-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TiFvO+vv0iWKbpW9laVXx0wju+aoG8abKCg6kCdT1AS0qdOiebu91vbgH7ut/gFm J2d6R61D7AlQuKn61+mAVw== 0000898733-98-000156.txt : 19980331 0000898733-98-000156.hdr.sgml : 19980331 ACCESSION NUMBER: 0000898733-98-000156 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUTECH RESEARCH & DEVELOPMENT PARTNERSHIP III CENTRAL INDEX KEY: 0000794357 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770129484 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20081 FILM NUMBER: 98579769 BUSINESS ADDRESS: STREET 1: 440 MISSION COURT STE 250 CITY: FREMONT STATE: CA ZIP: 94539 BUSINESS PHONE: 5106561855 10-K 1 PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR / / 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 of incorporation (I.R.S. Employer or organization) Identification No.) One Seaport Plaza, 28th Floor, New York, NY 10292 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 214-3500 Securities registered pursuant to Section 12(b) of the Act: None - ------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Depositary Units - ------------------------------------------------------------------------------- (Title of class) 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 _ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[CK] DOCUMENTS INCORPORATED BY REFERENCE Registrant's Annual Report to Unitholders for the year ended December 31, 1997 is incorporated by reference into Parts I, II and IV of this Annual Report on Form 10-K. Agreement of Limited Partnership, included as part of the Registration Statement on Form S-1 (File No. 33-6091) filed with the Securities and Exchange Commission on June 3, 1986 pursuant to Rule 424(b) of the Securities Act of 1933 and amended May 31, 1990, is incorporated by reference into Part IV of this Annual Report on Form 10-K. Index to exhibits can be found on page 7. PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III (a limited partnership) TABLE OF CONTENTS
PART I PAGE Item 1 Business......................................................................... 2 Item 2 Properties....................................................................... 3 Item 3 Legal Proceedings................................................................ 3 Item 4 Submission of Matters to a Vote of Unitholders................................... 3 PART II Item 5 Market for the Registrant's Units and Related Unitholder Matters................. 3 Item 6 Selected Financial Data.......................................................... 4 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................... 4 Item 8 Financial Statements and Supplementary Data...................................... 4 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................................... 4 PART III Item 10 Directors and Executive Officers of the Registrant............................... 4 Item 11 Executive Compensation........................................................... 5 Item 12 Security Ownership of Certain Beneficial Owners and Management................... 6 Item 13 Certain Relationships and Related Transactions................................... 6 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 7 Financial Statements and Financial Statement Schedules........................... 7 Exhibits......................................................................... 7 Reports on Form 8-K.............................................................. 7 SIGNATURES.................................................................................. 8
1 PART I Item 1. Business PruTech Research and Development Partnership III (the 'Registrant'), a California limited partnership, was formed on June 2, 1986 and will terminate on December 31, 2006 unless terminated sooner under the provisions of the Agreement of Limited Partnership, as amended (the 'Partnership Agreement'). The Registrant was formed to seek cash flow from the research and development of new technologies with potential commercial applications with proceeds raised from the initial sale of 40,934 depositary units ('Units'). The Registrant's general partner also contributed an amount equal to ten percent of the gross proceeds raised by the sale of Units. The Registrant's fiscal year for book and tax purposes ends on December 31. The Registrant entered into total commitments of $30.1 million for ten research and development projects in both publicly and privately held companies all of which have been fully funded. The Registrant also made equity investments in some of these companies. As of December 31, 1997, the Registrant held equity investments and/or royalty rights, which the general partner believes had value at December 31, 1997, relating to four companies. For more information regarding the Registrant's operations, see Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. The Registrant's general partner was paid an annual management fee equal to two percent of the unitholders' original capital contributions through June 30, 1997. Effective July 1, 1997, the general partner reduced its management fee to the greater of (a) $250,000 annually or (b) ten percent of the aggregate amount received from the Registrant's royalty position in a treatment for Alzheimer's disease with Forest Laboratories, Inc. after July 1, 1997 until the dissolution and liquidation of the Registrant, not to exceed the aggregate management fee payable under the terms of the Partnership Agreement ($818,680 per annum). The Registrant is engaged solely in the business of research and development; therefore, presentation of industry segment information is not applicable. For the years ended December 31, 1997, 1996 and 1995, revenue from the following portfolio company investments exceeded fifteen percent of the Registrant's total revenue:
1997 1996 1995 ---- ---- ---- Kopin Corporation 49% --% --% Creative BioMolecules, Inc. 48 29 -- Forest Laboratories, Inc. -- 66 63 Interleaf, Inc. -- -- 32
