<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, 1997
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,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Equity investments (cost basis
of $23,592,141 and $21,648,281 for
1997 and 1996, respectively) $29,951,703 28,511,247
Cash and cash equivalents 4,461,899 5,317,251
Other assets 3,343 61,783
---------- ----------
Total $34,416,945 33,890,281
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 55,416 58,301
Due to related parties 47,707 89,517
Other liabilities 41,679 27,618
---------- ----------
Total liabilities 144,802 175,436
Commitments and contingencies
(Notes 2 and 5)
Partners' capital:
Limited Partners
(Units outstanding of 160,000
in both 1997 and 1996) 27,811,881 26,997,022
General Partners 100,700 (145,143)
Net unrealized fair value increase
from cost of equity investments 6,359,562 6,862,966
---------- ----------
Total partners' capital 34,272,143 33,714,845
---------- ----------
Total $34,416,945 33,890,281
========== ==========
</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,
--------------------- ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income:
Notes receivable interest $ 4,837 9,132 47,629 13,871
Short-term investment interest 61,076 91,039 228,237 373,021
Other income -- 15,650 3,125 46,900
--------- --------- --------- ---------
Total income 65,913 115,821 278,991 433,792
Costs and expenses:
Management fees 77,891 108,513 248,126 317,704
Individual General Partners'
compensation 10,500 8,017 31,950 22,678
Operating expenses:
Administrative and investor services 174,676 101,443 424,924 331,622
Investment operations 114,217 47,052 245,900 230,224
Professional fees 13,889 18,149 74,150 57,152
Computer services 46,224 27,042 101,412 86,700
--------- --------- --------- ---------
Total operating expenses 349,006 193,686 846,386 705,698
--------- --------- --------- ---------
Total costs and expenses 437,397 310,216 1,126,462 1,046,080
--------- --------- --------- ---------
Net operating loss (371,484) (194,395) (847,471) (612,288)
Net realized (loss) gain from sales
of equity investments (17,668) 162,091 5,675,091 3,750,444
Realized gains from venture capital
limited partnership investments -- -- 512,349 399,599
Realized losses from investment
write-downs -- -- -- (1,038,546)
Recoveries from investments previously
written off -- -- -- 8,605
--------- --------- --------- ---------
Net realized (loss) income (389,152) (32,304) 5,339,969 2,507,814
Change in net unrealized
fair value:
Equity investments 3,644,579 (4,757,832) (503,404) (1,240,823)
Secured notes receivable -- -- -- 309,000
--------- --------- --------- ---------
Net income (loss) $3,255,427 (4,790,136) 4,836,565 1,575,991
========= ========= ========= =========
Net realized (loss) income per Unit $ (2) -- 30 16
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF PARTNERS' CAPITAL
- ------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1997:
Net Unrealized
Fair Value
Increase (Decrease)
From Cost of
Limited General Equity
Partners Partners Investments Total
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Partners' capital,
December 31, 1996 $26,997,022 (145,143) 6,862,966 33,714,845
Distributions (3,960,000) (319,267) -- (4,279,267)
Net realized income 4,774,859 565,110 -- 5,339,969
Change in net unrealized
fair value of
equity investments -- -- (503,404) (503,404)
---------- ------- --------- ----------
Partners' capital,
September 30, 1997 $27,811,881 100,700 6,359,562 34,272,143
========== ======= ========= ==========
</TABLE>
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 231,363 392,075
Cash paid to vendors (235,415) (154,557)
Cash paid to related parties (921,816) (1,701,201)
--------- ----------
Net cash used by operating
activities (925,868) (1,463,683)
--------- ----------
Cash flows from investing activities:
Secured notes receivable issued -- (171,666)
Purchase of equity investments (5,404,924) (6,721,386)
