<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, 1999
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)
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Equity investments (cost basis
of $21,312,640 and $20,686,838 for
1999 and 1998, respectively) $31,111,631 21,029,455
Notes receivable (cost basis of
$0 and $202,777 for 1999
and 1998, respectively) -- 202,777
---------- ----------
Total investments 31,111,631 21,232,232
Cash and cash equivalents 994,616 3,160,675
Due from related parties -- 23,135
Other assets 4,279 4,109
---------- ----------
Total assets $32,110,526 24,420,151
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 118,937 66,479
Due to related parties 33,286 --
Other liabilities 8,596 15,142
---------- ----------
Total liabilities 160,819 81,621
Commitments, contingencies and
subsequent events (Notes 2, 3 and 7)
Partners' capital:
Limited Partners
(160,000 Units outstanding) 22,782,515 24,328,469
General Partners (631,799) (332,556)
Net unrealized fair value increase
from cost of equity investments 9,798,991 342,617
---------- ----------
Total partners' capital 31,949,707 24,338,530
---------- ----------
Total liabilities
and partners' capital $32,110,526 24,420,151
========== ==========
</TABLE>
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------------ -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Notes receivable interest $ 10,623 2,473 21,279 13,170
Short-term investment interest 17,312 33,675 76,902 113,098
Other income -- 123 246 475
--------- --------- --------- ---------
Total income 27,935 36,271 98,427 126,743
Costs and expenses:
Management fees 76,751 70,155 202,044 216,085
Individual General Partners'
compensation 9,384 19,675 27,988 42,228
Operating expenses:
Administrative and investor services 153,470 274,777 453,359 578,719
Investment operations 64,919 88,932 208,436 284,514
Professional fees 13,262 16,664 67,591 51,556
Computer services 37,898 54,849 95,709 152,930
--------- --------- --------- ---------
Total operating expenses 269,549 435,222 825,095 1,067,719
--------- --------- --------- ---------
Total costs and expenses 355,684 525,052 1,055,127 1,326,032
--------- --------- --------- ---------
Net operating loss (327,749) (488,781) (956,700) (1,199,289)
Net realized (loss) gain from sales
of equity investments (537,313) 5,537 (698,453) (204,886)
Realized gains from venture capital
limited partnership investments -- 26,698 93,583 98,422
--------- --------- --------- ---------
Net realized loss (865,062) (456,546) (1,561,570) (1,305,753)
Change in net unrealized
fair value of equity investments 2,518,429 (3,272,118) 9,456,374 (4,377,668)
--------- --------- --------- ---------
Net income (loss) $1,653,367 (3,728,664) 7,894,804 (5,683,421)
========= ========= ========= =========
Net realized loss per Unit $ (5.35) (2.25) (9.66) (6.41)
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest and other income received $ 85,777 112,507
Cash paid to vendors (274,325) (141,956)
Cash paid to related parties (678,639) (1,241,321)
--------- ----------
Net cash used by operating
activities (867,187) (1,270,770)
--------- ----------
Cash flows from investing activities:
Proceeds from sales of
equity investments 1,122,241 542,476
Purchase of equity investments (2,524,179) (953,565)
Notes receivable issued (75,868) (35,962)
Repayments of notes receivable 198,844 450,712
Distributions from venture capital
limited partnerships 263,717 47,500
--------- ---------
Net cash (used) provided by
investing activities (1,015,245) 51,161
--------- ---------
Cash flows from financing activities:
Distribution to partners (283,627) --
--------- ---------
Net cash used by financing activities (283,627) --
--------- ---------
Net decrease in cash and cash
equivalents (2,166,059) (1,219,609)
Cash and cash equivalents at
beginning of year 3,160,675 4,304,928
--------- ---------
Cash and cash equivalents
at September 30 $ 994,616 3,085,319
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Reconciliation of net income (loss) to net
cash used by operating activities:
Net income (loss) $7,894,804 (5,683,421)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Net realized loss from sales of
equity investments 698,453 204,886
Realized gains from venture capital
limited partnership investments (93,583) (98,422)
Change in net unrealized fair value of
equity investments (9,456,374) 4,377,668
Changes in:
Due to/from related parties 56,421 (37,799)
Other changes, net 33,092 (33,682)
--------- ---------
Net cash used by operating activities $ (867,187) (1,270,770)
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- ----------------------------------------
1. General
-------
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, 1998. 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, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Management fees $202,044 216,085
Individual General Partners'
compensation 27,988 42,228
Reimbursable operating expenses 505,028 945,209
</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 $636 of such expenses due from
related parties at September 30, 1999, and $46,889 due from related
parties at December 31, 1998.
