<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 March 31, 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>
<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>
March 31, December 31,
1996 1995
<S> <C> <C>
- - ---------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 294,110 $ 480,692
Investments in equity securities 15,360,314 19,182,479
Other asset 216,669 216,669
----------- ------------
Total assets $15,871,093 $19,879,840
----------- ------------
----------- ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued management fee $ 204,670 $ 204,670
Accrued expenses and other liabilities 83,579 73,091
----------- ------------
Total liabilities 288,249 277,761
----------- ------------
Contingencies
Partners' capital
Unitholders (40,934 units issued and outstanding) 7,293,802 7,505,854
General partner 818,161 841,722
Unrealized gain on investments in equity securities 7,470,881 11,254,503
----------- ------------
Total partners' capital 15,582,844 19,602,079
----------- ------------
Total liabilities and partners' capital $15,871,093 $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>
Three months ended
March 31,
-------------------------
1996 1995
<S> <C> <C>
- - --------------------------------------------------------------------------------------------------
REVENUES
Gain on sale of investments in equity
securities $3,621,513 $4,256,226
Interest and other income 16,253 15,246
Termination of royalty rights -- 516,870
---------- ----------
3,637,766 4,788,342
---------- ----------
EXPENSES
Management fee 204,670 204,670
General and administrative 30,131 28,779
Interest -- 18,070
---------- ----------
234,801 251,519
---------- ----------
Net income $3,402,965 $4,536,823
---------- ----------
---------- ----------
ALLOCATION OF NET INCOME
Unitholders $3,062,668 $4,083,141
---------- ----------
---------- ----------
General partner $ 340,297 $ 453,682
---------- ----------
---------- ----------
Net income per unit $ 74.82 $ 99.75
---------- ----------
---------- ----------
- - --------------------------------------------------------------------------------------------------
</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 3,062,668 340,297 -- 3,402,965
Distribution (3,274,720 ) (363,858) -- (3,638,578)
Change in unrealized gain on investments
in equity securities -- -- (3,783,622 ) (3,783,622)
----------- --------- ----------- -----------
Partners' capital--March 31, 1996 $7,293,802 $ 818,161 $7,470,881 $15,582,844
----------- --------- ----------- -----------
----------- --------- ----------- -----------
- - -----------------------------------------------------------------------------------------------------
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>
Three months ended
March 31,
---------------------------
<S> <C> <C>
1996 1995
- - ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and other income received $ 16,253 $ 15,246
Royalty income received -- 13,942
Management fee paid (204,670) (1,023,350)
General and administrative expenses paid (17,710) (23,856)
Evaluation and monitoring expenses paid (1,933) (1,854)
Interest paid -- (55,742)
----------- -----------
Net cash used in operating activities (208,060) (1,075,614)
----------- -----------
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 (decrease) increase in cash and cash equivalents (186,582) 899,912
Cash and cash equivalents at beginning of period 480,692 152,084
----------- -----------
Cash and cash equivalents at end of period $ 294,110 $ 1,051,996
----------- -----------
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES
Net income $ 3,402,965 $ 4,536,823
----------- -----------
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:
Accrued expenses and other liabilities 10,488 (34,603)
Royalties receivable -- 13,942
Accrued management fee -- (818,680)
----------- -----------
Total adjustments (3,611,025) (5,612,437)
----------- -----------
Net cash used in operating activities $ (208,060) $(1,075,614)
----------- -----------
----------- -----------
- - ----------------------------------------------------------------------------------------------------
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
MARCH 31, 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 March 31, 1996 and the results of its operations and its
cash flows for the three months ended March 31, 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. 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 Corporation 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>
March 31, 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 $ 4,419,967 $ 6,790,144 724,282 $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 1,488,414 5,507,670 541,667 4,051,669 3,667,086 7,718,755
Somatix
Therapy
Corporation-
Common Stock 500,000 1,500,000 1,562,500 3,062,500 500,000 1,500,000 1,500,000 3,000,000
---------- ---------------- ------------- ---------- ---------------- ------------
$7,889,433 $ 7,470,881 $15,360,314 $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 March 31, 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>
C. 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>
Three months ended
March 31,
---------------------
1996 1995
<S> <C> <C>
- - -----------------------------------------------------------
Management fee $204,670 $204,670
Printing 5,925 3,165
-------- --------
$210,595 $207,835
-------- --------
-------- --------
</TABLE>
Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of March 31, 1996 and
December 31, 1995 were $20,342 and $16,464, respectively.
Prudential Securities Incorporated, an affiliate of R&D Funding Corp, owned
724 units in the Partnership at March 31, 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.
D. 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 March 31, 1996, the Partnership had approximately $294,000 of cash and
cash equivalents which is a decrease of approximately $187,000 as compared to
December 31, 1995. This decrease was primarily due to the excess of the January
1996 distribution and payment of operating expenses over proceeds from the sale
of stock as further discussed below.
As of March 31, 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. During the three months ended
March 31, 1996 and 1995, royalty positions did not generate royalty income for
the Partnership.
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
Corporation (``Kopin'') common stock for approximately $60,000.
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 $1,134,000 for the
three months ended March 31, 1996 as compared to the same period in 1995 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.
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.
Interest expense was eliminated following the repayment of the Partnership's
note and related interest payable during February 1995. Interest expense
recorded for the three months ended March 31, 1995 was approximately $18,000.
7
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings--This information is incorporated by reference to Note
D to the financial statements filed herewith in Item 1 of Part 1 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 of Form 8-K dated January 9, 1996,
as filed with the Securities and Exchange Commission on January
23, 1996, relating to Item 2 regarding the sale of Forest
Laboratories, Inc. common stock.
8
<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/ Russell L. Allen Date: May 15, 1996
----------------------------------------
Russell L. Allen
President and Director for the
Registrant
By: R&D Funding Corp
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: May 15, 1996
----------------------------------------
Steven Carlino
Vice President and Chief Accounting
Officer for the Registrant
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial
information extracted from the financial
statements for PruTech Research & Development
Partnership III and is qualified in its entirety
by reference to such financial statements
</LEGEND>
<RESTATED>
<CIK> 0000794357
<NAME> PruTech Research & Development Partnership III
<MULTIPLIER> 1
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Mar-31-1996
<PERIOD-TYPE> 3-Mos
<CASH> 294,110
<SECURITIES> 15,360,314
<RECEIVABLES> 216,669
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,871,093
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,871,093
<CURRENT-LIABILITIES> 288,249
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,582,844
<TOTAL-LIABILITY-AND-EQUITY> 15,871,093
<SALES> 3,621,513
<TOTAL-REVENUES> 3,637,766
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 234,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,402,965
<EPS-PRIMARY> 74.82
<EPS-DILUTED> 0
</TABLE>