Repayments of convertible and
secured notes receivable -- 62,500
Proceeds from sales of
equity investments 9,348,066 5,011,889
Distributions from venture capital
limited partnerships 406,641 93,107
--------- ----------
Net cash provided (used) by
investing activities 4,349,783 (1,725,556)
--------- ----------
Cash flows from financing activities:
Distributions to Limited and General
Partners (4,279,267) (3,565,256)
--------- ----------
Net cash used by financing
activities (4,279,267) (3,565,256)
--------- ----------
Net decrease in cash
and cash equivalents (855,352) (6,754,495)
Cash and cash equivalents at beginning
of year 5,317,251 12,607,605
--------- ----------
Cash and cash equivalents
at September 30 $4,461,899 5,853,110
========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Reconciliation of net income to net
cash used by operating activities:
Net income $4,836,565 1,575,991
Adjustments to reconcile net income
to net cash used by operating activities:
Net realized gain from sales of
equity investments (5,675,091) (3,750,444)
Realized gains from venture capital
limited partnership investments (512,349) (399,599)
Recoveries from investments previously
written off -- (8,605)
Realized losses from investment
write-downs -- 1,038,546
Change in net unrealized fair value:
Equity investments 503,404 1,240,823
Secured notes receivable -- (309,000)
Changes in:
Due to/from related parties (41,810) (796,014)
Other changes, net (36,587) (55,381)
--------- ---------
Net cash used by operating activities $ (925,868) (1,463,683)
========= =========
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 September 30, 1997, and December 31, 1996, and the related Statements
of Operations for the three and nine months ended September 30, 1997 and
1996, Statement of Partners Capital for the nine months ended September
30, 1997, and Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996, 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, 1996. The following notes to financial statements for
activity through September 30, 1997, 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.
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, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Management fees $248,126 317,704
Reimbursable operating expenses 599,930 564,805
Individual General Partners'
compensation 31,950 22,678
</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 $21,743 and $57,498 of such
expenses due to related parties at September 30, 1997, and December 31,
1996, respectively.
Amounts due to related parties for management fees were $25,964 and
$32,019 at September 30, 1997, and December 31, 1996, 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, 1997, the Partnership had an
indirect interest in such non-transferable options, worth approximately
$5,767, in Electronic Designs, Inc.
3. Equity Investments
------------------
A complete listing of the Partnerships equity investments at December
31, 1996, is in the 1996 Annual Report. Activity from January 1 through
September 30, 1997, consisted of:
<TABLE>
<CAPTION>
January 1 through
September 30, 1997
----------------------
Principal
Investment Amount or Cost Fair
Industry/Company Position Date Shares Basis Value
- ---------------- -------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $21,648,281 28,511,247
---------- ----------
Significant changes:
Communications
- --------------
NetChannel, Series B
Inc. Preferred
share
warrant at
$1.10;
exercised
01/97 10/96 295,454 (3,250) (3,250)
NetChannel, Series B
Inc. Preferred
shares 01/97 615,431 149,204 325,000
NetChannel, Series B
Inc. Preferred
shares 03/97 738,517 179,045 389,999
NetChannel, Convertible
Inc. note (1) 05/97 $146,622 151,980 151,980
NetChannel, Series B
Inc. Preferred
shares 05/97 415,604 182,866 219,474
NetChannel, Convertible
Inc. note (1) 09/97 $243,750 244,633 244,633
Wire Networks, Series A
Inc. Preferred
