
Certain reimbursable expenses have been accrued based upon interim
estimates prepared by the Managing General Partners and are adjusted to
actual costs periodically. There were $18,494 and $817,233 of such
expenses due to related parties at September 30, 1996, and December 31,
1995, respectively.
Amounts due to related parties for management fees were $36,171 and
$33,446 at September 30, 1996, and December 31, 1995, respectively.
Officers of the Managing General Partners occasionally receive stock
options as compensation for serving on the Boards of Directors of
portfolio companies. At September 30, 1996, the Partnership had an
indirect interest in non-transferable PolyMedica Industries, Inc., and
Conversion Technologies International, Inc., options at an exercise
price higher than the current market value.
In September of 1996, the Partnership made a tax distribution of 29,269
Theramatrix, Inc., common shares to the General Partners; the shares had
a fair value of $159,809 resulting in a realized gain of $6,147.
3. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December
31, 1995, is in the 1995 Annual Report. Activity from January 1 through
September 30, 1996, consisted of
<TABLE>
<CAPTION>
January 1 -
September 30, 1996
Principal -----------------------
Investment Amount or Cost Fair
Industry/Company Position Date Shares Basis Value
- ---------------- -------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $18,043,420 28,554,370
---------- ----------
Significant changes:
Communications
- --------------
P-Com, Inc. Common
shares 11/95 8,672 (155,012) (172,139)
Wire Networks, Inc. Series A
Preferred
shares 02/96 159,300 215,055 215,055
Wire Networks, Inc. Series B
Preferred
shares 02/96 194,642 437,945 437,945
Computer Systems and Software
- -----------------------------
Geoworks Common
shares 08/92 36,883 (196,708) (691,556)
Geoworks Common
shares 03/94 38,415 0 180,551
Geoworks Common
shares 06/94 113,117 (496,924) (2,120,944)
Geoworks Common
shares 06/94 111,695 0 524,967
Geoworks Common
shares 07/96 10,000 200,000 234,500
Geoworks Common
shares 09/96 15,000 298,125 351,750
Photon Dynamics Common
shares 07/96 50,000 300,000 353,750
Velocity Series A
Incorporated Preferred
shares 10/94 6,286,325 (1,000,000) (1,034,337)
Velocity Subordinated 08/95-
Incorporated notes (1) 10/95 $125,000 0 (125,000)
Velocity Subordinated 11/95-
Incorporated notes (1) 09/96 $1,371,400 1,371,400 831,666
Electronic Design Automation
- ----------------------------
Cadence Design Common
Systems, Inc. shares 07/96 12,000 313,439 444,301
Synopsis, Inc. Common
shares 07/96 7,000 238,569 322,176
Environmental
- -------------
Conversion Series A
Technologies Preferred
International, Inc. shares 05/95 200,000 (500,000) (500,000)
Conversion Convertible
Technologies note (1) 09/95-
International, Inc. 11/95 $62,500 (63,338) (63,338)
Conversion Common
Technologies shares
International, Inc. 05/96 69,180 500,000 179,315
Thermatrix, Inc. Common
shares 06/96 65,970 346,338 358,019
Industrial/Business Automation
- ------------------------------
Electronic Designs, Common
Inc. (formerly shares
Crystallume) various 625,477 0 1,352,021
Medical/Biotechnology
- ---------------------
Acusphere, Inc. Series B
Preferred
shares 05/95 125,000 0 67,500
Acusphere, Inc. Series C
Preferred
shares 05/96 163,551 350,000 350,000
Affymetrix, Inc. Common
shares 07/96 20,000 225,000 341,500
Biex, Inc. Series A
Preferred
shares 07/93 128,205 0 64,103
Biex, Inc. Series B
Preferred
shares 10/94 63,907 0 31,954
Biex, Inc. Series B
Preferred
share warrant
at $1.00;
expiring
10/99 10/94 23,540 0 11,770
Biex, Inc. Series C
Preferred
shares 06/95 83,334 0 41,667
Biex, Inc. Series C
Preferred
shares 12/95 83,333 0 41,667
Biex, Inc. Series C
Preferred
