<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 0-20081
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 77-0129484
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
440 Mission Court, Suite 250, Fremont, California 94539
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 656-1855
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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 _CK_ No __
<PAGE>
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 497,194 $ 480,692
Investments in equity securities 14,420,567 19,182,479
Other asset -- 216,669
----------- ------------
Total assets $14,917,761 $19,879,840
----------- ------------
----------- ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued management fee $ 204,670 $ 204,670
Accrued expenses and other liabilities 68,091 73,091
----------- ------------
Total liabilities 272,761 277,761
----------- ------------
Contingencies
Partners' capital
Unitholders (40,934 units issued and outstanding) 7,295,515 7,505,854
General partner 818,351 841,722
Unrealized gain on investments in equity securities 6,531,134 11,254,503
----------- ------------
Total partners' capital 14,645,000 19,602,079
----------- ------------
Total liabilities and partners' capital $14,917,761 $19,879,840
----------- ------------
----------- ------------
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
2
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
------------------------- ------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Gain on sale of investments in equity
securities $3,621,513 $4,256,226 $ -- $ --
Royalty income 216,665 -- 216,665 --
Termination of royalty rights -- 516,870 -- --
Interest and other income 26,981 30,879 10,728 15,633
---------- ---------- ---------- ---------
3,865,159 4,803,975 227,393 15,633
---------- ---------- ---------- ---------
EXPENSES
Management fee 409,340 409,340 204,670 204,670
General and administrative 50,951 80,709 20,820 51,930
Interest -- 18,070 -- --
---------- ---------- ---------- ---------
460,291 508,119 225,490 256,600
---------- ---------- ---------- ---------
Net income (loss) $3,404,868 $4,295,856 $ 1,903 $(240,967)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
ALLOCATION OF NET INCOME (LOSS)
Unitholders $3,064,381 $3,866,270 $ 1,713 $(216,870)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
General partner $ 340,487 $ 429,586 $ 190 $ (24,097)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net income (loss) per unit $ 74.86 $ 94.45 $ .04 $ (5.30)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
- -----------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(unaudited)
<TABLE>
<CAPTION>
UNREALIZED
GENERAL GAIN ON
UNITHOLDERS PARTNER INVESTMENTS TOTAL
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1995 $7,505,854 $ 841,722 $11,254,503 $19,602,079
Net income 3,064,381 340,487 -- 3,404,868
Distribution (3,274,720 ) (363,858) -- (3,638,578)
Change in unrealized gain on investments
in equity securities -- -- (4,723,369 ) (4,723,369)
----------- --------- ----------- -----------
Partners' capital--June 30, 1996 $7,295,515 $ 818,351 $6,531,134 $14,645,000
----------- --------- ----------- -----------
----------- --------- ----------- -----------
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
3
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
<S> <C> <C>
1996 1995
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and other income received $ 26,981 $ 30,879
Royalty income received 216,665 13,942
Management fee paid (409,340) (1,023,350)
General and administrative expenses paid (53,044) (24,064)
Evaluation and monitoring expenses paid (2,907) (26,605)
Cash received for other asset 216,669 --
Interest paid -- (55,742)
----------- -----------
Net cash used in operating activities (4,976) (1,084,940)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investments in equity securities 3,660,056 4,263,417
Proceeds from the termination of royalty rights -- 516,870
----------- -----------
Net cash provided by investing activities 3,660,056 4,780,287
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (3,638,578) (1,182,538)
Repayment of note payable -- (1,622,223)
----------- -----------
Net cash used in financing activities (3,638,578) (2,804,761)
----------- -----------
Net increase in cash and cash equivalents 16,502 890,586
Cash and cash equivalents at beginning of period 480,692 152,084
----------- -----------
Cash and cash equivalents at end of period $ 497,194 $ 1,042,670
----------- -----------
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES
Net income $ 3,404,868 $ 4,295,856
----------- -----------
Adjustments to reconcile net income to net cash used in operating
activities:
Gain on sale of investments in equity securities (3,621,513) (4,256,226)
Termination of royalty rights -- (516,870)
Changes in:
Other asset 216,669 --
Accrued expenses and other liabilities (5,000) (7,632)
Royalties receivable -- 13,942
Accrued management fee -- (614,010)
----------- -----------
Total adjustments (3,409,844) (5,380,796)
----------- -----------
Net cash used in operating activities $ (4,976) $(1,084,940)
----------- -----------
----------- -----------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
</TABLE>
4
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(unaudited)
A. General
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of PruTech Research and Development Partnership III (the
``Partnership'') as of June 30, 1996, the results of its operations for the six
and three months ended June 30, 1996 and 1995 and its cash flows for the six
months ended June 30, 1996 and 1995. However, the operating results for the
interim periods may not be indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1995.
