<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 June 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)
June 30, December 31,
1996 1995
-------- -----------
<S> <C> <C>
ASSETS
Investments:
Equity investments (cost basis
of $19,770,288 and $18,043,420 for
1996 and 1995, respectively) $33,798,247 28,554,370
Secured notes receivable, net (cost
basis of $533,334 for 1995) -- 224,334
---------- ----------
Total investments 33,798,247 28,778,704
Cash and cash equivalents 9,543,116 12,607,605
Other assets 63,786 1,858
---------- ----------
Total $43,405,149 41,388,167
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 18,082 26,378
Due to related parties 108,561 850,679
Distributions payable -- 3,565,256
Deferred income -- 31,250
Other liabilities 38,206 40,431
---------- ----------
Total liabilities 164,849 4,513,994
Commitments and contingencies
(Notes 2 and 6)
Partners' capital:
Limited Partners
(Units outstanding of 160,000
in both 1996 and 1995) 29,175,669 26,660,952
General Partners 36,672 11,271
Net unrealized fair value increase
(decrease) from cost:
Equity investments 14,027,959 10,510,950
Secured notes receivable -- (309,000)
---------- ----------
Total partners' capital 43,240,300 36,874,173
---------- ----------
Total $43,405,149 41,388,167
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------------ -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Notes receivable interest $ 1,310 54,617 4,739 57,930
Short-term investment interest 121,632 84,351 281,982 128,171
Other income 15,625 15,625 31,250 31,250
--------- --------- --------- ---------
Total income 138,567 154,593 317,971 217,351
Costs and expenses:
Management fees 105,721 84,464 209,191 169,978
Individual General Partners'
compensation 9,661 9,000 14,661 16,500
Operating expenses:
Administrative and investor services 153,463 83,190 230,179 152,133
Investment operations 119,533 52,020 183,172 106,349
Professional fees 28,488 29,271 39,003 41,345
Computer services 43,663 19,140 59,658 38,217
--------- --------- --------- ---------
Total operating expenses 345,147 183,621 512,012 338,044
--------- --------- --------- ---------
Total costs and expenses 460,529 277,085 735,864 524,522
--------- --------- --------- ---------
Net operating loss (321,962) (122,492) (417,893) (307,171)
Net realized gain from sales
of equity investments 398,866 2,025,442 3,588,353 2,478,529
Realized gains from venture capital
limited partnership investments 353,403 -- 399,599 --
Realized losses from investment
write-downs (1,000,000) (365,092) (1,038,546) (365,092)
Recoveries from investments previously
written off 8,605 42,582 8,605 42,582
--------- --------- --------- ---------
Net realized (loss) income (561,088) 1,580,440 2,540,118 1,848,848
Change in net unrealized
fair value:
Equity investments 1,221,345 1,546,762 3,517,009 2,562,160
Secured notes receivable 409,000 -- 309,000 --
--------- --------- --------- ---------
Net income $1,069,257 3,127,202 6,366,127 4,411,008
========= ========= ========= =========
Net realized (loss) income per Unit $ (3) 10 16 11
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 285,386 185,492
Cash paid to vendors (173,675) (100,291)
Cash paid to related parties (1,376,746) (431,961)
---------- ---------
Net cash used by operating
activities (1,265,035) (346,760)
---------- ---------
Cash flows from investing activities:
Secured notes receivable issued (171,666) --
Purchase of equity investments (2,469,748) (991,584)
Repayments of convertible and
secured notes receivable 62,500 125,000
Proceeds from sales of
equity investments 4,256,103 3,819,264
Distributions from venture capital
limited partnerships 88,613 1,476
---------- ---------
Net cash provided by
investing activities 1,765,802 2,954,156
---------- ---------
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 cash equivalents (3,064,489) 934,312
Cash and cash equivalents at beginning
of year 12,607,605 4,049,929
---------- ---------
Cash and cash equivalents at June 30 $ 9,543,116 4,984,241
========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Reconciliation of net income to net
cash used by operating activities:
Net income $ 6,366,127 4,411,008
Adjustments to reconcile net income
to net cash used by operating activities:
Net realized gain from sales of
equity investments (3,588,353) (2,478,529)
Realized gains from venture capital
limited partnership investments (399,599) --
Recoveries from investments previously
