<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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 814-48
TECHNOLOGY FUNDING PARTNERS III, L.P.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 94-3033783
------------------------------ ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 Alameda de las Pulgas, Suite 250
San Mateo, California 94403
--------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(650) 345-2200
--------------------------------------------------
(Registrant's telephone number, including area code)
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,
2000 1999
---------- -----------
<S> <C> <C>
ASSETS
Equity investments (cost basis
of $16,769,034 and $20,194,582 for
2000 and 1999, respectively) $19,537,464 36,642,407
Notes receivable, net (cost basis of
$3,858,855 and $20,824 for 2000
and 1999, respectively) 2,513,057 20,824
---------- ----------
Total investments 22,050,521 36,663,231
Cash and cash equivalents 9,417,238 1,560,773
Due from related parties 3,885 66,844
Other assets 8,593 2,343
---------- ----------
Total $31,480,237 38,293,191
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 46,858 73,159
Other liabilities 3,836 3,836
---------- ----------
Total liabilities 50,694 76,995
Commitments and contingencies
(Notes 2 and 7)
Partners' capital:
Limited Partners
(160,000 Units outstanding) 32,819,692 35,782,284
General Partners (1,390,149) 2,433,912
---------- ----------
Total partners' capital 31,429,543 38,216,196
---------- ----------
Total liabilities
and partners' capital $31,480,237 38,293,191
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
STATEMENTS OF OPERATIONS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------------ -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Notes receivable interest $ 304,434 3,364 351,211 10,656
Short-term investment interest 66,464 24,023 89,789 59,590
Other income -- 123 -- 246
---------- --------- ---------- ---------
Total income 370,898 27,510 441,000 70,492
Costs and expenses:
Management fees 133,389 64,243 229,122 125,293
Individual General Partners'
compensation 15,301 7,190 20,461 18,604
Operating expenses:
Administrative and investor services 151,473 171,040 263,624 299,889
Investment operations 249,442 63,697 314,322 143,517
Professional fees 15,963 43,916 34,074 54,329
Computer services 33,570 29,077 66,438 57,811
---------- --------- ---------- ---------
Total operating expenses 450,448 307,730 678,458 555,546
---------- --------- ---------- ---------
Total costs and expenses 599,138 379,163 928,041 699,443
---------- --------- ---------- ---------
Net operating loss (228,240) (351,653) (487,041) (628,951)
Net realized (loss) gain from sales
of equity investments (63,642) -- 11,160,950 199,951
Realized gains from venture capital
limited partnership investments 202,900 -- 490,929 93,583
Realized losses from investment
write-downs -- (361,091) -- (361,091)
Net realized loss on foreign
currency (63,370) -- (63,370) --
---------- --------- ---------- ---------
Net realized (loss) income (152,352) (712,744) 11,101,468 (696,508)
Change in net unrealized
fair value:
Equity investments (18,639,213) 5,679,116 (13,679,395) 6,937,945
Notes receivable (1,345,798) -- (1,345,798) --
Net unrealized loss on foreign
currency transaction (25,038) -- -- --
---------- --------- ---------- ---------
Net (loss) income $(20,162,401) 4,966,372 (3,923,725) 6,241,437
========== ========= ========== =========
Net (loss) income per Unit $ (100.06) 24.94 (18.52) 28.92
========== ========= ========== =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest and other income received $ 91,434 68,466
Cash paid to vendors (204,971) (207,052)
Cash paid to related parties (692,662) (434,916)
---------- ---------
Net cash used by operating
activities (806,199) (573,502)
---------- ---------
Cash flows from investing activities:
Proceeds from sales of
equity investments 15,736,552 873,237
Purchase of equity investments (841,998) (2,126,366)
Notes receivable issued (3,500,000) (75,868)
Repayments of notes receivable 6,837 198,844
Distributions from venture capital
limited partnerships 187,571 93,338
---------- ---------
Net cash provided (used) by
investing activities 11,588,962 (1,036,815)
---------- ---------
Cash flows from financing activities:
Tax distributions to General Partners (2,862,928) --
---------- ---------
Net cash used by financing activities (2,862,928) --
---------- ---------
Effect of exchange rate changes on
cash and cash equivalents (63,370) --
---------- ---------
Net increase (decrease) in cash and
cash equivalents 7,856,465 (1,610,317)
Cash and cash equivalents at
beginning of year 1,560,773 3,160,675