General Partner The general partner of the Registrant is R&D Funding Corp (the 'General Partner'), an affiliate of Prudential Securities Incorporated ('PSI'). Both the General Partner and PSI are wholly owned subsidiaries of Prudential Securities Group Inc. In its capacity as General Partner, R&D Funding Corp was responsible for locating, evaluating, negotiating and structuring the Registrant's research and development projects and continues to monitor these projects. R&D Funding Corp is also responsible for the management of and provides the administrative services necessary for the operation of the Registrant. The assignor limited partner is Prudential-Bache Investor Services Inc., an affiliate of the General Partner, who has assigned substantially all the rights attributable to its limited partnership interest to investors. Competition The companies and products in which the Registrant holds equity investments and/or royalty rights face substantial competition in the markets for their products and technologies. There are no assurances that the Registrant's investments will not decline in value due to the development by others of technologically superior products or for other competitive reasons. 2 Employees The Registrant has no employees. Management and administrative services for the Registrant are performed by the General Partner and its affiliates pursuant to the Partnership Agreement. See Notes B and F to the financial statements in the Registrant's annual report to limited partners for the year ended December 31, 1997 ('Registrant's 1997 Annual Report') which is filed as an exhibit hereto. Investment Portfolio Summary For a description of the companies in which the Registrant's investments or royalty rights were active during 1997, see page 2 of the Registrant's 1997 Annual Report which is filed as an exhibit hereto. Item 2. Properties The Registrant does not own or lease any property. Item 3. Legal Proceedings This information is incorporated by reference to Note G to the financial statements in the Registrant's 1997 Annual Report which is filed as an exhibit hereto. Item 4. Submission of Matters to a Vote of Unitholders None PART II Item 5. Market for the Registrant's Units and Related Unitholder Matters As of March 5, 1998, there were 3,033 holders of record owning 40,934 Units. A significant secondary market for the Units has not developed and it is not expected that one will develop in the future. There are also certain restrictions set forth in Article 8 of the Partnership Agreement limiting the ability of the Unitholders to transfer Units. Consequently, holders of Units may not be able to liquidate their investments in the event of an emergency or for any other reason. The following per Unit cash distributions were paid to Unitholders during the following calendar quarters:
Quarter ended 1997 1996 - ------------- ------- ------ March 31 $175.00 $80.00 June 30 -- -- September 30 100.00 -- December 31 -- --
There are no material restrictions upon the Registrant's present or future ability to make distributions in accordance with the provisions of the Partnership Agreement. During 1997, the Registrant paid distributions of $4,548,222, $3,411,167 and $4,548,222 of which $4,093,400 ($100 per unit), $3,070,050 ($75 per unit) and $4,093,400 ($100 per unit), respectively, were paid to the Unitholders and the remainder to the General Partner. The sources of the distributions were proceeds from the sale of a portion of the Registrant's equity holdings in Creative BioMolecules, Inc., Kopin Corporation and Somatix Therapy Corporation/Cell Genesys Corporation. (Cell Genesys Corporation acquired Somatix Therapy Corporation in June 1997.) The Registrant paid a distribution of $3,638,578 during 1996 of which $3,274,720 ($80 per unit) was paid to the Unitholders and the remainder to the General Partner. The source for the 1996 distribution was the January 1996 sale of the Registrant's remaining 75,000 shares of Forest Laboratories, Inc. common stock for proceeds of approximately $3,600,000. The amount to be distributed by the Registrant in future quarters will be based on the extent to which the market value of its investments can be realized and from the revenue stream from royalties as well as interest income. It is not expected that the Registrant's eventual total distributions will equal the Unitholder's initial investments. 3 Item 6. Selected Financial Data The following table presents selected financial data of the Registrant. This data should be read in conjunction with the financial statements of the Registrant and the notes thereto on pages 3 through 12 of the Registrant's 1997 Annual Report which is filed as an exhibit hereto.
Year ended December 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ Royalty income $ -- $ 216,665 $ -- $ 50,468 $ 96,798 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Gain on sale of investments in equity securities $ 7,888,065 $ 5,194,202 $ 8,998,197 $ 2,364,352 $ 772,027 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Termination of royalty rights $ -- $ -- $ 2,241,783 -- -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total revenues $ 8,023,958 $ 5,448,886 $11,311,651 $ 2,706,567 $ 1,019,176 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Write-off of investments in equity securities $ 295,000 $ -- $ -- $ 500,000 $ 505,904 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 7,056,240 $ 4,534,518 $10,308,841 $ 805,584 $ (616,780) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) per Unit $ 155.14 $ 99.70 $ 226.66 $ 17.71 $ (13.56) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Notes payable $ -- $ -- $ -- $ 1,622,223 $ 3,206,223 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 4,221,385 $15,664,366 $19,879,840 $19,448,580 $35,635,145 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total limited partner distributions $11,256,850 $ 3,274,720 $ 7,122,516 $ 347,939 $ -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Limited partner distributions per Unit $ 275.00 $ 80.00 $ 174.00 $ 8.50 $ -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This information is incorporated by reference to pages 13 and 14 of the Registrant's 1997 Annual Report which is filed as an exhibit hereto. Item 8. Financial Statements and Supplementary Data The financial statements are incorporated by reference to pages 3 through 12 of the Registrant's 1997 Annual Report which is filed as an exhibit hereto. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Reference is made to the Registrant's Current Report on Form 8-K dated June 25, 1996, as filed with the Securities and Exchange Commission on June 28, 1996 regarding the change in the Registrant's certifying accountant from Deloitte & Touche LLP to Price Waterhouse LLP. PART III Item 10. Directors and Executive Officers of the Registrant There are no directors or executive officers of the Registrant. The Registrant is managed by the General Partner. The General Partner's directors and executive officers, and any persons holding more than 10% of the Registrant's Units ('Ten Percent Owners') are required to report their initial ownership of such Units and any 4 subsequent changes in that ownership to the Securities and Exchange Commission on Forms 3, 4 and 5. Such executive officers, directors and Ten Percent Owners are required by Securities and Exchange Commission regulations to furnish the Registrant with copies of all Forms 3, 4 or 5 they file. All of these requirements were satisfied on a timely basis. In making these disclosures, the Registrant has relied solely on written representations of the General Partner's directors and executive officers or copies of the reports they have filed with the Securities and Exchange Commission during and with respect to its most recent fiscal year. The directors and executive officers of R&D Funding Corp and their positions with regard to managing the Registrant are as follows:
