<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, 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)
September 30, December 31,
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Equity investments, at fair value
(cost basis of $16,864,506 and
$20,194,582 for 2000 and 1999,
respectively) $16,776,755 36,642,407
Notes receivable, at fair value
(cost basis of $4,849,612 and
$20,824 for 2000 and 1999,
respectively) 12,807 20,824
---------- ----------
Total investments 16,789,562 36,663,231
Cash and cash equivalents 8,816,170 1,560,773
Due from related parties -- 66,844
Other assets 7,382 2,343
---------- ----------
Total $25,613,114 38,293,191
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 65,481 73,159
Due to related parties 42,640 --
Other liabilities 2,330 3,836
---------- ----------
Total liabilities 110,451 76,995
Commitments and contingencies
Partners' capital:
Limited Partners
(160,000 Units outstanding) 28,050,535 35,782,284
General Partners (2,547,872) 2,433,912
---------- ----------
Total partners' capital 25,502,663 38,216,196
---------- ----------
Total liabilities
and partners' capital $25,613,114 38,293,191
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
STATEMENTS OF OPERATIONS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Notes receivable interest $ 492,314 10,623 843,525 21,279
Short-term investment interest 109,229 17,312 199,018 76,902
Other income -- -- -- 246
--------- --------- ---------- ---------
Total income 601,543 27,935 1,042,543 98,427
Costs and expenses:
Management fees 78,700 76,751 307,822 202,044
Individual General Partners'
compensation 10,187 9,384 30,648 27,988
Operating expenses:
Administrative and investor services 133,540 153,470 397,164 453,359
Investment operations 60,185 64,919 374,507 208,436
Professional fees 42,070 13,262 76,144 67,591
Computer services 36,170 37,898 102,608 95,709
--------- --------- ---------- ---------
Total operating expenses 271,965 269,549 950,423 825,095
--------- --------- ---------- ---------
Total costs and expenses 360,852 355,684 1,288,893 1,055,127
--------- --------- ---------- ---------
Net operating income (loss) 240,691 (327,749) (246,350) (956,700)
Net realized gain (loss) from sales
of equity investments 93,177 (537,313) 11,254,127 (698,453)
Realized gains from venture capital
limited partnership investments 86,440 -- 577,369 93,583
Net realized loss on foreign
currency -- -- (63,370) --
--------- --------- ---------- ---------
Net realized income (loss) 420,308 (865,062) 11,521,776 (1,561,570)
Change in net unrealized
fair value:
Equity investments (2,856,181) 2,518,429 (16,535,576) 9,456,374
Notes receivable (3,491,007) -- (4,836,805) --
--------- --------- ---------- ---------
Net (loss) income $(5,926,880) 1,653,367 (9,850,605) 7,894,804
========= ========= ========== =========
Net (loss) income per unit $ (29.80) 8.08 (48.32) 37.00
========= ========= ========== =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
-----------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Interest and other income received $ 201,342 85,777
Cash paid to vendors (296,395) (274,325)
Cash paid to related parties (897,237) (678,639)
---------- ----------
Net cash used by operating
activities (992,290) (867,187)
---------- ----------
Cash flows from investing activities:
Proceeds from sales of
equity investments 15,808,070 1,122,241
Purchase of equity investments (841,998) (2,524,179)
Notes receivable issued (4,000,000) (75,868)
Repayments of notes receivable 7,892 198,844
Distributions from venture capital
limited partnerships 200,021 263,717
---------- ---------
Net cash provided (used) by
investing activities 11,173,985 (1,015,245)
---------- ---------
Cash flows from financing activities:
Distribution to General Partners (2,862,928) (283,627)
---------- ---------
Net cash used by financing activities (2,862,928) (283,627)
---------- ---------
Effect of exchange rate changes on
Cash and cash equivalents (63,370) --
---------- ---------
Net increase (decrease) in cash and
cash equivalents 7,255,397 (2,166,059)
Cash and cash equivalents at
beginning of year 1,560,773 3,160,675
---------- ---------
Cash and cash equivalents
at September 30 $ 8,816,170 994,616
========== =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
-----------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Reconciliation of net (loss) income
to net cash used by operating
activities:
Net (loss) income $(9,850,605) 7,894,804
Adjustments to reconcile net (loss)
income to net cash used by operating
activities:
Net realized (gain) loss from sales
of equity investments (11,254,127) 698,453
Realized gains from venture capital
limited partnership investments (577,369) (93,583)
Change in net unrealized fair value:
Equity investments 16,535,576 (9,456,374)
Notes receivable 4,836,805 --
Net realized loss on foreign currency
transaction 63,370 --
Changes in:
Accrued interest on notes receivable (841,201) (12,650)
Due to/from related parties 109,484 56,421