shares 04/96 83,333 83,333 125,000
Biex, Inc. Series D
Preferred
shares 08/96 111,115 166,673 166,673
CardioTech Common
International, Inc. shares 06/96 201,714 410,197 360,663
CareCentric Series B
Solutions, Inc. Preferred
shares 09/96 166,323 282,749 282,749
CV Therapeutics, Inc. Series G
Preferred
shares 03/96 76,134 65,470 152,268
CV Therapeutics, Inc. Common
share warrant
at $.25;
expiring
03/99 03/96 114,201 86,798 199,852
Endocare, Inc. Common
shares 08/96 7,500 22,500 22,427
Endocare, Inc. Common
share
warrant
at $3.00;
expiring
08/01 08/96 112,500 0 110,274
Endocare, Inc. Convertible
note (1) 08/96 $562,500 571,500 571,500
Everest & Jennings Common
International Ltd. shares 01/94 59,272 0 (165,963)
Gilead Sciences, Inc. Common
shares 07/96 20,000 347,500 556,500
Lifecell Common 02/92 &
Corporation shares 11/95 247,529 (39,226) 334,321
Lifecell Common
Corporation shares 08/96 12,500 38,750 47,350
Matrix
Pharmaceuticals, Common 01/92 &
Inc. shares (2) 01/95 321,633 0 (3,443,082)
Matrix
Pharmaceuticals, Common
Inc. shares 09/96 133,000 998,476 1,020,775
Metra Biosystems, Common
Inc. shares 12/95 9,697 (162,425) (173,382)
Molecular Geriatrics Series B
Corporation Preferred
shares 09/93 250,000 (125,000) (125,000)
Molecular Geriatrics Common
Corporation shares 01/96 23,585 125,000 47,170
Neurocrine Common
Biosciences, Inc. shares 07/96 35,000 241,875 379,750
Paradigm Biosciences, Series A
Inc. Preferred 04/93&
shares 12/94 268,816 0 204,300
Paradigm Biosciences, Convertible
Inc. note (1) 10/95 $51,250 (52,272) (52,272)
Paradigm Biosciences, Series B
Inc. Preferred
shares 05/96 68,889 137,779 137,779
PHERIN Corporation Series B
Preferred
shares 08/91 200,000 0 200,000
PolyMedica Common
Industries, Inc. shares 03/92 411,800 (505,199) (299,894)
Sensor Medics Common
Corporation share warrant
at $3.60;
exercised
06/96 05/90 134,722 (15,000) (15,000)
SyStemix, Inc. Common
shares 08/91 57,585 (29,446) (63,460)
SyStemix, Inc. Common
shares 01/92 5,014 (91,396) (77,466)
SyStemix, Inc. Common
shares 09/96 340 5,333 5,279
TheraTx, Inc. Common
shares (2) 06/94 60,000 (15,064) (171,132)
Thermo Electron Common
Corporation shares 06/96 26,318 351,482 1,020,578
Retail/Consumer Products
- ------------------------
YES! Entertainment Common
Corporation shares 06/95 33,333 0 171,624
Venture Capital Limited Partnership Investments
- -----------------------------------------------
Various Limited
Partnership
Interests various $3,968,756 (139,056) 255,940
----------- ----------
Total significant changes during the nine months
ended September 30, 1996 5,145,220 3,814,984
Other changes, net 106,930 196,343
---------- ----------
Total equity investments at September 30, 1996 $23,295,570 32,565,697
========== ==========
(1) Convertible and subordinated notes include accrued interest. The interest rates on these
notes issued in 1996 ranged from 8% to 18%.
(2) Common stockholders have a right to purchase one Preferred share for each share
of common stock held, subject to certain conditions.
</TABLE
Marketable Equity Securities
- ----------------------------
At September 30, 1996, and December 31, 1995, marketable equity
securities had aggregate costs of $12,210,446 and $8,296,440,
respectively, and aggregate fair values of $20,464,799 and $17,960,638,
respectively. The net unrealized gains at September 30, 1996, and
December 31, 1995, included gross gains of $9,435,278 and $11,735,816,
respectively.
Acusphere, Inc.
- ---------------
In May of 1996, the Partnership made an additional investment in
Acusphere, Inc., by purchasing 163,551 Series C Preferred shares for
$350,000. The pricing of this round, in which third parties
participated, indicated an increase in the change in fair value of
$67,500 for the Partnership's existing investment.
Affymetrix, Inc.