Name Position Brian J. Martin President, Chief Executive Officer, Chairman of the Board of Directors and Director Barbara J. Brooks Vice President--Finance and Chief Financial Officer Steven Carlino Vice President and Chief Accounting Officer Frank W. Giordano Director Nathalie P. Maio Director
BRIAN J. MARTIN, age 47, is the President, Chief Executive Officer, Chairman of the Board of Directors and a Director of R&D Funding Corp. He is a Senior Vice President of PSI. Mr. Martin also serves in various capacities for other affiliated companies. Mr. Martin joined PSI in 1980. Mr. Martin is a member of the Pennsylvania Bar. BARBARA J. BROOKS, age 49, is the Vice President-Finance and Chief Financial Officer of R&D Funding Corp. She is a Senior Vice President of PSI. Ms. Brooks also serves in various capacities for other affiliated companies. She has held several positions within PSI since 1983. Ms. Brooks is a certified public accountant. STEVEN CARLINO, age 34, is a Vice President of R&D Funding Corp. He is a First Vice President of PSI. Mr. Carlino also serves in various capacities for other affiliated companies. Prior to joining PSI in October 1992, he was with Ernst & Young for six years. Mr. Carlino is a certified public accountant. FRANK W. GIORDANO, age 55, is a Director of R&D Funding Corp. He is a Senior Vice President of PSI and an Executive Vice President and General Counsel of Prudential Mutual Fund Management, LLC, an affiliate of PSI. Mr. Giordano also serves in various capacities for other affiliated companies. He has been with PSI since July 1967. NATHALIE P. MAIO, age 47, is a Director of R&D Funding Corp. She is a Senior Vice President and Deputy General Counsel of PSI and supervises nonlitigation legal work for PSI. She joined PSI's Law Department in 1983; presently, she also serves in various capacities for other affiliated companies. Effective May 2, 1997, Brian J. Martin replaced Thomas F. Lynch III as Chief Executive Officer, Chairman of the Board of Directors and as a Director of R&D Funding Corp. Additionally, Mr. Martin replaced Michael S. Hasley as President of R&D Funding Corp effective January 30, 1998. There are no family relationships among any of the foregoing directors or executive officers. All of the foregoing directors and executive officers have indefinite terms. Item 11. Executive Compensation The Registrant does not pay or accrue any fees, salaries or any other form of compensation to directors and officers of the General Partner for their services. Certain officers and directors of the General Partner receive compensation from affiliates of the General Partner, not from the Registrant, for services performed for various affiliated entities, which may include services performed for the Registrant; however, the General Partner believes that any compensation attributable to services performed for the Registrant is immaterial. See Item 13 Certain Relationships and Related Transactions for information regarding compensation to the General Partner. 5 Item 12. Security Ownership of Certain Beneficial Owners and Management As of March 5, 1998, no director or executive officer of the General Partner owns directly or beneficially any interest in the voting securities of the General Partner. As of March 5, 1998, no director or executive officer of the General Partner owns directly or beneficially any of the Units issued by the Registrant. As of March 5, 1998, no Unitholder beneficially owns more than five percent of the Units issued by the Registrant. Item 13. Certain Relationships and Related Transactions The Registrant has and will continue to have certain relationships with the General Partner and its affiliates. There have been no direct financial transactions between the Registrant and the directors or officers of the General Partner. Reference is made to Notes B and F to the financial statements in the Registrant's 1997 Annual Report which is filed as an exhibit hereto, which identify the related parties and discuss the services provided by these parties and the amounts paid or payable for their services. 6 PART IV
Page Number in Annual Report Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements and Report of Independent Accountants--incorporated by reference to the Registrant's 1997 Annual Report included as an exhibit hereto Reports of Independent Accountants: Report of Independent Accountants at December 31, 1997 and 1996 and for the years then ended 3 Independent Auditors' Report for the year ended December 31, 1995 3A Financial Statements: Statements of Financial Condition--December 31, 1997 and 1996 4 Statements of Operations--Three years ended December 31, 1997 5 Statements of Changes in Partners' Capital--Three years ended December 31, 1997 5 Statements of Cash Flows--Three years ended December 31, 1997 6 Notes to Financial Statements 8 2. Financial Statement Schedules All schedules have been omitted because they are not applicable or the required information is included in the financial statements or the notes thereto. 3. Exhibits Description: Form of Agreement for Services (incorporated by reference to Exhibit 2.1 included with Registrant's Form S-1 Registration Statement (No. 33-6091) filed on June 3, 1986) 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 (No. 33-6091) filed on June 3, 1986) Escrow Agreement (incorporated by reference to Exhibit 10.1 included with Registrant's Form S-1 Registration Statement (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 for the year ended December 31, 1991) Registrant's 1997 Annual Report (with the exception of the information and data incorporated by reference in Items 3, 7 and 8 of this Annual Report on Form 10-K, no other information or data appearing in the Registrant's 1997 Annual Report is to be deemed filed as part of this report) (filed herewith) Letter dated June 28, 1996 from Deloitte & Touche LLP to the Securities and Exchange Commission regarding change in certifying accountant (incorporated by reference to Exhibit 16.1 to the Registrant's Current Report on Form 8-K dated June 25, 1996) Financial Data Schedule (filed herewith) (b) Reports on Form 8-K-- None