shares 02/96 159,300 0 269,217
Wire Networks, Series B
Inc. Preferred
shares 02/96 194,642 0 153,767
Wire Networks, Series C
Inc. Preferred
shares 07/97 71,576 217,593 217,593
Wire Networks, Convertible
Inc. note (1) 11/96 $206,795 (208,691) (208,691)
Computers and Computer Equipment
- --------------------------------
Electronic Common
Designs, Inc. shares various 645,477 0 1,170,218
Computer Systems and Software
- -----------------------------
Geoworks Common
shares 03/94 38,415 (179,267) (970,939)
Geoworks Common
shares 06/94 65,110 (31,052) (1,767,463)
Geoworks Common
shares 07/96 10,000 (200,000) (252,750)
Geoworks Common
shares 09/96 15,000 (298,125) (379,125)
Geoworks Common
shares 02/97 50,000 956,250 729,585
Electronic Design Automation
- ----------------------------
Cadence Design Common
Systems, Inc. shares 07/96 12,000 0 174,899
Synopsys, Inc. Common
shares 07/96 7,000 (238,569) (313,600)
Synopsys, Inc. Common
shares 02/97 14,000 560,005 582,400
Environmental
- -------------
Thermatrix, Inc. Common
shares 06/96 65,970 0 (288,999)
Conversion Series A
Technologies private
International, Inc. placement
units (3) 08/97-09/97 2.3625 236,250 236,250
Information Technology
- ----------------------
WorldRes, Inc. Series B
Preferred
shares 01/97 221,894 750,002 750,002
Medical/Biotechnology
- ---------------------
ADESSO Specialty Series C
Services Preferred
Organization, Inc. shares 01/97 177,420 1,100,004 1,100,004
Affymetrix, Inc. Common
shares 07/96 20,000 (225,000) (401,760)
Biex, Inc. Series A
Preferred
shares 07/93 128,205 0 76,923
Biex, Inc. Series B
Preferred
shares 10/94 63,907 0 38,344
Biex, Inc. Series B
Preferred
share
warrant
at $1.00 10/94 23,540 0 14,124
Biex, Inc. Series C
Preferred
shares Various 250,000 0 149,998
Biex, Inc. Series D
Preferred
shares 08/96 111,115 0 66,669
Biex, Inc. Series D
Preferred
shares 03/97 44,446 66,669 93,337
Biex, Inc. Series E
Preferred
shares 08/97 13,333 33,334 27,999
Cardiac Pathways Common
Corporation shares 05/97 7,134 72,267 61,531
CardioTech Common
International, shares
Inc. 06/96 201,713 0 401,006
CV Therapeutics, Inc. Common
shares 11/96 33,724 0 146,265
Endocare, Inc. Convertible
note (1) 08/96 $562,500 (594,500) (594,500)
Endocare, Inc. Common
shares 01/97 52,500 183,750 201,495
Endocare, Inc. Common
shares 01/97 249,000 622,500 955,662
Endocare, Inc. Common
share
warrant
at $3.00 08/96 112,500 0 49,050
Gilead Sciences, Common
Inc. shares 07/96 20,000 (347,500) (508,500)
Lifecell Common
Corporation shares various 265,847 0 1,309,296
Lifecell Redeemable
Corporation Series A
Preferred
shares 11/94 12,500 (220,785) (220,785)
Lifecell Common
Corporation shares 03/97 85,213 220,785 682,812
Matrix Common
Pharmaceuticals, shares (2)
Inc. various 454,633 0 (611,026)
Pharmadigm, Series A
Inc. Preferred
shares various 268,816 0 53,763
Pharmadigm, Series B
Inc. Preferred
shares 05/96 68,889 0 13,777
Pharmadigm, Series C
Inc. Preferred
shares 06/97 126,000 274,428 274,428
Pharmadigm, Series C
Inc. Preferred
share warrant
at $2.20;
expiring
06/00 06/97 8,820 2,772 2,772
Pharmos . Common
Corporation shares various 60,331 0 71,432
PolyMedica Common
Industries, Inc. shares 03/92 411,800 (1,168,705) (1,539,308)
SyStemix, Inc. Common
shares various 61,260 (445,275) (937,094)
TheraTx, Inc. Common
shares (2) 06/94 60,000 (90,000) (654,180)
Thermo Electron Common
Corporation shares 06/96 25,245 0 (68,909)
Venture Capital Limited Partnership Investments
- -----------------------------------------------
Various Limited
Partnership
Interests Various $3,939,219 (45,883) (273,235)
---------- ----------
Total significant changes during the nine months
ended September 30, 1997 1,907,735 1,411,590
Other changes, net 36,125 28,866
---------- ----------
Total equity investments at September 30, 1997 $23,592,141 29,951,703
========== ==========
(1) Convertible notes include accrued interest. The interest rate on notes issued
in 1997 was 8%.
