<PAGE>
UNITED STATES
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, 1998
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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,
1998 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.
<PAGE>
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
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 7A Quantitative and Qualitative Disclosures About Market Risk....................... 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............................... 5
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
</TABLE>
1
<PAGE>
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. For more information regarding the Registrant's
operations, see Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
At December 31, 1998, the Registrant has an investment in the common stock of
Creative BioMolecules, Inc. (OTC-CBMI) and royalty positions with Forest
Laboratories, Inc. ('Forest') and Creative BioMolecules, Inc., that will expire
in December 1999. The Registrant's royalty position with Creative BioMolecules,
Inc. is believed to have little to no value and the equity position's value is
easily determinable and is salable. The Registrant's royalty position in
Synapton, a drug developed by Forest for the treatment of Alzheimer's disease,
is illiquid, and any estimate of its value is subject to significant uncertainty
due to a number of factors including, among other things, (i) whether the Food
and Drug Administration (the 'FDA') will approve Synapton for sale, which would
require that the FDA reverse its non-approval position issued in November 1998,
(ii) the difficulty, in light of the fact that FDA approval is yet to be
obtained, in manufacturing and distributing the product prior to the expiration
of the Registrant's royalty position and (iii) market acceptance of the product.
Due to the nature of the Forest royalty, the general partner is not able at this
time to predict with any degree of certainty, the value, if any, of the royalty
position. Forest has recently advised the Registrant that it will be meeting
with the FDA to discuss the status of Synapton. Depending on the timing and
results of that meeting, the Registrant's general partner may determine that the
royalty interest in Synapton does not warrant the continuing operation of the
Registrant through the end of the royalty period at which point the general
partner will liquidate and distribute any remaining assets (reduced by a reserve
to satisfy any liabilities of the Registrant) and dissolve the Registrant. In
the event that the general partner determines that continuing operations through
the expiration date of the Synapton royalty position may be in the best interest
of the Registrant, the general partner will proceed to dissolve the Registrant
as soon as practicable thereafter.
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 Synapton 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, 1998, 1997 and 1996, revenue from the
following portfolio company investments exceeded fifteen percent of the
Registrant's total revenue:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Kopin Corporation 52% 49% --%
Cell Genesys Corporation 17 -- --
Creative BioMolecules, Inc. -- 48 29
Forest -- -- 66
</TABLE>
2
<PAGE>
<PAGE>
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. 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, which 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.
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 as further discussed in Notes B and F to the
financial statements in the Registrant's annual report to Unitholders for the
year ended December 31, 1998 ('Registrant's 1998 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 1998, see page 2 of the Registrant's 1998
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 1998 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 4, 1999, there were 3,036 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:
<TABLE>
<CAPTION>
Quarter ended 1998 1997
- ------------- ------- -------
<S> <C> <C>
March 31 $ -- $175.00
June 30 60.00 --
September 30 -- 100.00
December 31 -- --
</TABLE>
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. The Registrant paid a distribution of $2,728,933 during
1998 of which $2,456,040 ($60 per Unit) was paid to the Unitholders and the
remainder to the General Partner. 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),
3
<PAGE>
<PAGE>
respectively, were paid to the Unitholders and the remainder to the General
Partner. The sources for the 1998 and 1997 distributions include the 1997 sales
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
amount to be distributed by the Registrant in future quarters will be based on
the extent to which the market value of its investment in Creative BioMolecules,
Inc. can be realized and from the revenue stream from royalties, if any, as well
as interest income. It is not expected that the Registrant's eventual total
distributions will equal the Unitholder's initial investments.
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 13 of the Registrant's 1998
Annual Report which is filed as an exhibit hereto.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Royalty income $ -- $ -- $ 216,665 $ -- $ 50,468
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Gain on sale of
investments in equity
securities $ 243,595 $ 7,888,065 $ 5,194,202 $ 8,998,197 $ 2,364,352
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Termination of royalty
rights $ -- $ -- $ -- $ 2,241,783 $ --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total revenues $ 359,797 $ 8,023,958 $ 5,448,886 $11,311,651 $ 2,706,567
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Write-off of investments
in equity securities $ -- $ 295,000 $ -- $ -- $ 500,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income $ 39,971 $ 7,056,240 $ 4,534,518 $10,308,841 $ 805,584
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income per Unit $ .88 $ 155.14 $ 99.70 $ 226.66 $ 17.71
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Notes payable $ -- $ -- $ -- $ -- $ 1,622,223
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total assets $ 1,231,691 $ 4,221,385 $15,664,366 $19,879,840 $19,448,580
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Total limited partner
distributions $ 2,456,040 $11,256,850 $ 3,274,720 $ 7,122,516 $ 347,939
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Limited partner
distributions per Unit $ 60.00 $ 275.00 $ 80.00 $ 174.00 $ 8.50
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information is incorporated by reference to pages 14 and 15 of the
Registrant's 1998 Annual Report which is filed as an exhibit hereto.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information regarding quantitative and qualitative disclosures about market
risk is not required pursuant to Item 305(e) of Regulation S-K.
