1996
- --------------------------------------------------------------------------------
PruTech Research and Annual
Development Partnership II Report
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
LETTER TO LIMITED PARTNERS FOR THE YEAR ENDED DECEMBER 31, 1996
1
PRUTECH II PORTFOLIO
The following investments and/or royalty rights were active during the year, or
had value at the end of the year. The Partnership's position in each investment
and/or royalty right is as of December 31, 1996. Certain of the securities held
by the Partnership have restrictions on resale due to contractual obligations
and/or Federal securities laws and regulations, and as noted below, certain of
these securities have been sold subsequent to December 31, 1996.
BIOCOMPATIBLES INTERNATIONAL plc (BII, London Stock Exchange)
Position: 942,045 shares of common stock
In February 1996, the Partnership sold 48,608 shares of Biocompatibles common
stock for approximately $396,000.
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 generated
approximately $289,000 for the Partnership. During November 1996, Biocompatibles
initiated another rights offering which the Partnership also sold for
approximately $597,000.
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.
In connection with the liquidation of the remaining assets of the
Partnership, on February 7, 1997, the Partnership sold its remaining 942,045
shares of Biocompatibles International plc common stock for approximately
$18,557,000.
BOSTON SCIENTIFIC CORPORATION (BSX)
Position: None
Pursuant to an agreement which closed January 26, 1996 between the
Partnership, an affiliate of the Partnership and 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.
ECOGEN INC. (EECN)
Position: 102,165 shares of common stock; royalty rights on genetically
engineered pesticide products which expire in 2004
Sales of the Partnership's royalty-bearing products decreased in 1996,
creating royalties of $115,000 during 1996 as compared to $149,000 in 1995. The
Partnership sold 6,500 shares of Ecogen Inc. common stock between February 24,
1997 and March 4, 1997 for $25,000. The stock price of Ecogen was $3.56 per
share as of March 20, 1997.
NAVIGATION TECHNOLOGIES CORPORATION
Position: 2,284,541 shares of common stock
Navigation Technologies Corporation, a private company, develops high quality
navigable map databases.
2
OPTICAL SPECIALTIES, INC. (OSI)
Position: 291,988 shares of common stock; 144,666 shares of Series D preferred
stock; royalties on technology and products licensed to OSI and to
Toray Industries, a Japanese manufacturer, which expire in 1999
The Partnership received payments of $150,000 from OSI in 1996, as compared
to $777,000 in 1995. The 1995 payments were primarily past-due royalties and
accumulated interest payments. The Partnership's other licensee, Toray
Industries, generated no royalties for the Partnership during 1996, as compared
to $81,000 during 1995. The stock price of OSI common stock was $.13 per share
as of March 20, 1997.
During April 1996, the Partnership received 17,360 shares of OSI common stock
for granting an extension of its term loan. In July 1996, OSI paid off its term
loan and as a result, the Partnership's guarantee of the loan was eliminated,
and the related escrowed funds were released to the Partnership.
During November 1996, the Partnership exercised warrants to acquire, on a net
issuance, 166,399 shares of OSI common stock.
SILICON VALLEY RESEARCH, INC. (SVRI)
Position: 84,614 shares of common stock
During January 1996, SVRI completed a 1 for 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. During October 1996, the Partnership sold
134,941 shares of SVRI common stock generating $562,000 for the Partnership.
During December 1996, the Partnership exercised its warrants to acquire, on a
net issuance basis, 72,749 shares of SVRI common stock. The stock price of SVRI
common stock was $1.19 per share as of March 20, 1997.
SOMATIX THERAPY CORPORATION (SOMA)
Position: None
From the period January 1, 1996 through March 27, 1996, the Partnership sold
its remaining 113,692 shares for $765,000.
SYNBIOTICS CORPORATION (SBIO)
Position: 293,003 shares of common stock; director's options for 39,494 shares
of common stock exercisable at prices ranging from $2.63 to $4.00 per
share
In June 1996, the Partnership sold 2,300 shares of Synbiotics Corporation
common stock for $11,000. During the third quarter of 1996, the Partnership sold
46,500 shares of Synbiotics Corporation common stock for $191,000. During the
fourth quarter of 1996, the Partnership sold 118,500 shares of Synbiotics
Corporation common stock for $431,000. The Partnership sold 152,500 shares of
Synbiotics Corporation common stock between January 6, 1997 and March 14, 1997
for $594,000.