- ----------------
In July of 1996, the Partnership purchased 20,000 Affymetrix, Inc.,
common shares for $225,000 and recorded an increase in the change in
fair value of $116,500 at September 30, 1996, to reflect its
unrestricted market value.
Biex, Inc.
- ----------
In April of 1996, the Partnership purchased an additional 83,333 Series
C Preferred shares for $83,333. Then in August of 1996, the Partnership
purchased 111,115 Series D Preferred shares for $166,673. The pricing
of the Series D financing round, in which third parties participated,
indicated an increase in the change in fair value of $232,828 for the
Partnership's prior investments.
Cadence Design Systems, Inc.
- ----------------------------
In July of 1996, the Partnership purchased 12,000 common shares of
Cadence Design Systems, Inc., for $313,439 and recorded an increase in
the change in fair value of $130,862 at September 30, 1996, to reflect
its unrestricted market value.
CardioTech International, Inc.
- ------------------------------
In June of 1996, PolyMedica Industries, Inc., ("PolyMedica") declared a
stock distribution and the Partnership received 201,714 common shares of
CardioTech International, Inc. The Partnership allocated $410,197 of
PolyMedica cost basis to these shares and recorded a fair value of
$360,663 at September 30, 1996, to reflect its unrestricted market
value.
CareCentric Solutions, Inc.
- ---------------------------
In September of 1996, the Partnership made an additional investment in
the company by purchasing 166,323 Series B Preferred shares for
$282,749.
Conversion Technologies International, Inc.
- -------------------------------------------
In May of 1996, the company completed its initial public offering
("IPO"). Prior to the IPO, the company effected a reverse stock split
resulting in the Partnership's Series A Preferred shares, Series A
Preferred warrant and common share warrant being converted into 69,180
common shares, a warrant to purchase 17,293 common shares, and 31,250
Class A warrants, respectively. The convertible note with a principal
balance of $62,500 including accrued interest was repaid in full. At
September 30, 1996, the Partnership recorded a decrease in the change in
fair value of $320,685 to reflect the publicly-traded market price of
its investments; a portion of the fair value was adjusted to reflect a
discount for restricted securities.
CV Therapeutics, Inc.
- ---------------------
In March of 1996, the Partnership made an additional investment in the
company by purchasing 76,134 Series G Preferred shares and a warrant for
114,201 common shares for a total cost of $152,268. The fair values
above reflect the valuation on this financing, which resulted in an
increase in the change in fair value of $199,852.
Endocare, Inc.
- --------------
In August of 1996, the Partnership issued convertible notes of $562,500
to the company and received a warrant to purchase 112,500 common shares.
The Partnership also received 7,500 common shares as payment for loan
processing fees. At September 30, 1996, the Partnership recorded an
increase in the change in fair value of $110,201 to reflect the
publicly-traded market price of its investments; a portion of the fair
value was adjusted to reflect a discount for restricted securities.
Geoworks
- --------
During the first quarter of 1996, the Partnership sold 150,000 common
shares of Geoworks for total proceeds of $3,813,125 and realized a gain
of $3,119,493.
During the third quarter of 1996, the Partnership also purchased an
additional 25,000 Geoworks common shares for $498,125.
The Partnership recorded a decrease in the change in fair value of
$1,325,225. The decrease included a decrease of $2,118,868 due to the
sale mentioned above, partially offset by an increase in market price at
September 30, 1996, for its remaining, unrestricted shares.
Gilead Sciences, Inc.
- --------------------
In July of 1996, the Partnership purchased 20,000 Gilead Sciences, Inc.,
common shares for $347,500 and recorded an increase in the change in
fair value of $209,000 at September 30, 1996, to reflect its
unrestricted market value.
Lifecell Corporation
- --------------------
In August of 1996, the Partnership sold 10,300 common shares for $38,947
and realized a loss of $279. In addition, the Partnership also cash
exercised its warrant for $38,750 and received 12,500 common shares. At
September 30, 1996, the Partnership recorded an increase in the change
in fair value of $382,147 to reflect the unrestricted market price of
its investment.
Matrix Pharmaceuticals, Inc.
- ----------------------------
In September of 1996, the Partnership purchased an additional 133,000
common shares for $998,475. The Partnership also recorded a decrease in
the change in fair value of $3,420,783 to reflect the unrestricted
market price of its investment at September 30, 1996.