Item 8. Financial Statements and Supplementary Data
The financial statements are incorporated by reference to pages 3 through 13
of the Registrant's 1998 Annual Report which is filed as an exhibit hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
4
<PAGE>
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 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 48, 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 50, 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 35, 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 56, is a Director of R&D Funding Corp. He is a Senior
Vice President 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 48, 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 January 30, 1998, Brian J. Martin replaced Michael S. Hasley as
President of R&D Funding Corp.
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.
5
<PAGE>
See Item 13 Certain Relationships and Related Transactions for information
regarding compensation to the General Partner.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 4, 1999, 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 4, 1999, no director or executive officer of the General Partner
owns directly or beneficially any of the Units issued by the Registrant.
As of March 4, 1999, 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 1998 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
<PAGE>
PART IV
<TABLE>
<CAPTION>
Page
Number
in Annual
Report
<S> <C> <C> <C>
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 1998 Annual Report included as an exhibit hereto
Report of Independent Accountants 3
Financial Statements:
Statements of Financial Condition--December 31, 1998 and 1997 4
Statements of Operations--Three years ended December 31, 1998 5
Statements of Changes in Partners' Capital--Three years ended December 31, 1998 5
Statements of Cash Flows--Three years ended December 31, 1998 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 1998 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 1998 Annual
Report is to be deemed filed as part of this report) (filed herewith)
Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K--
None
</TABLE>
7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PruTech Research and Development Partnership III
By: R&D Funding Corp
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: March 31, 1999
----------------------------------------
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 31, 1999
----------------------------------------
Brian J. Martin
President, Chief Executive Officer,
Chairman of the Board of Directors and
Director
By: /s/ Barbara J. Brooks Date: March 31, 1999
----------------------------------------
Barbara J. Brooks
Vice President--Finance and Chief
Financial Officer
By: /s/ Steven Carlino Date: March 31, 1999
----------------------------------------
Steven Carlino
Vice President
By: /s/ Frank W. Giordano Date: March 31, 1999
----------------------------------------
Frank W. Giordano
Director
By: /s/ Nathalie P. Maio Date: March 31, 1999
----------------------------------------
Nathalie P. Maio
Director
8
<PAGE>
1998
- --------------------------------------------------------------------------------
PruTech Research and Annual
Development Partnership III Report
<PAGE>
LETTER TO UNITHOLDERS FOR
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
1
<PAGE>
PRUTECH III INVESTMENTS
The Partnership had a position in the following investments and/or royalty
rights as of December 31, 1998.
CREATIVE BIOMOLECULES, INC. (CBMI)
Position: 20,000 shares of common stock; royalty rights on soft tissue growth
factor products which expire December 1999
During the fourth quarter of 1998, the Partnership sold 4,484 shares of CBMI
common stock for approximately $12,000. The stock price of CBMI was $2.50 per
share as of March 24, 1999.
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 drug treatment for Alzheimer's disease which
expire December 1999
The filing of a New Drug Application with the Food and Drug Administration,
seeking approval of Synapton, a drug developed by FRX for the treatment of
Alzheimer's disease, was made on November 18, 1997. On November 18, 1998, FRX
announced that it was evaluating and would be preparing a response to a
non-approvable letter received from the Food and Drug Administration on its new
drug application for Synapton. Forest has recently advised the Partnership that
it will be meeting with the FDA to discuss the status of Synapton.
