UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number 33-14582
PAINEWEBBER R&D PARTNERS II, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3437420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 713-2000
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 X No
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
FORM 10-Q
SEPTEMBER 30, 1995
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition 2
(unaudited) at September 30, 1995 and
December 31, 1994
Statements of Operations 3
(unaudited) for the three months
ended September 30, 1995 and 1994
Statements of Operations 4
(unaudited) for the nine months
ended September 30, 1995 and 1994
Statement of Changes in Partners' Capital 5
(unaudited) for the nine months
ended September 30, 1995
Statements of Cash Flows 6
(unaudited) for the nine months
ended September 30, 1995 and 1994
Notes to Financial Statements 7-13
(unaudited)
Item 2. Management's Discussion and Analysis of 14-15
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
All schedules are omitted either because they are not applicable or the
information required to be submitted has been included in the financial
statements or notes thereto.
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Page 2
Item 1. Financial Statements
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Financial Condition
(unaudited)
September 30, December 31,
1995 1994
- ------------------------------------------------------------------------------
Assets:
Cash $ 5,718 $ 6,703
Marketable securities, at market value 1,438,748 2,308,631
Investments, at market value 2,542,500 10,327,102
Interest receivable 5,594 7,673
Investments in product development projects 178,474 183,228
Royalty income receivable 29,132 42,472
------------ -----------
Total assets $ 4,200,166 $12,875,809
============ ===========
Liabilities and partners' capital:
Accrued liabilities $ 72,383 $ 151,442
Partners' capital 4,127,783 12,724,367
------------ -----------
Total liabilities and partners' capital $ 4,200,166 $12,875,809
============ ===========
- ------------------------------------------------------------------------------
See notes to financial statements.
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Page 3
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Operations
(unaudited)
For the three months ended September 30, 1995 1994
- ------------------------------------------------------------------------------
Revenues:
Interest income $ 18,624 $ 25,604
Income from product development projects 111,952 51,440
Unrealized appreciation (depreciation) of
investments and marketable securities 2,651,841 (3,427)
Realized loss on distribution of investment
and marketable securities - (275,278)
--------- --------
2,782,417 (201,661)
--------- --------
Expenses:
Expenditures under product development
projects - 338,598
Management fee 47,953 157,613
General and administrative costs 70,098 55,371
--------- --------
118,051 551,582
--------- --------
Net income (loss) $ 2,664,366 $ (753,243)
=========== ==========
Net income (loss) per partnership unit:
Limited partners (based on 8,257 units) $319.45 $ (90.31)
General partner $ 26,643.66 $(7,532.43)
- ------------------------------------------------------------------------------
See notes to financial statements.
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Page 4
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Operations
(unaudited)
For the nine months ended September 30, 1995 1994
- -------------------------------------------------------------------------------
Revenues:
Interest income $ 68,874 $ 79,626
Income from product development projects 328,363 144,747
Unrealized appreciation (depreciation) of
investments and marketable securities 2,694,573 (11,091)
Realized gain (loss) on distribution of
investments 2,656,630 (583,917)
--------- --------
5,748,440 (370,635)
--------- --------
Expenses:
Expenditures under product development
projects - 921,396
Management fee 299,117 472,839
General and administrative costs 224,834 174,106
--------- --------
523,951 1,568,341
--------- ---------
Net income (loss) before cumulative effect of
change in accounting method 5,224,489 (1,938,976)
Cumulative effect of change in accounting
method - 366,334
----------- -----------
Net income (loss) $ 5,224,489 $(1,572,642)
=========== ===========
Net income (loss) per partnership unit before
cumulative effect of change in accounting
method:
Limited partners (based on 8,257 units) $626.41 $ (232.48)
General partner $ 52,244.89 $(19,389.76)
Cumulative effect of change in accounting
method per partnership unit:
Limited partners (based on 8,257 units) $ - $ 43.92
General partner $ - $ 3,663.34
Net income (loss) per partnership unit:
Limited partners (based on 8,257 units) $ 626.41 $ (188.56)
General partner $ 52,244.89 $(15,726.42)
- ------------------------------------------------------------------------------
See notes to financial statements.