Other changes, net (14,223) 45,742
---------- ---------
Net cash used by operating activities $ (992,290) (867,187)
========== =========
</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 the 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. The valuation procedures were revised and approved by the
Management Committee in the quarter ended June 30, 2000. A change in
fair value of $15,927,394 was recognized during the quarter ended June
30, 2000 to reflect the revisions to the valuation methodology 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 Partnership may reasonably expect to receive
if the investments were 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. 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 September 30, 2000 and December 31, 1999, the investment portfolio
included investments totaling $5,617,490 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 $6,837,057 and $12,206,492 at September
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 nine months
ended September 30, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Management fees $307,822 202,044
Individual General Partners'
compensation 30,648 27,988
Reimbursable operating expenses 668,251 505,028
</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 $16,407 due to related parties for
such expenses at September 30, 2000 compared to $21,106 due from related
parties for such expenses at December 31, 1999.
Amounts due to related parties for management fees were $26,233 and
$26,758 at September 30, 2000, and December 31, 1999, respectively.
Management fees are equal to one quarter of one percent of the fair value
of Partnership assets for each quarter.
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 September 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 September 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
September 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 value of $375,281.
3. Equity Investments
------------------
<TABLE>
At September 30, 2000, equity investments consisted of:
<CAPTION>
September 30, 2000
Principal ------------------------
Amount or
Industry (1)/ Investment Shares as of Cost Fair
Company Position Date September 30, 2000 Basis Value
---------------- --------- ---------- ------------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Communications--3.5%
--------------------
Illinois
Superconductor Common
Corporation share
warrants at
$1.47-$9.56;
expiring
2000-2002 1999 2,624 $ 18,858 877
Women.com Common 1996-
Networks, Inc. shares 1999 580,956 1,609,163 885,725
--------- ---------
1,628,021 886,602
--------- ---------
Computer Systems and Software--6.5%
-----------------------------------
Blaze Software, Common 2000 5,221 86,440 67,027
Inc. shares
Photon Dynamics, Common
Inc. shares 1996 37,500 225,000 1,580,850
--------- ---------
311,440 1,647,877
--------- ---------
Electronic Design Automation--2.4%
----------------------------------
Cadence Design Common
Systems, Inc. shares 1996 24,000 313,439 609,912
--------- ---------
313,439 609,912
--------- ---------
Environmental--0.2%
-------------------
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 45,909
Triangle Common
Biomedical share
Sciences, Inc.(a) warrants at
$28.00;
expiring
2009 1999 4,099 4,099 1,640
--------- ---------
1,430,229 47,549
--------- ---------
Industrial/Business Automation--0.8%
------------------------------------
Nanophase
Technologies Common
Corporation shares 2000 14,557 251,108 196,709
PRI Automation, Common 1998-
Inc. shares 1999 7 315 133
--------- ---------
251,423 196,842
--------- ---------
Information Technology--8.2%
----------------------------
WorldRes, Inc. Preferred 1997-
(a) (b) shares 1999 434,392 1,708,124 2,019,056
WorldRes, Inc. Preferred
(a) (b) share
warrants at
$3.70-$4.63;
expiring 1997-
2002-2003 1998 24,305 195 70,784
--------- ---------
1,708,319 2,089,840
--------- ---------
Medical/Biotechnology--39.5%
----------------------------
Acusphere, Inc. Preferred 1995-
(a) shares 2000 432,138 1,100,909 1,231,593
ADESSO Specialty
Services
Organization Preferred 1997-
Inc. (a) (b) shares 2000 204,670 1,393,803 859,614
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 2000 785,883 1,046,583 209,318
Biex, Inc. (a) (b) Preferred
share warrants
at $0.01-$2.50;
expiring 1998-
2003-2005 2000 75,617 23 5
CollaGenex
Pharmaceuticals, Common
Inc. shares 1999 4,401 108,100 35,868
CV Therapeutics, Common
Inc. shares 2000 1,080 21,658 80,763
Endocare, Inc. Common 1996-
(b) shares 1999 492,929 1,416,252 4,593,607
Flamel Common
Technologies S.A. shares 2000 7,774 43,511 54,659
LifeCell Common 1992-
Corporation shares 1997 351,060 1,263,574 1,357,725
Matrix
Pharmaceutical, Common 1992-
Inc. shares 1995 31,633 74,821 479,240
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 1,344
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 62,369
---------- ----------
9,741,248 10,084,893
---------- ----------
Retail/Consumer Products--0.0%
------------------------------
YES!
