<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 period ended March 31, 1995
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)
March 31, December 31,
1995 1994
-------- -----------
<S> <C> <C>
ASSETS
Equity investments (cost basis
of $19,323,324 and $19,299,469 for
1995 and 1994, respectively) $30,450,902 29,411,649
Cash and cash equivalents 3,331,908 4,049,929
Other assets 2,782 743,924
---------- ----------
Total $33,785,592 34,205,502
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 34,652 25,839
Due to related parties 20,432 44,572
Distributions payable -- 1,673,084
Deferred income 78,125 93,750
Other liabilities 19,682 19,362
---------- ----------
Total liabilities 152,891 1,856,607
Commitments, contingencies and
subsequent event (Notes 2, 5 and 6)
Partners' capital:
Limited Partners
(Units outstanding of 160,000
in both 1995 and 1994) 22,505,123 22,269,799
General Partners -- (33,084)
Net unrealized fair value increase
from cost of equity investments 11,127,578 10,112,180
---------- ----------
Total partners' capital 33,632,701 32,348,895
---------- ----------
Total $33,785,592 34,205,502
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1995 1994
---- ----
<S> <C> <C>
Income:
Notes receivable interest $ -- 90,508
Short-term investment interest 43,821 403
Other income 18,937 1,524
--------- ---------
Total income 62,758 92,435
Costs and expenses:
Management fees 85,514 90,019
Individual general partners'
compensation 7,500 7,500
Operating expenses:
Administrative and
investor services 68,943 113,520
Investment operations 54,329 106,639
Computer services 19,077 32,644
Professional fees 12,074 16,915
--------- ---------
Total operating expenses 154,423 269,718
--------- ---------
Total costs and expenses 247,437 367,237
--------- --------
Net operating loss (184,679) (274,802)
Net realized gain from sales of
investments 453,087 83,437
--------- ---------
Net realized income (loss) 268,408 (191,365)
Change in net unrealized
fair value:
Equity investments 1,015,398 (2,688,153)
Secured notes receivable -- (19,000)
--------- ---------
Net income (loss) $1,283,806 (2,898,518)
========= =========
Net realized income (loss) per Unit $ 1 (1)
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited)
- -----------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 44,279 79,888
Cash paid to vendors (26,877) (59,084)
Cash paid to related parties (234,844) (313,012)
--------- ---------
Net cash used by operating
activities (217,442) (292,208)
--------- ----------
Cash flows from investing activities:
Secured notes receivable issued -- (684,959)
Purchase of equity investments (150,252) (760,747)
Repayments of convertible and
secured notes receivable -- 174,128
Proceeds from sales of investments 1,321,281 193,437
Distributions from venture capital
limited partnerships 1,476 16,651
--------- ---------
Net cash provided (used) by
investing activities 1,172,505 (1,061,490)
--------- ---------
Cash flows from financing activities:
Distributions to Limited and General
Partners (1,673,084) --
Proceeds from short-term
borrowings, net -- 1,358,623
--------- ---------
Net cash (used) provided
by financing activities (1,673,084) 1,358,623
--------- ---------
Net (decrease) increase in
cash and cash equivalents (718,021) 4,925
Cash and cash equivalents at beginning
of year 4,049,929 73,890
--------- ---------
Cash and cash equivalents at March 31 $ 3,331,908 78,815
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (unaudited) (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1995 1994
---- ----
<S> <C> <C>
Reconciliation of net income (loss) to net
cash used by operating activities:
Net income (loss) $ 1,283,806 (2,898,518)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Net realized gain from sales of
investments (453,087) (83,437)
Change in net unrealized fair value:
Equity investments (1,015,398) 2,688,153
Secured notes receivable -- 19,000
Other changes, net (32,763) (17,406)
--------- ---------
Net cash used by operating activities $ (217,442) (292,208)
========= =========
</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 March 31, 1995 and December 31, 1994 and the related Statements of
Operations and Statements of Cash Flows for the three months ended March
31, 1995 and 1994, 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, 1994. The following notes to financial statements for
activity through March 31, 1995 supplement those included in the Annual
Report on Form 10-K.
2. Related Party Transactions
--------------------------
Related party costs are included in costs and expenses shown on the
Statements of Operations. Related party expenses for the three months
ended March 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Management fees $ 85,514 90,019
Reimbursable operating expenses 117,690 215,776
Individual general partners'
compensation 7,500 7,500
</TABLE>
Certain reimbursable expenses have been accrued based upon interim
estimates prepared by the Managing General Partners and are adjusted to
actual costs periodically. There were $6,988 due from related parties
at March 31, 1995 for such expenses compared to $15,526 due to related
parties at December 31, 1994.
Amounts due to related parties for management fees payable were $27,420
and $29,046 at March 31, 1995 and December 31, 1994, respectively.
Officers of the Managing General Partners occasionally receive stock
options as compensation for serving on the Boards of Directors of
portfolio companies. At March 31, 1995, the Partnership had an indirect
interest in such non-transferable PolyMedica options at an exercise
price higher than the current market value.
