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 JUNE 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
JUNE 30, 1995
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition 2
(unaudited) at June 30, 1995 and
December 31, 1994
Statements of Operations 3
(unaudited) for the three months
ended June 30, 1995 and 1994
Statements of Operations 4
(unaudited) for the six months
ended June 30, 1995 and 1994
Statement of Changes in Partners' Capital 5
(unaudited) for the six months
ended June 30, 1995
Statements of Cash Flows 6
(unaudited) for the six months
ended June 30, 1995 and 1994
Notes to Financial Statements 7-12
(unaudited)
Item 2. Management's Discussion and Analysis of 13-14
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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.
<PAGE>
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Financial Condition
(unaudited)
June 30, December 31,
1995 1994
------------------------------------------------------------------------------
Assets:
Cash $ 5,667 $ 6,703
Marketable securities, at market value 1,340,327 2,308,631
Investment, at market value - 10,327,102
Interest receivable 4,035 7,673
Investments in product development projects 178,167 183,228
Royalty income receivable 23,645 42,472
------------ -----------
Total assets $ 1,551,841 $12,875,809
============ ===========
Liabilities and partners' capital:
Accrued liabilities $ 88,424 $ 151,442
Partners' capital 1,463,417 12,724,367
------------ -----------
Total liabilities and partners' capital $ 1,551,841 $12,875,809
============ ===========
-----------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 3
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Operations
(unaudited)
For the three months ended June 30, 1995 1994
------------------------------------------------------------------------------
Revenues:
Interest income $ 21,928 $ 24,842
Income from product development projects 192,829 42,372
Unrealized appreciation (depreciation) of
investments and marketable securities 28,848 (483,144)
Realized gain on distribution of investment 1,138,556 -
--------- --------
1,382,161 (415,930)
--------- --------
Expenses:
Expenditures under product development
projects - 169,250
Management fee 125,582 157,613
General and administrative costs 87,044 87,525
-------- -------
212,626 414,388
-------- -------
Net income (loss) $ 1,169,535 $ (830,318)
============ ============
Net income (loss) per partnership unit:
Limited partners (based on 8,257 units) $ 140.23 $ (99.56)
General partner $ 11,695.35 $ (8,303.18)
-------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 4
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Operations
(unaudited)
For the six months ended June 30, 1995 1994
-------------------------------------------------------------------------------
Revenues:
Interest income $ 50,250 $ 54,022
Income from product development projects 216,411 93,307
Unrealized appreciation (depreciation) of
investments and marketable securities 42,732 (483,144)
Realized gain on distribution of investments 2,656,630 166,841
--------- --------
2,966,023 (168,974)
--------- --------
Expenses:
Expenditures under product development
projects - 582,798
Management fee 251,164 315,226
General and administrative costs 154,736 118,735
--------- ---------
405,900 1,016,759
--------- ---------
Net income (loss) before cumulative effect of
change in accounting method 2,560,123 (1,185,733)
Cumulative effect of change in accounting method - 366,334
--------- ----------
Net income (loss) $ 2,560,123 $ (819,399)
========= ==========
Net income (loss) per partnership unit before
cumulative effect of change in accounting
method:
Limited partners (based on 8,257 units) $ 306.95 $ (142.17)
General partner $ 25,601.23 $ (11,857.33)
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) $ 306.95 $ (98.25)
General partner $ 25,601.23 $ (8,193.99)
See notes to financial statements.