written off (8,605) (42,582)
Realized losses from investment
write-downs 1,038,546 365,092
Change in net unrealized fair value:
Equity investments (3,517,009) (2,562,160)
Secured notes receivable (309,000) --
Changes in:
Due to/from related parties (742,118) (6,853)
Other changes, net (105,024) (32,736)
--------- ---------
Net cash used by operating activities $(1,265,035) (346,760)
========= =========
Non-cash investing activities:
Reclassification of secured notes to
equity investments (subordinated
notes receivable) $ 705,000 --
========= =========
Non-cash exercise of warrants $ 336,482 --
========= =========
</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 June 30, 1996, and December 31, 1995, and the related Statements of
Operations for the three and six months ended June 30, 1996 and 1995,
and Statements of Cash Flows for the six months ended June 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
June 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.
The Partnership is scheduled to be dissolved on December 31, 1996. The
Managing General Partners intend to obtain Management Committee approval
for a two-year extension to December 31, 1998.
2. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party expenses for the six months
ended June 30, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Management fees $209,191 169,978
Reimbursable operating expenses 410,776 238,630
Individual General Partners'
compensation 14,661 16,500
</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 $73,321 and $817,233 of such
expenses due to related parties at June 30, 1996, and December 31, 1995,
respectively.
Amounts due to related parties for management fees were $35,240 and
$33,446 at June 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 June 30, 1996, the Partnership had an indirect
interest in such non-transferable options, worth approximately $679, in
PolyMedica Industries, Inc., and Conversion Technologies International,
Inc.
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
June 30, 1996, consisted of:
<TABLE>
<CAPTION>
January 1 -
June 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 0 584,869
Geoworks Common
shares 06/94 113,117 (496,924) (2,120,944)
Geoworks Common
shares 06/94 111,695 0 1,700,557
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) 06/96 $1,345,000 1,345,000 878,333
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 69,180 500,000 266,896
Thermatrix, Inc. Common
shares 06/96 95,239 500,000 897,366
Industrial/Business Automation
- ------------------------------
Electronic Designs, Common
Inc. (formerly shares
Crystallume) various 625,477 0 667,749
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
Biex, Inc. Series C
Preferred
shares 04/96 83,333 83,333 83,333
CardioTech Common
International, Inc. shares 06/96 201,714 410,197 1,159,856
CV Therapeutics, Inc. Series G
Preferred
shares 03/96 76,134 65,470 150,745
CV Therapeutics, Inc. Common
share warrant
at $.25;
expiring
03/99 03/96 114,201 86,798 199,852
Everest & Jennings Common
International Ltd. shares 01/94 59,272 0 (72,609)
Lifecell Common 02/92 &
Corporation shares 11/95 257,829 0 434,443
Matrix
Pharmaceuticals, Common 01/92 &
Inc. shares (2) 01/95 321,633 0 (580,548)
Metra Biosystems, Common
Inc. shares 12/95 9,697 0 (122,958)
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
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) (346,427)
Sensor Medics Common
Corporation share warrant
at $3.60;
exercised
06/96 05/90 134,722 (15,000) (15,000)
SyStemix, Inc. Common 08/91 &
shares 01/92 65,486 (27,342) 130,325
TheraTx, Inc. Common
shares (2) 06/94 70,043 0 400,646
TheraTx, Inc. Common
shares (2) 05/96 20,230 289,627 366,163
Thermo Electron Common
Corporation shares 06/96 26,318 351,471 1,071,143
Retail/Consumer Products
- ------------------------
YES! Entertainment Common
Corporation shares 06/95 33,333 0 208,498
Venture Capital Limited Partnership Investments
- -----------------------------------------------
Various Limited
Partnership
Interests various $3,968,756 (30,659) 364,337
----------- ----------
Total significant changes during the six months
ended June 30, 1996 1,730,221 5,202,732
Other changes, net (3,353) 41,145
---------- ----------
Total equity investments at June 30, 1996 $19,770,288 33,798,247
========== ==========
(1) Convertible and subordinated notes include accrued interest. The interest rate on these
notes issued in 1996 ranged from 8% to 12%.
