<PAGE>
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
/ / 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 0-21464
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 13-3268435
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(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer 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:
Units of Limited Partnership Interest
- -----------------------------------------------------------------------
(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 Limited Partners 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. 2-94273) filed with the Securities and Exchange
Commission on March 4, 1985 pursuant to Rule 424(b) of the Securities Act of
1933, and amended on 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>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(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 Limited Partners.............................. 3
PART II
Item 5 Market for the Registrant's Units and Related Limited Partner Matters............ 3
Item 6 Selected Financial Data.......................................................... 4
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 5
Item 8 Financial Statements and Supplementary Data...................................... 5
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 5
PART III
Item 10 Directors and Executive Officers of the Registrant............................... 5
Item 11 Executive Compensation........................................................... 6
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
General
PruTech Research and Development Partnership II (the 'Registrant'), a
California limited partnership, was formed on October 4, 1984 and will terminate
in accordance with the Plan of Dissolution and Liquidation (the 'Plan') approved
by the limited partners as discussed below. 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 100,000
limited partnership interests ('Units'). R&D Funding Corp (the 'General
Partner') also contributed an amount equal to 10% 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 approximately $91 million
for 18 research and development projects in both publicly and privately held
companies, all of which have been fully funded. The Registrant held equity
investments and/or royalty rights which were active during the year ended
December 31, 1997 relating to six companies. For more information regarding the
Registrant's business, see Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.
In September 1996, the General Partner mailed to all limited partners a
consent solicitation statement (the 'Statement') asking for their written
consent to approve the Plan, as more fully described in the Statement. On
October 30, 1996, holders of 68.4% of the Units approved the Plan. Accordingly,
the Plan has been adopted. In accordance with the terms of the Plan, the General
Partner has sold or otherwise disposed of substantially all of the Registrant's
remaining investments and intends to distribute the resulting proceeds (reduced
by a reserve to satisfy any liabilities or contingencies of the Registrant) to
the partners by making a single, final distribution in accordance with the terms
of the Agreement of Limited Partnership, as amended (the 'Partnership
Agreement'). The General Partner anticipates that the final liquidation of the
Registrant will occur by December 31, 1998 subject to the sale or disposition of
the Registrant's few remaining assets (which are estimated to have little to no
value) and the settlement of the Partnership's remaining liabilities and
contingencies, certain of which have ongoing discussions; however, due to the
nature of the remaining contingencies to be resolved, liquidation may take
longer. It is expected that the Registrant's eventual total distributions will
not equal the partners' initial investment.
As a result of the adoption of the Plan, the Registrant adopted the
liquidation basis of accounting effective December 31, 1996, whereby assets are
valued at their estimated net realizable values and liabilities stated at their
estimated settlement amounts. For more information regarding the effects of the
liquidation basis of accounting, see Note B 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.
The General Partner was paid an annual management fee equal to two percent of
the limited partners' original capital contributions through June 30, 1997.
Effective July 1, 1997, the General Partner reduced its management fee to
$125,000 per quarter as further discussed in Note B to the Registrant's 1997
Annual Report which is filed as an exhibit hereto.
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, 1996 and 1995, respectively, revenue from
the following investments exceeded 15% of the Registrant's total revenue
(inclusive of liquidating activities for 1996):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Biocompatibles International plc 76% 37%
Navigation Technologies Corporation -- 25
</TABLE>
Comparative information for the year ended December 31, 1997 is not provided
as the Registrant no longer reports results of operations under the liquidation
basis of accounting as further discussed in Note B to the Registrant's 1997
Annual Report which is filed as an exhibit hereto.
2
<PAGE>
General Partner
The General Partner of the Registrant is 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 was also responsible for the management of and provided the
administrative services necessary for the operation of the Registrant. In its
capacity as liquidating agent with respect to the Registrant's assets, the
General Partner is proceeding to complete the liquidation of the Registrant's
remaining assets and effect the complete voluntary dissolution of the Registrant
in accordance with the Plan.
Competition
As of December 31, 1997, the Registrant is in the process of liquidation with
few remaining assets (which are estimated to have little to no value), and as
such, competition has no impact on the value of the Registrant's remaining
assets.
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 1997 Annual Report which is filed as an exhibit hereto.
Investment Portfolio Summary
For a description of the companies in which the Registrant's equity
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 Limited Partners
None
PART II
Item 5. Market for the Registrant's Units and Related Limited Partner Matters
As of March 5, 1998, there were 9,035 holders of record owning 100,000 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 a limited partner 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 limited partners
during the following calendar quarters:
<TABLE>
<CAPTION>
Quarter Ended 1997 1996
<S> <C> <C>
- --------------------- ------- ------
March 31 $190.00 $ --
June 30 -- 40.00
September 30 -- --
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. During 1997, the Registrant paid distributions of
$16,666,667 and $4,444,444 of which $15,000,000 ($150 per Unit) and $4,000,000
($40 per Unit), respectively, were paid to the limited partners and the
remainder to the General Partner. The sources for the
3
<PAGE>
1997 distributions were proceeds from the sale of the Registrant's remaining
equity position in Biocompatibles International plc, which represented the
liquidation of the Registrant's most significant asset, and the sale of a
portion of the Registrant's equity position in Synbiotics Corporation. The
Registrant paid distributions of $4,444,444 during 1996 of which $4,000,000 ($40
per Unit) was paid to the limited partners and the remainder to the General
Partner. The sources for the 1996 distribution were proceeds from the
termination of Boston Scientific Corporation royalty rights, the sales of a
portion of the Registrant's equity position in Biocompatibles International plc,
and the sale of the Registrant's remaining equity position in Somatix Therapy
Corporation.
The Registrant plans to sell or otherwise dispose of its few remaining assets
and distribute any remaining cash with a single, final distribution. It is
expected that the Registrant's eventual total distributions will not equal the
partners' initial investment.