7 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. PruTech Research and Development Partnership III By: R&D Funding Corp A Delaware corporation, General Partner By: /s/ Steven Carlino Date: March 30, 1998 ---------------------------------------- Steven Carlino Vice President and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities (with respect to the General Partner) and on the dates indicated. By: R&D Funding Corp A Delaware corporation, General Partner By: /s/ Brian J. Martin Date: March 30, 1998 ---------------------------------------- Brian J. Martin President, Chief Executive Officer, Chairman of the Board of Directors and Director By: /s/ Barbara J. Brooks Date: March 30, 1998 ---------------------------------------- Barbara J. Brooks Vice President--Finance and Chief Financial Officer By: /s/ Steven Carlino Date: March 30, 1998 ---------------------------------------- Steven Carlino Vice President By: /s/ Frank W. Giordano Date: March 30, 1998 ---------------------------------------- Frank W. Giordano Director By: /s/ Nathalie P. Maio Date: March 30, 1998 ---------------------------------------- Nathalie P. Maio Director 8 EX-13 2 ANNUAL REPORT 1997 - ------------------------------------------------------------- Prutech Research and Annual Development Partnership III Report PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III (a limited partnership) LETTER TO UNITHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1997 1 PRUTECH III INVESTMENTS The following investments and/or royalty rights had value at the end of the year. The Partnership's position in each investment is as of December 31, 1997. CREATIVE BIOMOLECULES, INC. (CBMI) Position: 24,484 shares of common stock; royalty rights on soft tissue growth factor products which expire December 1999 During the first quarter of 1997, the Partnership sold 441,898 shares of CBMI common stock for approximately $5,019,000 and the Partnership exercised its option to purchase 6,900 shares of CBMI common stock at an exercise price of $8.50 per share for a total cost of $59,000. During the remainder of 1997, the Partnership sold 49,900 shares of Creative BioMolecules, Inc. common stock for approximately $506,000. The stock price of CBMI was $10.38 per share as of March 20, 1998. It appears unlikely that the Partnership's projects will produce sales royalties for the Partnership as the Partnership's royalty rights expire in 1999. FOREST LABORATORIES, INC. (FRX) Position: Royalty rights to a treatment of Alzheimer's disease which expire December 1999 Clinical studies on Synapton, a drug developed by FRX for the treatment of Alzheimer's disease, were completed during 1996. The filing of a New Drug Application with the Food and Drug Administration, seeking approval of Synapton, was made on November 18, 1997. KOPIN CORPORATION (KOPN) Position: 13,310 shares of common stock During 1997, the Partnership sold 524,023 shares of Kopin Corporation common stock for approximately $7,852,000. The stock price of Kopin Corporation was $17.19 per share as of March 20, 1998. SOMATIX THERAPY CORPORATION (SOMA)/CELL GENESYS CORPORATION (CEGE) Position: 17,465 shares of CEGE common stock During the first quarter of 1997, the Partnership sold 205,000 shares of SOMA common stock for approximately $517,000. At March 31, 1997, the General Partner concluded that an impairment in value that was not temporary had occurred for the Partnership's equity investment in SOMA. As a result, the value of the Partnership's 295,000 shares of common stock was written down by $295,000. During the second quarter of 1997, the Partnership sold 6,000 shares of SOMA common stock for approximately $12,000. On June 2, 1997, Cell Genesys Corporation acquired Somatix Therapy Corporation. As a result, the Partnership received 111,265 shares of CEGE common stock or 0.385 shares for each of its 289,000 shares of SOMA common stock. During the second half of 1997, the Partnership sold 93,800 shares of CEGE common stock for approximately $661,000. The stock price of CEGE was $6.25 per share as of March 20, 1998. 2 1177 Avenue of the Americas Telephone 212 596 7000 New York, NY 10036 Fascimile 212 596 8910 Price Waterhouse LLP (LOGO) REPORT OF INDEPENDENT ACCOUNTANTS February 12, 1998 To the Partners of PruTech Research and Development Partnership III In our opinion, the accompanying statements of financial condition and the related statements of operations, changes in partners' capital and cash flows present fairly, in all material respects, the financial position of PruTech Research and Development Partnership III at December 31, 1997 and 1996, and the results of its operations and the changes in its cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the general partner; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the general partner, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP 3 Deloitte & Touche LLP (LOGO) - ------------------------------------------------------------------------------ Two World Financial Center Telephone: (212) 436-2000 New York, New York 10281-1414 Facsimile: (212) 436-5000 INDEPENDENT AUDITORS' REPORT To the Partners of PruTech Research and Development Partnership III We have audited the accompanying statements of operations, changes in partners' capital and cash flows of PruTech Research and Development Partnership III (a California limited partnership) for the year ended December 31, 1995. These financial statements are the responsibility of the General Partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partner, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the results of operations and cash flows of PruTech Research and Development Partnership III for the year ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP February 13, 1996 3A PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III (a limited partnership) STATEMENTS OF FINANCIAL CONDITION
December 31, ----------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $3,668,595 $ 2,342,441 Investments in equity securities 552,790 13,321,925 ------------ ------------ Total assets $4,221,385 $15,664,366 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' CAPITAL Liabilities Accrued expenses and other liabilities $ 84,357 $ 80,438 Accrued management fee 62,500 204,670 ------------ ------------ Total liabilities 146,857 285,108 ------------ ------------ Contingencies Partners' capital Unitholders (40,934 units issued and outstanding) 3,405,966 8,312,200 General partner 386,179 931,316 Unrealized gain on investments in equity securities 282,383 6,135,742 ------------ ------------ Total partners' capital 4,074,528 15,379,258 ------------ ------------ Total liabilities and partners' capital $4,221,385 $15,664,366 ------------ ------------ ------------ ------------ - ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 4 PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III (a limited partnership) STATEMENTS OF OPERATIONS
Year ended December 31, ----------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- REVENUES Gain on sale of investments in equity securities $7,888,065 $5,194,202 $ 8,998,197 Interest and other income 135,893 38,019 71,671 Royalty income -- 216,665 -- Termination of royalty rights -- -- 2,241,783 ---------- ---------- ----------- 8,023,958 5,448,886 11,311,651 ---------- ---------- ----------- EXPENSES Management fee 534,340 818,680 818,680 Write-down of investments in equity securities 295,000 -- -- General and administrative 138,378 95,688 166,060 Interest -- -- 18,070 ---------- ---------- ----------- 967,718 914,368 1,002,810 ---------- ---------- ----------- Net income $7,056,240 $4,534,518 $10,308,841 ---------- ---------- ----------- ---------- ---------- ----------- ALLOCATION OF NET INCOME Unitholders $6,350,616 $4,081,066 $ 9,277,957 ---------- ---------- ----------- ---------- ---------- ----------- General partner $ 705,624 $ 453,452 $ 1,030,884 ---------- ---------- ----------- ---------- ---------- ----------- Net income per unit $ 155.14 $ 99.70 $ 226.66 ---------- ---------- ----------- ---------- ---------- ----------- - ----------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