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Page 5
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statement of Changes in Partners' Capital
(unaudited)
Limited General
For the nine months ended September 30, 1995 Partners Partner Total
- -------------------------------------------------------------------------------
Balance at December 31, 1994 $ 12,594,066 $ 130,301 $12,724,367
Net income 5,172,244 52,245 5,224,489
Distributions to partners:
Cash (908,270) (9,174) (917,444)
Cygnus Therapeutic Systems common stock (12,773,579) (130,050) (12,903,629)
----------- ----------- -----------
Balance at September 30, 1995 $ 4,084,461 $ 43,322 $ 4,127,783
=========== =========== ===========
- -------------------------------------------------------------------------------
See notes to financial statements.
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Page 6
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
(unaudited)
For the nine months ended September 30, 1995 1994
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 5,224,489 $(1,572,642)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Unrealized (appreciation) depreciation of
investments and marketable securities (2,694,573) 11,091
Realized (gain) loss on distribution of investments (2,656,630) 583,917
Income from product development projects (247,855) -
Cumulative effect of change in accounting method - (366,334)
Decrease (increase) in operating assets:
Marketable securities 1,010,090 2,054,896
Investments 91,970 (4,963)
Investments in product development projects 252,608 244,298
Interest receivable 2,079 6,544
Royalty income receivable 13,340 48,971
Decrease in operating liabilities:
Accrued liabilities (79,059) (13,778)
Liabilities under product development projects - (576,018)
-------- --------
Cash provided by operating activities 916,459 415,982
-------- --------
Cash flows from financing activities:
Distribution to partners (917,444) (417,020)
-------- --------
Cash used for financing activities (917,444) (417,020)
-------- --------
Decrease in cash (985) (1,038)
Cash at beginning of period 6,703 6,369
-------- --------
Cash at end of period $ 5,718 $ 5,331
======== ========
- -------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest during the nine months ended
September 30, 1995 and 1994.
Supplemental schedule of non-cash activities:
- -------------------------------------------------------------------------------
For the nine months ended September 30, 1995 1994
- -------------------------------------------------------------------------------
Distribution of investments to partners:
Alkermes, Inc. common stock $ - $ 1,985,385
Cygnus Therapeutic Systems common stock $12,903,629 $ -
- -------------------------------------------------------------------------------
See notes to financial statements.
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Page 7
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
The financial information as of and for the periods ended September 30, 1995
and 1994 is unaudited. However, in the opinion of management of PaineWebber
R&D Partners II, L.P. (the "Partnership"), such information includes all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation. The results of operations reported for the interim periods ended
September 30, 1995, are not necessarily indicative of results to be expected
for the year ended December 31, 1995. These financial statements should be
read in conjunction with the most recent annual report of the Partnership on
Form 10-K for the year ended December 31, 1994, and the previously issued
quarterly reports for the quarters ended June 30 and March 31, 1995.
The Partnership is a Delaware limited partnership that commenced operations
on September 30, 1987 with a total of $72.0 million available for investment.
PWDC Holding Company (the "Manager") is the general partner of PaineWebber
Technologies II, L.P. (the "General Partner"), which is the general partner of
the Partnership. PWDC Holding Company is a wholly owned subsidiary of
PaineWebber Development Corporation ("PWDC"), an indirect, wholly owned
subsidiary of Paine Webber Group Inc. The Partnership will terminate on
December 31, 2012, unless its term is extended or reduced by the General
Partner.
The principal objective of the Partnership is to provide long-term capital
appreciation to investors through investing in the development and
commercialization of new products with technology companies ("Sponsor
Companies"), which are expected to address significant market opportunities.