Amounts due to related parties for management fees were $33,922 and
$23,754 at September 30, 1999, and December 31, 1998, 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, 1999, the Partnership had an
indirect interest in Conversion Technologies International, Inc., White
Electronic Designs Corporation, Endocare, Inc., PolyMedica Corporation
and Thermatrix Inc. non-transferable options with a total current market
value of $93,138.
3. Equity Investments
------------------
<TABLE>
A complete listing of the Partnerships equity investments at December 31, 1998, is in the 1998
Annual Report on Form 10-K. Activity from January 1 through September 30, 1999, consisted of:
<CAPTION>
January 1 through
September 30, 1999
------------------------
Principal
Investment Amount or Cost Fair
Industry/Company Position Date Shares Basis Value
- ---------------- -------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $20,686,838 21,029,455
---------- ----------
Significant changes:
Communications
- --------------
Illinois Superconductor Common
Corporation shares 02/99 5,810 116,542 4,143
Women.com Networks Series A
Preferred
shares 02/96 159,300 0 1,068,903
Women.com Networks Series B
Preferred
shares 02/96 194,642 0 1,306,048
Women.com Networks Series C
Preferred
shares 07/97 71,576 0 480,275
Women.com Networks Series D
Preferred
shares 06/98 121,581 0 815,809
Women.com Networks Series E
Preferred
shares 05/99 33,857 338,570 338,570
Computers and Computer Equipment
- --------------------------------
White Electronic Common
Designs Corporation shares various 822,983 0 933,254
Computer Systems and Software
- -----------------------------
Photon Dynamics, Common
Inc. shares 07/96 50,000 0 747,800
Electronic Design Automation
- ----------------------------
Cadence Design Common
Systems, Inc. shares 07/96 24,000 0 (349,200)
Synopsys, Inc. Common
shares 02/97 14,000 (560,005) (735,000)
Environmental
- -------------
Triangle Biomedical Series A, B
Sciences, Inc. and C
(formerly Naiad Preferred 12/95-
Technologies, Inc.) shares 11/97 209,332 (405,202) (680,330)
Triangle Biomedical
Sciences, Inc.
(formerly Naiad Common
Technologies, Inc.) shares 09/99 3,326 70,228 96,463
Thermatrix Inc. Common
shares 06/96 65,970 0 (92,731)
Thermatrix Inc. Series E
Preferred
shares 06/99 1,000 990,000 746,633
Information Technology
- ----------------------
WorldRes, Series B and C
Inc. Preferred 01/97-
shares 12/97 361,252 -- 848,943
WorldRes, Series D
Inc. Preferred
shares 03/99 73,140 442,497 442,497
Medical/Biotechnology
- ---------------------
Avalon Imaging, Inc. Series D
Preferred
Shares 12/98 75,690 (61,603) (61,603)
Biex, Inc. Series A, B,
C, D and E
Preferred 07/93-
shares 08/97 629,792 -- 109,942
Biex, Inc. Series F
Preferred
shares 03/99 132,743 345,132 345,132
Cardiac Pathways Common
Corporation shares 06/91 7,134 (72,267) (29,164)
CardioTech
International, Common
Inc. shares 06/96 195,600 0 (124,597)
CV Therapeutics, Inc. Common
shares various 16,862 (337,240) 109,603
Endocare, Inc. Common 08/96-
shares 04/98 380,429 0 1,597,802
Endocare, Inc. Common
shares 07/99 112,500 337,500 696,150
LifeCell Common
Corporation shares various 351,060 0 374,932
Matrix Common
Pharmaceutical, Inc. shares various 321,633 0 884,491
Oxford GlycoSciences Common
Plc shares 08/93 106,772 0 131,116
Pherin Pharmaceuticals, Series B
Inc. Preferred
shares 08/91 200,000 0 660,000
Simione Central Series A, B
Holdings, Inc. and C
(formerly CareCentric Preferred 10/95-
Solutions, Inc.) shares 12/97 366,126 (494,257) (384,432)
Simione Central
Holdings, Inc. Common share
(formerly CareCentric warrant at $.15;
Solutions, Inc. expiring 12/02 12/97 38,813 (34,932) (34,932)
Simione Central
Holdings, Inc.