UNREALIZED GENERAL GAIN ON UNITHOLDERS PARTNER INVESTMENTS TOTAL - ------------------------------------------------------------------------------------------------------ Partners' capital--December 31, 1994 $ 5,350,413 $ 602,229 $10,750,699 $ 16,703,341 Net income 9,277,957 1,030,884 -- 10,308,841 Distributions (7,122,516) (791,391) -- (7,913,907) Change in unrealized gain on investments in equity securities -- -- 503,804 503,804 ------------ ----------- ----------- ------------ Partners' capital--December 31, 1995 7,505,854 841,722 11,254,503 19,602,079 Net income 4,081,066 453,452 -- 4,534,518 Distributions (3,274,720) (363,858) -- (3,638,578) Change in unrealized gain on investments in equity securities -- -- (5,118,761 ) (5,118,761) ------------ ----------- ----------- ------------ Partners' capital--December 31, 1996 8,312,200 931,316 6,135,742 15,379,258 Net income 6,350,616 705,624 -- 7,056,240 Distributions (11,256,850) (1,250,761) (12,507,611) Change in unrealized gain on investments in equity securities -- -- (5,853,359 ) (5,853,359) ------------ ----------- ----------- ------------ Partners' capital--December 31, 1997 $ 3,405,966 $ 386,179 $ 282,383 $ 4,074,528 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------ - ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 5 PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III (a limited partnership) STATEMENTS OF CASH FLOWS
Year ended December 31, --------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Interest and other income received $ 135,893 $ 38,019 $ 71,671 Management fee paid (676,510) (818,680) (1,637,360) General and administrative expenses paid (134,459) (88,341) (154,963) Royalty income received -- 216,665 389,023 Cash received for other assets -- 216,669 -- Interest paid -- -- (55,742) ------------ ----------- ------------ Net cash used in operating activities (675,076) (435,668) (1,387,371) ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale of investments in equity securities 14,567,491 5,935,995 9,010,326 Purchase of investments in equity securities (58,650) -- -- Proceeds from the termination of royalty rights -- -- 2,241,783 ------------ ----------- ------------ Net cash provided by investing activities 14,508,841 5,935,995 11,252,109 ------------ ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Distributions (12,507,611) (3,638,578) (7,913,907) Repayment of note payable -- -- (1,622,223) ------------ ----------- ------------ Net cash used in financing activities (12,507,611) (3,638,578) (9,536,130) ------------ ----------- ------------ Net increase in cash and cash equivalents 1,326,154 1,861,749 328,608 Cash and cash equivalents at beginning of year 2,342,441 480,692 152,084 ------------ ----------- ------------ Cash and cash equivalents at end of year $ 3,668,595 $ 2,342,441 $ 480,692 ------------ ----------- ------------ ------------ ----------- ------------ - -----------------------------------------------------------------------------------------------------
(continued on next page) 6 PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III (a limited partnership) STATEMENTS OF CASH FLOWS (Cont'd)
Year ended December 31, --------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES Net income $ 7,056,240 $ 4,534,518 $ 10,308,841 ------------ ----------- ------------ Adjustments to reconcile net income to net cash used in operating activities: Gain on sale of investments in equity securities (7,888,065) (5,194,202) (8,998,197) Write-down of investments in equity securities 295,000 -- -- Termination of royalty rights -- -- (2,241,783) Changes in: Royalties receivable -- -- 389,023 Accrued management fee (142,170) -- (818,680) Accrued expenses and other liabilities 3,919 7,347 (26,575) Other assets -- 216,669 -- ------------ ----------- ------------ Total adjustments (7,731,316) (4,970,186) (11,696,212) ------------ ----------- ------------ Net cash used in operating activities $ (675,076) $ (435,668) $ (1,387,371) ------------ ----------- ------------ ------------ ----------- ------------ - -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES 1997 At March 31, 1997, the General Partner concluded that an impairment in value that was not temporary had occurred for the Partnership's equity investment in Somatix Therapy Corporation. As a result, the value of the Partnership's 295,000 shares of common stock was written down by $295,000. On June 2, 1997, Cell Genesys Corporation acquired Somatix Therapy Corporation. As a result, the Partnership received 111,265 of Cell Genesys Corporation common stock or 0.385 shares for each of its 289,000 shares of Somatix Therapy Corporation common stock. 1995 Exercised a warrant to acquire, on a net issuance basis, 171,635 shares of Interleaf, Inc. common stock. - ------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 7 PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III (a limited partnership) NOTES TO FINANCIAL STATEMENTS A. General PruTech Research and Development Partnership III (the 'Partnership'), a California limited partnership, was formed on June 2, 1986 and will terminate on December 31, 2006 unless terminated sooner under the provisions of the Agreement of Limited Partnership, as amended (the 'Partnership Agreement'). Capital resources were originally provided by the sale of depositary units and by contributions of the General Partner equal to ten percent of depositary contributions. The Partnership was formed to seek cash flow from the research and development of new technologies with potential commercial applications. The general partner of the Partnership is R&D Funding Corp (the 'General Partner'), an affiliate of Prudential Securities Incorporated ('PSI'). Both the General Partner and PSI are wholly owned subsidiaries of Prudential Securities Group Inc. ('PSGI'). The assignor limited partner is Prudential-Bache Investor Services Inc., an affiliate of the General Partner, who has assigned substantially all the rights attributable to its limited partnership interest to investors. At December 31, 1997, the Partnership held equity investments or active royalty rights relating to four portfolio companies. B. Summary of Significant Accounting Policies Basis of accounting The books and records of the Partnership are maintained on the accrual basis of accounting