Certain balances for prior periods have been reclassified to conform with
current financial statement presentation.
B. Royalties
On April 1, 1990 the Partnership entered into a Technology Development
Investment Agreement with Kopin Corporation (``Kopin'') for the development of
LED technology. Pursuant to the Agreement, Kopin was obligated to pay to the
Partnership royalties on the sale of products containing the technology through
April 1, 1996, with a minimum royalty payment of $433,334 due April 1, 1996
(payable in cash or by the delivery of a promissory note). Kopin agreed to pay
cash for the minimum royalty because the Partnership also agreed to transfer to
Kopin its GaAs technology developed under an earlier contract. During the second
quarter of 1996, the Partnership received the $433,334 minimum royalty payment
of which $216,669 represented a reduction of its receivable from Kopin and
$216,665 was recorded as royalty income. As a result of the above, the
Partnership holds no technology or royalty positions with Kopin and, therefore,
no further royalties will be received by the Partnership from Kopin.
C. Investments
During the first quarter of 1996, the Partnership sold its remaining 75,000
shares of Forest Laboratories, Inc. common stock with a cost basis of $6,130
resulting in a gain of $3,594,350 and 4,334 shares of Kopin common stock with a
cost basis of $32,413 resulting in a gain of $27,163.
Investments in marketable equity securities available-for-sale include the
following:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------------------------------------------- ------------------------------------------------------
Gross unrealized Carrying Gross unrealized Carrying
Shares Cost basis gains value Shares Cost basis gains value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------- ---------------------------------------------
Creative
BioMolecules,
Inc.-Common
Stock 724,282 $2,370,177 $3,786,220 $ 6,156,397 724,282 $2,370,177 $ 2,699,797 $ 5,069,974
Forest
Laboratories,
Inc.-
Common Stock -- -- -- -- 75,000 6,130 3,387,620 3,393,750
Kopin
Corporation-
Common Stock 537,333 4,019,256 682,414 4,701,670 541,667 4,051,669 3,667,086 7,718,755
Somatix
Therapy
Corporation-
Common Stock 500,000 1,500,000 2,062,500 3,562,500 500,000 1,500,000 1,500,000 3,000,000
---------- ---------------- ------------- ---------- ---------------- ------------
$7,889,433 $6,531,134 $14,420,567 $7,927,976 $ 11,254,503 $ 19,182,479
---------- ---------------- ------------- ---------- ---------------- ------------
---------- ---------------- ------------- ---------- ---------------- ------------
</TABLE>
The gross unrealized gains would be allocated 90% to the Unitholders and 10%
to R&D Funding Corp (the ``General Partner'') if realized at June 30, 1996;
however, there is no assurance that the Partnership would receive these amounts
in the event of the sale of its position in these securities.
5
<PAGE>
D. Related Parties
The General Partner and its affiliates perform certain services for the
Partnership (for which they are reimbursed through the management fee) which
include, but are not limited to: accounting and financial management; registrar,
transfer and assignment functions; asset management; investor communications and
other administrative services. The Partnership also reimburses an affiliate of
the General Partner for printing services. The management fee and printing costs
were:
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
--------------------- ---------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------
Management fee $409,340 $409,340 $204,670 $204,670
Printing 5,925 6,392 -- 3,164
-------- -------- -------- --------
$415,265 $415,732 $204,670 $207,834
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of June 30, 1996 and
December 31, 1995 were $6,756 and $16,464, respectively.