Metra Biosystems, Inc.
- ----------------------
In July of 1996, the Partnership sold all of its investment in the
Company for total proceeds of $49,175 resulting in a realized loss of
$113,250.
Molecular Geriatrics Corporation
- --------------------------------
In January of 1996, the company converted its Series B Preferred shares
into common shares and then effected a reverse stock split.
Consequently, the Partnership's Series B investment became 23,585 common
shares.
In June of 1996, the company completed a Series C Preferred round of
financing in which the Partnership did not participate. The lower
pricing of this round indicated that the fair value of the Partnership's
investment had declined by $77,830.
Neurocrine Biosciences, Inc.
- ----------------------------
In July of 1996, the Partnership purchased 35,000 common shares of
Neurocrine Biosciences, Inc., for $241,875 and recorded an increase of
$137,875 in the change in fair value at September 30, 1996, to reflect
its unrestricted market value.
P-Com, Inc.
- -----------
During the first quarter of 1996, the Partnership sold all of its
investment in the company for proceeds of $165,852 resulting in a
realized gain of $10,840.
Paradigm Biosciences, Inc.
- --------------------------
In February of 1996, the Partnership issued $43,334 in convertible notes
to the company and received a warrant to purchase 5,416 Series B
Preferred shares at $2.00 per share.
In May of 1996, the Partnership purchased 68,889 Series B Preferred
shares with $40,000 in cash and by converting two notes totaling $94,584
including accrued interest of $3,195 for a total cost of $137,779. The
pricing of this financing round, in which third parties participated,
indicated an increase in the change in fair value of $204,300 for the
Partnership's existing investment.
PHERIN Corporation
- ------------------
The Partnership recorded an increase in fair value of $200,000, based on
the valuation set at a prior round of financing in which third parties
participated.
Photon Dynamics
- ---------------
In July of 1996, the Partnership purchased 50,000 common shares of
Photon Dynamics for $300,000; an increase of $53,750 in the change in
fair value was recorded at September 30, 1996, to reflect its
unrestricted market value.
PolyMedica Industries, Inc.
- ---------------------------
During the first six months of 1996, the Partnership sold 26,565 common
shares of PolyMedica for total proceeds of $215,062 and realized a gain
of $120,060.
In June of 1996, the company declared a distribution of CardioTech
International, Inc., ("CardioTech") common stock. The Partnership
received 201,714 CardioTech common shares and allocated $410,197 of
PolyMedica cost basis to these shares.
As of September 30, 1996, the Partnership recorded a decrease in fair
value of $299,894 to reflect the market price of the remaining
PolyMedica unrestricted shares. This fair value decrease was more than
offset by the fair value of CardioTech common stock.
Synopsis, Inc.
- --------------
In July of 1996, the Partnership purchased 7,000 common shares of
Synopsis, Inc., for $238,569 and recorded an increase in the change in
fair value of $83,607 at September 30, 1996, to reflect its unrestricted
market value.
SyStemix, Inc.
- --------------
During the first nine months of 1996, the Partnership sold 10,901 common
shares of SyStemix, Inc., for total proceeds of $166,484 and a realized
gain of $45,642. In September of 1996, the Partnership purchased an
additional 340 common shares for $5,333. The Partnership also recorded a
decrease in fair value of $135,647 at September 30, 1996, mainly due to
the sale mentioned above.
TheraTx, Inc.
- -------------
In August of 1996, the Partnership sold 30,273 common shares of TheraTx,
Inc., for total proceeds of $529,777 and realized a gain of $225,086.
This gain included the sale of 20,230 TheraTx common shares, which was a
distribution in February of 1996 from a venture capital limited
partnership investment, for total proceeds of $354,025 and a gain of
$64,398. At September 30, 1996, the Partnership recorded a decrease in
fair value of $171,132 mainly due to the sale mentioned above.
Thermatrix, Inc.
- ----------------
In February of 1996, the Partnership made an investment in the company
by purchasing 200,000 Series D Preferred shares for $500,000.
In June of 1996, the company completed its IPO. The Partnership's
Series D Preferred shares were converted into 95,239 common shares
reflecting a reverse stock split.