2
<PAGE>
PricewaterhouseCoopers (LOGO)
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Telephone (212) 596 8000
Facsimile (212) 596 8910
Report of Independent Accountants
February 12, 1999
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, 1998 and 1997, and the
results of its operations and the changes in its cash flows for each of the
three years in the period ended December 31, 1998 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/ PricewaterhouseCoopers LLP
3
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
-----------------------------
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $1,157,931 $3,668,595
Investments in equity securities 73,760 552,790
------------ ------------
Total assets $1,231,691 $4,221,385
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued management fee $ 62,500 $ 62,500
Accrued expenses and other liabilities 57,698 84,357
------------ ------------
Total liabilities 120,198 146,857
------------ ------------
Contingencies
Partners' capital
Unitholders (40,934 units issued and outstanding) 985,900 3,405,966
General partner 117,283 386,179
Accumulated other comprehensive income 8,310 282,383
------------ ------------
Total partners' capital 1,111,493 4,074,528
------------ ------------
Total liabilities and partners' capital $1,231,691 $4,221,385
------------ ------------
------------ ------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
<S> <C> <C> <C>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
REVENUES
Gain on sale of investments in equity securities $243,595 $7,888,065 $5,194,202
Interest and other income 116,202 135,893 38,019
Royalty income -- -- 216,665
-------- ---------- ----------
359,797 8,023,958 5,448,886
-------- ---------- ----------
EXPENSES
Management fee 250,000 534,340 818,680
General and administrative 69,826 138,378 95,688
Write-down of investments in equity securities -- 295,000 --
-------- ---------- ----------
319,826 967,718 914,368
-------- ---------- ----------
Net income $ 39,971 $7,056,240 $4,534,518
-------- ---------- ----------
-------- ---------- ----------
ALLOCATION OF NET INCOME
Unitholders $ 35,974 $6,350,616 $4,081,066
-------- ---------- ----------
-------- ---------- ----------
General partner $ 3,997 $ 705,624 $ 453,452
-------- ---------- ----------
-------- ---------- ----------
Net income per unit $ .88 $ 155.14 $ 99.70
-------- ---------- ----------
-------- ---------- ----------
- ---------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
GENERAL COMPREHENSIVE
UNITHOLDERS PARTNER INCOME (LOSS) TOTAL
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1995 $ 7,505,854 $ 841,722 $ 11,254,503 $ 19,602,079
Comprehensive loss:
Net income 4,081,066 453,452 4,534,518
Net unrealized losses on investments
in equity securities (5,118,761) (5,118,761)
------------
Comprehensive loss (584,243)
------------
Distributions (3,274,720) (363,858) (3,638,578)
------------ ----------- -------------- ------------
Partners' capital--December 31, 1996 8,312,200 931,316 6,135,742 15,379,258
Comprehensive income:
Net income 6,350,616 705,624 7,056,240
Net unrealized losses on investments
in equity securities (5,853,359) (5,853,359)
------------
Comprehensive income 1,202,881
------------
Distributions (11,256,850) (1,250,761) (12,507,611)
------------ ----------- -------------- ------------
Partners' capital--December 31, 1997 3,405,966 386,179 282,383 4,074,528
Comprehensive loss:
Net income 35,974 3,997 39,971
Net unrealized losses on investments
in equity securities (274,073) (274,073)
------------
Comprehensive loss (234,102)
------------
Distribution (2,456,040) (272,893) (2,728,933)
------------ ----------- -------------- ------------
Partners' capital--December 31, 1998 $ 985,900 $ 117,283 $ 8,310 $ 1,111,493
------------ ----------- -------------- ------------
------------ ----------- -------------- ------------
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and other income received $ 116,202 $ 135,893 $ 38,019
Management fee paid (250,000) (676,510) (818,680)
General and administrative expenses paid (96,485) (134,459) (88,341)
Royalty income received -- -- 216,665
Cash received for other assets -- -- 216,669
----------- ------------ -----------
Net cash used in operating activities (230,283) (675,076) (435,668)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investments in equity
securities 448,552 14,567,491 5,935,995
Purchase of investments in equity securities -- (58,650) --
----------- ------------ -----------
Net cash provided by investing activities 448,552 14,508,841 5,935,995
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (2,728,933) (12,507,611) (3,638,578)
----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents (2,510,664) 1,326,154 1,861,749
Cash and cash equivalents at beginning of year 3,668,595 2,342,441 480,692
----------- ------------ -----------
Cash and cash equivalents at end of year $ 1,157,931 $ 3,668,595 $ 2,342,441
----------- ------------ -----------
----------- ------------ -----------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
6
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP III
(a limited partnership)
STATEMENTS OF CASH FLOWS (Cont'd)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH USED IN
OPERATING ACTIVITIES
Net income $ 39,971 $ 7,056,240 $ 4,534,518
----------- ------------ -----------
Adjustments to reconcile net income to net cash used
in operating activities:
Gain on sale of investments in equity securities (243,595) (7,888,065) (5,194,202)
Write-down of investments in equity securities -- 295,000 --
Changes in:
Accrued expenses and other liabilities (26,659) 3,919 7,347
Accrued management fee -- (142,170) --
Other assets -- -- 216,669
----------- ------------ -----------
Total adjustments (270,254) (7,731,316) (4,970,186)
----------- ------------ -----------
Net cash used in operating activities $ (230,283) $ (675,076) $ (435,668)
----------- ------------ -----------
----------- ------------ -----------
- -----------------------------------------------------------------------------------------------------
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 Somatix Therapy Corporation 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.