(2) Common stockholders have a right to purchase one Preferred share for each share
of common stock held, subject to certain conditions.
(3) Each private placement unit consists of 10,000 premium preferred shares with a stated value
of $10.00 per share.</TABLE>
Marketable Equity Securities
- ----------------------------
At September 30, 1997, and December 31, 1996, marketable equity
securities had aggregate costs of $11,709,539 and $11,534,692,
respectively, and aggregate fair values of $15,491,870 and $16,424,731,
respectively. The net unrealized gains at September 30, 1997, and
December 31, 1996, included gross gains of $5,672,215 and $7,523,038,
respectively.
ADESSO Specialty Services Organization, Inc.
- --------------------------------------------
In January of 1997, the Partnership invested in the company by
purchasing 177,420 Series C Preferred shares for $1,100,004.
Affymetrix, Inc.
- ----------------
In January of 1997, the Partnership sold its entire investment in the
company for total proceeds of $577,481 and realized a gain of $352,481.
Biex, Inc.
- ----------
In March of 1997, the Partnership made an additional investment in the
company by purchasing 44,446 Series D Preferred shares for $66,669.
In August of 1997, the Partnership purchased 13,333 Series E Preferred
shares for $33,334. The pricing of this round in which third parties
participated, indicated a fair value increase of $367,391 for the
Partnership's existing investment.
Conversion Technologies International, Inc.
- -------------------------------------------
In August and September of 1997, the Partnership made an additional
investment in the company of $236,250 by purchasing 1.875 and .4875
units of Series A private placement. Each unit consists of 10,000
premium preferred shares with a stated value of $10 per share.
Endocare, Inc.
- --------------
In January of 1997, the Partnership made an additional investment in the
company by purchasing 52,500 common shares for $183,750. In addition,
the Partnership converted its $562,500 note receivable, including
accrued interest of $60,000, into 249,000 common shares at a total cost
of $622,500. At September 30, 1997, the Partnership recorded an
increase in the change in fair value of $410,652 to reflect the
publicly-traded market price of its investments.
Geoworks Corporation
- --------------------
In January of 1997, the Partnership sold 110,000 common shares of the
company for total proceeds of $2,737,410 and realized a gain of
$2,028,966. Then in February of 1997, the Partnership purchased 50,000
common shares of the company for $956,250 on the open market. At
September 30, 1997, the Partnership recorded a decrease in the change in
fair value of $2,888,498 to reflect the publicly-traded market price of
its investments; $2,071,806 of the decrease was due to the sale
mentioned above.
Gilead Sciences, Inc.
- ---------------------
In January of 1997, the Partnership sold its entire investment in the
company for total proceeds of $622,480 and realized a gain of $274,980.
Lifecell Corporation
- --------------------
In March of 1997, the Partnership received a stock dividend of 1,601
common shares. A cost basis of $4,148 was allocated to these shares
from the Partnership's existing Series A Preferred share investment. In
addition, the company redeemed its Series A Preferred shares by
converting the Partnership's 12,500 Series A Preferred shares into
83,612 common shares. At September 30, 1997, the Partnership recorded
an increase in the change in fair value of $1,771,323 to reflect the
publicly-traded market price of its investments.
NetChannel, Inc.
- ----------------
In January of 1997, the Partnership cash exercised its Series B
Preferred share warrant for $324,999 and received 295,454 Series B
Preferred shares. In March of 1997, the Partnership issued a $325,000
convertible note receivable to the company. The Partnership also
received an additional 354,545 Series B Preferred shares as a result of
an adjustment to the warrant exercise price.