(formerly CareCentric Common
Solutions, Inc.) shares 08/99 127,559 382,875 144,461
Simione Central Convertible
Holdings, Inc. notes
(formerly CareCentric and
Solutions, Inc.) interest various $96,250 (102,327) (102,327)
Venture Capital Limited Partnership Investments
- -----------------------------------------------
Various Limited
Partnership
interests various (279,160) (212,548)
---------- ----------
Total significant changes during the nine months
ended September 30, 1999 676,351 10,076,103
Other changes, net (50,549) 6,073
---------- ----------
Total equity investments at September 30, 1999 $21,312,640 31,111,631
========== ==========
</TABLE>
Marketable Equity Securities
- ----------------------------
At September 30, 1999, and December 31, 1998, marketable equity securities
had aggregate costs of $8,662,062 and $9,045,454, respectively, and
aggregate fair values of $11,146,874 and $6,797,268, respectively. The net
unrealized gain and loss at September 30, 1999, and December 31, 1998,
included gross gains of $4,154,160 and $911,588, respectively.
Avalon Imaging, Inc.
- --------------------
In October 1999, the company agreed to sell its assets. The Partnership
valued its portion of the estimated sales proceeds at $28,468 and realized
a loss of $61,603 as of September 30, 1999.
Biex, Inc.
- ----------
In March 1999, the Partnership purchased 132,743 Series F Preferred shares
for $345,132. The pricing of this round, in which third parties
participated, indicated a $69,417 increase in the fair value of the
Partnership's investment in the company's preferred shares and warrants.
In May 1999, the Partnership received a stock dividend of 18,786 Preferred
shares with a fair value of $48,844.
Cardiac Pathways Corporation
- ----------------------------
In March 1999, the Partnership sold its entire investment in the company
for proceeds of $19,618 and realized a loss of $52,649.
CV Therapeutics, Inc.
- ---------------------
In August and September 1999, the Partnership sold a total of 16,862 common
shares for proceeds of $249,004 and realized a loss of $88,236.
Endocare, Inc.
- --------------
In July 1999, the Partnership exercised a warrant and purchased 112,500
common shares for $337,500.
Pherin Pharmaceuticals, Inc.
- ----------------------------
In May 1999, the company completed a new round of financing in which the
Partnership did not participate. The pricing of this round, in which third
parties participated, indicated a $660,000 increase in the fair value of
the Partnership's investment.
Simione Central Holdings, Inc. (formerly CareCentric Solutions, Inc.)
- --------------------------------------------------------------------
In August 1999, CareCentric Solutions, Inc. was acquired by Simione Central
Holdings, Inc. The Partnership received 127,559 Simione common shares and
realized a loss of $361,091 on the sale. The Simione shares are publicly
traded, but may not be sold prior to December 2000.
Synopsys, Inc.
- --------------
In January 1999, the Partnership sold its entire investment in the company
for proceeds of $812,000 and realized a gain of $251,995.
Thermatrix Inc.
- ---------------
In June 1999, the Partnership purchased 1,000 Series E Preferred shares and
a warrant for 35,000 common shares for $1,000,000 in a private placement.
The Preferred shares are convertible to common shares, with the number of
common shares to be received determined by dividing the aggregate purchase
price of the shares and warrant by the lesser of $5.00 per share or 85% of
the common share market price on the conversion date. At September 30,
1999, the Preferred shares would have been convertible into 482,555 common
shares; the preferred shares were valued by applying the publicly traded
market price of the common shares to the number of common shares into which
the preferred shares were convertible at September 30, 1999 and applying a
discount for selling restrictions. The common share warrant has an
exercise price of $5.3125 per share and expires on June 30, 2002.
Triangle Biomedical Sciences, Inc. (formerly Naiad Technologies, Inc.)
- ---------------------------------------------------------------------
In August 1999, Naiad Technologies, Inc. was acquired by Triangle
Biomedical Sciences, Inc., a privately held company. The Partnership
received 611 Triangle common shares and a warrant for 611 Triangle common
shares and realized a loss of $387,474 on the sale. In conjunction with
the sale, the Partnership agreed to advance $75,000 to Naiad to settle
outstanding liabilities; through September 30, 1999, $52,500 of this amount
had been advanced for which the Partnership received 2,715 Triangle shares.