(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 June 30, 1996, and December 31, 1995, marketable equity securities
had aggregate costs of $5,926,911 and $8,296,440, respectively, and
aggregate fair values of $19,937,358 and $17,960,638, respectively. The
net unrealized gains at June 30, 1996, and December 31, 1995, included
gross gains of $14,010,447 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.
Biex, Inc.
- ----------
In April of 1996, the Partnership made an additional investment in Biex,
Inc., by purchasing 83,333 Series C Preferred shares for a total cost of
$83,333.
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
$1,159,856 at June 30, 1996, to reflect its unrestricted market value.
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 was repaid in full including accrued interest. At
June 30, 1996, the Partnership recorded a decrease in the change in fair
value of $233,104 to reflect the publicly-traded market price of its
investments; a portion of the fair value was adjusted to reflect a 25%
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 $198,329.
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. The Partnership recorded an increase in the change in
fair value of $166,558. The change included an increase in market price
at June 30, 1996 for its remaining, unrestricted shares, partially
offset by a decrease of $2,118,868 due to the sale mentioned above.
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 pricing of
this round indicated a $77,830 fair value decrease in the Partnership's
investments.
P-Com, Inc.
- -----------
During the first quarter of 1996, the Partnership sold all of its
investment in the company for total 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 conversion 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.
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 stock 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 June 30, 1996, the Partnership recorded a decrease in fair value
of $346,427 to reflect the market price at June 30, 1996, for its
remaining PolyMedica unrestricted shares. This decrease in fair value
is more than offset by the increase in fair value of CardioTech common
stock.
SyStemix, Inc.
- --------------
In May of 1996, the Partnership sold 1,500 common shares of SyStemix,
Inc., for total proceeds of $28,597 and a realized gain of $1,255. The
Partnership recorded an increase in fair value of $130,325 to reflect
the market price at June 30, 1996, for its remaining unrestricted
shares.
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. At June 30, 1996, the Partnership
recorded an increase in the change in fair value of $397,366 to reflect
the publicly-traded market price of its investments; a portion of the
fair value was adjusted to reflect a 25% 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 $351,471,
which reflects a realized gain of $336,471 and a warrant cost basis of
$15,000. The Sensor common shares were in turn exchanged for 26,318
shares of marketable, unrestricted Thermo common stock. An increase in
fair value of $719,672 reflected the unrestricted market value of Thermo
stock at June 30, 1996.
Velocity Incorporated
- ---------------------
During the first six months of 1996, the Partnership issued $640,000 in
subordinated notes to continue company operations and reclassified
secured notes receivable of $705,000 to subordinated notes.
During the second quarter of 1996, the Managing General Partners
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 $626,004 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 $30,659 in venture
capital limited partnership investments during the six months ended June
30, 1996. The decrease was a result of returns of capital in the form
of stock and cash distributions of $36,956 and $1,516, respectively,
partially offset by additional contributions of $7,813. The Partnership
recorded a fair value increase of $364,337 as a result of a net increase
in the fair value of the underlying investments, partially offset by
cash and stock distributions from the profits of certain venture capital
limited partnership investments which were recorded as realized gains.