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 1997
Annual Report which is filed as an exhibit hereto.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
----------- ----------- ---------- ----------- -----------
Gain on sale of investments in
equity securities $ -- (1) $ 1,680,522 $5,058,228 $ -- $ 1,346,953
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Royalty income $ -- (1) $ 299,180 $1,516,735 $ 474,663 $ 493,252
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Interest and other income $ -- (1) $ 1,220,545 $ 301,339 $ 503,557 $ 339,337
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Total operating revenues $ -- (1) $ 6,672,247 $7,859,432 $ 1,670,074 $ 2,982,778
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Write-down of investments
in equity securities $ -- (1) $ -- $ -- $(1,489,410) $(1,417,712)
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Liquidating activities:
Investments in equity securities $ -- (1) $19,128,500 $ -- $ -- $ --
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Estimated liquidation costs $ -- (1) $(1,593,996) $ -- $ -- $ --
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Net income (loss) $ -- (1) $21,863,750 $5,570,951 $(2,130,645) $ (651,120)
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Net income (loss) per Unit $ -- (1) $ 196.77 $ 50.14 $ (19.18) $ (5.86)
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Total assets(2) $ 3,452,809 $24,797,746 $8,142,500 $ 6,837,750 $12,039,000
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Net assets in liquidation(1) $ 2,579,260 $22,601,949 $ -- $ -- $ --
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Total limited partner
distributions $19,000,000 $ 4,000,000 $3,000,000 $ 2,000,000 $ --
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Limited partner distributions
per Unit $ 190.00 $ 40.00 $ 30.00 $ 20.00 $ --
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
</TABLE>
- ---------------
(1) The Registrant adopted the liquidation basis of accounting as of December
31, 1996 in accordance with generally accepted accounting principles and no
longer reports results of operations as further discussed in Note B to the
financial statements in the Registrant's 1997 Annual Report which is filed as an
exhibit hereto. The change in estimated liquidation values of assets and
liabilities during 1997 totalled $1,088,422.
(2) Includes $2,357,754, $1,798,977 and $3,423,329 of unrealized gain on
investments in equity securities at December 31, 1995, 1994 and 1993,
respectively. Total assets at December 31, 1997 and 1996 reflect estimated net
realizable values as more fully described in Notes B and D to the financial
statements in the Registrant's 1997 Annual Report which is filed as an exhibit
hereto.
4
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information is incorporated by reference to pages 14 through 15 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 13
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
None
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 ten percent 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 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.
5
<PAGE>
<PAGE>
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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 5, 1998, no director or 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 officer of the General Partner owns
directly or beneficially any of the Units issued by the Registrant.
As of March 5, 1998, no owner of Units beneficially owns more than five
percent (5%) of the outstanding Units of 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. However, 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
<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 Independent Auditors' Report--incorporated by
reference to the Registrant's 1997 Annual Report which is filed as an
exhibit hereto
Independent Auditors' Report 3
Financial Statements:
Statements of Net Assets--December 31, 1997 and 1996 4
Statement of Changes in Net Assets--Year ended December 31, 1997 4
Statements of Operations--Two years ended December 31, 1996 5
Statements of Changes in Partners' Capital--Two years ended December 31,
1996 5
Statements of Cash Flows--Two years ended December 31, 1996 6
Notes to Financial Statements 8
2. Financial Statement Schedules and Independent Auditors' Report on 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:
PruTech Research and Development Partnership II Agreement of Limited
Partnership (incorporated by reference to Exhibit 3.1 included with
Registrant's Form S-1 Registration Statement (No. 2-94273) filed on
November 9, 1984)
Escrow Agreement (incorporated by reference to Exhibit 10.1 included with
Registrant's Amendment No. 1 to Form S-1 Registration Statement (No.
2-94273) filed on March 4, 1985)
Form of Agreement for Services (incorporated by reference to Exhibit 10.2
included with Registrant's Amendment No. 1 to Form S-1 Registration
Statement (No. 2-94273) filed on March 4, 1985)
First Amendment to the Agreement of Limited Partnership of PruTech Research
and Development Partnership II (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)
Consent Statement dated September 4, 1997 regarding solicitation of Limited
Partner approval of the Plan of Dissolution and Liquidation of Registrant
as filed with the Securities and Exchange Commission on September 4, 1996
(incorporated by reference)
Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
Registrant's Current Report on Form 8-K dated October 9, 1997 as filed with
the Securities and Exchange Commission on October 29, 1997, relating to
Item 2 and the sale of Registrant's remaining 136,000 shares of Ecogen Inc.
common stock.
</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 II
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
<PAGE>
1997
- --------------------------------------------------------------------------------
PruTech Research and Annual
Development Partnership II Report
(In Process of Liquidation)
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
LETTER TO THE LIMITED PARTNERS FOR THE
YEAR ENDED DECEMBER 31, 1997
1
<PAGE>
PRUTECH II INVESTMENTS
The following investments and/or royalty rights were active during the year as
the Partnership has been selling its remaining assets as part of the liquidation
process. The Partnership's position in each investment and/or royalty right is
as of December 31, 1997.
OPTICAL SPECIALTIES, INC. (OPSL)
Position: 274,628 shares of common stock; 144,666 shares of Series D preferred
stock; royalties on technology and products licensed to OPSL and to
Toray Industries, a Japanese manufacturer, which expire in 1999
The Partnership did not receive royalties from OPSL during 1997. The
Partnership's other licensee, Toray Industries, generated $24,000 in royalties
during 1997. The last reported trade on March 20, 1998 of OPSL common stock, a
thinly traded stock, was at a price of six cents per share and there is no
assurance that the Partnership will be able to sell its shares at a similar
share price.
During 1997, the Partnership sold 17,360 shares of OPSL common stock for
approximately $700. During 1997, the Partnership's investment in OPSL preferred
stock was determined to be permanently impaired and the estimated net realizable
value of this stock was reduced from $43,400 to zero.