Entertainment Common
Corporation shares 1995 33,333 0 0
---------- ----------
0 0
---------- ----------
Venture Capital Limited Partnership Investments--4.8%
-----------------------------------------------------
Alta IV, Limited Ltd.
Partnership (a) Partnership
interests various $1,000,000 146,698 40,393
Batterson,
Johnson, and Ltd.
Wang Limited Partnership
Partnership (a) interests various $500,000 0 93,170
Columbine Ltd.
Venture Fund II, Partnership
L.P. (a) interests various $750,000 469,667 501,061
Delphi Ltd.
Ventures, L.P. Partnership
(a) interests various $1,000,000 652,842 263,175
Medical Science Ltd.
Partners, L.P. Partnership
(a) interests various $500,000 187,222 135,900
O,W&W Pacrim Ltd.
Investments Partnership
Limited (a) interests various 200 505 131,562
Trinity Ventures Ltd.
IV, L.P. (a) Partnership
interests various $125,008 23,453 47,979
---------- ----------
1,480,387 1,213,240
---------- ----------
Total equity investments--65.9% $16,864,506 16,776,755
========== ==========
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 09/30/00.
(2) The Partnership has no income-producing equity investments.
</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 nine months ended
September 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 7,931 common shares in the company
for proceeds of $214,137 and realized a gain of $134,150.
In September 2000, the Partnership net exercised a common share warrant for
2,880 shares at $20.00 each and received 1,974 common shares with a cost
basis of $39,538. The Partnership realized a gain of $39,538 on the
warrant exercise.
In September 2000, the Partnership sold 894 common shares for proceeds of
$71,518 and realized a gain of $53,638.
In October 2000, the Partnership sold the remaining 1,080 common shares for
proceeds of $86,397 and realized a gain of $64,739.
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 $200,021 from Alta IV,
Limited Partnership, Batterson, Johnson and Wang Limited Partnership,
Medical Science Partners, L.P. and O,W&W Pacrim Investments Limited,
$40,632 of which were recorded as returns of capital and the remaining
recorded as realized gains. The Partnership received stock distributions
of Blaze Software, Inc., Epoch Pharmaceuticals Inc., Flamel Technologies
S. A. and Nanophase Technologies Corporation with fair values totaling
$486,339. Distributions totaling $417,980 were recorded as realized gains
and distributions totaling $68,359 were recorded as returns of capital.
The Partnership recorded a $205,446 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 September 30, 2000, marketable equity securities had aggregate costs of
$4,000,027 and aggregate market values of $5,351,539. The net unrealized
gains at September 30, 2000, included gross gains of $2,286,784.
Subsequent Events
-----------------
Subsequent to Sept 30, 2000, the fair value of the Partnership's investment
in Endocare, Inc. decreased by $1,112,296 as a result of a decrease in the
publicly traded market price on November 9, 2000.
4. Notes Receivable, net
---------------------
Activity from January 1 through September 30 consisted of:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Balance at January 1 $ 20,824 202,777
Notes receivable issued 4,000,000 75,868
Notes converted to equity investments -- (75,868)
Repayments of notes receivable (7,892) (198,844)
Change in interest receivable 836,680 (3,933)
Change in allowance for loan losses (4,836,805) --
--------- -------
Total notes receivable, net
at September 30 $ 12,807 --
========= =======
</TABLE>
The interest rate on notes receivable at September 30, 2000 ranged from 16%
to 50%. All notes are due on demand.