In May of 1997, the company effected a 1-to-2.083 stock split. As a
result, the Partnership received an additional 1,023,926 Series B
Preferred shares. The Partnership also purchased 415,604 Series B
Preferred shares by converting $178,378 of the notes receivable
discussed above including accrued interest of $4,488 for a total cost of
$182,866. The remaining note principal of $146,622 was reissued as a
new note. In September of 1997, the Partnership funded bridge notes
totaling $243,750. In addition, the Partnership is entitled to receive
warrants to purchase 25% of the number of shares issued upon conversion
of the bridge note at an exercise price equal to the conversion price.
At September 30, 1997, the Partnership recorded an increase in the
change in fair value of $426,609 for the above transactions.
Pharmadigm, Inc.
- ----------------
In June of 1997, the Partnership made an additional investment of
$277,200 in the company by purchasing 126,000 Series C Preferred shares
and received a warrant to purchase 8,820 Series C Preferred shares. The
pricing of this round, in which third parties participated, was adjusted
by Pharmadigm, Inc., in August of 1997 and indicated a fair value
increase of $68,623, for the Partnership's existing investment.
PolyMedica Industries, Inc.
- ---------------------------
During the first quarter of 1997, the Partnership sold 42,700 common
shares of the company for total proceeds of $254,004 and realized a gain
of $132,820. In addition, the Partnership received 2,625 common shares
for the option exercise price of $14,109 as a result of an officer
exercising his option for the benefit of the Partnership (See Note 2 for
additional information).
Then in the second quarter of 1997, the Partnership sold its remaining
investments, including the shares received from the option exercise, for
total proceeds of $2,211,689 and realized a gain of $1,150,059.
Synopsys, Inc.
- --------------
During the first quarter of 1997, the Partnership purchased 21,000
common shares of the company on the open market for $840,009 as well as
sold 14,000 common shares for total proceeds of $629,975 and realized a
gain of $111,402. At September 30, 1997, the Partnership recorded a
decrease in the change in fair value of $52,636 to reflect the publicly-
traded market price of its investments.
SyStemix, Inc.
- --------------
In January of 1997, the Partnership sold its entire investment in the
company for total proceeds of $1,178,532 and realized a gain of
$733,257.
TheraTx, Inc.
- -------------
During the first quarter of 1997, the Partnership sold its entire
investment in the company for total proceeds of $997,467 and realized a
gain of $907,467.
Wire Networks, Inc.
- -------------------
In July of 1997, the Partnership converted its $206,795 note receivable,
including accrued interest of $10,798, into 71,576 Series C Preferred
shares at a total cost of $217,593. The pricing of this round in which
third parties participated, indicated a fair value increase of $422,984
for the Partnerships existing investment.
WorldRes, Inc.
- --------------
In January of 1997, the Partnership invested in the company by
purchasing 221,894 Series B Preferred shares for $750,002.
Venture Capital Limited Partnership Investments
- -----------------------------------------------
The Partnership recorded a cost basis decrease of $45,883 in venture
capital limited partnership investments during the nine months ended
September 30, 1997. The decrease was a result of a return of capital in
the form of cash and stock distribution of $882 and $7,656,
respectively, and the redemption of 600 shares of O,W&W Pacrim
Investments Limited for $37,345. The Partnership recorded a fair value
decrease of $273,235 as a result of cash and stock distributions from
certain venture capital limited partnership investments, partially
offset by a net increase in the fair value of the underlying
investments.
During the first nine months of 1997, the Partnership received cash
distributions totaling $368,414, tradable common and preferred stock
distributions of US West Media Group with fair values of $47,663 and
$10,447, respectively, and common stock distributions of Cardiac Pathways
Corporation, Informix Software, Inc., and Versant Object Technology with
fair values of $72,268, $7,963 (of which $7,656 represented a
distribution from returns of capital), and $13,250, respectively. These
distributions were recorded as realized gains from venture capital
limited partnership investments.