---------- ---------
Cash and cash equivalents
at June 30 $ 9,417,238 1,550,358
========== =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
-----------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Reconciliation of net (loss) income to
net cash used by operating activities:
Net (loss) income $(3,923,725) 6,241,437
Adjustments to reconcile net (loss)
income to net cash used by
operating activities:
Net realized gain from sales of
equity investments (11,160,950) (199,951)
Realized gains from venture capital
limited partnership investments (490,929) (93,583)
Realized losses from investment
write-downs -- 361,091
Change in net unrealized fair value:
Equity investments 13,679,395 (6,937,945)
Notes receivable 1,345,798 --
Net realized loss on foreign currency
transaction 63,370 --
Changes in:
Accrued interest on notes receivable (349,566) (2,026)
Accounts payable and accrued expenses (26,301) 17,723
Due to related parties 62,959 51,116
Other changes, net (6,250) (11,364)
--------- ---------
Net cash used by operating activities $ (806,199) (573,502)
========= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
----------------------------------------
1. General
-------
Interim Financial Statements
----------------------------
In the opinion of the Managing General Partners, the accompanying interim
financial statements reflect all adjustments necessary for a fair
presentation of the financial position, results of operations, and cash
flows for the interim periods presented. These statements should be read
in conjunction with the Annual Report on Form 10-K for the year ended
December 31, 1999. 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.
Valuation of Investments
------------------------
Investments are valued at fair value as required by the Investment Company
Act of 1940.
The Management Committee has the authority to establish valuation
procedures and periodically apply such procedures to the Partnership's
venture capital 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. Any change in fair value which results from the revision in
estimating procedures is reported as a change in accounting estimate. The
valuation procedures have been revised and approved by the Management
Committee and applied under their direction by the Managing General
Partners in preparing the June 30, 2000 financial statements. A change in
accounting estimate of $15,927,394 was recognized during the quarter ended
June 30, 2000 to reflect the revisions to the valuation and is included in
the "Change in net unrealized fair value of investments" on the Statement
of Operations.
The fair value of investments in publicly traded securities is considered
to be the amount which the company may reasonably expect to receive if sold
on the valuation date. Unrestricted securities are valued at the five-day
average closing sales price or bid/ask price that is available on a
national securities exchange or over-the-counter market. Valuation
discounts of 5% to 50% are applied to securities subject to resale
restrictions resulting from Rule 144, contractual lock-ups such as those
commonly associated with underwriting agreements, or knowledge of material
non-public information and also to unrestricted securities when the number
of shares held by the Partnership and its affiliates is substantial in
relation to the average trading volume.
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 on a current sale. Inherent in
the good faith determination of fair value of these investments is the
selection of a reasonable period for orderly disposition. As the
Partnership nears the end of its life, the available period for disposition
necessarily shortens. Other 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 June 30, 2000 and December 31, 1999, the investment portfolio included
investments totaling $9,063,280 and $14,443,405, 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, contractual
or practical restrictions as determined by the Management Committee
amounted to $7,946,622 and $12,206,492 at June 30, 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.
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, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Management fees $229,122 125,293
Individual General Partners'
compensation 20,461 18,604
Reimbursable operating expenses 506,038 342,135
</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 was $48,347 and $21,106 due from related
parties for such expenses at June 30, 2000 and December 31, 1999,
respectively.
Amounts due to related parties for management fees were $44,462 and $26,758
at June 30, 2000, and December 31, 1999, respectively.