Women.com Networks
- ------------------
In May 1999, the Partnership purchased 33,857 Series E Preferred shares for
$338,570. The pricing of this round, in which third parties participated,
indicated a $3,671,035 increase in the fair value of the Partnership's
existing investment.
In October 1999, the company completed an initial public offering priced at
$10 per common share and the Partnership's Preferred shares were converted
into 580,956 common shares. Based on the publicly-traded market price, the
fair value of the Partnership's investment increased from $5,809,561 at
September 30, 1999 to $11,256,024 on November 11, 1999.
WorldRes, Inc.
- --------------
In March 1999, the Partnership purchased 73,140 Series D Preferred shares
for $442,497. The pricing of this round, in which third parties
participated, indicated a $890,358 increase in the fair value of the
Partnership's investment in the company's Preferred shares and warrants.
In November 1999, the company completed an additional round of financing in
which the Partnership did not participate. The pricing of this round, in
which third parties participated, indicated an increase in the fair value
of the Partnership's investment from $2,669,655 at September 30, 1999 to
$6,733,714.
Venture Capital Limited Partnerships
- ------------------------------------
The Partnership made an additional investment of $7,813 in venture capital
limited partnerships during the nine months ended September 30, 1999.
The Partnership received cash distributions totaling $263,717 from
Batterson, Johnson and Wang, Limited Partnership, Delphi Ventures, L.P. and
O,W&W Pacrim Investments Limited. The Partnership received stock and
warrant distributions of Illinois Superconductor Corporation and Informix
Software, Inc. with fair values totaling $116,839. Distributions totaling
$93,583 were recorded as realized gains and distributions totaling $286,973
were recorded as returns of capital.
The Partnership recorded a $212,548 net decrease in fair value as a result
of distributions from the partnerships which were partially offset by an
increase in the fair value of the underlying investments of the
partnerships.
Other Equity Investments
- ------------------------
Other significant changes reflected above relate to market value
fluctuations or the elimination of a discount relating to selling
restrictions for publicly-traded portfolio companies. Portions of the
Partnership's Conversion Technologies International, Inc., Simione Central
Holdings, Inc., and Thermatrix Inc. investments are restricted.
4. Notes Receivable
----------------
Activity from January 1 through September 30, 1999 consisted of:
Balance at January 1, 1999 $202,777
Notes issued 75,868
Notes converted to equity investments (75,868)
Repayments (198,844)
Change in accrued interest (3,933)
-------
Balance at September 30, 1999 $ --
=======
The interest rate on notes issued in 1999 was 5%.
5. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at September 30, 1999, and December 31, 1998,
consisted of:
<TABLE>
1999 1998
--------- ---------
<S> <C> <C>
Demand accounts $ 48,926 55,472
Money-market accounts 945,690 3,105,203
------- ---------
Total $994,616 3,160,675
======= =========
</TABLE>
6. Distributions
-------------
During the nine months ended September 30, 1999, the Partnership declared
and paid a tax distribution of $283,627 to the General Partners.
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 September 30, 1999, the
Partnership had the following unfunded commitments:
<TABLE>
<CAPTION>
TYPE
- ----
<S> <C>
Equity investments $17,500
Line of credit guarantees 15,720
------
$33,220
======
</TABLE>
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, 1999, net cash used by operating
activities totaled $867,187. The Partnership paid management fees of
$191,876 to the Managing General Partners and reimbursed related parties
for operating expenses of $458,775. In addition, $27,988 was paid to the
Individual General Partners as compensation for their services. Other
operating expenses of $274,325 were paid and $85,777 in interest and other
income was received.
During the nine months ended September 30, 1999, the Partnership funded
equity investments of $2,524,179 primarily to portfolio companies in the
communications, environmental, information technology and
medical/biotechnology industries. Cash proceeds from equity investment
sales were $1,122,241, repayments of notes receivable were $198,844, and
cash distributions from venture capital limited partnership investments
were $263,717. The Partnership issued $75,868 in notes receivable to a
portfolio company in the medical/biotechnology industry. A tax
distribution of $283,627 was paid to the General Partners. As of September
30, 1999, the Partnership had unfunded commitments of $33,220 as discussed
in Note 7 to the financial statements.