Prudential Securities Incorporated, an affiliate of R&D Funding Corp, owned
724 units in the Partnership at June 30, 1996.
The Partnership maintains an account with the Prudential Institutional
Liquidity Portfolio Fund, an affiliate of R&D Funding Corp, for investment of
its available cash in short-term instruments pursuant to the guidelines
established by the Partnership Agreement.
The Partnership has engaged in research and development co-investment
projects with PruTech Research and Development Partnership, PruTech Research and
Development Partnership II and PruTech Project Development Partnership
(collectively, the ``PruTech R&D Partnerships''), for which R&D Funding Corp
serves as the general partner. The allocation of the co-investment projects'
profits or losses among the PruTech R&D Partnerships is consistent with the
costs incurred to fund the research and development projects.
E. Contingencies
On April 15, 1994 a multiparty petition captioned Mack et al. v. Prudential
Securities Incorporated et al. (Cause No. 94-17695) was filed in the 80th
Judicial District Court of Harris County, Texas, purportedly on behalf of
investors in the Partnership against the Partnership, the General Partner,
Prudential Securities Incorporated, The Prudential Insurance Company of America
and a number of other defendants. The petition alleges common law fraud and
fraud in the inducement and negligent misrepresentation in connection with the
offering of the Partnership units; negligence and breach of fiduciary duty in
connection with the operation of the Partnership; civil conspiracy; and
violations of the Federal Securities Act of 1933 (sections 11 and 12), and of
the Texas Securities and Deceptive Trade Practices statutes. The suit seeks,
among other things, compensatory and punitive damages, costs and attorneys'
fees. The ultimate outcome of this litigation as well as the impact on the
Partnership cannot presently be determined.
The General Partner, Prudential Securities Incorporated and the Partnership
believe they have meritorious defenses to the complaint and intend to vigorously
defend themselves against this action.
6
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of June 30, 1996, the Partnership had approximately $497,000 of cash and
cash equivalents which is an increase of approximately $17,000 as compared to
December 31, 1995.
As of June 30, 1996, the Partnership had approximately $7.9 million invested
in equity securities with an aggregate market value which exceeded its cost.
Certain of these investments are in development stage companies which are more
speculative and higher in risk than other equity investments. Additionally, the
realization of this market value is further impacted by certain sale
restrictions and market volume capacity. The amount to be distributed by the
Partnership in future quarters will be based on the extent to which the market
value of its investments can be realized and, to a lesser extent, from the
revenue stream from royalties and interest income. Except for royalty income
from Kopin Corporation (``Kopin'') in 1996 as further discussed below, the
Partnership's royalty positions did not generate royalty income for the
Partnership during the six months ended June 30, 1996 and 1995.
In January 1996, the Partnership sold its remaining 75,000 shares of Forest
Laboratories, Inc. (``Forest'') common stock for approximately $3,600,000. The
proceeds from the sale were used to pay the January 1996 distribution discussed
below.
During the first quarter of 1996, the Partnership sold 4,334 shares of Kopin
common stock for approximately $60,000.
On April 1, 1990 the Partnership entered into a Technology Development
Investment Agreement with Kopin for the development of LED technology. Pursuant
to the Agreement, Kopin was obligated to pay to the Partnership royalties on the
sale of products containing the technology through April 1, 1996, with a minimum
royalty payment of $433,334 due April 1, 1996 (payable in cash or by the
delivery of a promissory note). Kopin agreed to pay cash for the minimum royalty
because the Partnership also agreed to transfer to Kopin its GaAs technology
developed under an earlier contract. During the second quarter of 1996, the
Partnership received the $433,334 minimum royalty payment of which $216,669
represented a reduction of its receivable from Kopin and $216,665 was recorded
as royalty income. As a result of the above, the Partnership holds no technology
or royalty positions with Kopin and, therefore, no further royalties will be
received by the Partnership from Kopin.