Once the product development phase is completed, the Sponsor Companies have the
option to license and commercialize the products resulting from the product
development project, and the Partnership has the right to receive payments
based upon the sale of such products. In connection with product development
projects (the "Projects"), the Partnership sought to obtain warrants to
purchase the common stock of Sponsor Companies. These warrants will have the
potential to provide additional capital appreciation to the Partnership which
is not directly dependent upon the outcome of the Projects (see Note 5). In
addition, the Partnership invests as a limited partner in product development
limited partnerships. Such partnerships were formed to develop specific, new
products through contracts with Sponsor Companies. The Sponsor Companies
conduct the Projects and affiliates of the Sponsor Companies serve as general
partners of the partnerships. As a result of restructuring some of the
original Projects, the Partnership also obtained restricted common stock in
some of the Sponsor Companies (see Note 3). As such, the Partnership is
engaged in diverse Projects through contracts, participation in other
partnerships and investments in securities of the Sponsor Companies.
All distributions to the limited partners of the Partnership (the "Limited
Partners") and the General Partner (collectively, the "Partners") from the
Partnership will initially be made pro rata in accordance with their respective
net capital contributions. The following table sets forth the proportion of
each distribution to be received by the Limited Partners and the General
Partner, respectively:
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Page 8
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 1 CONTINUED)
Limited General
Partners Partner
-------- -------
I. Until the value of the aggregate
distributions for each limited
partnership unit ("Unit") equals
$10,000 plus simple interest
on such amount accrued at 7% per
annum for each Unit sold
at the Initial Closing (6% per
annum for each subsequent Unit
sold up to the 5,000th Unit and
5% per annum for each Unit
sold thereafter) ("Contribution
Payout") 99% 1%
II. After Contribution Payout and
until the value of the
aggregate distributions for
each Unit equals $50,000
("Final Payout") 80% 20%
III. After Final Payout 75% 25%
At September 30, 1995, the Partnership has made cash and securities
distributions since inception of $1,565 and $7,297 per Unit, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Partnership adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("Statement No. 115"), for investments held as of or acquired after
January 1, 1994. In accordance with Statement No. 115, prior period financial
statements have not been restated to reflect the change in accounting method.
The cumulative effect of adopting Statement No. 115 as of January 1, 1994, was
to increase net income for the nine months ended September 30, 1994, by
$366,334 or $43.92 per Unit. Prior to the adoption of Statement No. 115, the
Partnership accounted for its investments in restricted common stock
(regardless of the restriction period) at the lower of cost or fair value.
Marketable securities consist of a money market fund and common stock which
are recorded at market value. Marketable securities are not considered cash
equivalents for the Statements of Cash Flows.
Realized and unrealized gains or losses are determined on a specific
identification method and are reflected in the Statements of Operations during
the period in which the change in value occurs.
The Partnership invested in Projects, further described in Note 5, through
one of the following two vehicles:
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Page 9
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 2 CONTINUED)
- Product Development Contracts
The Partnership paid amounts to Sponsor Companies under product
development contracts. Such amounts were expensed by the Partnership
when incurred by the Sponsor Companies.
- Product Development Limited Partnerships
The Partnership participates as a limited partner in product
development limited partnerships formed to develop specific products.
Such participations are accounted for using the equity method. Such
partnerships expensed product development costs when incurred.
The Partnership carries warrants at a zero value in cases where the Sponsor
Company's stock is not publicly traded or the exercise period has not been
attained. To the extent that the Partnership's warrants are currently
exercisable and the Sponsor Company's stock is publicly traded, the warrants
are carried at intrinsic value (the excess of market price per share over the
exercise price per share), which approximates fair value.
3. MARKETABLE SECURITIES AND INVESTMENTS
MARKETABLE SECURITIES:
The money market fund consists of obligations with maturities of one year
or less that are subject to fluctuations in value.