The stock price of Synbiotics was $4.13 per share as of March 20, 1997.
3
Deloitte &
Touche LLP
--------------------------------------------------------
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 statement of net assets in process of
liquidation of PruTech Research and Development Partnership II, L.P. (a
California Limited Partnership) as of December 31, 1996. In addition, we have
audited the accompanying statement of financial condition of PruTech Research
and Development Partnership II, L.P. as of December 31, 1995, and the related
statements of operations, changes in partners' capital and cash flows for each
of the three 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 have approved the dissolution and ultimate liquidation of the
Partnership. As a result, the Partnership has 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, 1996, (2) its financial
condition at December 31, 1995 and (3) the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles on the bases described
in the preceding paragraph.
/s/ Deloitte & Touche LLP
March 26, 1997
- -----------------
Deloitte Touche
Tohmatsu
International
- -----------------
4
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENT OF NET ASSETS
(in process of liquidation)
December 31, 1996
- -------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 4,718,876
Investments in equity securities 20,078,870
-----------
Total assets 24,797,746
-----------
Liabilities
Estimated liquidation costs 1,593,996
Accrued management fee 500,000
Accrued expenses and other liabilities 101,801
-----------
Total liabilities 2,195,797
-----------
Contingencies
Net assets in liquidation $22,601,949
-----------
-----------
Net assets in liquidation
Limited partners (100,000 units issued and outstanding) $20,273,254
General partner 2,328,695
-----------
Total net assets in liquidation $22,601,949
-----------
-----------
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement
5
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENT OF FINANCIAL CONDITION
(going concern basis)
December 31, 1995
- -------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 2,936,616
Investments in equity securities 3,911,066
U.S. Treasury bills held in escrow, at amortized cost 585,707
Due from affiliate 462,586
Royalties receivable 147,560
Notes receivable, net 19,031
Interest receivable 5,585
Stock warrants 74,349
-----------
Total assets $ 8,142,500
-----------
-----------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued management fee $ 500,000
Accrued expenses and other liabilities 102,103
-----------
Total liabilities 602,103
-----------
Contingencies
Partners' capital
Limited partners (100,000 units issued and outstanding) 4,595,879
General partner 586,764
Unrealized gain on investments in equity securities 2,357,754
-----------
Total partners' capital 7,540,397
-----------
Total liabilities and partners' capital $ 8,142,500
-----------
-----------
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The accompanying notes are an integral part of this statement
6
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF OPERATIONS
(going concern basis)
Year ended December 31,
-------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
REVENUES
Royalty income $ 299,180 $ 1,516,735 $ 474,663
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 1,220,545 301,339 503,557
Recovery of R&D commitment -- -- 691,854
----------- ----------- -----------
6,672,247 7,859,432 1,670,074
----------- ----------- -----------
EXPENSES
Management fee 2,000,000 2,000,000 2,000,000
General and administrative 343,001 288,481 311,309
Write-down of investments in equity securities -- -- 1,489,410
----------- ----------- -----------
2,343,001 2,288,481 3,800,719
----------- ----------- -----------
Income (loss)-going concern basis 4,329,246 5,570,951 (2,130,645)
----------- ----------- -----------
Liquidating activities:
Investments in equity securities 19,128,500 -- --
Estimated liquidation costs (1,593,996) -- --
----------- ----------- -----------
Net income (loss) $21,863,750 $ 5,570,951 $(2,130,645)
----------- ----------- -----------
----------- ----------- -----------
ALLOCATION OF NET INCOME (LOSS)
Limited partners $19,677,375 $ 5,013,856 $(1,917,580)
----------- ----------- -----------
----------- ----------- -----------
General partner $ 2,186,375 $ 557,095 $ (213,065)
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per limited partnership unit $ 196.77 $ 50.14 $ (19.18)
----------- ----------- -----------
----------- ----------- -----------
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STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
UNREALIZED
LIMITED GENERAL GAIN ON
PARTNERS PARTNER INVESTMENTS TOTAL
- -----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1993 $ 6,499,603 $ 798,289 $3,423,329 $10,721,221
Net loss (1,917,580) (213,065) -- (2,130,645)
Distribution (2,000,000) (222,222) -- (2,222,222)
Change in unrealized gain on
investments in equity securities -- -- (1,624,352) (1,624,352)
----------- ---------- ----------- -----------
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