in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain balances from prior years have been reclassified to conform with the current financial statement presentation. Cash and cash equivalents Cash and cash equivalents include money market funds. Investments The Partnership's equity securities that have readily determinable fair values are classified as available-for-sale securities. These securities are measured at fair value in the statements of financial condition and unrealized gains and losses are reported as a separate component of partners' capital. Equity securities traded on a national securities exchange or the Nasdaq national market are valued at the last reported sales price on the primary exchange on which they are traded. Equity securities traded in the over-the-counter market and thinly traded securities are valued at the mean between the last reported bid and asked prices. Equity securities which are not readily marketable are accounted for under the cost method. The carrying value of an investment is written down to its fair value when a decline in value is considered to be other than temporary. The Partnership uses the average cost method to determine gains or losses on the sale of securities. Royalty income Royalty income represents revenue generated from licenses granted by the Partnership. 8 Management fee This fee provides for the cost of overseeing, supervising and monitoring the conduct of the development projects and for overseeing and monitoring product exploitation resulting from the development projects. The General Partner was paid an annual management fee equal to two percent of the unitholders' original capital contributions through June 30, 1997. Effective July 1, 1997, the General Partner reduced its management fee to the greater of (a) $250,000 annually or (b) ten percent of the aggregate amount received from the Partnership's royalty position in a treatment for Alzheimer's disease with Forest Laboratories, Inc. after July 1, 1997 until the dissolution and liquidation of the Partnership, not to exceed the aggregate management fee payable under the terms of the Partnership Agreement ($818,680 per annum). Income taxes The Partnership is not required to provide for, or pay, any Federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the individual partners. The Partnership may be subject to other state and local taxes in jurisdictions in which it operates. Profit and loss allocations and distributions Profits and losses are allocated ninety percent to the unitholders and ten percent to the General Partner until such time as the total net profits allocated to each unitholder equal all losses previously allocated whereupon the General Partner will be allocated net profits in an additional amount of twenty-five percent with a corresponding reduction to the unitholders to be shared in proportion to their capital contributions. Distributions of cash are made in accordance with the Partnership Agreement and are allocated ninety percent to the unitholders and ten percent to the General Partner. C. Royalties At December 31, 1997 and 1996, the Partnership retains certain royalty rights with Forest Laboratories, Inc. and Creative BioMolecules, Inc. whose carrying values for financial reporting purposes are zero. The royalty rights with Forest Laboratories, Inc. ('Forest') relate to Synapton, a drug developed by Forest for the treatment of Alzheimer's disease. Forest filed a new drug application with the Food and Drug Administration, seeking approval of Synapton, on November 18, 1997. The Partnership's royalty rights with Forest and Creative BioMolecules, Inc. will expire in December 1999. 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 Gas 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, the Partnership holds no technology or royalty positions with Kopin and, therefore, no further royalties will be received by the Partnership from Kopin. In November 1995, the Partnership and Interleaf, Inc. ('Interleaf') agreed to settle all royalty and other disputes between them and the Partnership sold to Interleaf the Partnerships' right, title and interest in technology licensed to Interleaf for $2,100,000. In connection with this transaction, the Partnership applied $375,081 of the proceeds to its outstanding royalty receivable balance and the remaining $1,724,919 was recognized as income. During 1995, revenues from Interleaf inclusive of the gain on common stock sold (see Note D) represented approximately thirty-two percent of the Partnership's total 1995 revenues. 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 $516,870. No further royalty payments will be received by the Partnership from MNS as a result of this agreement. 9 D. Investments In connection with certain of its research and development contracts, the Partnership has exercised its warrants or has converted its technology, royalty rights, warrants or notes receivable into an equity position in the companies performing the research and development. Investments in equity securities available-for-sale at December 31, 1997 and 1996 include the following:
1997 1996 -------------------------------------------------- -------------------------------------------------- Gross unrealized Carrying Gross unrealized Carrying Shares Cost basis gains value Shares Cost basis gains value - ------------------------------------------------------------------------ -------------------------------------------- Creative BioMolecules, Inc.-Common Stock 24,484 $ 80,124 $100,446 $ 180,570 509,382 $1,666,928 $3,617,910 $ 5,284,838 Kopin Corporation- Common Stock 13,310 99,556 124,212 223,768 537,333 4,019,255 2,361,582 6,380,837 Cell Genesys Corporation- Common Stock 17,465 90,727 57,725 148,452 -- -- -- -- Somatix Therapy Corporation-Common Stock -- -- -- -- 500,000 1,500,000 156,250 1,656,250 ---------- ---------------- ----------- ---------- ---------------- ----------- $270,407 $282,383 $ 552,790 $7,186,183 $6,135,742 $13,321,925 ---------- ---------------- ----------- ---------- ---------------- ----------- ---------- ---------------- ----------- ---------- ---------------- -----------