During the first half 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 June 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 June 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 June 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 June 30, 1996, and December 31, 1995,
consisted of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Demand accounts $ 519,643 20,911
Money-market accounts 9,023,473 12,586,694
---------- ----------
Total $ 9,543,116 12,607,605
========== ==========
</TABLE>
6. 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 June 30, 1996,
the Partnership had unfunded commitments as follows:
<TABLE>
<S> <C>
Type
- ----
Equity investments $ 6,250
Term notes 80,000
Venture capital limited partnership investments 31,244
-------
Total $117,494
=======
</TABLE>
In July of 1994, the Partnership guaranteed for a two-year period a $2
million loan between a financial institution and a portfolio company in
the medical/biotechnology industry. The Partnership had received a
guarantee fee of $125,000, which was recorded as deferred income and is
being amortized as other income over the two-year period. During 1996,
$31,250 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. However, if the affiliated partnerships are unable to
finance their portion of the guarantee, the Partnership's share may
increase up to $1,000,000. 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
During the six months ended June 30, 1996, net cash used by operating
activities totaled $1,265,035. The Partnership paid management fees of
$207,397 to the Managing General Partners and reimbursed related parties
for operating expenses of $1,154,688. In addition, $14,661 was paid to
the Individual General Partners as compensation for their services.
Other operating expenses of $173,675 were paid and $285,386 in interest
income was received. Distributions totaling $3,565,256 were paid to
Limited and General Partners.
During the six months ended June 30, 1996, the Partnership funded
$171,666 in secured notes receivable and $2,469,748 in equity
investments mainly to portfolio companies in the communications,
computer systems and software, medical/biotechnology, and
industrial/business automation industries. Proceeds from equity
investment sales were $4,256,103 and distributions of $88,613 from
venture capital limited partnership investments were received.
Repayments of convertible notes receivable provided cash of $62,500.
As of June 30, 1996, the Partnership was committed to fund additional
investments of $117,494 and had outstanding guarantees up to $3,000,000
as discussed in Note 6 to the financial statements.
During the first half 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 cash equivalents at June 30, 1996, were $9,543,116. 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 income was $1,069,257 and $3,127,202 for the three months ended June
30, 1996 and 1995, respectively. The decrease in net income was
primarily due to a $1,626,576 decrease in net realized gain from sales
of equity investments, a $634,908 increase in realized losses from
investment write-downs, a $325,417 decrease in the change in net
unrealized fair value of equity investments, and a $161,526 increase in
total operating expenses. These changes were partially offset by a
$409,000 increase in the change in net unrealized fair value of secured
notes receivable and a $353,403 increase in realized gains from venture
capital limited partnership investments.
Net realized gains from sales of equity investments were $398,866 and
$2,025,442 for the quarters ended June 30, 1996 and 1995, respectively.
The 1996 gain mainly resulted from the non-cash exercise of a Sensor
Medics Corporation warrant in exchange for Thermo Electron Corporation
common shares. The 1995 gain mostly related to sales of GeoWorks.
During the quarter ended June 30, 1996, the Partnership recorded
realized losses from investment write-downs of $1,000,000 related to a
portfolio company in the computer systems and software industry. During
the same period in 1995, such losses totaled $365,092 related primarily
to equity investments for portfolio companies in the retail/consumer
products and communications industries.
During the quarter ended June 30, 1996, the increase in fair value of
equity investments of $1,221,345 was primarily due to venture capital
limited partnership investments as well as portfolio companies in the
industrial/business automation and environmental industries. During the
same period in 1995, the increase of $1,546,762 was mostly attributable
to increases in portfolio companies in the computer systems and software
industry.
Operating expenses were $345,147 for the quarter ended June 30, 1996,
compared to $183,621 for the same period in 1995. The increase was
primarily due to higher administrative and investor services and
investment operations expenses from increased portfolio activities.
The Partnership recorded an increase in the change in fair value of
secured notes receivable of $409,000 at June 30, 1996, due to the
elimination of loan loss reserves. No such reserve was recorded at June
30, 1995.