During 2000, the Partnership issued notes receivable totaling $4,000,000 to
a portfolio company in the computer equipment industry. Interest income on
these notes for the nine months ended September 30, 2000 totals $836,805
and is payable on demand. In determining fair value as of September 30,
2000, the Managing General Partners gave consideration to deterioration in
the company's performance during the quarter ended September 30, 2000 as a
result of business, technical, financing and legal challenges, the
company's financial position at September 30, 2000 and its ability to
obtain critical additional financing, and, as a result, recorded a
$4,836,805 decrease in the fair value of notes and interest receivable.
The company is actively exploring opportunities for additional financing
and should they ultimately be successful, the impact on the Partnership's
fair value would likely be positive. Because of the inherent uncertainties
involved in predicting the outcome of the company's ability to obtain
additional financing, the estimated fair value at September 30, 2000 may
differ significantly from a value that would have been used had the outcome
of the company's efforts been known, and the difference could be material.
5. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at September 30, 2000, and December 31, 1999,
consisted of:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Demand accounts $6,990,121 161,015
Money-market accounts 1,826,049 1,399,758
--------- ---------
$8,816,170 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 September 30, 2000, there were
no unfunded commitments to portfolio companies.
8. Subsequent Events
-----------------
On October 25, 2000, the General Partners voted to extend the life of the
Partnership to December 31, 2002.
On November 8, 2000, a proxy statement and ballot were mailed to the
Limited Partners of record on the close of business October 31, 2000 along
with a notice of the annual meeting of Limited Partners to be held on
December 8, 2000. Items to be voted upon include the following:
(1) The election of three Individual General Partners to serve as members
of the Partnership's Management Committee each for a three-year term;
(2) The election of two Managing General Partners to serve as members of
the Partnership's Management Committee each for a three-year term;
(3) Ratification of the Management Committee's appointment of Arthur
Andersen LLP as independent certified public accountants of the
Partnership;
(4) The amendment of Article 2, Section (m) of the Partnership Agreement
to delete references to "Controlling Person" in the definition of
"General Partner Overhead" so that the salary and fringe benefits of a
Controlling Person of a Managing General Partner directly involved in
carrying out the business of the Partnership are expenses of the
Partnership;
(5) The amendment of Article 1.03 of the Partnership Agreement to clarify
the Partnership's investment objective;
(6) The amendment of Article 5.04 of the Partnership Agreement to clarify
the Limited Partners' right to vote under the Investment Company Act
of 1940, as amended (the "Act");
(7) Such other matters as may properly come before the Meeting or any
adjournment thereof.
If approved, the change proposed in Item 4 would become effective as of
January 1, 2000 and would result in additional expense to the Partnership
of approximately $76,245 for the year ending December 31, 2000.
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 nine months ended September 30, 2000, net cash used by operating
activities totaled $992,290. The Partnership paid management fees of
$308,347 to the Managing General Partners and reimbursed related parties
for operating expenses of $630,738. The Partnership also received
investment sales proceeds of $72,496 from an affiliated partnership. In
addition, $30,648 was paid to the Individual General Partners as
compensation for their services. Other operating expenses of $296,395 were
paid and $201,342 in interest income was received.
During the nine months ended September 30, 2000, the Partnership funded
equity investments of $841,998 to portfolio companies in the
medical/biotechnology industry and issued $4,000,000 in notes receivable to
a portfolio company in the computer systems and software industry.
Proceeds from equity investment sales were $15,808,070 and repayments of
notes receivable were $7,892. The Partnership received cash distributions
from venture capital limited partnerships totaling $200,021. Tax
distributions totaling $2,862,928 were paid to the General Partners.
Cash and cash equivalents at September 30, 2000, were $8,816,170. 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. On October 25, 2000 the General Partners voted to extend the life
of the Partnership to December 31, 2002.
Results of Operations
---------------------
Current quarter compared to corresponding quarter in the
--------------------------------------------------------
preceding year
--------------
Net loss was $5,926,880 for the three months ended September 30, 2000, as
compared to net income of $1,653,367 for the three months ended September
30, 1999. The decrease was primarily due to a $5,374,610 decrease in the
change in net unrealized fair value of equity investments and a $3,491,007
decrease in the change in net unrealized fair value of notes receivable,
partially offset by a $630,490 increase in net realized gain from equity
investment sales and a $573,608 increase in interest income.