Cash and cash equivalents at September 30, 1999, were $994,616. 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 $1,653,367 for the three months ended September 30, 1999, as
compared to a net loss of $3,728,664 for the three months ended September
30, 1998. The improvement was primarily due to a $5,790,547 increase in
the net unrealized fair value of equity investments and a $165,673 decrease
in operating expenses, partially offset by a $542,850 increase in net
realized loss from equity investment sales.
The Partnership recorded an increase in fair value of equity investments of
$2,518,429 during the quarter ended September 30, 1999 primarily due to
increases in the communications, computers and computer equipment and
medical/biotechnology industries, partially offset by decreases in the
environmental industry. During the same period in 1998, the decrease in
fair value of equity investments of $3,272,118 was substantially
attributable to decreases in the Partnership's public portfolio companies
in all industry segments.
Operating expenses were $269,549 for the quarter ended September 30, 1999,
compared to $435,222 for the same period in 1998. The decrease is
attributable to decreased investment monitoring, administrative overhead
and computer expenses.
Net realized loss from sales of equity investments was $537,313 for the
quarter ended September 30, 1999 as compared to a gain of $5,537 in the
quarter ended September 30, 1998. The 1999 loss resulted from the sale of
the company's investments in Avalon Imaging, Inc., Naiad Technologies, Inc.
and CV Therapeutics, Inc.
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 $7,894,804 for the nine months ended September 30, 1999, as
compared to net loss of $5,683,421 for the nine months ended September 30,
1998. The increase was primarily due to a $13,834,042 increase in the net
unrealized fair value of investments and a $242,624 decrease in operating
expenses, partially offset by a $493,567 increase in realized losses from
sales of equity investments.
During the nine months ended September 30, 1999, the increase in fair value
of equity investments of $9,456,374 was primarily attributable to increases
in the communications, computer and computer equipment, computer systems
and software, medical/biotechnology and information technology industries,
partially offset by decreases in the electronic design automation and
environmental industries. During the comparable period of 1998, the
decrease of $4,377,668 was due to decreases in the Partnership's public
portfolio companies in all industry segments.
Operating expenses for the nine months ended September 30, 1999 and 1998
were $825,095 and $1,067,719, respectively. The decrease is attributable
to decreased investment monitoring activities, administrative overhead and
computer expenses.
Net realized loss from sales of equity investments was $698,453 for the
nine months ended September 30, 1999 as compared to a net realized loss of
$204,886 for the nine months ended September 30, 1998. The 1999 loss
primarily related to the sale of the Partnership's investments in
CareCentric Solutions, Inc., CV Therapeutics, Inc. and Naiad Technologies,
Inc., partially offset by a gain on the sale of Synopsys, Inc. common
shares. The 1998 loss primarily related to the sale of our investment in
NetChannel, Inc.
YEAR 2000
- ---------
Widespread use of computer programs that use two digits rather than four to
store, calculate, and display year values in dates may cause computer
systems to malfunction in the year 2000, resulting in significant business
delays and disruptions.
The Partnership's State of Readiness
------------------------------------
Computer services are provided to the Partnership by its Managing General
Partner, Technology Funding Inc. ("TFI"). For several years, TFI has
sought to use Year 2000 compliant storage formats and algorithms in its
internally-developed and maintained systems. TFI has also completed
initial evaluations of computer systems, software, and embedded
technologies. Those evaluations confirmed that certain components of its
network server hardware and operating systems, voice mail system, e-mail
system, and accounting software may have Year 2000 compliance issues.
These resources and several less-critical components of the systems
environment were all scheduled as part of normal maintenance and
replacement cycles to be replaced or upgraded as Year 2000 compatible
components became available from vendors during 1998 and 1999. That
program remains on schedule to provide Year 2000 capable systems timely
without significant expenditures or disruption of Partnership operations.
TFI has implemented and tested Year 2000 capable versions of all its
mission-critical systems. However, the risk remains that TFI may not be
able to verify whether Year 2000 compatibility claims by vendors are
accurate, or whether changes undertaken to achieve Year 2000 compatibility
will create other undetected problems in associated systems. Therefore,
TFI anticipates that Year 2000 compliance testing and maintenance of these
systems will continue as needed into the first quarter of 2000.