Realized gains from venture capital limited partnership investments were
$353,403 for the three months ended June 30, 1996. The gain represented
distributions from profits of two venture capital limited partnerships.
There was no such gain realized in 1995.
Total income was $138,567 and $154,593 during the quarters ended June
30, 1996 and 1995, respectively. The increase of $37,281 in short-term
investment interest was mainly from investment sale proceeds. This
increase was more than offset by a $53,307 decrease in notes receivable
interest. Included in the 1995 balance of $54,617 was approximately
$50,000 in interest income related to a secured note receivable
previously written off from a portfolio company in the
medical/biotechnology industry. The remaining decrease was due to notes
receivable on nonaccrual status.
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 six months compared to corresponding six months in the preceding
- ------------------------------------------------------------------------
year
- ----
Net income was $6,366,127 and $4,411,008 for the six months ended June
30, 1996 and 1995, respectively. The increase in net income was
primarily due to a $1,109,824 increase in net realized gain from sales
of equity investments, a $954,849 increase in the change in net
unrealized fair value of equity investments, a $399,599 increase in
realized gains from venture capital limited partnership investments, and
a $309,000 increase in the change in net unrealized fair value of
secured notes receivable. These changes were partially offset by a
$673,454 increase in realized losses from investment write-downs.
Net realized gain from sales of equity investments was $3,588,353 for
the six months ended June 30, 1996, compared to $2,478,529 for the same
period in 1995. The 1996 net gain mainly related to sales of Geoworks.
The net gain in 1995 mostly related to sales of GeoWorks and UroMed
Corporation investments.
During the six months ended June 30, 1996, the increase in fair value of
equity investments of $3,517,009 was primarily attributable to increases
in portfolio companies in the medical/biotechnology and
industrial/business automation industries, partially offset by decreases
in portfolio companies in the computer systems and software industry.
During the same period ended June 30, 1995, the increase of $2,562,160
was primarily attributable to increases in portfolio companies in the
computer systems and software and medical/biotechnology industries,
partially offset by decreases in portfolio companies in the
industrial/business automation industry.
Realized gains from venture capital limited partnership investments was
$399,599 for the six months ended June 30, 1996. The gain represents
distributions from profits of two venture capital limited partnerships.
There was no such gain realized in 1995.
The Partnership recorded an increase in the change in fair value of
secured notes receivable of $309,000 at June 30, 1996, due to the
elimination of loan loss reserves. No such reserve was recorded at June
30, 1995.
During the six months ended June 30, 1996, the Partnership recorded
realized losses from investment write-downs of $1,038,546 mostly related
to equity investments for a portfolio company in the computer systems
and software industry. During the same period in 1995, such losses
totaled $365,092 primarily due to equity investments in portfolio
companies in the retail/consumer products and communications industries.
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 June 30, 1996.
(b) Financial Data Schedule for the six months ended and as of June 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: August 9, 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 JUNE 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> JUN-30-1996
<PERIOD-TYPE> 6-MOS
<INVESTMENTS-AT-COST> 19,770,288
<INVESTMENTS-AT-VALUE> 33,798,247
<RECEIVABLES> 0
<ASSETS-OTHER> 63,786
<OTHER-ITEMS-ASSETS> 9,543,116
<TOTAL-ASSETS> 43,405,149
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 164,849
<TOTAL-LIABILITIES> 164,849
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 29,212,341
<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> 14,027,959
<NET-ASSETS> 43,240,300
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 286,721
<OTHER-INCOME> 31,250
<EXPENSES-NET> (735,864)
<NET-INVESTMENT-INCOME> (417,893)
<REALIZED-GAINS-CURRENT> 2,958,011
<APPREC-INCREASE-CURRENT> 3,826,009
<NET-CHANGE-FROM-OPS> 6,366,127
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6,366,127
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 209,191
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 739,022
<AVERAGE-NET-ASSETS> 40,057,237
<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> 1.8
<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>