At December 31, 1999, the Partnership had a receivable of $72,496 for
investment sales proceeds due from an affiliated partnership. These monies
were received in the first quarter of 2000. There were no such receivables
at June 30, 2000.
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 June 30, 2000, the Partnership had an indirect
interest in non-transferable Thermatrix Inc. options at an exercise price
higher than the current market value. At June 30, 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 $358,459.
3. Equity Investments
------------------
<TABLE>
At June 30, 2000, equity investments consisted of:
<CAPTION>
June 30, 2000
Principal ------------------------
Amount or
Industry (1)/ Investment Shares as of Cost Fair
Company Position Date June 30, 2000 Basis Value
---------------- --------- ---------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Communications--4.8%
--------------------
Illinois
Superconductor Common
Corporation share
warrants at
$1.47-$9.56;
expiring
2000-2002 1999 2,624 18,858 1,794
Women.com Common 1996-
Networks, Inc. shares 1999 580,956 1,609,163 1,498,866
--------- ---------
1,628,021 1,500,660
--------- ---------
Computer Systems and Software--7.7%
-----------------------------------
Photon Dynamics, Common
Inc. shares 1996 37,500 225,000 2,431,425
--------- ---------
225,000 2,431,425
--------- ---------
Electronic Design Automation--1.5%
----------------------------------
Cadence Design Common
Systems, Inc. shares 1996 24,000 313,439 480,912
--------- ---------
313,439 480,912
--------- ---------
Environmental--0.1%
-------------------
Thermatrix Inc. Common
(b) shares 1996 65,970 346,338 0
Thermatrix Inc. Preferred
(a) (b) shares 1999 1,000 990,000 0
Thermatrix Inc. Common share
(b) warrant
at $5.31;
expiring
2002 1999 35,000 10,000 0
Triangle
Biomedical Common
Sciences, Inc.(a) shares 1999 4,099 79,792 28,693
Triangle Common
Biomedical share
Sciences, Inc.(a) warrants at
$28.00;
expiring
2009 1999 4,099 4,099 1,025
--------- ---------
1,430,229 29,718
--------- ---------
Industrial/Business Automation--0.5%
------------------------------------
PRI Automation, Common 1998-
Inc. shares 1999 7 315 433
Nanophase
Technologies Common
Corporation shares 2000 14,557 251,108 152,849
--------- ---------
251,423 153,282
--------- ---------
Information Technology--8.3%
----------------------------
WorldRes, Inc. Preferred 1997-
(a) (b) shares 1999 434,392 1,708,124 2,523,819
WorldRes, Inc. Preferred
(a) (b) share
warrants at
$3.70-$4.63;
expiring 1997-
2002-2003 1998 24,305 195 88,480
--------- ---------
1,708,319 2,612,299
--------- ---------
Medical/Biotechnology--34.6%
----------------------------
Acusphere, Inc. Preferred 1995-
(a) shares 2000 432,138 1,100,909 821,062
ADESSO Specialty
Services
Organization Preferred 1997-
Inc. (a) (b) shares 2000 204,670 1,393,803 1,719,228
American OBGYN, Preferred
Inc. (a) shares 1994 148,439 1,226,202 345,779
American OBGYN, Common
Inc. (a) shares 1994 12,611 0 9,458
Biex, Inc. (a) (b) Preferred 1993-
shares 1999 777,021 1,023,540 204,707
Biex, Inc. (a) (b) Preferred
share warrants
at $0.01-$2.50;
expiring 1998-
2003-2005 2000 71,186 0 0
Biex, Inc. (a) (b) Convertible
note (2) 2000 $23,065 23,242 4,648
CollaGenex
Pharmaceuticals, Common
Inc. shares 1999 4,401 108,100 40,929
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 4,495,021
Flamel Common
Technologies shares 2000 7,774 43,511 37,704
LifeCell Common 1992-
Corporation shares 1997 351,060 1,263,574 1,952,735
Matrix
Pharmaceutical, Common 1992-
Inc. shares 1995 31,633 74,821 420,719
Molecular
Geriatrics Common
Corporation (a) shares 1993 23,585 125,000 16,510
Oxford Common
GlycoSciences Plc shares 1993 50 239 1,584
Peptide
Therapeutics Common
Group Plc shares 1998 978 2,659 882
Pharmadigm, Preferred 1993-
Inc. (a) shares 1998 546,143 945,039 218,457
Pharmadigm, Preferred
Inc. (a) share
warrants at
$2.00-$2.50;
expiring 1995-
2000-2001 1997 10,541 0 0
Pherin
Pharmaceuticals, Preferred
Inc. (a) shares 1991 200,000 200,000 371,000
Sanarus Medical, Preferred
Inc. (a) (b) shares 2000 260,000 390,000 156,000
Simione Central Common
Holdings, Inc.(a) shares 1999 25,561 382,875 55,074
---------- ----------
9,719,766 10,871,497
---------- ----------
Retail/Consumer Products--0.0%
------------------------------
YES!