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
7
<PAGE>
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 (see discussion below) 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,
which has assigned substantially all the rights attributable to its limited
partnership interest to investors.
At December 31, 1998, the Partnership has an investment in the common stock
of Creative BioMolecules, Inc. (OTC-CBMI) and royalty positions with Forest
Laboratories, Inc. ('Forest') and Creative BioMolecules, Inc., that will expire
in December 1999. The Partnership's royalty position with Creative BioMolecules,
Inc. is believed to have little to no value and the equity position's value is
easily determinable and is salable. The Partnership's royalty position in
Synapton, a drug developed by Forest for the treatment of Alzheimer's disease,
is illiquid, and any estimate of its value is subject to significant uncertainty
due to a number of factors including, among other things, (i) whether the Food
and Drug Administration (the 'FDA') will approve Synapton for sale, which would
require that the FDA reverse its non-approval position issued in November
1998,(ii) the difficulty, in light of the fact that FDA approval is yet to be
obtained, in manufacturing and distributing the product prior to the expiration
of the Partnership's royalty position and (iii) market acceptance of the
product. Due to the nature of the Forest royalty, the General Partner is not
able at this time to predict with any degree of certainty, the value, if any, of
the royalty position. Forest has advised the Partnership that it will be meeting
with the FDA to discuss the status of Synapton. Depending on the timing and
results of that meeting, the General Partner may determine that the royalty
interest in Synapton does not warrant the continuing operation of the
Partnership through the end of the royalty period at which point the General
Partner will liquidate and distribute any remaining assets (reduced by a reserve
to satisfy any liabilities of the Partnership) and dissolve the Partnership. In
the event that the General Partner determines that continuing operations through
the expiration date of the Synapton royalty position may be in the best interest
of the Partnership, the General Partner will proceed to dissolve the Partnership
as soon as practicable thereafter.
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.
Effective January 1, 1998, the Partnership adopted the provisions of
Statement of Financial Accounting Standards ('SFAS') No. 130, 'Reporting
Comprehensive Income.' This Statement establishes standards for reporting and
display of comprehensive income and its components within financial statements.
Comprehensive income includes net income as well as certain revenues, expenses,
gains and losses that are excluded from net income under generally accepted
accounting principles ('other comprehensive
8
<PAGE>
<PAGE>
income/loss'). During each of the three years ended December 31, 1998, the
Partnership's only source of other comprehensive income/loss was net unrealized
losses on investments in marketable equity securities, which are included in the
statements of changes in partners' capital and are more fully described in Note
D. The adoption of SFAS No. 130 has had no impact on earnings or total partners'
capital.
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 under
the caption 'Accumulated Other Comprehensive Income'. 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.
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.
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 Synapton 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, 1998 and 1997, the Partnership retains certain royalty rights
with Forest and Creative BioMolecules, Inc. whose carrying values for financial
reporting purposes are zero. The royalty rights with Forest relate to Synapton.
Forest filed a new drug application with the FDA, seeking approval of Synapton,
on November 18, 1997. On November 18, 1998, Forest announced that it was
evaluating and would be preparing a response to a non-approvable letter received
from the FDA on its new drug application for Synapton. Forest has recently
advised the Partnership that it will be meeting with the FDA to discuss the
status of Synapton. The Partnership's royalty rights with Forest and Creative
BioMolecules, Inc. will expire in December 1999 (Refer to Note A for further
discussion).
9
<PAGE>
<PAGE>
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, the Partnership holds no
technology or royalty positions with Kopin and, therefore, no further royalties
will be received by the Partnership from Kopin.