BIOCOMPATIBLES INTERNATIONAL plc (BII, London Stock Exchange)
Position: None
On February 7, 1997, the Partnership sold its remaining 942,045 shares of
Biocompatibles International plc common stock for approximately $18,557,000.
NAVIGATION TECHNOLOGIES CORPORATION
Position: None
During April 1997, the Partnership sold its remaining 2,284,541 shares of
Navigation Technologies Corporation common stock for approximately $800,000.
SILICON VALLEY RESEARCH, INC. (SVRI)
Position: None
Throughout 1997, the Partnership sold its remaining 84,614 shares of Silicon
Valley Research, Inc. common stock for approximately $89,000.
SYNBIOTICS CORPORATION (SBIO)
Position: None
During the third quarter of 1997, the Partnership exercised its options to
purchase 21,266 shares of Synbiotics Corporation common stock at a cost of
approximately $59,000 and subsequently sold these shares for approximately
$86,000. Additionally, the Partnership sold its remaining 293,003 shares of
Synbiotics Corporation common stock for approximately $1,119,000 during 1997.
ECOGEN INC. (EECN)
Position: None
The Partnership sold 102,165 shares of EECN common stock during the first
half of 1997 for approximately $325,000.
Pursuant to an agreement dated as of March 31, 1997 between the Partnership
and EECN, the Partnership assigned to EECN its right, title and interest in and
to certain technologies, products and property licensed to EECN and agreed to
terminate all license agreements with EECN in exchange for 136,000 shares of
EECN common stock. No further royalty payments will be received by the
Partnership from EECN as a result of this agreement. The Partnership sold the
136,000 shares of EECN common stock for approximately $441,000 during the second
half of 1997.
2
<PAGE>
<PAGE>
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 II, L.P.
We have audited the accompanying statements of net assets in process of
liquidation of PruTech Research and Development Partnership II, L.P. (a
California Limited Partnership) as of December 31, 1997 and 1996, and the
related statement of changes in net assets in process of liquidation for the
year ended December 31, 1997. In addition, we have audited the accompanying
statements of operations, changes in partners' capital, and cash flows for each
of the two years in the period ended December 31, 1996. 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 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
misstatement. 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 audits provide a reasonable basis for our
opinion.
As discussed in Notes A and B to the financial statements, the Partnership's
limited partners approved a plan of liquidation on October 30, 1996, and the
Partnership commenced liquidation shortly thereafter. As a result, the
Partnership changed its basis of accounting from the going-concern basis to the
liquidation basis effective December 31, 1996.
In our opinion, such financial statements present fairly, in all material
respects, (1) the net assets in process of liquidation of PruTech Research and
Development Partnership II, L.P. at December 31, 1997 and 1996, (2) the changes
in its net assets in process of liquidation for the year ended December 31,
1997, and (3) the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles applied on the bases described in the preceding
paragraph.
/s/ Deloitte & Touche LLP
February 13, 1998
3
<PAGE>
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF NET ASSETS
(in process of liquidation)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 3,452,809 $ 4,718,876
Investments in equity securities -- 20,078,870
------------ ------------
Total assets 3,452,809 24,797,746
------------ ------------
Liabilities
Estimated liquidation costs 873,549 1,593,996
Accrued management fee -- 500,000
Accrued expenses and other liabilities -- 101,801
------------ ------------
Total liabilities 873,549 2,195,797
------------ ------------
Contingencies
Net assets in liquidation $ 2,579,260 $22,601,949
------------ ------------
------------ ------------
Net assets in liquidation
Limited partners (100,000 units issued and outstanding) $ 2,252,834 $20,273,254
General partner 326,426 2,328,695
------------ ------------
Total net assets in liquidation $ 2,579,260 $22,601,949
------------ ------------
------------ ------------
- --------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(in process of liquidation)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNER TOTAL
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Net assets in liquidation--December 31, 1996 $ 20,273,254 $ 2,328,695 $22,601,949
Changes in estimated liquidation values of assets
and liabilities 979,580 108,842 1,088,422
Distributions (19,000,000) (2,111,111) (21,111,111)
------------ ----------- -----------
Net assets in liquidation--December 31, 1997 $ 2,252,834 $ 326,426 $ 2,579,260
------------ ----------- -----------
------------ ----------- -----------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF OPERATIONS
(going concern basis)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
REVENUES
Royalty income $ 299,180 $1,516,735
Gain on sale of investments in equity securities 1,680,522 5,058,228
Termination of royalty rights 3,472,000 983,130
Interest and other income 1,220,545 301,339
----------- ----------
6,672,247 7,859,432
----------- ----------
EXPENSES
Management fee 2,000,000 2,000,000
General and administrative 343,001 288,481
----------- ----------
2,343,001 2,288,481
----------- ----------
Income-going concern basis 4,329,246 5,570,951
----------- ----------
Liquidating activities:
Investments in equity securities 19,128,500 --
Estimated liquidation costs (1,593,996) --
----------- ----------
Net income $21,863,750 $5,570,951
----------- ----------
----------- ----------
ALLOCATION OF NET INCOME
Limited partners $19,677,375 $5,013,856
----------- ----------
----------- ----------
General partner $ 2,186,375 $ 557,095
----------- ----------
----------- ----------
Net income per limited partnership unit $ 196.77 $ 50.14
----------- ----------
----------- ----------
- --------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
UNREALIZED
LIMITED GENERAL GAIN ON
PARTNERS PARTNER INVESTMENTS TOTAL
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1994 $ 2,582,023 $ 363,002 $1,798,977 $ 4,744,002
Net income 5,013,856 557,095 -- 5,570,951
Distributions (3,000,000) (333,333) -- (3,333,333)
Change in unrealized gain on
investments in equity securities -- -- 558,777 558,777
----------- ---------- ----------- -----------
Partners' capital--December 31, 1995 4,595,879 586,764 2,357,754 7,540,397
Net income 19,677,375 2,186,375 -- 21,863,750
Distributions (4,000,000) (444,444) -- (4,444,444)
Change in unrealized gain on
investments in equity securities -- -- (2,357,754 ) (2,357,754)
----------- ---------- ----------- -----------
Net assets in liquidation--
December 31, 1996 $20,273,254 $2,328,695 $ -- $22,601,949