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
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The accompanying notes are an integral part of these statements
7
PRUTECH RESEARCH AND DEVELOPMENT PARTNERSHIP II
(a limited partnership)
STATEMENTS OF CASH FLOWS
(going concern basis)
Year ended December 31,
--------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Royalty income received $ 446,740 $ 1,530,276 $ 617,789
R&D recoveries received -- -- 650,000
Interest and other income received 346,844 1,190,780 127,681
General and administrative expenses paid (343,303) (280,126) (343,486)
Management fee paid (2,000,000) (3,500,000) (500,000)
Cash (paid) received from other assets 462,586 (462,586) 4,065
------------ ----------- -----------
Net cash (used in) provided by operating activities (1,087,133) (1,521,656) 556,049
------------ ----------- -----------
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 4,340
Proceeds from the sale of technology -- 27,418 --
Purchase of U.S. Treasury bills held in escrow (1,991,217) (1,167,415) (1,739,831)
Redemption of U.S. Treasury bills held in escrow 2,570,133 1,171,800 1,757,700
Investments in equity securities -- -- (770)
------------ ----------- -----------
Net cash provided by investing activities 7,313,837 7,163,136 21,439
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (4,444,444) (3,333,333) (2,222,222)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,782,260 2,308,147 (1,644,734)
Cash and cash equivalents at beginning of year 2,936,616 628,469 2,273,203
------------ ----------- -----------
Cash and cash equivalents at end of year $ 4,718,876 $ 2,936,616 $ 628,469
------------ ----------- -----------
------------ ----------- -----------
- ----------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ 21,863,750 $ 5,570,951 $(2,130,645)
------------ ----------- -----------
Adjustments to reconcile net income (loss) to net
cash (used in) provided by 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) --
Write-down of investments in equity securities -- -- 1,489,410
Recovery of R&D commitment income -- -- (41,854)
Interest income from receipt of stock warrants -- -- (32,495)
Changes in:
Accrued management fee -- (1,500,000) 1,500,000
Interest receivable 12,376 916,859 (343,381)
Royalties receivable 147,560 13,541 143,126
Due from affiliate 462,586 (462,586) --
Other assets -- -- 4,065
Accrued expenses and other liabilities (302) 8,355 (32,177)
------------ ----------- -----------
Total adjustments (22,950,883) (7,092,607) 2,686,694
------------ ----------- -----------
Net cash (used in) provided by operating activities $ (1,087,133) $(1,521,656) $ 556,049
------------ ----------- -----------
------------ ----------- -----------
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(continued on next page)
8
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 as further discussed in Note D.
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.
1994
Satisfied a $43,400 royalty receivable from Optical Specialties, Inc., by
accepting 144,666 shares of that company's preferred stock.
Lombart Lenses Limited, Inc. transferred all of its assets and liabilities to
a wholly-owned subsidiary of Biocompatibles in exchange for 161,448 shares
of Biocompatibles convertible preferred stock (see Note D).
Received $550,000 in cash and a warrant to acquire 150,000 shares of common
stock from Silicon Valley Research, Inc. in satisfaction of its outstanding
note (principal and interest of $591,854 and $32,495, respectively).
The General Partner concluded that an impairment in value that was not
temporary had occurred in the Partnership's equity investments in Synbiotics
Corporation and Somatix Therapy Corporation. As a result, the value of the
Partnership's common stock was written down by $949,375 and $540,035,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
9
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''). At December 31, 1996, the Partnership held
equity investments and/or royalty rights, which had value at December 31, 1996
or were active during the year then ended, 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 is proceeding
to sell or otherwise dispose of the Partnership's remaining investments and
distribute the resulting proceeds (reduced by a working capital reserve to
satisfy any liabilities or contingencies of the Partnership) to the partners in
accordance with the terms of the Agreement of Limited Partnership, as amended
(the ``Partnership Agreement''). Due to the nature of certain remaining
investments of the Partnership, the General Partner is not able to predict with
any degree of certainty the timing of sales, the proceeds that will be received
or the cash amounts that may ultimately be available for distribution by the
Partnership, except as otherwise disclosed herein. It is not expected that the
Partnership's eventual total distributions will equal the partners' initial
investment. The General Partner estimates that the final liquidation of the
Partnership's remaining investments will occur by December 31, 1997; however,
due to the nature of the remaining investments, liquidation may take longer.
