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 June 30, 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
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(Exact name of registrant as specified in its charter)
California 13-3268435
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
440 Mission Court, Suite 250, Fremont, California 94539
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 656-1855
N/A
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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
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ASSETS
Cash and cash equivalents $ 3,614,426 $2,936,616
Investments in equity securities 3,470,173 3,911,066
U.S. Treasury bills held in escrow, at amortized cost 325,227 585,707
Royalties receivable 105,000 147,560
Stock warrants 74,349 74,349
Interest receivable 53 5,585
Due from affiliate -- 462,586
Note receivable, net -- 19,031
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Total assets $ 7,589,228 $8,142,500
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued management fee $ 500,000 $ 500,000
Accrued expenses and other liabilities 174,740 102,103
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Total liabilities 674,740 602,103
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Commitments and contingencies
Partners' capital
Limited partners (100,000 units issued and outstanding) 4,108,213 4,595,879
General partner 532,579 586,764
Unrealized gain on investments in equity securities 2,273,696 2,357,754
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Total partners' capital 6,914,488 7,540,397
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Total liabilities and partners' capital $ 7,589,228 $8,142,500
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The accompanying notes are an integral part of these statements
2
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF OPERATIONS
(unaudited)
Six months ended Three months ended
June 30, June 30,
------------------------- -------------------------
1996 1995 1996 1995
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REVENUES
Royalty income $ 289,415 $ 478,730 $ 105,000 $ 292,467
Gain on sale of investment in equity
securities 814,818 1,939,643 6,768 1,939,643
Termination of royalty rights 3,472,000 983,130 -- --
Interest and other income 504,172 192,071 352,852 87,435
---------- ---------- ---------- ----------
5,080,405 3,593,574 464,620 2,319,545
---------- ---------- ---------- ----------
EXPENSES
Management fee 1,000,000 1,000,000 500,000 500,000
General and administrative 177,812 164,222 101,530 83,039
---------- ---------- ---------- ----------
1,177,812 1,164,222 601,530 583,039
---------- ---------- ---------- ----------
Net income (loss) $3,902,593 $2,429,352 $ (136,910) $1,736,506
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
ALLOCATION OF NET INCOME (LOSS)
Limited partners $3,512,334 $2,186,417 $ (123,219) $1,562,855
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
General partner $ 390,259 $ 242,935 $ (13,691) $ 173,651
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per limited partnership
unit $ 35.12 $ 21.86 $ (1.23) $ 15.63
---------- ---------- ---------- ----------
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STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(unaudited)
UNREALIZED
LIMITED GENERAL GAIN ON
PARTNERS PARTNER INVESTMENTS TOTAL
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Partners' capital--December 31, 1995 $4,595,879 $586,764 $2,357,754 $ 7,540,397
Net income 3,512,334 390,259 -- 3,902,593
Distribution (4,000,000) (444,444) -- (4,444,444)
Change in unrealized gain on investments
in equity securities -- -- (84,058 ) (84,058)
---------- -------- ----------- -----------
Partners' capital--June 30, 1996 $4,108,213 $532,579 $2,273,696 $ 6,914,488
---------- -------- ----------- -----------
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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)
Six months ended
June 30,
----------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
Royalty income received $ 331,975 $ 509,631
Interest and other income received 504,755 1,069,686
General and administrative expenses paid (86,861) (150,228)
Evaluation and monitoring expenses paid (18,314) (16,632)
Management fee paid (1,000,000) (500,000)
Cash received from affiliate 462,586 --
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Net cash provided by operating activities 194,141 912,457
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of investment in equity securities 1,171,652 1,941,860
Proceeds from the termination of royalty rights 3,472,000 983,130
Collection of note receivable 19,031 937,612
Purchase of U.S. Treasury bills held in escrow (1,991,217) (582,671)
Redemption of U.S. Treasury bills held in escrow 2,256,647 585,900
Proceeds from the sale of technology -- 27,418
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Net cash provided by investing activities 4,928,113 3,893,249
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CASH FLOWS FROM FINANCING ACTIVITY
Distribution paid (4,444,444) --
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Net increase in cash and cash equivalents 677,810 4,805,706
Cash and cash equivalents at beginning of period 2,936,616 628,469
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Cash and cash equivalents at end of period $ 3,614,426 $ 5,434,175
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RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 3,902,593 $ 2,429,352
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Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of investment in equity securities (814,818) (1,939,643)
Termination of royalty rights (3,472,000) (983,130)
Gain on sale of technology -- (27,418)
Changes in:
Royalties receivable 42,560 30,901
Interest receivable 583 905,033
Due from affiliate 462,586 --
Accrued management fee -- 500,000
Accrued expenses and other liabilities 72,637 (2,638)
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Total adjustments (3,708,452) (1,516,895)
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Net cash provided by operating activities $ 194,141 $ 912,457
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
1996
Received 17,360 shares of Optical Specialties, Inc. common stock for granting an extension of its
term loan as further discussed in Note E.