Then in September of 1996, as disclosed in Note 2 to the financial
statements, the Partnership distributed 29,269 common shares. At
September 30, 1996, the Partnership recorded an increase in the change
in fair value of $11,681 to reflect the publicly-traded market price of
its remaining investments; the fair value of which was adjusted to
reflect a discount for restricted securities.
Thermo Electron Corporation/Sensor Medics Corporation
- -----------------------------------------------------
In June of 1996, Thermo Electron Corporation ("Thermo") acquired Sensor
Medics Corporation ("Sensor"). Immediately prior to the acquisition,
the Partnership exercised its Sensor warrant without cash and received
94,704 shares of Sensor common stock with a cost basis of $351,482,
which reflects a realized gain of $336,482 and a warrant cost basis of
$15,000. The Sensor common shares were in turn exchanged for 26,318
shares of Thermo common stock. An increase in fair value of $669,096
reflected the publicly-traded market value of Thermo stock at September
30, 1996; a portion of the fair value was adjusted to reflect a discount
for restricted securities.
Velocity Incorporated
- ---------------------
During the first nine months of 1996, the Partnership issued $666,400 in
subordinated notes to continue company operations, and reclassified
secured notes receivable of $705,000 to subordinated notes.
The Managing General Partners have determined that there has been an
other than temporary decline in value for the Partnership's preferred
stock investment. As a result, a realized loss of $1,000,000 was
recorded. The Partnership also recorded a decrease in the change in
fair value of $699,071 for its investment.
Wire Networks, Inc.
- -------------------
In February of 1996, the Partnership invested in the company by
purchasing 159,300 Series A Preferred shares and 194,642 Series B
Preferred shares for $215,055 and $437,945, respectively.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
The Partnership recorded a cost basis decrease of $139,056 in venture
capital limited partnership investments during the nine months ended
September 30, 1996. The decrease was a result of returns of capital in
the form of stock and cash distributions of $140,859 and $6,010,
respectively, partially offset by additional contributions of $7,813.
The Partnership recorded a fair value increase of $255,940 as a result
of a net increase in the fair value of the underlying investments,
partially offset by cash and stock distributions from certain venture
capital limited partnership investments.
During the first nine months of 1996, the Partnership also received cash
distributions totaling $87,097 and common stock distributions of TheraTx,
Inc., and Oravax, Inc., shares with fair values of $289,627 and $22,875,
respectively; these distributions were from profits and are recorded as
realized gains from venture capital limited partnership investments.
In June of 1996, the Partnership sold its distribution of Oravax, Inc.,
for total proceeds of $19,940 and realized a loss of $2,935.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations or the elimination of a discount relating to selling
restrictions for publicly-traded portfolio companies. The Partnership's
YES! Entertainment Corporation shares are restricted.
4. Secured Notes Receivable, Net
-----------------------------
Activity from January 1, 1996, through September 30, 1996, consisted of:
</TABLE>
<TABLE>
<S> <C>
Balance at January 1, 1996 $224,334
1996 activity:
Secured notes receivable issued 171,666
Decrease in allowance for loan losses 309,000
Reclassification of secured notes to equity
investments (subordinated notes receivable) (705,000)
-------
Total secured notes receivable, net,
at September 30, 1996 $ --
=======
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<S> <C>
Balance at January 1, 1996 $309,000
Change in net unrealized fair value of
secured notes receivable (309,000)
-------
Balance at September 30, 1996 $ --
=======
</TABLE>
Refer to Note 3, Equity Investments, for additional information
regarding the reclassification of notes.
5. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at September 30, 1996, and December 31, 1995,
consisted of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Demand accounts $ 11,319 20,911
Money-market accounts 5,335,633 12,586,694
--------- ----------
Total $5,346,952 12,607,605
========= ==========
</TABLE>
6. Commitments, Contingencies and Subsequent Events
------------------------------------------------
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 September 30,
1996, the Partnership had unfunded commitments as follows:
Type
- ----
[S] [C]
Term notes $ 942,600
Equity investments 804,160
Venture capital limited partnership investments 23,431
---------
Total $1,770,191
=========
In 1994, the Partnership, along with two other entities, agreed to
guarantee until October of 1996 a $2,000,000 loan between a financial
institution and a portfolio company in the medical/biotechnology
industry. The Partnership received a guarantee fee which was recorded
as deferred income and was amortized as other income over a two-year
period. During the nine months ended September 30, 1996, $46,900 was
recorded as other income.