In January 1996, the Partnership paid a distribution of approximately
$3,639,000. Unitholders received a total of approximately $3,275,000 ($80 per
unit) and the General Partner received the remainder.
Results of Operations
The Partnership's net income decreased by approximately $891,000 but
increased by $243,000 for the six and three months ended June 30, 1996 as
compared to the same periods in 1995. The six month decrease was primarily due
to a decrease in gains on the sale of investments in equity securities and
income from the termination of royalty rights recorded in 1995. The three month
increase was primarily due to 1996 royalty income resulting from the Kopin
transaction as discussed above.
During the first quarter of 1996, gains totalling approximately $3,622,000
were recorded on the sale of common stock of Forest and Kopin as discussed above
as compared to a gain of approximately $4,256,000 on the sale of 88,000 shares
of Forest common stock during the first quarter of 1995.
In March 1995, the Partnership and the MacNeal-Schwendler Corporation
(``MNS'') agreed to terminate the Partnership's contractual rights with respect
to MNS software and to transfer the technology relating to the software to MNS
in exchange for approximately $517,000. No further royalty payments will be
received by the Partnership from MNS as a result of this agreement.
General and administrative expenses decreased by approximately $30,000 and
$31,000 for the six and three months ended June 30, 1996 as compared to the same
periods in 1995. These decreases were primarily due to professional costs
incurred from the use of consultants in 1995 relating to a royalty dispute with
Interleaf, Inc.
7
<PAGE>
Interest expense was eliminated following the repayment of a Partnership note
and related interest payable during February 1995. Interest expense recorded for
the six months ended June 30, 1995 was approximately $18,000.
8
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings--This information is incorporated by reference to Note
E to the financial statements filed herewith in Item 1 of Part I of the
Registrant's Quarterly Report.
Item 2. Changes in Securities--None
Item 3. Defaults Upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--None
Item 5. Other Information--None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits--
PruTech Research and Development Partnership III Agreement of
Limited Partnership (incorporated by reference to Exhibit 3.1
included with Registrant's Form S-1 Registration Statement, File No.
33-6091, filed on June 3, 1986)
First Amendment to the Agreement of Limited Partnership of PruTech
Research and Development Partnership III (incorporated by reference
to Exhibit 3 included with Registrant's Annual Report on Form 10-K
filed March 28, 1992)
Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
Registrant's Current Report on Form 8-K dated June 25, 1996, as
filed with the Securities and Exchange Commission on June 28,
1996, relating to Item 4 regarding the change in the
Registrant's certifying accountant from Deloitte & Touche LLP to
Price Waterhouse LLP.
9
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
PruTech Research and Development Partnership III
By: R&D Funding Corp
A Delaware corporation, General Partner
By: /s/ Michael S. Hasley Date: August 14, 1996
----------------------------------------
Michael S. Hasley
President for the Registrant
By: R&D Funding Corp
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: August 14, 1996
----------------------------------------
Steven Carlino
Vice President and Chief Accounting
Officer for the Registrant
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial
information extracted from the financial
statements for PruTech Research and
Development Partnership III and is qualified
in its entirety by reference to such
financial statements
</LEGEND>
<RESTATED>
<CIK> 0000794357
<NAME> PruTech Research and
Development Partnership III
<MULTIPLIER> 1
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Jun-30-1996
<PERIOD-TYPE> 6-Mos
<CASH> 497,194
<SECURITIES> 14,420,567
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,917,761
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,917,761
<CURRENT-LIABILITIES> 272,761
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 14,645,000
<TOTAL-LIABILITY-AND-EQUITY> 14,917,761
<SALES> 3,838,178
<TOTAL-REVENUES> 3,865,159
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 460,291
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,404,868
<EPS-PRIMARY> 74.86
<EPS-DILUTED> 0
</TABLE>