At September 30, 1995, the Partnership held the following marketable
securities:
Market Cost
------ ----
Money market fund $1,199,715 $1,199,715
Alkermes, Inc. common stock (3,227 shares) 20,975 22,589
Cygnus, Inc. common
stock (11,867 shares) 218,058 69,719
---------- ----------
$1,438,748 $1,292,023
========== ==========
At December 31, 1994, the Partnership held the following marketable
securities:
Market Cost
------ ----
Money market fund $2,301,774 $2,301,774
Alkermes, Inc. common stock (3,227 shares) 6,857 22,589
---------- ----------
$2,308,631 $2,324,363
========== ==========
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Page 10
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 3 CONTINUED)
Alkermes, Inc. ("Alkermes") common stock had a market value of $6.50 and
$2.125 per share as of September 30, 1995 and December 31, 1994, respectively.
Cygnus, Inc. (formerly, Cygnus Therapeutic Systems) ("Cygnus") common stock had
a market value at September 30, 1995, of $18.375. (See section entitled
"Investments".) In conjunction with a public offering by Cygnus of its common
stock, the Partnership has agreed not to sell, contract to sell or otherwise
dispose of its shares of Cygnus common stock for a period expiring on January
5, 1996.
INVESTMENTS:
At September 30, 1995, the Partnership recorded its warrant to purchase
300,000 common shares of Cygnus as an investment with a carrying value equal to
its intrinsic value of $2,542,500 (which approximates fair value)-(see Note 5).
Accordingly, the Partnership recognized unrealized appreciation of this amount
for the quarter ended September 30, 1995, which has been reflected in the
accompanying Statements of Operations.
In December 1994 the Partnership and Cygnus entered into the GMS
Technology Purchase Agreement whereby Cygnus purchased from the Partnership the
rights to glucose monitoring system ("GMS") technology developed under product
development agreements between Cygnus and the Partnership. In exchange for its
technology rights, the Partnership received 1,529,941 shares of Cygnus common
stock valued at $8,988,403 which was based on the market price per share of
$5.875 on the date of receipt. At December 31, 1994, the Partnership recorded
its Cygnus common stock at the closing market price of $6.75 per share
(totaling $10,327,102). In May 1995 the Partnership distributed to its Partners
1,518,074 shares of Cygnus common stock. The market value of the Cygnus common
stock on the date of distribution was $12,903,629 ($8.50 per share). The
carrying value of the shares distributed was $10,246,999 ($6.75 per share) as
of December 31, 1994. Accordingly, the Partnership recognized realized gain
upon the distribution of $2,656,630 for the nine months ended September 30,
1995. The remaining 11,867 shares of Cygnus common stock were held as
marketable securities.
In 1994, in accordance with the adoption of Statement No. 115, the
Partnership commenced recording investments in restricted common stock (where
the restriction period expires in one year or less) at market value with
unrealized gains and losses reflected in the Statements of Operations during
the period in which the change in value occurs. Restricted common stock, with
a restriction period greater than one year, is carried at the lower of cost or
fair value. The cumulative effect at January 1, 1994 of adopting Statement No.
115 was to increase the carrying value of the Alkermes restricted common stock
by $366,334.
On January 5 and August 8, 1994, 166,841 and 200,202 shares, respectively,
of Alkermes restricted common stock were distributed by the Partnership to its
Partners. The market value of the Alkermes common stock on January 5 and
August 8, 1994, was $1,334,728 ($8.00 per share) and $650,656 ($3.25 per
share), respectively, compared to the carrying value of $1,167,887 ($7.00 per
share) and $1,401,414 ($7.00 per share), respectively. An aggregate realized
loss of $583,917 was recognized with respect to the distributions.