Entertainment Common
Corporation shares 1995 33,333 0 0
---------- ----------
0 0
---------- ----------
Venture Capital Limited Partnership Investments--4.6%
-----------------------------------------------------
Alta IV, Limited Ltd.
Partnership (a) Partnership
interests various $1,000,000 146,698 54,316
Batterson,
Johnson, and Ltd.
Wang Limited Partnership
Partnership (a) interests various $500,000 0 164,474
Columbine Ltd.
Venture Fund II, Partnership
L.P. (a) interests various $750,000 469,667 697,476
Delphi Ltd.
Ventures, L.P. Partnership
(a) interests various $1,000,000 652,842 211,729
Medical Science Ltd.
Partners, L.P. Partnership
(a) interests various $500,000 187,222 136,386
O,W&W Pacrim Ltd.
Investments Partnership
Limited (a) interests various 200 12,955 124,833
Trinity Ventures Ltd.
IV, L.P. (a) Partnership
interests various $125,008 23,453 68,457
---------- ----------
1,492,837 1,457,671
---------- ----------
Total equity investments--62.1% $16,769,034 19,537,464
========== ==========
Legends and footnotes:
-- No investment held at end of period.
0 Investment active with a carrying value or fair value of zero.
(a) Equity security acquired in a private placement transaction; resale may be subject to certain
selling restrictions.
(b) Portfolio company is an affiliate of the Partnership; resale may be subject to certain
selling restrictions.
(1) Represents the total fair value of a particular industry segment as a percentage of partners'
capital at 06/30/00.
(2) The Partnership has no income-producing equity investments except for convertible and
subordinated notes which include accrued interest. Interest rates on such notes range from
5% to 10%.
</TABLE>
All investments are valued at fair value as determined in good faith by the
Managing General Partners. See Note 1--Valuation of Investments.
Significant purchases and sales of investments during the six months ended
June 30, 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 Specialty Services Organization, Inc.
--------------------------------------------
In March 2000, the Partnership purchased 7,726 Series E Preferred shares
for $129,797.
CV Therapeutics, Inc.
---------------------
In January 2000, the Partnership sold its entire investment in the company
for proceeds of $214,137 and realized a gain of $134,150.
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 Pharmaceuticals, 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.
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
$3,552,526.
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.
Sanarus Medical, Inc.
---------------------
In February 2000, the Partnership purchased 260,000 Series A Preferred
shares in the company for $390,000.
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.
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.
Venture Capital Limited Partnerships
------------------------------------
The Partnership received cash distributions totaling $187,571 from Alta IV,
Limited Partnership, Batterson, Johnson and Wang Limited Partnership and
Medical Science Partners, L.P., $28,182 of which were recorded as returns
of capital and the remaining recorded as realized gains. The Partnership
received stock distributions of Epoch Pharmaceuticals Inc., Flamel
Technologies and Nanophase Technologies Corporation with fair values
totaling $399,899. Distributions totaling $331,540 were recorded as
realized gains and distributions totaling $68,359 were recorded as returns
of capital.