3. Equity Investments
------------------
A complete listing of the Partnership's equity investments at December
31, 1994 is in the 1994 Annual Report. Activity from January 1 through
March 31, 1995 consisted of:
<TABLE>
<CAPTION>
January 1 -
March 31, 1995
Principal --------------
Investment Amount or Cost Fair
Industry/Company Position Date Shares Basis Value
- ---------------- -------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $19,299,469 29,411,649
---------- ----------
Significant changes:
Computer Systems and Software
- -----------------------------
Geoworks Common 01/92-
shares 06/94 875,110 0 1,437,390
Velocity Convertible
Incorporated note (1) 03/95 $125,000 125,042 125,042
Electronic Design Automation
- ----------------------------
IKOS Systems, Inc. Common
shares 03/92 8,294 (15,866) (19,026)
Industrial/Business Automation
- ------------------------------
Crystallume Common
shares 03/94 348,611 0 (379,380)
Oxford GlycoSystems Common
shares 08/93 266,934 0 (286,416)
Medical/Biotechnology
- ---------------------
Lifecell Common
Corporation shares 02/92 252,923 0 50,585
Matrix Warrants
Pharmaceuticals, for common
Inc. shares
at $.23;
exercised
01/95 04/90 1,905 0 (24,422)
Matrix
Pharmaceuticals, Common 01/92 &
Inc. shares 01/95 321,633 438 (36,250)
PolyMedica Common
Industries, Inc. shares 03/92 438,365 0 988,513
SyStemix, Inc. Common 08/91 &
shares 01/92 66,986 0 (242,824)
TheraTx, Inc. Common
shares 06/94 70,043 (16,500) (345,180)
UroMed Common
Corporation shares 03/94 59,942 (95,409) (277,232)
---------- ----------
Total significant changes during the three months
ended March 31, 1995 (2,295) 990,800
Other changes, net 26,150 48,453
---------- ----------
Total equity investments at March 31, 1995 $19,323,324 30,450,902
========== ==========
(1) Convertible notes include accrued interest. The interest rate on note issued
in 1995 was 12%.
</TABLE>
Marketable Equity Securities
- ----------------------------
At March 31, 1995 and December 31, 1994, marketable equity securities
had aggregate costs of $9,623,152 and $9,713,832, respectively, and
aggregate fair values of $18,249,263 and $17,350,086, respectively. The
net unrealized gains at March 31, 1995 and December 31, 1994 included
gross gains of $10,986,849 and $10,000,499, respectively.
IKOS Systems Inc.
- -----------------
During the first quarter of 1995, the Partnership sold all of its
holdings in the company for total proceeds of $24,882 and a realized
gain of $9,016.
Matrix Pharmaceuticals, Inc.
- ----------------------------
In January 1995, the Partnership cash exercised its warrant to purchase
1,905 common shares, resulting in a recorded cost basis of $438. The
Partnership also recorded a decrease in fair value of $60,672 to reflect
the unrestricted market value at March 31, 1995.
Oxford GlycoSystems
- -------------------
In March 1995, the company had a new round of equity financing in which
the Partnership did not participate. The pricing of this round
indicated a decrease in the change in fair value of $286,416 for the
Partnership's existing investments.
TheraTx, Inc.
- -------------
In January 1995, the Partnership sold 11,000 common shares of TheraTx,
Inc. for total proceeds of $214,500 and a realized gain of $198,000.
The Partnership also received proceeds of $127,750 from sales prior to
December 31, 1994, which have been settled. The Partnership recorded a
decrease in unrealized fair value of $345,180 during the first quarter
of 1995, a portion was realized related to the sale mentioned above,
with the remainder due to a change in the market value of the remaining
unrestricted shares at March 31, 1995.
UroMed Corporation
- ------------------
In January 1995, the Partnership sold its remaining holdings in the
company for total proceeds of $341,314 and a realized gain of $245,905.
The Partnership also received proceeds of $218,660 from sales prior to
December 31, 1994, which have been settled.
Velocity Incorporated
- ---------------------
In March 1995, the Partnership issued a convertible note of $125,000 to
the company and received warrants to purchase 12,500 common shares at an
exercise price of $1.00 per share.
Other Equity Investments
- ------------------------
Other significant changes during the quarter ended March 31, 1995
reflected above relate to market value fluctuations and the elimination
of a discount relating to selling restrictions for publicly-traded
portfolio companies.
The Partnership also received proceeds of $394,009 in January 1995 from
sales of Powersoft Corporation prior to December 31, 1994, which have
been settled.
4. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at March 31, 1995 and December 31, 1994
consisted of:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Demand accounts $ -- 3,059
Money-market accounts 3,331,908 4,046,870
--------- ---------
Total $3,331,908 4,049,929
========= =========
</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 March 31, 1995,
the Partnership had unfunded commitments of $79,683 for venture capital
limited partnership investments.
In July 1994, the Partnership agreed to guarantee for a two-year period
a $2 million loan between a financial institution and a portfolio
company in the medical/biotechnology industry. The Partnership has
received a guarantee fee of $125,000, which is recorded as deferred
income and is being amortized as other income over the two-year period.