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. However, due to the nature of certain of the
Partnership's remaining investments, the General Partner is not able to predict
with any degree of certainty the amounts which will be realized from these
investments and therefore, such assets continue to be carried at cost. See
discussion below for additional information on accounting for the Partnership's
remaining investments under the liquidation basis of accounting.
Accruals totaling approximately $1,594,000 have been recorded as of December
31, 1996 for the estimated future 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 estimated conclusion of liquidation.
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.
Cash and cash equivalents
Cash and cash equivalents include money market funds.
10
Investments
In accordance with the liquidation basis of accounting as further discussed
above, the Partnership's investments in equity securities at December 31, 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 in 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, 1996, the Partnership held stock options and certain other
securities with little or no value and accordingly, such assets are carried at
zero. The Partnership also holds royalty positions whose values are not readily
determinable and, as such, these assets are also 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 in the statements of financial condition 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 carrying value of an investment
was written down to its fair value when a decline in value was considered to be
other than temporary.
The Partnership uses the average cost method to determine gains or losses on
the sale of securities.
Royalty income
Royalty income represents revenue generated from licenses granted by the
Partnership.
Management fee
The General Partner is paid an annual management fee equal to two percent of
the limited partners' original capital contributions. 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.
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 until such time as the total net profits allocated to each
limited partner equal all losses previously allocated whereupon the General
Partner will be allocated net profits in an additional amount of 25% with a
corresponding reduction to the limited partners to be shared in proportion to
their capital contributions.
Distributions of cash are made in accordance with the Partnership Agreement
and are allocated 90% to the limited partners and 10% to the General Partner.
C. 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.
11
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:
Estimated
net realizable
Shares value
--------------------------------------------------------------------------------
Ecogen Inc.--Common Stock 102,165 $ 264,352
Synbiotics Corporation--Common Stock 293,003 1,042,291
Silicon Valley Research, Inc.--Common Stock 84,614 169,229
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
--------------
$ 20,078,870
--------------
--------------
* Position carried at cost
As more fully discussed in Note I, the Partnership has realized approximately
$19,177,000 of the December 31, 1996 $20,079,000 value from 1997 sales of these
securities. The remaining amount of approximately $902,000 reflects the December
31, 1996 prices for securities which are marketable (as more fully described in
Note B) and, as of March 20, 1997 fluctuations in share prices from the December
31, 1996 prices would not have a significant impact on the estimated net
realizable values of the Partnership's assets. However, there is no assurance
that the Partnership would receive these amounts in the event of the sale of its
position in these securities.
Investments in equity securities at December 31, 1995 include the following:
Gross
Cost unrealized Carrying
Marketable equity securities available-for-sale Shares basis gains value
- -------------------------------------------------------------------------------------------------------
Ecogen Inc.--Common Stock 510,827 $ 20,537 $ 713,777 $ 734,314
Somatix Therapy Corporation--Common Stock 113,692 341,076 341,076 682,152
Synbiotics Corporation--Common Stock 460,303 891,837 201,383 1,093,220
Silicon Valley Research, Inc.--Common Stock 293,612 -- 1,101,044 1,101,044
Texas Biotechnology Corporation--Common Stock 603 770 474 1,244
---------- ---------- ----------
1,254,220 2,357,754 3,611,974
---------- ---------- ----------
Not readily marketable equity securities
- ------------------------------------------------------------------------------------------
Optical Specialties, Inc.--Common Stock 108,229 -- -- --
Optical Specialties, Inc.--Preferred Stock 144,666 43,400 -- 43,400
Biocompatibles International plc--Common Stock 968,688 253,474 -- 253,474
Navigation Technologies Corporation--Common Stock 2,284,541 2,218 -- 2,218
---------- ---------- ----------
299,092 -- 299,092
---------- ---------- ----------
$1,553,312 $2,357,754 $3,911,066
---------- ---------- ----------
---------- ---------- ----------
12
Ecogen Inc.