<PAGE>
Page 11
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. RELATED PARTY TRANSACTIONS
The Manager receives an annual management fee for management and
administrative services provided to the Partnership. The management fee is
equal to 2% of the aggregate gross proceeds received by the Partnership,
reduced by the Partnership's capital commitments in Projects that have been
concluded, and the final proceeds of which (if any) have been distributed to
the Partners of the Partnership. The management fee is payable quarterly in
advance and is adjusted annually on the first day of each fiscal year in an
amount proportionate to the increase in the prior year in the Consumer Price
Index published by the United States Department of Labor. The management fees
paid by the Partnership to the Manager were $47,953 and $157,613 for the three
months ended September 30, 1995 and 1994, respectively, and $299,117 and
$472,839 for the nine months ended September 30, 1995 and 1994, respectively.
Aggregate management fees paid to the Manager since January 1, 1994, were
$917,912.
As of July 1, 1995, the Manager had eliminated the management fee charged
for nine of the Partnership's ten Projects with the exception being FOCUS
Surgery, Inc.
The Partnership's portfolio of a money market fund is managed by Mitchell
Hutchins Institutional Investors ("MHII"), an affiliate of PWDC. PWDC pays
MHII a fee with respect to such money management services.
PWDC and PaineWebber Incorporated, and its affiliates, have acted in an
investment banking capacity for several of the Sponsor Companies. In addition,
PWDC and its affiliates have direct limited partnership interests in the same
Projects as the Partnership.
The Partnership is involved in certain legal actions. The General Partner
believes these actions will be resolved without material adverse effect on the
Partnership's financial statements, taken as a whole.
5. COMMITMENTS UNDER PRODUCT DEVELOPMENT PROJECTS
The Partnership entered into ten Projects (Alkermes; Cadre Technologies
Inc.; Centocor Partners III, L.P.; Compression Labs, Incorporated; Cygnus;
FOCUS Surgery Inc. (formerly Focal Surgery, Inc. (successor to Diasonics,
Inc.)); Genentech Clinical Partners IV, L.P.; Genzyme Development Partners,
L.P.; Rogers Corporation; and Synergen Clinical Partners, L.P). As of
September 30, 1995, all of the Projects were fully funded.
If the Projects produce any product for commercial sale, the Sponsor
Companies have the option to enter into joint ventures or royalty agreements
with the Partnership to manufacture and market the products developed. In
addition, the Sponsor Companies have the option to purchase the Partnership's
interest in the technology. In consideration for such purchase options, the
Partnership has received warrants to purchase shares of common stock of the
Sponsor Companies. These warrants were carried at zero value as of December 31,
1994. At September 30, 1995, the market price per share of Cygnus common stock
exceeded the exercise price per share of the warrant and, accordingly, the
Partnership
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Page 12
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
recorded this warrant as an investment with a carrying value equal to its
intrinsic value which approximates fair value (see Note 3). At September 30,
1995, the Partnership owned the following warrants:
9/30/95
Number of Shares Exercise Price Exercise Market Price
that can be Purchased per Share Period Per Share*
--------------------- ------------- ----------- ----------
Cadre Technologies Inc. 625,000 $ 5.00 Current to 6/97 (A)
Centocor, Inc. 2,800 $13.33 Current to 2/96 $10.875
Cygnus, Inc. (B) 300,000 $ 9.90 Current to 9/97 $18.375
OEC Medical Systems, Inc.(C) 200,000 $12.70 Current to 8/97 $8.125
* The share prices of these technology companies are generally highly volatile
and the shares are often thinly traded. The market prices indicated as
of September 30, 1995, may not be indicative of the ultimate values, if any,
that may be realized by the Partnership.
(A)At September 30, 1995, the common stock of Cadre Technologies Inc. was not
publicly traded.
(B)The carrying value of this warrant at its intrinsic value has been included
in Investments in the accompanying Statements of Financial Condition. In
conjunction with a public offering by Cygnus of its common stock, the
Partnership has agreed not to sell, contract to sell or otherwise dispose of
its warrant to purchase Cygnus common shares for a period expiring on
January 5, 1996.
