SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 0-21464
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 13-3268435
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
440 Mission Court, Suite 250, Fremont, California 94539
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 656-1855
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes CK No _
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(unaudited)
March 31, December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 7,976,678 $2,936,616
Investments in equity securities 2,842,942 3,911,066
U.S. Treasury bills held in escrow, at amortized cost 584,804 585,707
Stock warrants 74,349 74,349
Interest receivable 6,727 5,585
Due from affiliate -- 462,586
Royalties receivable -- 147,560
Notes receivable, net -- 19,031
----------- ------------
Total assets 11,485,500 $8,142,500
----------- ------------
----------- ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued management fee $ 500,000 $ 500,000
Accrued expenses and other liabilities 121,346 102,103
----------- ------------
Total liabilities 621,346 602,103
----------- ------------
Commitments and contingencies
Partners' capital
Limited partners (100,000 units issued and outstanding) 8,231,432 4,595,879
General partner 990,714 586,764
Unrealized gain on investments in equity securities 1,642,008 2,357,754
----------- ------------
Total partners' capital 10,864,154 7,540,397
----------- ------------
Total liabilities and partners' capital 11,485,500 $8,142,500
----------- ------------
----------- ------------
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
2
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended
March 31,
-------------------------
1996 1995
- --------------------------------------------------------------------------------------------------
REVENUES
Termination of royalty rights $3,472,000 $ 983,130
Gain on sale of investments in equity securities 808,050 --
Royalty income 184,415 186,263
Interest and other income 151,320 104,636
---------- ----------
4,615,785 1,274,029
---------- ----------
EXPENSES
Management fee 500,000 500,000
General and administrative 76,282 81,183
---------- ----------
576,282 581,183
---------- ----------
Net income $4,039,503 $ 692,846
---------- ----------
---------- ----------
ALLOCATION OF NET INCOME
Limited partners $3,635,553 $ 623,561
---------- ----------
---------- ----------
General partner $ 403,950 $ 69,285
---------- ----------
---------- ----------
Net income per limited partnership unit $ 36.36 $ 6.24
---------- ----------
---------- ----------
- --------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(unaudited)
UNREALIZED
LIMITED GENERAL GAIN ON
PARTNERS PARTNER INVESTMENTS TOTAL
- ----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1995 $4,595,879 $586,764 $2,357,754 $ 7,540,397
Net income 3,635,553 403,950 -- 4,039,503
Change in unrealized gain on investments
in equity securities -- -- (715,746) (715,746)
---------- -------- ----------- -----------
Partners' capital--March 31, 1996 $8,231,432 $990,714 $1,642,008 $10,864,154
---------- -------- ----------- -----------
---------- -------- ----------- -----------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
3
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
March 31,
---------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Royalty income received $ 331,975 $ 161,010
Interest and other income received 148,770 16,103
General and administrative expenses paid (47,977) (70,051)
Evaluation and monitoring expenses paid (9,061) (12,296)
Management fee paid (500,000) --
Cash received for other assets 462,586 --
------------ ----------
Net cash provided by operating activities 386,293 94,766
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the termination of royalty rights 3,472,000 983,130
Proceeds from the sale of investments in equity securities 1,160,428 --
Collection of note receivable 19,031 --
Purchase of U.S. Treasury bills held in escrow (1,169,490) (578,846)
Redemption of U.S. Treasury bills held in escrow 1,171,800 585,900
Proceeds from the sale of technology -- 27,418
------------ ----------
Net cash provided by investing activities 4,653,769 1,017,602
------------ ----------
Net increase in cash and cash equivalents 5,040,062 1,112,368
Cash and cash equivalents at beginning of period 2,936,616 628,469
------------ ----------
Cash and cash equivalents at end of period $ 7,976,678 $1,740,837
------------ ----------
------------ ----------
- ----------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 4,039,503 $ 692,846
------------ ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of investments in equity securities (808,050) --
Gain on sale of technology -- (27,418)
Termination of royalty rights (3,472,000) (983,130)
Changes in:
Due from affiliate 462,586 --
Royalties receivable 147,560 (25,253)
Accrued management fee -- 500,000
Interest receivable (2,549) (61,115)
Accrued expenses and other liabilities 19,243 (1,164)
------------ ----------
Total adjustments (3,653,210) (598,080)
------------ ----------
Net cash provided by operating activities $ 386,293 $ 94,766
------------ ----------
------------ ----------
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
1996
Ecogen Inc. completed a 5:1 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 2:1 reverse stock split which resulted in the receipt of
146,806 shares of common stock in exchange for 293,612 shares of common stock.
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
4
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(unaudited)
A. General
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of PruTech Research and Development Partnership II (the
``Partnership'') as of March 31, 1996 and the results of its operations and its
cash flows for the three months ended March 31, 1996 and 1995. However, the
operating results for the interim periods may not be indicative of the results
expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1995.