The Partnership also agreed to jointly guarantee with two affiliated
partnerships, a $2,000,000 line of credit between a financial
institution and a portfolio company in the computer systems and software
industry, of which the Partnership's share is $500,000. The Partnership
purchased a certificate of deposit for the same amount as security for
the guarantee. While the Partnership expects the portfolio companies to
repay the loan or line of credit, if the portfolio companies fail to do
so, the Partnership may be liable up to $3,000,000. In October of 1996,
the $2,000,000 guarantee was reduced to $1,000,000 and the Partnership,
together with an affiliated entity, honored the guarantee by assuming
$1,000,000 of the financial institution line of credit. The Partnership
remains as a joint guarantor on the remaining $1,000,000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
During the nine months ended September 30, 1996, net cash used by
operating activities totaled $1,463,683. The Partnership paid
management fees of $314,979 to the Managing General Partners and
reimbursed related parties for operating expenses of $1,363,544. In
addition, $22,678 was paid to the Individual General Partners as
compensation for their services. Other operating expenses of $154,557
were paid and $392,075 in interest income was received. Distributions
totaling $3,565,256 were paid to Limited and General Partners.
During the nine months ended September 30, 1996, the Partnership issued
$171,666 in secured notes receivable and funded equity investments of
$6,721,386 mainly to portfolio companies in the medical/biotechnology
and computer systems and software industries. Proceeds from sales of
equity investments totaled $5,011,889 and distributions of $93,107 from
venture capital limited partnership investments were received.
Repayments of convertible and secured notes receivable provided cash of
$62,500. As of September 30, 1996, the Partnership was committed to
fund $1,770,191 in additional investments and has outstanding guarantees
up to $3,000,000 as discussed in Note 6 to the financial statements. As
of October 31, 1996, total outstanding guarantees decreased to
$1,000,000.
During the first nine months of 1996, Conversion Technologies
International, Inc., and Thermatrix, Inc., completed their initial
public offerings ("IPOs"). Although the Partnership's holdings in these
companies are subject to selling restrictions, the IPOs indicate
potential future liquidity for these investments.
Cash and restricted cash at September 30, 1996, were $5,853,110. Cash
reserves, interest income on short-term investments, future proceeds
from equity investment sales are expected to be adequate to fund
Partnership operations and future investments through the next twelve
months.
Results of Operations
- ---------------------
Current quarter compared to corresponding quarter in the preceding year
- -----------------------------------------------------------------------
Net loss was $4,790,136 for the quarter ended September 30, 1996,
compared to a net income of $3,225,268 during the same period in 1995.
The change was primarily due to a $4,139,588 decrease in the change in
net unrealized fair value of equity investments, a $3,428,311 decrease
in net realized gain from sales of equity investments, and a $401,801
decrease in net realized gain from venture capital limited partnership
investments.
During the quarter ended September 30, 1996, the decrease in fair value
of equity investments of $4,757,832 was primarily attributable to
decreases in portfolio companies in the medical/biotechnology and
computer systems and software industries. During the same period in
1995, the decrease of $618,244 was primarily attributable to investment
sales as gains were realized for a portfolio company in the computer
systems and software industry, partially offset by increases in the
medical/biotechnology industry.
For the quarter ended September 30, 1996, net realized gain from sales
of equity investments was $162,091. For the same period in 1995, net
realized gain of $3,590,402 mostly related to a partial sale of GeoWorks
stock.
During the quarter ended September 30, 1996, the Partnership did not
record a net realized gain from venture capital limited partnership
investments. During the same period in 1995, such gains totaled
$401,801. The 1995 gain represented distributions from profits of two
venture capital limited partnership investments.
Management fees were $108,513 and $92,252 for the quarters ended
September 30, 1996 and 1995, respectively. The increase was due to an
increase in Partnership asset fair value. Beginning in June of 1992,
management fees for each quarter were one quarter of one percent of the
fair value of Partnership assets.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
Current nine months compared to corresponding nine months in the
- ----------------------------------------------------------------
preceding year
- --------------
Net income was 1,575,991 and $7,636,276 for the nine months ended
September 30, 1996 and 1995, respectively. The decrease in net income
was primarily due to a $3,184,739 decrease in the change in net
unrealized fair value of equity investments, a $2,318,487 decrease in
net realized gain from sales of equity investments, a $639,119 increase
in realized losses from investment write-downs, and a $225,962 increase
in total operating expenses. These changes were partially offset by a
$309,000 increase in the change in net unrealized fair value of secured
notes receivable, and a $103,842 increase in total income.