(C)In October 1993, Diasonics, Inc. completed a major corporate restructuring
under which Diasonics, Inc. was divided into three separate publicly
traded companies: Diasonics UltraSound, Inc., FOCUS Surgery Inc. and OEC
Medical Systems, Inc. The Partnership's warrant is to purchase the stock of
OEC Medical Systems, Inc. FOCUS Surgery, Inc. will continue to develop
the product for which the Partnership has provided funding.
6. INCOME TAXES
The Partnership is not subject to federal, state or local income taxes.
Accordingly, the individual Partners are required to report their distributive
shares of realized income and loss on their individual federal and state income
tax returns.
<PAGE>
Page 13
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
7. LEGAL PROCEEDINGS
On July 12, 1995, the Partnership commenced an action against Centocor,
Inc. ("Centocor") and Centocor Partners III, L.P. in the Chancery Court of
Delaware arising from certain agreements entered into by Centocor and Eli Lilly
& Company in July 1992. The Partnership's complaint seeks damages, interest
and expenses. There can be no assurance that the Partnership's claim will be
successful.
<PAGE>
Page 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Partners' capital at September 30, 1995 was $4.1 million compared to $12.7
million at December 31, 1994, a decrease of $8.6 million resulting from cash
and security distributions to the Partners of $13.8 million offset by net
income from operations of $5.2 million (as discussed in Results of Operations
below).
The Partnership's working capital is invested in marketable securities and a
money market fund. Liquid assets at September 30, 1995, were $1.4 million
compared to $2.3 million at December 31, 1994, a decrease of $0.9 million
attributable to a cash distribution to Partners of this amount. The balance of
liquid assets will be used for the payment of management fees and
administrative costs related to managing the Partnership's investments.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1994:
Net income for the quarter ended September 30, 1995, was $2.7 million
compared to a net loss of $0.7 million for the same period in 1994. The
favorable variance of $3.4 million was due to an increase in revenues of $3.0
million and a decline in expenses of $0.4 million.
Revenues for the three months ended September 30, 1995, were $2.8 million
compared to $(0.2) million for the three months ended September 30, 1994, a
favorable variance of $3.0 million. The increase was primarily due to the
recognition of unrealized appreciation of investments and marketable securities
of $2.6 million during the quarter ended September 30, 1995, and the
recognition of unrealized loss on distribution of investment of $0.3 million
during the quarter ended September 30, 1994. At September 30, 1995, the
Partnership recorded its warrant to purchase Cygnus common stock as an
investment with a carrying value equal to its intrinsic value of $2.6 million.
Accordingly, the Partnership recognized unrealized appreciation of this amount
in the third quarter of 1995. In August 1994 the Partnership distributed
200,202 shares of Alkermes common stock with a market value at the date of
distribution of $0.6 million compared to a carrying value of $0.9 million
resulting in the recognition of unrealized loss of $0.3 million.
Expenses for the three months ended September 30, 1995, were $0.1 million
compared to $0.5 million for the same period in 1994. The decrease is
attributable to decreases in product development expenditures of $0.3 million
and management fees of $0.1 million. During the third quarter of 1994
expenditures under product development projects was $0.3 million attributable
to accrued payments related to Cygnus. For the same period in 1995 the
Partnership had no accruals for payments to Projects. Management fees have
declined as a result of the Manager's decision to eliminate the management fee
charged on certain Projects.
<PAGE>
Page 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1994:
Net income for the nine months ended September 30, 1995, was $5.2 million
compared to a net loss of $1.6 million for the same nine month period in 1994.
The favorable variance of $6.8 million was due to an increase in revenues of
$6.1 million and a decline in expenses of $1.1 million offset by the 1994
cumulative effect of a change in accounting method of $0.4 million.
The Partnership adopted the provisions of Statement No. 115 for investments
held as of or acquired after January 1, 1994. The cumulative effect of
adopting Statement No. 115 as of January 1, 1994 was to increase net income for
the nine months ended September 30, 1994 by $0.4 million due to the difference
between the carrying value and market value of a restricted security position
as of December 31, 1993. In accordance with Statement No. 115, prior period
financial statements have not been restated to reflect the change in accounting
method.