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.
1995
Converted 161,448 shares of Biocompatibles International plc preferred stock into 1,614,480 shares
of common stock.
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The accompanying notes are an integral part of these statements
4
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1996, the results of its operations for the six
and three months ended June 30, 1996 and 1995 and its cash flows for the six
months ended June 30, 1996 and 1995. However, the operating results for the
interim periods may not be indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1995.
Certain balances for prior periods have been reclassified to conform with
current financial statement presentation.
B. 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:
June 30, 1996 December 31, 1995
------------------------------------------------ ------------------------------------------------
Marketable equity Gross Gross
securities Cost unrealized Carrying Cost unrealized Carrying
available-for-sale Shares basis gains value Shares basis gains value
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Ecogen Inc.--Common Stock 102,165 $ 20,537 $ 464,749 $ 485,286 510,827 $ 20,537 $ 713,777 $ 734,314
Somatix Therapy Corpora-
tion--Common Stock -- -- -- -- 113,692 341,076 341,076 682,152
Synbiotics Corporation--
Common Stock 458,003 887,381 944,631 1,832,012 460,303 891,837 201,383 1,093,220
Silicon Valley Research,
Inc.--Common Stock 146,806 -- 862,485 862,485 293,612 -- 1,101,044 1,101,044
Texas Biotechnology
Corporation--Common
Stock 603 770 1,830 2,600 603 770 474 1,244
---------- ---------- ---------- ---------- ---------- ----------
908,688 2,273,695 3,182,383 1,254,220 2,357,754 3,611,974
---------- ---------- ---------- ---------- ---------- ----------
Not readily marketable
equity
securities
- --------------------------
Optical Specialties,
Inc.--
Common Stock 125,589 -- -- -- 108,229 -- -- --
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
---------- ---------- ---------- ---------- ---------- ----------
$1,196,478 $2,273,695 $3,470,173 $1,553,312 $2,357,754 $3,911,066
---------- ---------- ---------- ---------- ---------- ----------
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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 June 30, 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 (``Biocompatibles'') 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.
During April 1996, Biocompatibles launched a rights offering to its
shareholders. Under the offering, the Partnership was entitled to purchase one
unit (stock and warrant) for each 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 which is included in interest and other income on the
statement of operations.
During April 1996, the Partnership received 17,360 shares of Optical
Specialties, Inc. (``OSI'') common stock for granting an extension of its term
loan as further discussed in Note E.
In June 1996, the Partnership sold 2,300 shares of Synbiotics Corporation
common stock for approximately $11,000 resulting in a gain of approximately
$7,000.