During the nine months ended September 30, 1996, the decrease in fair
value of equity investments of $1,240,823 was primarily attributable to
decreases in portfolio companies in the computer systems and software
and medical/biotechnology industries, partially offset by increases in
the industrial/business automation industry. During the same period in
1995, the increase of $1,943,916 was primarily attributable to increases
in the medical/biotechnology and computer systems and software
industries, partially offset by decreases in venture capital limited
partnership investments as a result of distributions received and a
portfolio company in the industrial/business automation industry.
Net realized gain from sales of equity investments was $3,750,444 for
the nine months ended September 30, 1996, compared to $6,068,931 for the
same period in 1995. The net gain in 1996 mainly related to sales of
Geoworks stock. The 1995 net gain mostly related to sales of GeoWorks
and UroMed Corporation investments.
During the nine months ended September 30, 1996, the Partnership
recorded realized losses from investment write-downs of $1,038,546
mostly related to equity investments of a portfolio company in the
computer systems and software industry. During the same period in 1995,
such losses totaling $399,427 were primarily due to portfolio companies
in the retail/consumer products and communications industries.
Total operating expenses were $705,698 for the nine months ended
September 30, 1996, compared to $479,736 for the same period in 1995.
The increase was primarily due to higher administrative and investor
services and investment operations expenses from increased overall
portfolio activities as well as additional allocated overhead costs in
1996 as permitted by the Partnership Agreement.
The Partnership recorded an increase of $309,000 in the change in fair
value of secured notes receivable at September 30, 1996, as notes were
reclassified to equity investments resulting in the elimination of a
corresponding loan loss reserve. No loan loss reserves were recorded at
September 30, 1995.
Total income was $433,792 and $329,950 during the nine months ended
September 30, 1996 and 1995, respectively. The increase of $153,273 in
short-term investment interest was mainly from investment sale proceeds.
Included in the 1995 notes receivable interest balance of $63,327 was
approximately $50,000 in interest income related to a previously written
off secured note receivable from a portfolio company in the
medical/biotechnology industry.
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K were filed by the Partnership during the
quarter ended September 30, 1996.
(b) Financial Data Schedule for the nine months ended and as of
September 30, 1996 (Exhibit 27).
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING PARTNERS III, L.P.
By: TECHNOLOGY FUNDING INC.
Managing General Partner
Date: November 8, 1996 By: /s/Debbie A. Wong
------------------------------------
Debbie A. Wong
Controller
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<PERIOD-TYPE> 9-MOS
<INVESTMENTS-AT-COST> 23,295,570
<INVESTMENTS-AT-VALUE> 32,565,697
<RECEIVABLES> 0
<ASSETS-OTHER> 4,656
<OTHER-ITEMS-ASSETS> 5,853,110
<TOTAL-ASSETS> 38,423,463
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 133,108
<TOTAL-LIABILITIES> 133,108
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 29,020,228
<SHARES-COMMON-STOCK> 160,000
<SHARES-COMMON-PRIOR> 160,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,270,127
<NET-ASSETS> 38,290,355
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 386,892
<OTHER-INCOME> 46,900
<EXPENSES-NET> (1,046,080)
<NET-INVESTMENT-INCOME> (612,288)
<REALIZED-GAINS-CURRENT> 3,120,102
<APPREC-INCREASE-CURRENT> (931,823)
<NET-CHANGE-FROM-OPS> 1,575,991
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 159,809
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,416,182
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 317,704
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,050,388
<AVERAGE-NET-ASSETS> 37,582,264
<PER-SHARE-NAV-BEGIN> 167
<PER-SHARE-NII> 16
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 182
<EXPENSE-RATIO> 2.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>
A zero value is used since the change in net unrealized fair value is
not allocated to General Partners and Limited Partners as it is not
taxable. Only taxable gains or losses are allocated in accordance with
the Partnership Agreement.
</FN>
</TABLE>