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, 1998 and
1997 include the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------- --------------------------------------------------
Gross unrealized Carrying Gross unrealized Carrying
Shares Cost basis gain value Shares Cost basis gains value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------ --------------------------------------------
Creative BioMolecules,
Inc.-Common Stock 20,000 $ 65,450 $ 8,310 $ 73,760 24,484 $ 80,124 $ 100,446 $ 180,570
Kopin Corporation-
Common Stock -- -- -- -- 13,310 99,556 124,212 223,768
Cell Genesys
Corporation-
Common Stock -- -- -- -- 17,465 90,727 57,725 148,452
---------- ---------------- ----------- ---------- ---------------- -----------
$ 65,450 $ 8,310 $ 73,760 $ 270,407 $ 282,383 $ 552,790
---------- ---------------- ----------- ---------- ---------------- -----------
---------- ---------------- ----------- ---------- ---------------- -----------
</TABLE>
If upon the sale of the Partnership's remaining equity investment the gross
unrealized gain is realized, such gain would be allocated ninety percent to the
unitholders and ten percent to the General Partner; however, there is no
assurance that the Partnership would receive such amount in the event of the
sale of its remaining equity position.
Creative BioMolecules, Inc.
During the fourth quarter of 1998, the Partnership sold 4,484 shares of
Creative BioMolecules, Inc. common stock with a cost basis of approximately
$15,000 resulting in a loss of approximately $3,000.
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 the second quarter of 1998, the Partnership sold its remaining 13,310
shares of Kopin Corporation common stock for approximately $286,000 resulting in
a gain of approximately $186,000. During 1998, revenues relating to the
Partnership's investment in Kopin Corporation represented approximately 52% of
the Partnership's total revenues.
10
<PAGE>
<PAGE>
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 second quarter of 1998, the Partnership sold its remaining 17,465
shares of Cell Genesys Corporation common stock for approximately $151,000
resulting in a gain of approximately $60,000. During 1998, revenues relating to
the Partnership's investment in Cell Genesys Corporation represented
approximately 17% of the Partnership's total revenues.
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 investment in Somatix Therapy
Corporation 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.
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 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 represented approximately 66% of the
Partnership's total 1996 revenues.
Net Unrealized Losses on Investment in Equity Securities
For the three years ended December 31, 1998, the Partnership's net unrealized
losses on investments in equity securities were comprised as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
-----------------------------------------
Unrealized holding gain/loss $ (30,478) $ 2,034,706 $ 75,441
Less: reclassification adjustment for realized
gains included in net income (243,595) (7,888,065) (5,194,202)
--------- ----------- -----------
Net unrealized losses on investment in equity
securities $(274,073) $(5,853,359) $(5,118,761)
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
11
<PAGE>
E. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income (loss) for tax reporting purposes:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
----------------------------------------
Net income per financial statements $ 39,971 $7,056,240 $ 4,534,518
Gain on sale of investments in equity
securities (100,959) (1,107,903) --
Write-down/write-off of investment in equity
securities -- 295,000 (511,194)
Royalty income -- -- (76,698)
--------- ---------- -----------
Tax basis net income (loss) $ (60,988) $6,243,337 $ 3,946,626
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1998 1997 1996
<S> <C> <C> <C>
----------------------------------
Management fee $250,000 $534,340 $818,680
Printing 6,444 13,448 11,849
-------- -------- --------
$256,444 $547,788 $830,529
-------- -------- --------
-------- -------- --------
</TABLE>
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 Synapton 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).
Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses) as of December 31, 1998 and 1997 were $5,025 and
$7,788, respectively.
Prudential Securities Incorporated, an affiliate of R&D Funding Corp, owned
724 units in the Partnership at December 31, 1998.
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 which was dissolved
and liquidated in December 1996, PruTech Research and Development Partnership II
which was dissolved and liquidated in December 1998 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 alleged common law fraud
12
<PAGE>
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 sought,
among other things, compensatory and punitive damages, costs and attorneys'
fees. The claims of all plaintiffs have been settled or dismissed. The
Partnership did not contribute to any settlement or pay any costs of the
litigation.