The Partnership recorded a $437,427 increase in fair value as a result of a
net increase in the fair value of the underlying investments of the
partnerships.
Marketable Equity Securities
----------------------------
At June 30, 2000, marketable equity securities had aggregate costs of
$3,891,929 and aggregate market values of $7,019,038. The net unrealized
gains at June 30, 2000, included gross gains of $3,670,590.
4. Notes Receivable, net
---------------------
Activity from January 1 through June 30 consisted of:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Balance at January 1 $ 20,824 202,777
Notes receivable issued 3,500,000 75,868
Repayments of notes receivable (6,837) (198,844)
Change in interest receivable 344,868 (3,207)
Change in allowance for loan losses (1,345,798) --
--------- -------
Total notes receivable, net
at June 30 $2,513,057 76,594
========= =======
</TABLE>
The interest rate on notes receivable at June 30, 2000 ranged from 16% to
50%. All notes are due on demand.
In 2000, the Partnership recorded a $1,345,798 decrease in the fair value
of notes receivable from a portfolio company in the computer equipment
industry based on the fair value of the notes as determined in good faith
by the Managing General Partners.
5. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at June 30, 2000, and December 31, 1999,
consisted of:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Demand accounts $ 227,043 161,015
Money-market accounts 9,190,195 1,399,758
--------- ---------
$9,417,238 1,560,773
========= =========
</TABLE>
6. Distributions
-------------
In the first quarter of 2000, a tax distribution totaling $1,238,366 was
declared and paid to the General Partners. In April 2000, a tax
distribution was declared and paid to the General Partners totaling
$1,624,562.
7. 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, 2000, unfunded
commitments to portfolio companies totaled $500,000.
Item 2. 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 on 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.
During the six months ended June 30, 2000, net cash used by operating
activities totaled $806,199. The Partnership paid management fees of
$211,418 to the Managing General Partners and reimbursed related parties
for operating expenses of $533,279. The Partnership also received
investment sales proceeds of $72,496 from an affiliated partnership. In
addition, $20,461 was paid to the Individual General Partners as
compensation for their services. Other operating expenses of $204,971 were
paid and $91,434 in interest income was received.
During the six months ended June 30, 2000, the Partnership funded equity
investments of $841,998 to portfolio companies in the medical/biotechnology
industry and issued $3,500,000 in notes receivable to a portfolio company
in the computer systems and software industry. Proceeds from equity
investment sales were $15,736,552 and repayments of notes receivable were
$6,837. The Partnership received cash distributions from venture capital
limited partnerships totaling $187,571. Tax distributions totaling
$2,862,928 were paid to the General Partners.
Cash and cash equivalents at June 30, 2000, were $9,417,238. Cash
reserves, interest income on short-term investments, and 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 $20,162,401 for the quarter ended June 30, 2000, compared to
net income of $4,966,372 for the same period in 1999. The change was
primarily due to a decrease of $24,318,329 in the net unrealized fair value
of equity investments and a decrease of $1,345,798 in the net unrealized
fair value of notes receivable, partially offset by a $361,091 decrease in
realized losses from investment write-downs, a $343,388 increase in
interest income and a $202,900 increase in realized gains from venture
capital limited partnerships.
The Partnership recorded a decrease in fair value of equity investments of
$18,639,213 during the quarter ended June 30, 2000 primarily due to a
decrease in fair value of equity investments of $14,581,596 for the change
in accounting estimate discussed in Note 1 to the financial statements. In
addition, there were decreases in portfolio companies in the communications
and computer systems and software industries. During the same period in
1999, the increase in fair value of equity investments of $5,679,116 was
substantially attributable to increases in the communications, computers
and computer equipment and medical/biotechnology industries, partially
offset by decreases in the environmental and electronic design automation
industries.
During the quarter ended June 30, 2000, the Partnership recorded a decrease
in the fair value of notes receivable of $1,345,798 for the change in
accounting estimate discussed in Note 1 to the financial statements. There
was no such amount recorded for the corresponding period in 1999.