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF CASH FLOWS
(going concern basis)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Royalty income received $ 446,740 $ 1,530,276
Interest and other income received 346,844 1,190,780
General and administrative expenses paid (343,303) (280,126)
Management fee paid (2,000,000) (3,500,000)
Cash (paid) received from other assets 462,586 (462,586)
------------ -----------
Net cash used in operating activities (1,087,133) (1,521,656)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investments in equity securities 2,357,813 5,210,591
Proceeds from the sale of stock and warrant rights 886,077 --
Proceeds from the termination of royalty rights 3,472,000 983,130
Collection of notes receivable 19,031 937,612
Proceeds from the sale of technology -- 27,418
Purchase of U.S. Treasury bills held in escrow (1,991,217) (1,167,415)
Redemption of U.S. Treasury bills held in escrow 2,570,133 1,171,800
------------ -----------
Net cash provided by investing activities 7,313,837 7,163,136
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (4,444,444) (3,333,333)
------------ -----------
Net increase in cash and cash equivalents 1,782,260 2,308,147
Cash and cash equivalents at beginning of year 2,936,616 628,469
------------ -----------
Cash and cash equivalents at end of year $ 4,718,876 $ 2,936,616
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES
Net income $ 21,863,750 $ 5,570,951
------------ -----------
Adjustments to reconcile net income to net
cash used in operating activities:
Liquidating activities:
Investments in equity securities (19,128,500) --
Estimated liquidation costs 1,593,996 --
Gain on sale of investments in equity securities (1,680,522) (5,058,228)
Gain on sale of stock and warrant rights (886,077) --
Termination of royalty rights (3,472,000) (983,130)
Gain on sale of technology -- (27,418)
Changes in:
Accrued management fee -- (1,500,000)
Interest receivable 12,376 916,859
Royalties receivable 147,560 13,541
Due from affiliate 462,586 (462,586)
Accrued expenses and other liabilities (302) 8,355
------------ -----------
Total adjustments (22,950,883) (7,092,607)
------------ -----------
Net cash used in operating activities $ (1,087,133) $(1,521,656)
------------ -----------
------------ -----------
- --------------------------------------------------------------------------------------------------------
(continued on next page)
</TABLE>
6
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF CASH FLOWS (Cont'd)
(going concern basis)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
1996
Exercised warrants to acquire, on a net issuance, 166,399 shares of Optical
Specialties, Inc. common stock.
Received 21,965 shares of Biocompatibles International plc
('Biocompatibles') common stock in July 1996 as a result of
Biocompatibles' achievement of certain financial targets in 1995.
Received 17,360 shares of Optical Specialties, Inc. common stock
for granting an extension of its term loan.
Ecogen Inc. completed a 1:5 reverse stock split which resulted in
the receipt of 102,165 shares of common stock in exchange for 510,827
shares of common stock.
Silicon Valley Research, Inc. completed a 1:2 reverse stock split
which resulted in the receipt of 146,806 shares of common stock in
exchange for 293,612 shares of common stock.
Exercised remaining warrants to acquire, on a net issuance, 72,749
shares of Silicon Valley Research, Inc. common stock.
1995
Converted 161,448 shares of Biocompatibles convertible preferred
stock into 1,614,480 shares of common stock.
Partially exercised a warrant to acquire, on a net issuance, 23,731
shares of Silicon Valley Research, Inc. common stock.
Received 281 shares of Texas Biotechnology Corporation common stock
after certain contractual conditions were met.
----------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
7
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
A. General
PruTech Research and Development Partnership II (the 'Partnership'), a
California limited partnership, was formed on October 4, 1984 and will terminate
in accordance with the plan of dissolution and liquidation (the 'Plan') approved
by the limited partners as discussed below. Capital resources were originally
provided by the sale of limited partnership units and by contributions of the
general partner equal to 10% of limited partnership contributions. The
Partnership was formed to seek cash flow from the research and development of
new technology 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
Partnership held equity investments and/or royalty rights, which were active
during the year ended
December 31, 1997, relating to six companies.
In September 1996, the General Partner mailed to all limited partners a
consent solicitation statement (the 'Statement') asking for their written
consent to approve the Plan, as more fully described in the Statement. On
October 30, 1996, holders of 68.4% of the limited partnership units approved the
Plan. Accordingly, the Plan has been adopted.
In accordance with the terms of the Plan, the General Partner has sold or
otherwise disposed of substantially all of the Partnership's remaining
investments and intends to distribute the resulting proceeds (reduced by a
reserve to satisfy any liabilities or contingencies of the Partnership) to the
partners by making a single, final distribution in accordance with the terms of
the Agreement of Limited Partnership, as amended (the 'Partnership Agreement').
The General Partner anticipates that the final liquidation of the Partnership
will occur by December 31, 1998 subject to the sale or disposition of the
Partnership's few remaining assets (which are estimated to have little to no
value) and the settlement of the Partnership's remaining liabilities and
contingencies, certain of which have ongoing discussions; however, due to the
nature of the remaining contingencies to be resolved, liquidation may take
longer. It is expected that the Partnership's eventual total distributions will
not equal the partners' initial investment.
B. Summary of Significant Accounting Policies
Basis of accounting
As a result of the adoption of the Plan, the Partnership adopted the
liquidation basis of accounting effective December 31, 1996, whereby assets are
valued at their estimated net realizable values and liabilities stated at their
estimated settlement amounts. Accruals totaling approximately $1,594,000 were
recorded as of December 31, 1996 for the estimated costs of liquidating the
Partnership which include, but are not limited to, costs of selling or otherwise
disposing of the Partnership's remaining investments and general and
administrative costs through the then estimated conclusion of liquidation of
December 31, 1997. See discussion below for additional information on accounting
for the Partnership's remaining investments under the liquidation basis of
accounting.