13
<PAGE>
<PAGE>
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
At December 31, 1998, the Partnership has an investment in the common stock
of Creative BioMolecules, Inc. (OTC-CMBI) and royalty positions with Forest
Laboratories, Inc. ('Forest') and Creative BioMolecules, Inc., that will expire
in December 1999. The Partnership's royalty position with Creative BioMolecules,
Inc. is believed to have little to no value and the equity position's value
(approximately $74,000 at December 31, 1998) is easily determinable and is
salable. The Partnership's royalty position in Synapton, a drug developed by
Forest for the treatment of Alzheimer's disease, is illiquid, and any estimate
of its value is subject to significant uncertainty due to a number of factors
including, among other things, (i) whether the Food and Drug Administration (the
'FDA') will approve the Synapton for sale, which would require that the FDA
reverse its non-approval position issued in November 1998, (ii) the difficulty,
in light of the fact that FDA approval is yet to be obtained, in manufacturing
and distributing the product prior to the expiration of the Partnership's
royalty position and (iii) market acceptance of the product. Due to the nature
of the Forest royalty, the General Partner is not able at this time to predict
with any degree of certainty, the value, if any, of the royalty position. Forest
has advised the Partnership that it will be meeting with the FDA to discuss the
status of Synapton. Depending on the timing and results of that meeting, the
General Partner may determine that the royalty interest in Synapton does not
warrant the continuing operation of the Partnership through the end of the
royalty period at which point the General Partner will liquidate and distribute
any remaining assets (reduced by a reserve to satisfy any liabilities of the
Partnership) and dissolve the Partnership. In the event that the General Partner
determines that continuing operations through the expiration date of the
Synapton royalty position may be in the best interest of the Partnership, the
general partner will proceed to dissolve the Partnership as soon as practicable
thereafter.
As of December 31, 1998, the Partnership had approximately $1,158,000 of cash
and cash equivalents which is a decrease of approximately $2,511,000 as compared
to December 31, 1997. The decrease in cash and cash equivalents was primarily
due to the payment of distributions and management fees, offset by proceeds from
the sales of certain investments in equity securities, as further discussed
below.
The amount to be distributed by the Partnership in future quarters will be
based on the extent to which the market value of its remaining investment in
Creative BioMolecules, Inc. can be realized and from the revenue stream from
royalties, if any, and interest income. It is not expected that the
Partnership's eventual total distributions will equal the Unitholders' initial
investments.
During May 1998, the Partnership made a $2,728,933 distribution. Unitholders
received a total of $2,456,040 ($60 per unit) and the General Partner received
its 10% share.
During the second quarter of 1998, the Partnership sold its remaining 13,310
shares of Kopin Corporation common stock for approximately $286,000, and its
remaining 17,465 shares of Cell Genesys Corporation common stock for
approximately $151,000.
During the fourth quarter of 1998, the Partnership sold 4,484 shares of
Creative BioMolecules, Inc. common stock for approximately $12,000.
Results of Operations
Net income for the years ended December 31, 1998, 1997 and 1996 was
approximately $40,000, $7,056,000 and $4,535,000, respectively. The primary
reasons for the fluctuations in operating results are discussed below.
During 1998, the Partnership recorded gains of approximately $186,000 and
$60,000, respectively on the sale of its remaining 13,310 shares of Kopin
Corporation common stock and its remaining 17,465 shares of Cell Genesys
Corporation common stock. 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
14
<PAGE>
<PAGE>
Forest Laboratories, Inc. common stock and 214,900 shares of Creative
BioMolecules, Inc. common stock, respectively.
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
investment in Somatix Therapy Corporation common stock was written down by
$295,000.
No royalties were earned by the Partnership in 1998 and 1997. 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, 1998 decreased by
approximately $20,000 as compared to 1997 and increased by approximately $98,000
for the year ended December 31, 1997 as compared to 1996. 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 years ended 1998 and 1997 each decreased by
approximately $284,000 as compared to prior years. 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 Synapton 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, 1998
decreased by approximately $69,000 as compared to 1997 but increased by
approximately $43,000 for the year ended December 31, 1997 as compared to 1996.
The 1997 increase was due primarily to professional and other costs incurred in
1997 in considering alternatives for the orderly liquidation of the Partnership.
Such costs did not recur at the same level during 1998. Additionally, the 1998
decrease reflects 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, 1998.
15
<PAGE>
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
16
<PAGE>
<PAGE>
Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
PRUTEC386/170864
<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-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Dec-31-1998
<PERIOD-TYPE> 12-Mos
<CASH> 1,157,931
<SECURITIES> 73,760
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,231,691
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,231,691
<CURRENT-LIABILITIES> 120,198
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,111,493
<TOTAL-LIABILITY-AND-EQUITY> 1,231,691
<SALES> 0
<TOTAL-REVENUES> 359,797
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 319,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
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