Realized losses from investment write-downs totaled $361,091 in the quarter
ended June 30, 1999 and related to a portfolio company in the
medical/biotechnology industry. There were no write-downs in the
corresponding quarter of 2000.
For the quarter ended June 30, 2000, interest income of $370,898 was
primarily the result of interest earned on secured notes receivable and
higher cash balances. During the same period in 1999, interest income was
$27,510.
During the quarter ended June 30, 2000 the Partnership recorded realized
gains from venture capital limited partnership investments of $202,900.
The gains represented distributions from profits of venture capital limited
partnerships. There were no gains during the same period in 1999.
Operating expenses were $450,448 for the quarter ended June 30, 2000,
compared to $307,730 for the same period in 1999. 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.
If these expenses had been billed in prior years, operating expenses for
the three months ended June 30, 2000 and 1999 would have been $268,202 and
$333,545, respectively. The decrease is attributable to decreased
investment activity and the related administrative costs.
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 loss was $3,923,725 for the six months ended June 30, 2000, compared to
net income of $6,241,437 for the corresponding period in 1999. The change
was primarily due to a $20,617,340 decrease in net unrealized fair value of
equity investments and a $1,345,798 decrease in the net unrealized fair
value of notes receivable, partially offset by a $10,960,999 increase in
the realized gain from sales of equity investments, a $397,346 increase in
realized gains from venture capital limited partnerships, a $370,508
increase in interest income and a $361,091 decrease in realized losses from
investment write-downs.
During the six months ended June 30, 1999, the decrease in fair value of
equity investments of $13,679,395 was primarily attributable to a decrease
in fair value of equity investments of $14,581,596 for the change in
accounting estimate discussed in Note 1 to the financial statements. In
addition, there were decreases in portfolio companies in the communications
and computer and computer equipment industries, partially offset by
increases in the medical/biotechnology and computer system and software
industries. During the comparable period of 1999, the increase of
$6,937,945 was due to increases in the communications,
medical/biotechnology and information technology industries, partially
offset by decreases in the electronic design automation and environmental
industries.
During the six months ended June 30, 2000, the Partnership recorded a
decrease in the fair value of notes receivable of $1,345,798 for the change
in accounting estimate discussed in Note 1 to the financial statements.
There was no such amount recorded for the same period in 1999.
Net realized gain from sales of equity investments was $11,160,950 for the
six months ended June 30, 2000 as compared to a net realized gain of
$199,951 for the six months ended June 30, 1999. The 2000 gain primarily
resulted from the sales of shares in Matrix Pharmaceuticals, Inc., Oxford
GlycoSciences Plc and White Electronic Designs Corporation. (See Note 3.)
During the six months ended June 30, 2000, the Partnership recorded net
realized gains from venture capital limited partnership investments of
$490,929. During the same period in 1999, there were gains of $93,583.
The gains represented distributions from profits of venture capital limited
partnerships.
For the six months ended June 30, 2000, interest income of $441,000 was
primarily the result of interest on secured notes receivable and higher
cash balances. During the same period in 1999, interest income was
$70,492.
Realized losses from investment write-downs totaled $361,091 for the six
months ended June 30, 1999 and related to a portfolio company in the
medical/biotechnology industry. There were no write-downs in the
corresponding period of 2000.
Operating expenses for the six months ended June 30, 2000 and 1999 were
$678,458 and $555,546, 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. If these expenses had
been billed in prior years, operating expenses for the six months ended
June 30, 2000 and 1999 would have been $496,161 and $602,309, respectively.
The decrease is attributable to decreased investment activity and the
related administrative costs.
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, 2000.
(b) Financial Data Schedule for the six months ended and as of June 30,
2000 (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 14, 2000 By: /s/Charles R. Kokesh
-----------------------------------
Charles R. Kokesh
President, Chief Executive
Officer, Chief Financial
Officer and Chairman of
Technology Funding Inc. and
Managing General Partner of
Technology Funding Limited