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.
In October 1997, the Partnership sold 103,000 common shares of Matrix
Pharmaceuticals, Inc. for total proceeds of $401,312 and realized a loss
of $376,194.
In October 1997, the Partnership invested an additional $60,877 in
Nanodyne, Incorporated by purchasing preferred shares and warrants. The
pricing of this round indicated a fair value decrease of $211,723 for
the Partnerships investment at September 30, 1997.
In November 1997, the Partnership sold its entire investment in Thermo
Electron for total proceeds of $959,310 and realized a gain of $607,828.
4. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at September 30, 1997, and December 31, 1996,
consisted of:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Demand accounts $ 50,701 13,494
Money-market accounts 4,411,198 5,303,757
--------- ---------
Total $4,461,899 5,317,251
========= =========
</TABLE>
5. 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 September 30,
1997, the Partnership had unfunded commitments as follows:
<TABLE>
<S> <C>
Type
- ----
Equity investments $480,877
Venture capital limited partnership investments 15,618
-------
Total $496,495
=======
</TABLE>
In 1996, the Partnership jointly guaranteed with two affiliated
partnerships, a $1,000,000 line of credit between a financial
institution and a portfolio company in the computer systems and software
industry. If the affiliated partnerships are unable to finance their
portion of the guarantee, the Partnership may be liable for the entire
$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, 1997, net cash used by
operating activities totaled $925,868. The Partnership paid management
fees of $254,181 to the Managing General Partners and reimbursed related
parties for operating expenses of $635,685. In addition, $31,950 was
paid to the Individual General Partners as compensation for their
services. Other operating expenses of $235,415 were paid and $231,363
in interest income was received. Distributions totaling $4,279,267 were
paid to the Limited and General Partners.
During the nine months ended September 30, 1997, the Partnership funded
$5,404,924 in equity investments mainly to portfolio companies in the
medical/biotechnology, computer systems and software, communications,
electronic design automation and information technology industries.
Proceeds from equity investment sales were $9,348,066 and cash
distributions of $406,641 from venture capital limited partnership
investments were received. As of September 30, 1997, the Partnership
was committed to fund additional investments of $496,495 and had
outstanding guarantees up to $1,000,000 as discussed in Note 5 to the
financial statements.
Cash and cash equivalents at September 30, 1997, were $4,461,899. 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 income was $3,255,427 for the three months ended September 30, 1997
and net loss was $4,790,136 for the three months ended September 30
1996, respectively. The increase in net income was primarily due to an
increase of $8,402,411 in the change in net unrealized fair value of
equity investments. The increase was partially offset by a $179,759
decrease in net realized gains from equity investment sales and a
$155,320 increase in operating expenses.
The Partnership recorded an increase in fair value of equity investments
of $3,644,579 during the quarter ended September 30, 1997 due to
increases in portfolio companies in the computer systems and software,
computer and computer equipment, medical/biotechnology and
communications industries. During the same period in 1996, the decrease
in fair value of $4,757,832 was primarily due to decreases in portfolio
companies in the medical/biotechnology and computer systems and software
industries.
Net realized loss from sales of equity investments was $17,668 and net
realized gain from sales of equity investments was $162,091 for the
quarters ended September 30, 1997 and 1996, respectively.
Operating expenses were $349,006 for the quarter ended September 30,
1997, compared to $193,686 for the same period in 1996. The increase in
operating expenses in the current quarter over the comparative period in
1996 was primarily due to a higher level of activity required for
portfolio management in 1997. Additionally, in the third quarter of
1997, the Partnership's administrative and investor service operations
were relocated to Santa Fe, New Mexico. This relocation is expected to
lower the future operational costs of the Partnership sufficient to
recoup the initial relocation expenses incurred, and provide a
meaningful reduction in ongoing operational 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 nine months compared to corresponding nine months in the
- -----------------------------------------------------------------
preceding year
- --------------
Net income was $4,836,565 and $1,575,991 for the nine months ended
September 30, 1997 and 1996, respectively. The increase in net income
was primarily due to a $1,924,647 increase in net realized gains from
equity investment sales, a $1,038,546 decrease in realized losses from
investment write-downs, a $737,419 increase in the change in net
unrealized fair value of equity investments, and a $112,750 increase in
realized gains from venture capital limited partnership investments.