As part of Year 2000 evaluation, TFI has also assembled a database listing
its significant suppliers to assess the extent to which it needs to prepare
for any of those parties' potential failure to remediate their Year 2000
compliance issues. TFI reviewed public Year 2000 statements of those
suppliers and sent questionnaires to vendors whose public statements were
not adequate for assessment. All mission-critical vendors have responded
that they expect to be Year 2000 compliant barring any unforeseen
circumstances. TFI will continue to monitor its significant suppliers as
part of its Year 2000 evaluation. However, there can be no guarantee that
the systems of other companies on which TFI relies will be timely
converted, or that failure to convert will not have a material adverse
effect on the Partnership and its operations. TFI is also working with the
Partnership's portfolio companies to determine the extent to which their
operations are vulnerable to Year 2000 issues, and maintaining their
responses in the vendor database. There can be no guarantee that the
systems of portfolio companies in which the Partnership has invested will
be timely converted, or that their failure to convert will not have a
material adverse effect on the Partnership.
The Cost to Address Year 2000 Issues
------------------------------------
Expenditures in 1999 to date related to Year 2000 issues were not material
to the Partnership's financial statements. TFI expects that additional
expenditures for Year 2000 compliance will not be material to the
Partnership.
The Risks Associated with Year 2000 Issues
------------------------------------------
Any failure by the portfolio companies in which the Partnership has
invested, or by those portfolio companies' key suppliers or customers, to
anticipate and avoid Year 2000 related problems at reasonable cost could
have a material adverse effect on the value of and/or the timing of
realization of value from the Partnership's investments. If TFI's Year
2000 compliance issues have not been resolved correctly, internal system
failures or miscalculations could cause a temporary inability to process
transactions, loss of ability to send or receive e-mail and voice mail
messages, or disruptions in other normal business activities.
Additionally, failure of third parties on whom TFI relies to remediate
their Year 2000 issues timely could result in disruptions in the
Partnership's relationship with its financial institutions, temporary
disruptions in processing transactions, unanticipated costs, and problems
related to the Partnership's daily operations. While TFI continues to
address its internal Year 2000 issues, the overall risks associated with
the Year 2000 issue remain difficult to describe and quantify. There can
be no guarantee that the Year 2000 issue will not have a material adverse
effect on the Partnership and its operations.
TFI's Contingency Plan
----------------------
As part of its normal efforts to assure business continuation in the event
of natural disasters, systems failures, or other disruptions, TFI has
prepared contingency plans including an extensive Year 2000 contingency
plan. Taken together with TFI's Year 2000 remediation plan, it identifies
potential points of failure, approaches to correcting known Year 2000
problems, dates by which the preferred corrections are anticipated to be
made and tested, and alternative approaches if the corrections are not
completed timely or are later found to be inadequate. Although backup
systems and contingency approaches have been identified for most systems
and vendor dependencies, there remain some systems for which no good
alternative exists, and there may be some problems that prove more
intractable than currently anticipated.
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, 1999.
(b) Financial Data Schedule for the nine months ended and as of September
30, 1999 (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 12, 1999 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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 9-MOS
<INVESTMENTS-AT-COST> 21,312,640
<INVESTMENTS-AT-VALUE> 31,111,631
<RECEIVABLES> 0
<ASSETS-OTHER> 4,279
<OTHER-ITEMS-ASSETS> 994,616
<TOTAL-ASSETS> 32,110,526
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 160,819
<TOTAL-LIABILITIES> 160,819
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,150,716
<SHARES-COMMON-STOCK> 160,000
<SHARES-COMMON-PRIOR> 160,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,798,991
<NET-ASSETS> 31,949,707
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 98,181
<OTHER-INCOME> 246
<EXPENSES-NET> 1,055,127
<NET-INVESTMENT-INCOME> (956,700)
<REALIZED-GAINS-CURRENT> (604,870)
<APPREC-INCREASE-CURRENT> 9,456,374
<NET-CHANGE-FROM-OPS> 7,894,804
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (283,627)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7,611,177
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 202,044
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,065,323
<AVERAGE-NET-ASSETS> 28,144,118
<PER-SHARE-NAV-BEGIN> 152
<PER-SHARE-NII> (10)
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 142
<EXPENSE-RATIO> 3.75
<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.
</FN>
</TABLE>