During January 1996, 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. This transaction resulted in no gain or loss to
the Partnership. The Partnership sold 6,500 shares of Ecogen Inc. common stock
subsequent to 1996 as more fully discussed in Note I.
Somatix Therapy Corporation
The General Partner concluded that an impairment in value that was not
temporary had occurred in the Partnership's equity investment in Somatix Therapy
Corporation in 1994. As a result, the value of the Partnership's common stock
was written down by approximately $540,000 during the year ended December 31,
1994.
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.
Synbiotics Corporation
In 1994, the General Partner concluded that an impairment in value that was
not temporary had occurred in the Partnership's equity investment in Synbiotics
Corporation. As a result, the value of the Partnership's common stock was
written down by approximately $949,000 for the year ended December 31, 1994.
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. During the third quarter of 1996, the Partnership sold 46,500 shares of
Synbiotics Corporation common stock for approximately $191,000 resulting in a
gain of approximately $101,000. Additionally, during the fourth quarter of 1996,
the Partnership sold 118,500 shares of Synbiotics Corporation common stock for
approximately $431,000 resulting in a gain of approximately $202,000. The
Partnership sold 152,500 shares of Synbiotics Corporation common stock between
January 6, 1997 and March 14, 1997 as more fully discussed in Note I.
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.
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.
The Partnership received a promissory note in 1989 as part of a restructuring
agreement with Silvar-Lisco (now named SVRI) in which the company agreed to
repay a portion of its R&D funds as a result of its failure to complete the
Partnership's R&D project. In September 1994, the Partnership received $550,000
in cash and a warrant to purchase 150,000 shares of common stock from SVRI in
satisfaction of its outstanding note (principal and interest of $591,854 and
$32,495, respectively). Principal repayments were recognized by the Partnership
as a recovery of R&D commitment income.
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.
Texas Biotechnology Corporation
In July 1994, a subsidiary of Synbiotics Corporation merged with Texas
Biotechnology Corporation (``TBC''). Pursuant to the merger agreement, the
Partnership exercised its option to purchase 322 shares of TBC common stock and
was entitled to receive additional shares if certain conditions were met. In
July
13
1995, the merger contingencies were satisfied and the Partnership received an
additional 281 shares of TBC common stock.
During November 1996, the Partnership sold its entire holdings of 603 shares
of TBC common stock for proceeds of approximately $2,000 resulting in a gain of
approximately $1,000.
Optical Specialties, Inc.
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 H. During the fourth quarter of 1996, the
Partnership exercised warrants to acquire, on a net issuance, 166,399 shares of
OSI common stock.
Biocompatibles International plc
In September 1994, Lombart Lenses Limited, Inc. (``Lombart'') transferred all
of its assets and liabilities to a wholly-owned subsidiary of Biocompatibles
International plc (``Biocompatibles'') in a tax-free exchange for 200,000 shares
of Biocompatibles Series D Convertible Preferred Stock, of which the
Partnership's portion was 161,448. Concurrent with the transaction, Lombart
changed its name to Boissevain, Ltd. (``Boissevain''). Of the 161,448 shares
received, an escrow agent held 72,652 shares to cover any breach of
representations and warranty claims against Lombart. In April 1995, Boissevain
converted all of the Partnership's Biocompatibles preferred stock into 1,614,480
shares of common stock of that company, of which 363,258 shares remained in
escrow. In September 1995, the remaining shares held in escrow were released
without any claims.
In connection with this transaction, a promissory note previously issued to
the Partnership by Lombart was cancelled and a new promissory note was executed.
The principal balance of the new note (approximately $88,000) was equal to the
outstanding principal and interest balance of the cancelled note as of the
closing date of the transaction. The new note accrued interest at 5% per annum
and matured on March 23, 1996 at which time all principal and interest was paid.