During the year ended December 31, 1997, the Partnership reflected an
increase of approximately $1,088,000 in the estimated net liquidation value of
its assets and liabilities. The March 31, 1997 valuation of certain of the
Partnership's investments which were previously carried at cost (see Notes C and
D for additional discussion) resulted in an increase to the estimated net
liquidation value of the Partnership's assets by approximately $1,282,000.
Further increases, totalling approximately $242,000, were primarily attributable
to market fluctuations in the Partnership's remaining investments in equity
securities, interest earned on the Partnership's cash and cash equivalents and
royalty income received. These increases were offset by a $436,000 increase to
the estimated costs of liquidating the Partnership from the $1,594,000 estimate
accrued during 1996. The increase in liquidating costs principally reflect
estimated costs to be incurred by the Partnership during 1998 as the Partnership
did not liquidate during 1997.
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.
8
<PAGE>
Cash and cash equivalents
Cash and cash equivalents include money market funds.
Investments
In accordance with the liquidation basis of accounting as further discussed
above, the Partnership's investments in equity securities at December 31, 1997
and 1996 have generally been recorded at their estimated net realizable values
as further described below.
Equity securities held as of December 31, 1996 but sold between January 1,
1997 through March 20, 1997 have been recorded as of December 31, 1996 at the
net amount realized from such sales, while those securities which have not been
sold by March 20, 1997 are recorded as of December 31, 1996 utilizing the
December 31, 1996 prices as discussed below. Equity securities which are traded
on a national securities exchange or Nasdaq national market are valued at the
last 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 ask prices. Equity
securities which are not readily marketable are carried at cost because their
market values are not readily determinable.
As of December 31, 1997 and 1996, the Partnership held royalty positions,
stock options and certain other securities with little or no value and
accordingly, such assets are carried at zero.
Previous to the adoption of the liquidation basis of accounting on December
31, 1996, the Partnership classified equity securities that had readily
determinable fair values as available-for-sale securities. Such securities were
measured at fair value and unrealized gains and losses were reported as a
separate component of partners' capital. Equity securities which were traded on
a national securities exchange, Nasdaq national market, the over-the-counter
market and thinly-traded securities were valued as discussed above. Equity
securities which were not readily marketable were accounted for under the cost
method.
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 limited partners' original capital contributions through June 30, 1997.
Effective July 1, 1997, the General Partner reduced its management fee to
$125,000 per quarter as further discussed in Note F.
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 90% to the limited partners and 10% to the
General Partner in accordance with the Partnership Agreement.
Distributions are also allocated 90% to the limited partners and 10% to the
General Partner, except for the final liquidating distribution which shall equal
the remaining capital account balances of the partners determined in accordance
with the Partnership Agreement.
C. Royalties
The Partnership retains certain royalty rights with Optical Specialties, Inc.
with a carrying value of zero at December 31, 1997 and 1996.
Pursuant to an agreement dated as of March 31, 1997 between the Partnership
and Ecogen Inc. ('Ecogen'), the Partnership assigned to Ecogen its right, title
and interest in and to certain technologies, products and property licensed to
Ecogen and agreed to terminate all license agreements with Ecogen (the 'Ecogen
Rights') in exchange for 136,000 shares of Ecogen common stock with an estimated
net realizable value of $484,000 as of the date of the agreement. Prior to this
agreement, the Ecogen Rights were carried
9
<PAGE>
at zero. The Partnership was restricted from selling such shares until the
Securities and Exchange Commission declared the registration of the shares
effective on August 11, 1997. (The shares were subsequently sold as further
discussed in Note D.) No further royalty payments will be received by the
Partnership from Ecogen as a result of this agreement.
Pursuant to an agreement which closed January 26, 1996 between the
Partnership, an affiliate of the Partnership and Boston Scientific Corporation
('BSX'), the Partnership and its affiliate assigned to BSX all of their rights,
titles and interests in and to certain technologies licensed to BSX and agreed
to terminate all license agreements with BSX in exchange for $4,000,000 in cash,
of which the Partnership's portion was $3,472,000. No further royalty payments
will be received by the Partnership from BSX as a result of this agreement.
In March 1995, the Partnership and 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 $983,000. No further royalty payments will be
received by the Partnership from MNS as a result of this agreement.
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 at December 31, 1996 include the following:
<TABLE>
<CAPTION>
Estimated
net realizable
Shares value
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
Optical Specialties, Inc.--Common Stock* 291,988 $ --
Optical Specialties, Inc.--Preferred Stock* 144,666 43,400
Biocompatibles International plc--Common Stock 942,045 18,557,380
Navigation Technologies Corporation--Common Stock* 2,284,541 2,218
Silicon Valley Research, Inc.--Common Stock 84,614 169,229
Texas Biotechnology Corporation--Directors' options* 7,980 --
Synbiotics Corporation--Common Stock 293,003 1,042,291
Ecogen, Inc.--Common Stock 102,165 264,352
--------------
$ 20,078,870
--------------
--------------
* Position carried at cost as of December 31, 1996.
</TABLE>
At December 31, 1997, the Partnership's remaining investments in equity
securities consist of 274,628 shares of Optical Specialties, Inc. common stock
and 144,666 of its preferred stock. The carrying value of these remaining
positions as of December 31, 1997 is zero.
Optical Specialties, Inc.
During April 1996, the Partnership received 17,360 shares of Optical
Specialties, Inc. ('OPSL') common stock for granting an extension of its
guarantee of a term loan (which was fully paid by July 1996 with no payment
required by the Partnership). During June 1997, the Partnership sold these
17,360 shares of OPSL common stock for approximately $700.