While the Partnership expects the portfolio company to repay the loan to
the financial institution, if the portfolio company fails to do so, the
Partnership may be liable up to the guarantee amount.
6. Subsequent Event
----------------
Subsequent to March 31, 1995, the Partnership sold 275,000 common shares
of Geoworks for total proceeds of $2,483,919 and a realized gain of
$2,025,586.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
During the three months ended March 31, 1995, net cash used by
operations totaled $217,442. The Partnership paid management fees of
$87,140 to the Managing General Partners and reimbursed related parties
for operating expenses of $140,204. In addition, $7,500 was paid to the
individual general partners as compensation for their services. Other
operating expenses of $26,877 were paid and $44,279 in interest income
was received. Distributions totaling $1,673,084 were paid to Limited
and General Partners.
During the three months ended March 31, 1995, the Partnership funded
equity investments of $150,252 primarily to a portfolio company in the
computer systems and software industry. Proceeds from the sale of
investments were $1,321,281 of which $740,419 related to sales prior to
December 31, 1994, which have been settled. As of March 31, 1995, the
Partnership was committed to fund $79,683 in venture capital limited
partnership investments.
The Partnership maintains a margin account with a brokerage firm. At
March 31, 1995, the maximum borrowing capacity, which fluctuates based
on collateral value, was approximately $2,325,000. The Partnership's
ICU Medical, Inc. shares were pledged as collateral. The Partnership
did not draw on this account during the three months ended March 31,
1995.
Cash and cash equivalents at March 31, 1995 were $3,331,908. Cash
reserves, interest income on short-term investments, future proceeds
from sales of equity investments and borrowing capacity from the margin
account 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 $1,283,806 for the three months ended March 31, 1995
compared to a net loss of $2,898,518 during the same period in 1994.
The change was primarily due to a $3,703,551 increase in the change in
net unrealized fair value of equity investments, a $369,650 increase in
net realized gain from sales of investments, and a $115,295 decrease in
total operating expenses.
During the quarter ended March 31, 1995, the increase in fair value of
equity investments of $1,015,398 was primarily due to a portfolio
company in the computer systems and software industry, partially offset
by portfolio companies in the industrial/business automation industry.
During the same period in 1994, the decrease of $2,688,153 was primarily
due to portfolio companies in the medical/biotechnology,
industrial/business automation and communications industries, partially
offset by a portfolio company in the computer systems and software
industry.
Net realized gain from sales of investments was $453,087 and $83,437 for
the quarters ended March 31, 1995 and 1994, respectively. The 1995 gain
primarily related to sales of UroMed Corporation and TheraTx, Inc. The
1994 gain related to sales of EROX Corporation.
Operating expenses were $154,423 and $269,718 during the three months
ended March 31, 1995 and 1994, respectively. The decrease was primarily
due to lower investment operations and administrative and investor
services expenses from lower overall portfolio activities.
Total income decreased to $62,758 during the three months ended March
31, 1995 from $92,435 for the same period in 1994. The decrease was
primarily due to lower notes receivable interest as there was no note
receivable balance in 1995. This decrease was partially offset by
higher short-term investment interest from investment sale proceeds.
Given the inherent risk associated with the business of the Partnership,
the future performance of the portfolio company investments may
significantly impact future operations.
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 March 31, 1995.
(b) Financial Data Schedule for the quarter ended and as of March 31,
1995 (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: May 12, 1995 By: /s/Frank R. Pope
------------------------------------
Frank R. Pope
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FORM 10-Q AS OF MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER>1
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<PERIOD-TYPE> 3-MOS
<INVESTMENTS-AT-COST> 19,323,324
<INVESTMENTS-AT-VALUE> 30,450,902
<RECEIVABLES> 0
<ASSETS-OTHER> 2,782
<OTHER-ITEMS-ASSETS> 3,331,908
<TOTAL-ASSETS> 33,785,592
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 152,891
<TOTAL-LIABILITIES> 152,891
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,505,123
<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> 11,127,578
<NET-ASSETS> 33,632,701
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,821
<OTHER-INCOME> 18,937
<EXPENSES-NET> 247,437
<NET-INVESTMENT-INCOME> (184,679)
<REALIZED-GAINS-CURRENT> 453,087
<APPREC-INCREASE-CURRENT> 1,015,398
<NET-CHANGE-FROM-OPS> 1,283,806
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,283,806
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85,514
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 248,787
<AVERAGE-NET-ASSETS> 32,990,798
<PER-SHARE-NAV-BEGIN> 139
<PER-SHARE-NII> 1
<PER-SHARE-GAIN-APPREC> 0 <F1>
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 140
<EXPENSE-RATIO> .01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>
A zero value is used since the change in net unrealized fair value is
not allocated to General Partners and Limited Partners as it is not
taxable. Only taxable gains or losses are allocated in accordance with
the Partnership Agreement.
</FN>
</TABLE>