Revenues for the nine months ended September 30, 1995, were $5.7 million
compared to $(0.4) million for the nine months ended September 30, 1994, a
favorable variance of $6.1 million. The increase was primarily due to an
increase in unrealized appreciation of investments and marketable securities of
$2.7 million (see Results of Operations - Three months ended September 30, 1995
compared to the three months ended September 30, 1994) and an increase in
realized gain on distribution of investments of $3.2 million. In 1995 the
Partnership distributed to its Partners 1,518,074 shares of Cygnus common
stock. The market value of the Cygnus common stock at the date of distribution
was $12.9 million ($8.50 per share) compared to the carrying value as of
December 31, 1994, of $10.2 million ($6.75 per share). The Partnership
recognized a gain of $2.7 million upon distribution. In January and August
1994 the Partnership distributed 166,841 and 200,202 shares, respectively, of
the Alkermes common stock to its Partners. The aggregate market value of the
367,043 shares of Alkermes common stock on the dates of distribution was $2.0
million compared to the carrying value of $2.5 million resulting in the
recognition of a loss upon the distributions in the amount of $0.5 million.
Expenses decreased to $0.5 million for the nine months ended September 30,
1995, compared to $1.6 million for the same period in 1994. The favorable
variance of $1.1 million was attributable to decreases in product development
expenditures of $1.0 million and management fees of $0.1 million. Product
development expenditures were $0.9 million for the nine months ended September
30, 1994 compared to zero for the nine months ended September 30, 1995. During
1994 the Partnership accrued $0.7 million for payments due to Cygnus and
expensed $0.2 million for research and development expenditures related to
Genzyme Development Partners, L.P. For the same period in 1995 the Partnership
had no accruals for payments to Projects and accrued no accelerated research
and development expenditures relating to its Projects. Management fees have
declined as a result of the Manager's decision to eliminate the management fee
charged on certain Projects.
<PAGE>
Page 16
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
ACTION AGAINST CENTOCOR, INC. AND CENTOCOR DEVELOPMENT CORPORATION III
Information regarding this action was disclosed on the Partnership's
Form 10-Q for the quarter ended June 30, 1995. On or about September 15,
1995, Centocor and CDC III answered the complaint, denying the material
allegations thereof, asserting purported affirmative defenses, and
alleging a purported cross-claim against CP III and a purported third-
party claim against PaineWebber Group, Inc. ("PWG"), and PaineWebber
Development Corporation ("PWDC"). Centocor and CDC III also assert that
the Partnership cannot properly act as a derivative plaintiff because of
alleged conflicts of interests of PWG and PWDC.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
None
b) REPORTS ON FORM 8-K:
None
<PAGE>
Page 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 14th day of
November 1995.
PAINEWEBBER R&D PARTNERS II, L.P.
By: PaineWebber Technologies II, L.P.
(General Partner)
By: PWDC Holding Company
(General partner of the General Partner)
By:
-----------------------------------------
Eugene M. Matalene, Jr.
President and Principal Executive Officer
By:
------------------------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
* The capacities listed are with respect to PWDC Holding Company, the Manager,
as well as the general partner of the General Partner of the Registrant.
<PAGE>
Page 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 14th day of
November 1995.
PAINEWEBBER R&D PARTNERS II, L.P.
By: PaineWebber Technologies II, L.P.
(General Partner)
By: PWDC Holding Company
(General partner of the General Partner)
By: EUGENE M. MATALENE, JR./S/
-----------------------------------------
Eugene M. Matalene, Jr.
President and Principal Executive Officer
By: PIERCE R. SMITH/S/
------------------------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
* The capacities listed are with respect to PWDC Holding Company, the Manager,
as well as the general partner of the General Partner of the Registrant.
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<NAME> PAINEWEBBER R&D PARTNERS II, L.P.
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