The gross unrealized gains would be allocated ninety percent to the unitholders and ten percent to the General Partner if realized at December 31, 1997; however, there is no assurance that the Partnership would receive these amounts in the event of the sale of its position in these securities. Creative BioMolecules, Inc. During the first quarter of 1997, the Partnership sold 441,898 shares of Creative BioMolecules, Inc. common stock with a cost basis of approximately $1,446,000 resulting in a gain of approximately $3,573,000, and the Partnership exercised its option to purchase 6,900 shares of Creative BioMolecules, Inc. common stock at an exercise price of $8.50 per share for a total cost of approximately $59,000. During the remainder of 1997, the Partnership sold 49,900 shares of Creative BioMolecules, Inc. common stock with a cost basis of approximately $199,000 resulting in a gain of approximately $307,000. During 1997, revenues from the Partnership's investment in Creative BioMolecules, Inc. represented approximately 48% of the Partnership's total 1997 revenues. During December 1996, the Partnership sold 214,900 shares of Creative BioMolecules, Inc. common stock with a cost basis of approximately $703,000 resulting in a gain of approximately $1,573,000. During 1996, revenues from the Partnership's investment in Creative BioMolecules, Inc. represented approximately 29% of the Partnership's total 1996 revenues. Kopin Corporation During 1997, the Partnership sold 524,023 shares of Kopin Corporation common stock with a cost basis of approximately $3,920,000 resulting in a gain of approximately $3,932,000. During 1997, revenues from the Partnership's investment in Kopin Corporation represented approximately 49% of the Partnership's total 1997 revenues. During the first quarter of 1996, the Partnership sold 4,334 shares of Kopin Corporation common stock with a cost basis of approximately $32,000 resulting in a gain of approximately $27,000. Somatix Therapy Corporation/Cell Genesys Corporation During the first quarter of 1997, the Partnership sold 205,000 shares of Somatix Therapy Corporation common stock with a cost basis of approximately $615,000 resulting in a loss of approximately $98,000. At March 31, 1997, the General Partner concluded that an impairment in value that was not temporary had occurred for the Partnership's equity investment in Somatix Therapy Corporation. As a result, the value of the Partnership's common stock was written down by $295,000. During the second quarter of 1997, the Partnership sold 6,000 shares of Somatix Therapy Corporation common stock with a cost basis of approximately $12,000 resulting in no gain or loss to the Partnership. 10 On June 2, 1997, Cell Genesys Corporation acquired Somatix Therapy Corporation. As a result, the Partnership received 111,265 shares of Cell Genesys Corporation common stock or 0.385 shares for each of its 289,000 shares of Somatix Therapy Corporation common stock. During the second half of 1997, the Partnership sold 93,800 shares of Cell Genesys Corporation common stock with a cost basis of approximately $487,000 resulting in a gain of approximately $174,000. Forest Laboratories, Inc. 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 approximately $6,000 resulting in a gain of approximately $3,594,000. During 1996, revenues relating to the Partnership's investment in Forest Laboratories, Inc. represented approximately sixty-six percent of the Partnership's total 1996 revenues. During 1995, the Partnership sold 148,410 shares of Forest Laboratories, Inc. common stock with a cost basis of approximately $12,000 resulting in a gain of approximately $7,121,000. During 1995, revenues relating to the Partnership's investment in Forest Laboratories, Inc. represented approximately sixty-three percent of the Partnership's total revenues. Interleaf, Inc. In 1995, the Partnership exercised a warrant to acquire, on a net issuance basis, 171,635 shares of Interleaf, Inc. common stock which the Partnership sold for approximately $1,878,000. E. Income Taxes The following is a reconciliation of net income for financial reporting purposes to net income for tax reporting purposes:
Year ended December 31, ------------------------------------------ 1997 1996 1995 ------------------------------------------ Net income per financial statements $ 7,056,240 $4,534,518 $10,308,841 Gain on sale of investments in equity securities (1,107,903) -- -- Write-down/write-off of investment in equity securities 295,000 (511,194) (66,668) Royalty income -- (76,698) -- Expiration of stock warrants -- -- (180,000) ----------- ---------- ----------- Tax basis net income $ 6,243,337 $3,946,626 $10,062,173 ----------- ---------- ----------- ----------- ---------- -----------
The differences between the tax basis and book basis of partners' capital are primarily attributable to the cumulative effect of the book to tax income adjustments. F. 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 costs and expenses were:
Year ended December 31, ---------------------------------- 1997 1996 1995 ---------------------------------- Management fee $534,340 $818,680 $818,680 Printing 13,448 11,849 18,691 -------- -------- -------- $547,788 $830,529 $837,371 -------- -------- -------- -------- -------- --------
Effective July 1, 1997, the General Partner reduced its management fee to the greater of (a) $250,000 annually or (b) ten percent of the aggregate amount received from the Partnership's royalty position in a treatment for Alzheimer's disease with Forest Laboratories, Inc. after July 1, 1997 until the dissolution and liquidation of the Partnership, not to exceed the aggregate management fee payable under the terms of the Partnership Agreement ($818,680 per annum). 11 Printing costs payable to an affiliate of the General Partner (which are included in accrued expenses) as of December 31, 1997 and 1996 were $7,788 and $4,943, respectively. Prudential Securities Incorporated, an affiliate of R&D Funding Corp, owned 724 units in the Partnership at December 31, 1997. 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. G. 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, PSI, 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; 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 General Partner, PSI and the Partnership believe they have meritorious defenses to the complaint and are vigorously defending themselves in this action. The claims of most plaintiffs have been settled or dismissed. It is currently expected that the remaining claims will be resolved shortly. The Partnership has not contributed to any settlement or paid any costs of the litigation, nor is it anticipated that it will. 12 PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III (a limited partnership) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources As of December 31, 1997, the Partnership had approximately $3,669,000 of cash and cash equivalents which is an increase of approximately $1,326,000 as compared to December 31, 1996. The increase in cash and cash equivalents was primarily due to the proceeds from the sales of certain investments in equity securities, as further discussed below, reduced by the payment of distributions and management fees. As of December 31, 1997, the Partnership had approximately $270,000 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 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 from the revenue stream from royalties and interest income. It is not expected that the Partnership's eventual total distributions will equal the Unitholders' initial investments. The Partnership's royalty positions with Forest Laboratories, Inc. and Creative BioMolecules, Inc. did