In October 1995, the Partnership sold 645,792 shares of Biocompatibles common
stock resulting in a gain of approximately $2,892,000, which represented
approximately 37% of the Partnership's total 1995 revenues.
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
on 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). Subsequent
to 1996, the Partnership sold its remaining position in Biocompatibles common
stock as more fully discussed in Note I.
E. Note and Interest Receivable
The Partnership received a promissory note of $937,612 from a subsidiary of
American Telephone and Telegraph Inc. (``AT&T'') on June 23, 1988 in exchange
for its stock in Tridom Corporation. The note accrued interest at 11.06% and
matured on June 22, 1995 at which time all principal and interest was satisfied.
14
F. Income Taxes
The following is a reconciliation of net income (loss) for financial
reporting purposes with net income (loss) for tax reporting purposes:
Year ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
Net income (loss) per financial statements $21,832,821 $5,570,951 $(2,130,645)
Write-off of investment in equity securities -- (708,332) 1,489,410
Expiration of warrants -- (186,620) --
Gain on sale of investments in equity securities (2,601,427) (136,932) --
Recovery of R&D commitment per financial statements -- -- (691,854)
Adjustment to reflect change to liquidation basis
of accounting (17,503,575) -- --
Other 7,947 -- --
----------- ---------- -----------
Tax basis net income (loss) $ 1,735,766 $4,539,067 $(1,333,089)
----------- ---------- -----------
----------- ---------- -----------
The differences between the tax basis and book basis of partners' capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments.
G. Related Parties
The General Partner and its affiliates perform certain services for the
Partnership for which they are reimbursed through the management fee which
include, but are not limited to: accounting and financial management; registrar,
transfer and assignment functions; asset management; investor communications and
other administrative services. The Partnership also reimburses an affiliate of
the General Partner for printing services. The costs and expenses were:
Year ended December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
Management fee $2,000,000 $2,000,000 $2,000,000
Printing 9,014 21,761 13,152
---------- ---------- ----------
$2,009,014 $2,021,761 $2,013,152
---------- ---------- ----------
---------- ---------- ----------
Printing costs payable to an affiliate of the General Partner (which are
included in accrued expenses and other liabilities) as of December 31, 1996 and
1995 were $5,212 and $9,700, respectively.
Prudential Securities Incorporated, an affiliate of R&D Funding Corp, owned
340 limited partnership units at December 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.
H. 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 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
15
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. 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.
I. Subsequent Events
In connection with the liquidation of the remaining assets of the
Partnership, on February 7, 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. Between February 24, 1997 and March 4, 1997, the Partnership
sold 6,500 shares of Ecogen Inc. common stock for approximately $25,000. Between
January 6, 1997 and March 14, 1997, the Partnership sold 152,500 shares of
Synbiotics Corporation common stock for approximately $594,000. The December 31,
1996 carrying amounts of these investments reflect the net amounts realized from
these sales.
As a result of the above sales, 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.
16
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, 1996, the Partnership had cash and cash equivalents of
approximately $4.7 million. This amount is approximately $1.8 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, the sale of warrant and stock rights, the sales of stock and the
release of cash held in escrow partially offset by the payment of the management
fee and the April 1996 distribution as further discussed below.
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 is proceeding to sell or otherwise dispose of the
Partnership's remaining investments and distribute the resulting proceeds
(reduced by a working capital reserve to satisfy any liabilities or
contingencies of the Partnership) to the partners in accordance with the terms
of the Partnership Agreement. Due to the nature of certain remaining investments
of the Partnership, the General Partner is not able to predict with any degree
of certainty the timing of sales, the proceeds that will be received or the cash
amounts that may ultimately be available for distribution by the Partnership
except as otherwise disclosed herein. It is not expected that the Partnership's
eventual total distributions will equal the partners' initial investment. The
General Partner estimates that the final liquidation of the remaining
investments will occur by December 31, 1997; however, due to the nature of the
remaining investments, liquidation may take longer.