During the fourth quarter of 1996, the Partnership exercised warrants to
acquire, on a net issuance, 166,399 shares of OPSL common stock.
At September 30, 1997, the General Partner determined that the Partnership's
investment in OPSL preferred stock was permanently impaired and, as a result,
reduced the estimated net realizable value from $43,400 to zero.
Biocompatibles International plc
In October 1995, the Partnership sold 645,792 shares of Biocompatibles
International plc ('Biocompatibles') common stock resulting in a gain of
approximately $2,892,000, which represented approximately 37% of the
Partnership's total 1995 revenues.
10
<PAGE>
<PAGE>
In February 1996, the Partnership sold 48,608 shares of Biocompatibles common
stock for approximately $396,000 resulting in a gain of approximately $384,000.
During April 1996, Biocompatibles launched a rights offering to its
shareholders. Pursuant to the offering, the Partnership was entitled to purchase
one unit (stock and warrant) for every six Biocompatibles common stock shares
owned. The Partnership decided not to participate in the offering, but instead
sold the Partnership's rights in the marketplace. This sale of rights resulted
in a gain of approximately $289,000. During November 1996, Biocompatibles
initiated another rights offering which the Partnership also sold for
approximately $597,000. These sales were included in interest and other income
in the statements of operations.
In connection with its 1995 investment in Biocompatibles, the Partnership
received 21,965 shares of Biocompatibles common stock in July 1996 as a result
of Biocompatibles' achievement of certain financial targets in 1995.
Revenues generated during the year ended December 31, 1996 from the
Partnership's investment in Biocompatibles represented approximately 76% of the
Partnership's total 1996 revenues (including liquidating activities).
On February 7, 1997, the Partnership sold its remaining 942,045 shares of
Biocompatibles common stock for approximately $18,557,000 representing the
liquidation of the most significant remaining asset of the Partnership. The
December 31, 1996 carrying amount of this investment reflected the net amount
realized on this sale.
Navigation Technologies Corporation
In June 1995, the Partnership sold 2,284,542 shares of Navigation
Technologies Corporation common stock for approximately $1,942,000. This
transaction resulted in a gain of approximately $1,940,000, which represented
approximately 25% of the Partnership's total 1995 revenues.
During April 1997, the Partnership sold its remaining 2,284,541 shares of
Navigation Technologies Corporation common stock, which had been carried at a
cost basis of $2,218 at December 31, 1996, for approximately $800,000.
Silicon Valley Research, Inc.
In July 1995, the Partnership partially exercised a warrant to acquire, on a
net issuance basis, 23,731 shares of Silicon Valley Research, Inc. ('SVRI')
common stock. During July and August 1995, the Partnership sold 55,000 shares of
SVRI common stock resulting in a gain of approximately $227,000. During 1995,
SRVI stock was listed on the Nasdaq national market; accordingly, the
Partnership's investment in this stock was reclassified as marketable equity
securities.
During January 1996, SVRI completed a 1:2 reverse stock split which resulted
in the receipt of 146,806 shares of common stock in exchange for 293,612 shares
of common stock. This transaction resulted in no gain or loss to the
Partnership. During October 1996, the Partnership sold 134,941 shares of SVRI
common stock, which had a cost basis of zero, for approximately $562,000. During
December 1996, the Partnership exercised its warrants to acquire, on a net
issuance basis, 72,749 shares of SVRI common stock.
During 1997, the Partnership sold its remaining 84,614 shares of SVRI common
stock for approximately $89,000.
Texas Biotechnology Corporation
During November 1996, the Partnership sold 603 shares of Texas Biotechnology
Corporation ('TBC') common stock for proceeds of approximately $2,000 resulting
in a gain of approximately $1,000.
During July 1997, the Partnership exercised its options to purchase 7,980
shares of TBC common stock at exercise prices ranging from $1.38 to $2.40 for a
total cost of approximately $16,000. On August 5, 1997, the Partnership sold
these shares for approximately $46,000.
Synbiotics Corporation
During 1996, the Partnership sold 167,300 shares of Synbiotics Corporation
common stock for approximately $633,000 resulting in a gain of approximately
$310,000.
During 1997, the Partnership sold 293,003 shares of Synbiotics Corporation
common stock for approximately $1,119,000. The December 31, 1996 carrying amount
for Synbiotics Corporation common stock
11
<PAGE>
<PAGE>
reflected the net amount of approximately $594,000 realized on the sales of
152,500 of such shares through March 14, 1997.
Additionally, during the third quarter of 1997, the Partnership exercised its
options to purchase 21,266 shares of Synbiotics Corporation common stock at
exercise prices ranging from $2.63 to $2.94 for a total cost of approximately
$59,000 and subsequently sold these shares during 1997 for approximately
$86,000.
Ecogen Inc.
During the first quarter of 1997, the Partnership sold 6,500 shares of Ecogen
Inc. ('Ecogen') common stock for approximately $25,000. The December 31, 1996
carrying amount for Ecogen common stock reflected the net amount realized on
these sales. Additionally, pursuant to an agreement which closed March 31, 1997,
the Partnership received 136,000 shares of Ecogen common stock, as more fully
discussed in Note C. Subsequent to the first quarter of 1997, the Partnership
sold its remaining 231,665 shares (inclusive of the 136,000 shares received
during 1997) of Ecogen common stock for approximately $741,000.
Somatix Therapy Corporation
During the first quarter of 1996, the Partnership sold its remaining 113,692
shares of Somatix Therapy Corporation common stock for approximately $765,000
resulting in a gain of approximately $424,000.
E. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes with net income for tax reporting purposes for the years ended December
31, 1996 and 1995:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
<S> <C> <C>
1996 1995
---------------------------
Net income per financial statements $ 21,863,750 $5,570,951
Write-off of investment in equity securities -- (708,332)
Expiration of warrants -- (186,620)
Gain on sale of investments in equity securities (2,601,427) (136,932)
Adjustment to reflect change to liquidation basis
of accounting (17,534,504) --
Other 7,947 --
------------ ----------
Tax basis net income $ 1,735,766 $4,539,067
------------ ----------
------------ ----------
</TABLE>
As the Partnership no longer reports results of operations since its adoption
of the liquidation basis of accounting on December 31, 1996 (see Note B), the
following is a reconciliation of the change in estimated liquidation values of
assets and liabilities for financial reporting purposes with net income for tax
reporting purposes for the year ended December 31, 1997:
<TABLE>
<S> <C>
Change in estimated liquidation values of assets
and liabilities $ 1,088,422
Gain on sale of investments in equity securities (1,138,302 )
Liquidation basis adjustments (including the
recognition of 1996 adjustments) 18,146,944
------------
Tax basis net income $18,097,064
------------
------------
</TABLE>
The differences between the tax basis and book basis of net assets in
liquidation at December 31, 1997 and 1996 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
12
<PAGE>
<PAGE>
and other administrative services. The Partnership also reimburses an affiliate
of the General Partner for printing services. The costs and expenses for the two
years ended December 31, 1996 were:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1995
<S> <C> <C>
-------------------------
Management fee $2,000,000 $2,000,000
Printing 9,014 21,761
---------- ----------
$2,009,014 $2,021,761
---------- ----------
---------- ----------
</TABLE>
Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of December 31, 1996 were
$5,212.
Additionally, in conjunction with the adoption of the liquidation basis of
accounting (see Note B), the Partnership recorded an accrual as of December 31,
1996 for the estimated future costs expected to be incurred to liquidate the
Partnership. Included within that liquidation cost estimate was approximately
$1,507,000 which was expected to be charged by the General Partner and its
affiliates during the then anticipated liquidation period. Subsequent to that
accrual and effective July 1, 1997, the General Partner reduced its management
fee to $125,000 per quarter. Additionally, the Partnership did not complete its
final liquidation of the Partnership during 1997 as had previously been
anticipated. As a result of the above factors, costs expected to be charged by
the General Partner and its affiliates increased from the December 31, 1996
estimate by $258,000. The actual charges will depend primarily upon the length
of the time required to liquidate the Partnership and may differ from the amount
accrued.
Prudential Securities Incorporated, an affiliate of R&D Funding Corp, owned
340 limited partnership units 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 III, 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,
Prudential Securities Incorporated, The Prudential Insurance Company of America
and a number of other defendants. The petition alleges common law fraud, 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), as
amended, 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, Prudential Securities Incorporated and the Partnership
believe they have meritorious defenses to the complaint and are vigorously
defending themselves against 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.
Additionally, the General Partner believes that the litigation discussed above
will not have an adverse impact on its ability to liquidate the Partnership in
accordance with the Plan and in the time frame currently contemplated by the
General Partner.
13
<PAGE>
<PAGE>
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At December 31, 1997, the Partnership had cash and cash equivalents of
approximately $3,453,000 which is approximately $1,266,000 less than the
Partnership's cash balance at December 31, 1996. This decrease in cash and cash
equivalents was primarily due to distributions made in excess of proceeds from
the sales of certain investments in equity securities as further discussed
below, in addition to the payment of management fees.
In September 1996, R&D Funding Corp (the 'General Partner') mailed to all
limited partners a Consent Solicitation Statement (the 'Statement') asking for
their written consent to approve a plan of dissolution and liquidation of the
Partnership (the 'Plan'), as more fully described in the Statement. Holders of
68.4% of the limited partnership units approved the Plan on October 30, 1996 and
accordingly, the Plan has been adopted.
In accordance with the terms of the Plan, the General Partner has sold or
otherwise disposed of substantially all of the Partnership's remaining
investments and intends to distribute the resulting proceeds (reduced by a
reserve to satisfy any liabilities or contingencies of the Partnership) to the
partners by making a single, final distribution in accordance with the terms of
the Partnership Agreement. The Partnership's remaining investments in equity
securities are carried at cost or have been determined to be permanently
impaired (as further discussed below) as of December 31, 1997 and, as a result,
the carrying value of these remaining positions as of December 31, 1997 is zero.
The Partnership also holds royalty positions and technologies which have little
or no value and such assets are also carried at zero. The General Partner
anticipates that the final distribution and liquidation of the Partnership will
occur by December 31, 1998 subject to the sale or disposition of the
Partnership's few remaining assets and the settlement of the Partnership's
remaining liabilities and contingencies, certain of which have ongoing
discussions; however, due to the nature of the remaining contingencies to be
resolved, liquidation may take longer. It is expected that the Partnership's
eventual total distributions will not equal the partners' initial investment.
During the year ended December 31, 1997, the Partnership reflected an
increase of approximately $1,088,000 in the estimated net liquidation value of
its assets and liabilities. The March 31, 1997 valuation of the Partnership's
investments in Navigation Technologies Corporation and Ecogen, Inc. which were
previously carried at cost (see Notes C and D to the financial statements for
additional discussion) resulted in an increase to the estimated net liquidation
value of the Partnership's assets by approximately $1,282,000. Further
increases, totalling approximately $242,000, were primarily attributable to
market fluctuations in the Partnership's remaining investments in equity
securities, interest earned on the Partnership's cash and cash equivalents and
royalty income received. These increases were offset by a $436,000 increase to
the estimated costs of liquidating the Partnership from the $1,594,000 estimate
accrued during 1996. The increase in liquidating costs principally reflect
estimated costs to be incurred by the Partnership during 1998 as the Partnership
did not liquidate during 1997.