The Partnership recorded a decrease in fair value of equity investments of
$2,856,181 during the quarter ended September 30, 2000 primarily due to
decreases in portfolio companies in the communications, computer systems
and software, information technology and medical/biotechnology industries.
During the same period in 1999, the Partnership recorded an increase in
fair value of equity investments of $2,518,429 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 quarter ended September 30, 2000, the Partnership recorded a
decrease in the fair value of notes receivable of $3,491,007 which related
to a decrease in a portfolio company in the computer equipment, systems and
software industry. There was no change in fair value for the corresponding
period in 1999.
Realized gains from equity sales totaled $93,177 in the quarter ended
September 30, 2000, compared to a loss of $537,313 for the same period in
1999. The 2000 gain primarily resulted from the warrant net exercise and
sale of CV Therapeutics, Inc. common shares. (See Note 3.) The 1999 loss
relates to the sale of the Partnership's investments in Naiad Technologies,
Inc., CV Therapeutics, Inc. and Avalon Imaging, Inc.
For the quarter ended September 30, 2000, interest income of $601,543 was
primarily the result of interest earned on secured notes receivable and
higher cash balances. During the same period in 1999, interest income was
$27,935.
Operating expenses were $271,965 for the quarter ended September 30, 2000,
compared to $269,549 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 September 30, 2000 and 1999 would have been $271,965
and $285,331, 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 nine months compared to corresponding nine months in the
----------------------------------------------------------------
preceding year
--------------
Net loss was $9,850,605 for the nine months ended September 30, 2000, as
compared to net income of $7,894,804 for the nine months ended September
30, 1999. The decrease was primarily due to a $25,991,950 decrease in the
change in net unrealized fair value of equity investments, a $4,836,805
decrease in the change in net unrealized fair value of notes receivable and
a $125,328 increase in operating expenses, partially offset by a
$11,952,580 increase in net realized gain from equity investment sales, a
$944,116 increase in interest income and a $483,786 increase in realized
gains from venture capital limited partnership investments.
During the nine months ended September 30, 2000, the decrease in fair value
of equity investments of $16,535,576 was primarily attributable to a
decrease in fair value of equity investments of $14,581,596 as discussed in
Note 1 to the financial statements. In addition, there were decreases in
portfolio companies in the communications, computer and computer equipment
and information technology industries, partially offset by increases in the
medical/biotechnology industry. During the comparable period of 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 nine months ended September 30, 2000, the Partnership recorded a
decrease in the fair value of notes receivable of $4,836,805 of which
$1,345,798 related to the change in valuation methodology discussed in Note
1 to the financial statements and the remainder related to a decrease in a
portfolio company in the computer equipment, systems and software industry.
There was no change in fair value for the same period in 1999.
Operating expenses were $950,423 for the nine months ended September 30,
2000, compared to $825,095 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 nine months ended September 30, 2000 and 1999 would have
been $768,126 and $887,639, respectively. The decrease is attributable to
decreased investment activity and the related administrative costs.
Net realized gain from sales of equity investments was $11,254,127 for the
nine months ended September 30, 2000, compared to a net realized loss of
$698,453 for the nine months ended September 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.) The 1999 loss primarily related to the sale of the
Partnership's investments in CareCentric Solutions, Inc., Naiad
Technologies, Inc. and CV Therapeutics, Inc., partially offset by a gain on
the sale of Synopsys, Inc. common shares.
For the nine months ended September 30, 2000, interest income of $1,042,543
was primarily the result of interest earned on secured notes receivable and
higher cash balances. During the same period in 1999, interest income was
$98,427.
During the nine months ended September 30, 2000, the Partnership recorded
net realized gains from venture capital limited partnership investments of
$577,369. During the same period in 1999, there were gains of $93,583.
The gains represented distributions from profits of venture capital limited
partnerships.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) A Form 8-K was filed by the Partnership on September 12, 2000 to
report the resignation of KPMG LLP as the Partnership's independent
accountants. A Form 8-K/A was filed by the Partnership on September
25, 2000 with KPMG LLP's letter in response to the Form 8-K.
A Form 8-K was filed by the Partnership on November 13, 2000 to
report the appointment of Arthur Andersen LLP as the Partnership's
independent public accountants.
(b) Financial Data Schedule for the nine months ended and as of
September 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.
TECHNOLOGY FUNDING LTD.
Managing General Partners
Date: November 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