As of December 31, 1996, the Partnership had investments in equity securities
with an estimated net realizable value of approximately $20,079,000, of which
approximately $19,177,000 has been realized from sales of these securities in
1997 through March 20th. Certain of the Partnership's remaining investments are
in development stage companies which are more speculative and higher in risk
than other equity investments. The realization of the estimated net realizable
value of these remaining equity securities is further impacted by certain sale
restrictions and market volume capacity. The Partnership also holds royalty
positions whose values are not readily determinable and, as such, these assets
are carried at zero. As discussed in the Statement, the amount to be distributed
by the Partnership in future quarters will be based on the extent to which the
value of its remaining equity securities can be realized, the sale proceeds or
revenue stream from royalties, and, to a lesser extent, interest income.
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. Pursuant to the offering, the Partnership was entitled to purchase
one unit (stock and warrant) for every six Biocompatibles common
17
stock shares owned. The Partnership decided not to participate in the offering,
but rather sold the Partnership's rights. The sale resulted in a gain of
approximately $289,000.
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.
In June 1996, the Partnership sold 2,300 shares of Synbiotics Corporation
(``Synbiotics'') common stock for approximately $11,000 resulting in a gain of
approximately $7,000. During the third quarter of 1996, the Partnership sold
46,500 shares of Synbiotics common stock for approximately $191,000 resulting in
a gain of approximately $101,000. During the fourth quarter of 1996, the
Partnership sold 118,500 shares of Synbiotics common stock for approximately
$431,000 resulting in a gain of approximately $202,000.
During October 1996, the Partnership sold 134,941 shares of Silicon Valley
Research, Inc. (``SVRI'') common stock, which had a cost basis of zero, for
approximately $562,000.
During November 1996, Biocompatibles initiated another rights offering to its
shareholders. The Partnership decided not to participate in the rights offering,
but instead sold the Partnership's rights in the marketplace. This sale
generated approximately $597,000 for the Partnership.
Subsequent to 1996, the Partnership sold 6,500 shares of Ecogen Inc. common
stock, 152,500 shares of Synbiotics Corporation common stock and its remaining
942,045 shares of Biocompatibles common stock for approximately $25,000,
$594,000, and $18,557,000, respectively. 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.
Results of Operations
Summary
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 transactions with BSX, Somatix, SVRI and Synbiotics discussed above. The
1996 increase was reduced by the recognition of approximately $1.6 million of
estimated liquidation costs recorded 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, SVRI and Biocompatibles,
respectively, during 1995.
The Partnership recorded net income of approximately $5.6 million for the
year ended December 31, 1995 as compared to a net loss of approximately $2.1
million in 1994. This 1995 increase was primarily due to gains for the sale of
investments in equity securities in 1995 and the termination of royalty rights
of MNS as discussed above as well as the write-down of certain investments in
equity securities in 1994.
Operating Revenues
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 BSX (as a result of the termination of royalty rights
discussed above) Ecogen Inc. and OSI. Royalty income for the year ended December
31, 1995 increased by approximately $1,042,000 from 1994. This increase resulted
from increased royalties received from Optical Specialties, Inc., Boston
Scientific Corporation, Ecogen Inc. and Toray Industries offset, in part, by the
elimination of royalties from MNS.
Interest and other income for the year ended December 31, 1996 increased by
approximately $919,000 as compared with the same period in 1995. The increase
was due primarily to income from the Biocompatibles rights offerings 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 promissory note which matured in
June
18
1995 relating to the Partnership's investment in Tridom Corporation. Interest
and other income for the year ended December 31, 1995 decreased by approximately
$202,000 as compared to 1994. This fluctuation was primarily due to additional
interest recorded in 1994 in conjunction with the note receivable relating to
the Partnership's investment in Tridom Corporation and, to a lesser extent, the
elimination of interest income in connection with a note receivable from SVRI
and the sale of technology developed by ENI Diagnostics, Inc. (``ENI'') in 1995.
Operating Expenses
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. General and administrative expenses decreased by
approximately $23,000 for the year ended December 31, 1995 as compared to 1994.
This fluctuation was primarily due to legal costs incurred in 1994 relating to
the Lombart Lenses Limited, Inc./Biocompatibles transaction (see Note D to the
financial statements) and certain litigation which settled in March 1995.
Inflation
Inflation has had no material direct impact on operations or on the financial
condition of the Partnership from inception through December 31, 1996.
19
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
20
Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
PRUTRD851/170300