B. Royalties
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.
C. Investments
Investments in equity securities include the following:
March 31, 1996 December 31, 1995
------------------------------------------------ ------------------------------------------------
Gross Gross
Marketable equity Cost unrealized Carrying Cost unrealized Carrying
securities Shares basis gains value Shares basis gains value
- ---------------------------------------------------------------------------------------------------------------------------------
Ecogen Inc.--Common Stock 102,165 $ 20,537 $ 490,290 $ 510,827 510,827 $ 20,537 $ 713,777 $ 734,314
Somatix Therapy Corpora-
tion--Common Stock -- -- -- -- 113,692 341,076 341,076 682,152
Synbiotics Corporation--
Common Stock 460,303 891,837 489,072 1,380,909 460,303 891,837 201,383 1,093,220
Silicon Valley Research,
Inc.--Common Stock 146,806 -- 660,627 660,627 293,612 -- 1,101,044 1,101,044
Texas Biotechnology
Corporation--Common
Stock 603 770 2,019 2,789 603 770 474 1,244
---------- ---------- ---------- ---------- ---------- ----------
913,144 1,642,008 2,555,152 1,254,220 2,357,754 3,611,974
---------- ---------- ---------- ---------- ---------- ----------
Not readily marketable
equity
securities
- --------------------------
Optical Specialties,
Inc.--
Common Stock 108,229 -- -- -- 108,299 -- -- --
Optical Specialties,
Inc.--
Preferred Stock 144,666 43,400 -- 43,400 144,666 43,400 -- 43,400
Biocompatibles
International
plc--Common Stock 920,080 242,172 -- 242,172 968,688 253,474 -- 253,474
Navigation Technologies
Corporation--Common
Stock 2,284,541 2,218 -- 2,218 2,284,541 2,218 -- 2,218
---------- ---------- ---------- ---------- ---------- ----------
287,790 -- 287,790 299,092 -- 299,092
---------- ---------- ---------- ---------- ---------- ----------
$1,200,934 $1,642,008 $2,842,942 $1,553,312 $2,357,754 $3,911,066
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
5
The gross unrealized gains would be allocated 90% to the limited partners and
10% to R&D Funding Corp (the ``General Partner'') if realized at March 31, 1996;
however, there is no assurance that the Partnership would receive these amounts
in the event of the sale of its position in these securities.
During January 1996, Ecogen Inc. completed a 5:1 reverse stock split which
resulted in the receipt of 102,165 shares of common stock in exchange for
510,827 shares of common stock. Also during January 1996, Silicon Valley
Research, Inc. completed a 2:1 reverse stock split which resulted in the receipt
of 146,806 shares of common stock in exchange for 293,612 shares of common
stock. These transactions resulted in no gain or loss to the Partnership.
In February 1996, the Partnership sold 48,608 shares of Biocompatibles
International plc common stock for approximately $396,000 resulting in a gain of
approximately $384,000.
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.
D. Related Parties
The General Partner and its affiliates perform certain services for the
Partnership (for which they are reimbursed through the management fee) which
include but are not limited to: accounting and financial management; registrar,
transfer and assignment functions; asset management; investor communications and
other administrative services. The Partnership also reimburses an affiliate of
the General Partner for printing services. The management fee and printing costs
were:
Three months ended
March 31,
---------------------
1996 1995
---------------------
Management fee $500,000 $500,000
Printing 4,213 6,384
-------- --------
$504,213 $506,384
-------- --------
-------- --------
Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of March 31, 1996 and
December 31, 1995 were approximately $11,000 and $10,000, respectively.
Prudential Securities Incorporated, an affiliate of R&D Funding Corp, owned
340 limited partnership units at March 31, 1996.
The Partnership maintains an account with the Prudential Institutional
Liquidity Portfolio Fund, an affiliate of R&D Funding Corp, for investment of
its available cash in short-term instruments pursuant to the guidelines
established by the Partnership Agreement.
The Partnership has engaged in research and development co-investment
projects with PruTech Research and Development Partnership, PruTech Research and
Development Partnership 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.
E. Commitments and Contingencies
On June 30, 1988, the Partnership and an affiliated partnership guaranteed
for Optical Specialties, Inc. (``OSI'') $750,000 of a $1.5 million bank credit
line (later changed to a term loan) of which the Partnership was responsible for
$651,000. The loan was obtained to sustain OSI's operations. The Partnership
purchased U.S. Treasury bills to collateralize its portion of the guarantee. OSI
has paid $75,000 on the loan, reducing the Partnership's guarantee to $585,900.
The General Partner believes the Partnership's guarantee expired on February 15,
1995 and is negotiating for the release of the escrowed funds. Subsequent to
March 31, 1996, the Partnership received $173,600 of the escrowed funds plus
interest.