Pursuant to an agreement dated as of March 31, 1997 between the Partnership
and Ecogen Inc. ('Ecogen'), the Partnership assigned to Ecogen its right, title
and interest in and to certain technologies, products and property licensed to
Ecogen and agreed to terminate all license agreements with Ecogen (the 'Ecogen
Rights') in exchange for 136,000 shares of Ecogen common stock with an estimated
net realizable value of $484,000 as of the date of the agreement. Prior to this
agreement, the Ecogen Rights were carried at zero. The Partnership was
restricted from selling such shares until the Securities and Exchange Commission
declared the registration of the shares effective on August 11, 1997. The
Partnership sold these shares as discussed below. No further royalty payments
will be received by the Partnership from Ecogen as a result of this agreement.
In February 1997, the Partnership sold its remaining 942,045 shares of
Biocompatibles International plc common stock for approximately $18,557,000
representing the liquidation of the most significant remaining asset of the
Partnership.
During the first quarter of 1997, the Partnership sold 6,500 shares of Ecogen
common stock and 167,500 shares of Synbiotics Corporation common stock for
approximately $25,000 and $655,000, respectively.
14
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In February 1997, the Partnership made distributions of $16,666,667 and
$4,444,444 of which $15,000,000 ($150 per unit) and $4,000,000 ($40 per unit),
respectively, were paid to the limited partners and the remainder to the General
Partner.
During the second quarter of 1997, the Partnership sold its remaining shares
of Navigation Technologies Corporation common stock, 95,665 shares of Ecogen
common stock, 108,900 shares of Synbiotics Corporation common stock, 77,000
shares of Silicon Valley Research, Inc. common stock, and 17,360 shares of
Optical Specialties, Inc. common stock for approximately $800,000, $300,000,
$396,000, $82,000 and $700, respectively.
During the third quarter of 1997, the Partnership exercised its options to
purchase 21,266 shares of Synbiotics Corporation common stock for a total cost
of $59,000. Also, during the third quarter, the Partnership sold 103,900 shares
of Ecogen common stock, 25,283 shares of Synbiotics Corporation common stock,
7,614 shares of Silicon Valley Research, Inc. common stock, and 7,980 shares of
Texas Biotechnology Corporation common stock for approximately $349,000,
$104,000, $7,000, and $46,000, respectively.
At September 30, 1997, the General Partner determined that the Partnership's
investment in Optical Specialties, Inc. preferred stock was permanently impaired
and, as a result, reduced the estimated net realizable value from $43,400 to
zero.
Between October 1 and October 10, 1997, the Partnership sold its remaining
32,100 shares of Ecogen common stock and its remaining 12,586 shares of
Synbiotics Corporation common stock for approximately $92,000 and $50,000,
respectively.
Results of Operations
The Partnership adopted the liquidation basis of accounting as of December
31, 1996 in accordance with generally accepted accounting principles and no
longer reports results of operations. As such, there is no management discussion
comparing the corresponding 1997 and 1996 years.
The Partnership recorded net income of approximately $21.9 million for the
year ended December 31, 1996 as compared to net income of approximately $5.6
million in 1995. The increase was primarily due to the realization of the
Partnership's investment in Biocompatibles during 1996 and 1997 for
approximately $19.8 million as more fully described in Liquidity and Capital
Resources above. (In accordance with the liquidation basis of accounting as
discussed in Note A to the financial statements, 1996 net income reflected the
realization of the 1997 sales of Biocompatibles.) The 1996 increase was also due
to the fluctuations in royalty income, interest and other income and general and
administrative expenses discussed below, 1996 income of $3,472,000 from the
termination of royalty rights with Boston Scientific Corporation and gains
realized on the sales of Somatix Therapy Corporation, Silicon Valley Research
Inc. and Synbiotics Corporation common stock of approximately $424,000,
$562,000, and $310,000, respectively. The 1996 increase was reduced by the
recognition of approximately $1.6 million of estimated liquidation costs
recorded during 1996 in accordance with the liquidation basis of accounting, by
income of approximately $983,000 from the termination of the Partnership's
royalty rights with MacNeal Schwendler Corporation during March 1995 and gains
of approximately $1,940,000, $227,000 and $2,892,000 on sales of common stock in
Navigation Technologies Corporation, Silicon Valley Research, Inc. and
Biocompatibles, respectively, during 1995.
Royalty income for the year ended December 31, 1996 as compared to 1995
decreased by approximately $1,218,000. The decrease relates to lower 1996
royalties received from Boston Scientific Corporation (as a result of the
termination of royalty rights), Ecogen Inc. and Optical Specialties, Inc..
Interest and other income for the year December 31. 1996 increased by
approximately $919,000 as compared with the same period in 1995. The increase
was due primarily to 1996 income from two Biocompatibles rights offerings which
entitled the Partnership to purchase one unit (stock and warrant) for every six
shares of common stock of Biocompatibles. These rights were sold for
approximately $886,000.
General and administrative expenses increased by approximately $55,000 for
the year ended December 31, 1996 as compared to 1995. The increase is primarily
related to professional and other costs incurred in 1996 in connection with the
Statement as discussed above.
Inflation
Inflation has had no material direct impact on operations or on the financial
condition of the Partnership from inception through December 31, 1997.
15
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OTHER INFORMATION
The Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:
PruTech Research and Development Partnership II
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
16
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Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
PRUTRD851/170300
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial
information extracted from the financial
statements for Prutech Research and
Development Partnership II and is qualified
in its entirety by reference to such
financial statements
</LEGEND>
<RESTATED>
<CIK> 0000774560
<NAME> Prutech Research and Development Partnership II
<MULTIPLIER> 1
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1997
<PERIOD-END> Dec-31-1997
<PERIOD-TYPE> 12-Mos
<CASH> 3,452,809
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,452,809
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,452,809
<CURRENT-LIABILITIES> 873,549
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,579,260
<TOTAL-LIABILITY-AND-EQUITY> 3,452,809
<SALES> 0
<TOTAL-REVENUES> 0<F1>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0<F1>
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0
<FN>
<F1>Registrant adopted the liquidation basis of accounting on
December 31, 1996, and, accordingly, does not reflect
operations subsequent to 1996. See Note A to the financial
statements for further details.
</TABLE>