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:
Six months ended Three months ended
June 30, June 30,
------------------------- ---------------------
1996 1995 1996 1995
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Management fee $1,000,000 $1,000,000 $500,000 $500,000
Printing 5,336 13,510 1,123 8,533
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$1,005,336 $1,013,510 $501,123 $508,533
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---------- ---------- -------- --------
Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of June 30, 1996 and
December 31, 1995 were approximately $11,000 and $10,000, respectively.
Prudential Securities Incorporated, an affiliate of the General Partner,
owned 340 limited partnership units at June 30, 1996.
The Partnership maintains an account with the Prudential Institutional
Liquidity Portfolio Fund, an affiliate of the General Partner, 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.
6
E. Commitments and Contingencies
On June 30, 1988, the Partnership and an affiliated partnership guaranteed
for 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 which were held in escrow to collateralize its portion of the guarantee.
Prior to 1996, OSI paid $75,000 of the loan reducing the Partnership's guarantee
to $585,900. Additionally, the General Partner agreed to extend the
Partnership's guarantee in return for shares of OSI common stock as discussed in
Note C. During the three months ended June 30, 1996, OSI paid $260,400 of the
loan and subsequent to June 30, 1996, OSI paid the balance. Therefore, the
Partnership's guarantee was eliminated and the remaining escrowed funds were
released.
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.
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 June 30, 1996, the Partnership had cash and cash equivalents of
approximately $3.6 million which is approximately $678,000 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, the sales of stock and the release of cash held in escrow
offset, in part, by the payment of the management fee and the April 1996
distribution as further discussed below.
As of June 30, 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.
During the first quarter of 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 primarily from the transactions described above. Limited
partners received $4,000,000 ($40 per unit) and the General Partner received the
remainder.
During April 1996, Biocompatibles launched a rights offering to its
shareholders. Under the offering, the Partnership was entitled to purchase one
unit (stock and warrant) for each six Biocompatibles common stock shares owned.
The Partnership decided not to participate in the offering, but rather sell the
Partnership's rights in the market place. The sale resulted in a gain of
approximately $289,000.
In June 1996, the Partnership sold 2,300 shares of Synbiotics Corporation
(``Synbiotics'') common stock for $11,225 resulting in a gain of approximately
$6,800.
The Partnership owned U.S. Treasury bills which were held in escrow as
collateral in connection with a guarantee of a term loan for Optical
Specialties, Inc. (``OSI''). Through June 30, 1996, OSI paid half of the
original loan. In July 1996, OSI paid the balance of the loan and the remaining
escrowed funds were released.
Results of Operations
The Partnership's net income increased by approximately $1,473,000 but
decreased by $1,873,000 for the six and three months ended June 30, 1996,
respectively, as compared to the same periods in 1995. The six month increase
was primarily due to the 1996 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. The three month decrease
8
was primarily due to a gain of approximately $1,940,000 during June 1995 on the
sale of 2,284,542 shares of Navigation Technologies Corporation common stock.
Royalty income for the six and three months ended June 30, 1996 decreased by
approximately $189,000 and $187,000 as compared to the same periods in 1995.
These decreases were due primarily to lower 1996 royalties received from BSX (as
a result of the termination of royalty rights discussed above) and OSI offset,
in part, by increased royalties received in 1996 from Ecogen Inc.
Interest and other income for the six and three months ended June 30, 1996
increased by approximately $312,000 and $265,000 as compared with the same
periods in 1995. These increases were due primarily to income from the
Biocompatibles rights offering as discussed above and 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) during March
1996 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 increased by approximately $14,000 and
$18,000 for the six and three months ended June 30, 1996 as compared with the
same periods in 1995. These increases were due primarily to professional and
other costs incurred in 1996 in evaluating various alternatives with respect to
the orderly liquidation of the Partnership.
9
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--None
10
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/ Michael S. Hasley Date: August 14, 1996
----------------------------------------
Michael S. Hasley
President for the Registrant
By: R&D Funding Corp
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: August 14, 1996
----------------------------------------
Steven Carlino
Vice President
Chief Accounting Officer for the
Registrant
11