6
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 units; negligence and breach of fiduciary duty in
connection with the operation of the Partnership; civil conspiracy; and
violations of the federal Securities Act of 1933 (sections 11 and 12), 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 ultimate outcome of this litigation as well as the impact
on the Partnership cannot presently be determined.
The General Partner, Prudential Securities Incorporated and the Partnership
believe they have meritorious defenses to the complaint and intend to vigorously
defend themselves against this action.
F. Subsequent Event
In April 1996, the Partnership distributed $4,444,444 to its partners.
Limited partners received $4,000,000 ($40 per unit) and the General Partner
received the remainder.
7
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At March 31, 1996, the Partnership had cash and cash equivalents of
approximately $8.0 million which is approximately $5.0 million greater than the
Partnership's cash balance at December 31, 1995. This increase in cash was
primarily due to proceeds received in 1996 relating to the termination of
royalty rights and the sales of stock discussed below offset, in part, by the
payment of the management fee.
As of March 31, 1996, the Partnership had approximately $1.2 million invested
in equity securities with an aggregate market value which exceeded its cost.
Certain of these investments are in development stage companies which are more
speculative and higher in risk than other equity investments. Additionally, the
realization of this market value is further impacted by certain sale
restrictions and market volume capacity. The amount to be distributed by the
Partnership in future quarters will be based on the extent to which the market
value of its investments can be realized, the revenue streams from royalties,
and to a lesser extent, interest income. The General Partner is considering
various alternatives with respect to the orderly liquidation of the Partnership.
It is not expected that the Partnership's eventual total distributions will
equal the partners' initial investments.
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 February 1996, the Partnership sold 48,608 shares of Biocompatibles
International plc (``Biocompatibles'') common stock for approximately $396,000
resulting in a gain of approximately $384,000.
In March 1996, the Partnership sold its remaining 113,692 shares of Somatix
Therapy Corporation (``Somatix'') common stock for approximately $765,000
resulting in a gain of approximately $424,000.
In April 1996, the Partnership distributed $4,444,444 to its partners from
net proceeds resulting from the transactions described above. Limited partners
received $4,000,000 ($40 per unit) and the General Partner received the
remainder.
The Partnership owns U.S. Treasury bills which are held in escrow as
collateral in connection with a guarantee of a term loan for Optical
Specialties, Inc. The General Partner believes the Partnership's guarantee
expired on February 15, 1995 and is negotiating for the release of the escrowed
funds. Subsequent to March 31, 1996, the Partnership received $173,600 of
escrowed funds plus interest.
Results of Operations
The Partnership's net income increased by approximately $3,347,000 for the
three months ended March 31, 1996 as compared to the same period in 1995
primarily due to the transactions with BSX, Somatix and Biocompatibles discussed
above offset, in part, by income of approximately $983,000 from the termination
of the Partnership's royalty rights with MacNeal Schwendler Corporation during
March 1995.
Interest and other income for the three months ended March 31, 1996 increased
by approximately $47,000 as compared with the same period in 1995. This increase
was due primarily to the recognition of previously deferred income upon the
collection of a note receivable from Lombart Lenses Limited, Inc. (which was
recorded at a net value of $19,000) offset, in part, by interest recorded in
1995 in conjunction with a note receivable, which matured in June 1995, relating
to the Partnership's investment in Tridom Corporation.
General and administrative expenses decreased by approximately $5,000 for the
three months ended March 31, 1996 as compared with the same period in 1995. This
decrease was due primarily to a decrease in evaluation and monitoring expenses.
8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings--This information is incorporated by reference to Note
E to the financial statements filed herewith in Item 1 of Part I of the
Registrant's Quarterly Report.
Item 2. Changes in Securities--None
Item 3. Defaults Upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--None
Item 5. Other Information--None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits--
PruTech Research and Development Partnership II Agreement of Limited
Partnership (incorporated by reference to Exhibit 3.1 included with
Registrant's Form S-1 Registration Statement, File No. 2-94273, dated
November 9, 1984)
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)
Financial Data Schedule (filed herewith)
b. Reports on Form 8-K
Registrant's Current Report on Form 8-K dated January 26, 1996, as
filed with the Securities and Exchange Commission on February 6,
1996, relating to Item 2 regarding transfer of the Partnership's
interest in its BSX technology to BSX.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PruTech Research and Development Partnership II
By: R&D Funding Corp
A Delaware corporation, General Partner
By: /s/ Russell L. Allen Date: May 15, 1996
----------------------------------------
Russell L. Allen
President and Director for the
Registrant
By: R&D Funding Corp
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: May 15, 1996
----------------------------------------
Steven Carlino
Vice President
Chief Accounting Officer for the
Registrant
10