not generate royalty income for the Partnership during the three years ended December 31, 1997. During the first quarter of 1997, the Partnership sold 441,898 shares of Creative BioMolecules, Inc. common stock for approximately $5,019,000, and the Partnership exercised its option to purchase 6,900 shares of Creative BioMolecules, Inc. common stock at an exercise price of $8.50 per share for a total cost of approximately $59,000. Also, during the first quarter of 1997, the Partnership sold 173,189 shares of Kopin Corporation common stock for approximately $2,297,000, and 205,000 shares of Somatix Therapy Corporation common stock for approximately $517,000. In February and March of 1997, the Partnership made distributions of $4,548,222 and $3,411,167, respectively. Unitholders received a total of $4,093,400 ($100 per unit) and $3,070,050 ($75 per unit) and the General Partner received the remainder. During the second quarter of 1997, the Partnership sold 219,274 shares of Kopin Corporation common stock for approximately $2,848,000, and 6,000 shares of Somatix Therapy Corporation common stock for approximately $12,000. On June 2, 1997, Cell Genesys Corporation acquired Somatix Therapy Corporation. As a result, the Partnership received 111,265 shares of Cell Genesys Corporation common stock or 0.385 shares for each of its 289,000 shares of Somatix Therapy Corporation common stock. During the third quarter of 1997, the Partnership sold 19,900 shares of Creative BioMolecules, Inc. common stock for approximately $190,000, 99,754 shares of Kopin Corporation common stock for approximately $1,976,000, and 72,100 shares of Cell Genesys Corporation common stock for approximately $460,000. During August 1997, the Partnership made a $4,548,222 distribution, of which $4,093,400 ($100 per unit) was paid to the Unitholders, and the remainder to the General Partner. During the fourth quarter of 1997, the Partnership sold 30,000, 31,806, and 21,700 shares of Creative BioMolecules, Inc. common stock, Kopin Corporation common stock, and Cell Genesys Corporation common stock for approximately $316,000, $729,000, and $201,000, respectively. Results of Operations Net income for the years ended December 31, 1997, 1996 and 1995 was approximately $7,056,000, $4,535,000 and $10,309,000, respectively. The primary reasons for the fluctuations in operating results are discussed below. 13 During 1997, the Partnership recorded gains on the sale of common stock totalling approximately $7,888,000, including gains of $3,932,000 and $3,880,000 on the sale of common stock of Kopin Corporation and Creative BioMolecules, Inc., respectively. During 1996, the Partnership recorded gains of approximately $3,594,000 and $1,573,000 on the sale of 75,000 shares of Forest Laboratories, Inc. common stock and 214,900 shares of Creative BioMolecules, Inc. common stock, respectively. During 1995, the Partnership recorded gains of approximately $7,121,000 and $1,878,000, respectively, on the sale of 148,410 shares of Forest Laboratories, Inc. common stock and 171,635 shares of Interleaf, Inc. ('Interleaf') common stock. At March 31, 1997, the General Partner concluded that an impairment in value that was not temporary had occurred for the Partnership's equity investment in Somatix Therapy Corporation. As a result, the value of the Partnership's common stock was written down by $295,000. In November 1995, the Partnership and Interleaf agreed to settle all royalty and other disputes between them and to sell to Interleaf its right, title and interest in technology licensed to Interleaf for $2,100,000. In connection with this transaction, the Partnership applied $375,000 of the proceeds to its outstanding royalty receivable balance and the remaining $1,725,000 was recognized as income. 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 Interleaf or MNS as a result of these agreements. No royalties were earned by the Partnership in 1997 and 1995. Royalty income for the year ended December 31, 1996 was approximately $217,000 and related to an agreement in which the Partnership received a minimum royalty payment from Kopin Corporation and transferred to Kopin Corporation its rights to certain technologies and royalties. As a result of the agreement, the Partnership holds no technology or royalty positions with Kopin Corporation. Interest and other income for the year ended December 31, 1997 increased by approximately $98,000 as compared to 1996 and decreased by approximately $34,000 for the year ended December 31, 1996 as compared to 1995. These fluctuations in interest and other income largely reflect the level of Partnership funds invested in short-term instruments which has varied with the timing of sales of investments in equity securities and subsequent distributions to unitholders. Management fees for the year ended 1997 decreased by approximately $284,000 from the 1996 and 1995 amounts. Effective July 1, 1997, the General Partner reduced its management fee to the greater of (a) $250,000 annually or (b) ten percent of the aggregate amount received from the Partnership's royalty position in a treatment for Alzheimer's disease with Forest Laboratories, Inc. after July 1, 1997 until the dissolution and liquidation of the Partnership, not to exceed the aggregate management fee payable under the terms of the Agreement of Limited Partnership ($818,680 per annum.) General and administrative expenses for the year ended December 31, 1997 increased by approximately $43,000 as compared to 1996 and decreased by approximately $70,000 for the year ended December 31, 1996 as compared to 1995. The 1997 increase was due primarily to professional and other costs incurred in 1997 in considering alternatives for the orderly liquidation of the Partnership. The 1996 decrease as compared to 1995 primarily reflected lower evaluation and monitoring expenses as overall activity decreased in the Partnership's R&D projects and license agreements. Inflation Inflation has had no direct material impact on operations or on the financial condition of the Partnership from inception through December 31, 1997. 14 OTHER INFORMATION The Partnership's Annual Report on Form 10-K as filed with the Securities and Exchange Commission is available to Unitholders without charge upon written request to: PruTech Research and Development Partnership III P.O. Box 2016 Peck Slip Station New York, New York 10272-2016 15 Peck Slip Station BULK RATE P.O. Box 2016 U.S. POSTAGE New York, NY 10272 PAID Automatic Mail PRUTEC386/170864 EX-27 3 ART. 5 FDS FOR 4TH QUARTER 10-K
5 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 0000794357 Prutech Research and Development Partnership III 1 Dec-31-1997 Jan-1-1997 Dec-31-1997 12-Mos 3,668,595 552,790 0 0 0 4,221,385 0 0 4,221,385 146,857 0 0 0 0 4,074,528 4,221,385 0 8,023,958 0 0 967,718 0 0 0 0 0 0 0 0 7,056,240 155.14 0
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