These changes were partially offset by a $309,000 decrease in the change
in net unrealized fair value of secured notes receivable and a $154,801
decrease in interest and other income.
Net realized gain from sales of equity investments was $5,675,091 for
the nine months ended September 30, 1997, compared to $3,750,444 for the
same period in 1996. The 1997 net gain mainly related to sales of
Geoworks Corporation, PolyMedica Industries, Inc., TheraTx, Inc., and
SyStemix, Inc. The 1996 net gain mainly related to sales of Geoworks.
During the nine months ended September 30, 1997, the Partnership did not
record any realized losses from investment write-downs. During the same
period in 1996, the Partnership recorded realized losses of $1,038,546
mostly related to equity investments for a portfolio company in the
computer systems and software industry.
During the nine months ended September 30, 1997, the decrease in fair
value of equity investments of $503,404 was substantially attributable
to the sales of Geoworks and PolyMedica common stock, as the gains were
realized. There were also significant increases in portfolio companies
in the computer and computer equipment, communications and
medical/biotechnology industries. During the same period ended
September 30, 1996, the decrease in fair value 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 portfolio companies in the industrial
business automation industries.
Realized gains from venture capital limited partnerships were $512,349
and $399,599 for the nine months ended September 30, 1997 and 1996,
respectively. See Note 3 to the financial statements for further
discussion.
The Partnership recorded an increase in the change in fair value of
secured notes receivable of $309,000 at September 30, 1996, due to the
elimination of loan loss reserves. No change in the reserve was
required at September 30, 1997.
Interest and other income was $278,991 and $433,792 for the nine months
ended September 30, 1997 and 1996, respectively. The decrease was
primarily due to lower cash balances.
Operating expenses were $846,386 for the nine months ended September 30,
1997, compared to $705,698 for the same period in 1996. The increase in
operating expenses in the current period over the comparative period in
1996 was primarily due to a higher level of activity required for
portfolio management in 1997, as well as non-recurring costs associated
with the relocation of the Partnership's administrative and investor
service operations as discussed above.
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, 1997.
(b) Financial Data Schedule for the nine months ended and as of
September 30, 1997 (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 14, 1997 By: /s/Michael R. Brenner
------------------------------------
Michael R. Brenner
Controller
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF September 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<PERIOD-TYPE> 9-MOS
<INVESTMENTS-AT-COST> 23,592,141
<INVESTMENTS-AT-VALUE> 29,951,703
<RECEIVABLES> 0
<ASSETS-OTHER> 3,343
<OTHER-ITEMS-ASSETS> 4,461,899
<TOTAL-ASSETS> 34,416,945
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 144,802
<TOTAL-LIABILITIES> 144,802
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,912,581
<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> 6,359,562
<NET-ASSETS> 34,272,143
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 275,866
<OTHER-INCOME> 3,125
<EXPENSES-NET> (1,126,462)
<NET-INVESTMENT-INCOME> (847,471)
<REALIZED-GAINS-CURRENT> 6,187,440
<APPREC-INCREASE-CURRENT> (503,404)
<NET-CHANGE-FROM-OPS> 4,836,565
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (4,279,267)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 557,298
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 248,126
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,131,662)
<AVERAGE-NET-ASSETS> 33,993,494
<PER-SHARE-NAV-BEGIN> 169
<PER-SHARE-NII> 30
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 25
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 174
<EXPENSE-RATIO> 3.3
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
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>