<PAGE>
Page 5
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statement of Changes in Partners' Capital
(unaudited)
<TABLE>
<CAPTION>
Limited General
For the six months ended June 30, 1995 Partners Partner Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 $ 12,594,066 $ 130,301 $12,724,367
Net income 2,534,522 25,601 2,560,123
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 June 30, 1995 $ 1,446,739 $ 16,678 $ 1,463,417
=========== =========== ===========
</TABLE>
------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 6
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
(unaudited)
For the six months ended June 30, 1995 1995 1994
------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 2,560,123 $ (819,399)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Unrealized (appreciation) depreciation of
investments and marketable securities (42,732) 483,144
Realized gain on distribution of investments (2,656,630) (166,841)
Cumulative effect of change in accounting method - (366,334)
Decrease in operating assets:
Marketable securities 999,169 1,878,415
Investment 91,970 22,701
Investments in product development projects 5,061 244,298
Interest receivable 3,638 6,048
Royalty income receivable 18,827 57,499
Decrease in operating liabilities:
Accrued liabilities (63,018) (8,938)
Liabilities under product development projects - (914,616)
------- -------
Cash provided by operating activities 916,408 415,977
------- -------
Cash flows from financing activities:
Distribution to partners (917,444) (417,020)
--------- --------
Cash used for financing activities (917,444) (417,020)
--------- --------
Decrease in cash (1,036) (1,043)
Cash at beginning of period 6,703 6,369
-------- --------
Cash at end of period $ 5,667 $ 5,326
======== ========
----------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest during the six months ended June
30, 1995 and 1994.
Supplemental schedule of non-cash activities:
-----------------------------------------------------------------------------
For the six months ended June 30, 1995 1994
Distribution of investments to partners:
Alkermes, Inc. common stock $ - $ 1,334,728
Cygnus Therapeutic Systems common stock $12,903,629 $ -
-----------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
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 June 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
June 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
report for the quarter ended 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:
<PAGE>
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 June 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 six months ended June 30, 1994 by $366,334 or
$43.92 per Unit.
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:
<PAGE>
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 participated as a limited partner in product
development limited partnerships formed to develop specific products.
Such participations were 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 June 30, 1995, the Partnership held the following marketable securities:
Market Cost
---------- ----------
Money market fund $1,210,635 $1,210,635
Alkermes, Inc. common stock (3,227 shares) 12,504 22,589
Cygnus Therapeutic Systems common
stock (11,867 shares) 117,188 69,719
---------- -----------
$1,340,327 $1,302,943
========== ===========
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
========== ==========
Alkermes, Inc. ("Alkermes") common stock had a market value of $3.875 and
$2.125 per share as of June 30, 1995 and December 31, 1994, respectively.
Cygnus Therapeutic Systems ("Cygnus") common stock had a market value at June
30, 1995 of $9.875. (See section entitled "Investments".)
<PAGE>
Page 10
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 3 Continued)
INVESTMENTS:
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. 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.
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 $11,765,073 ($7.75 per share) and
$10,246,999 ($6.75 per share) as of March 31, 1995 and December 31, 1994,
respectively. Accordingly, the Partnership recognized realized gain upon the
distribution of $1,138,556 for the three months ended June 30, 1995 and
$2,656,630 for the six months ended June 30, 1995. The remaining 11,867 shares
of Cygnus common stock were held as marketable securities.
On January 2, 1994, 170,084 shares of Alkermes restricted common stock,
with a carrying value of $1,190,588 ($7.00 per share), became saleable without
volume limitation pursuant to Securities and Exchange Commission Rule 144. The
Partnership distributed 166,841 shares of Alkermes common stock to its Partners
on January 5, 1994. The market value of the Alkermes common stock on the date
of distribution was $1,334,728 ($8.00 per share) compared to the carrying value
of $1,167,887 ($7.00 per share). A realized gain of $166,841 was recognized
with respect to the distribution.
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 $125,582 and $157,613 for the three
months ended June 30, 1995 and 1994, respectively and $251,164 and $315,226 for
the six months ended June 30, 1995 and 1994, respectively. Aggregate
management fees paid to the Manager since January 1, 1994, were $869,959.
<PAGE>
Page 11
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 4 Continued)
As of January 1, 1995, the Manager had eliminated the management fee
charged for the following seven of the Partnership's Projects:
- Alkermes, Inc.
- Cadre Technologies, Inc.
- Centocor Partners, III, L.P.
- Compression Labs, Inc.
- Genentech Clinical Partners IV, L.P.
- Rogers Corporation
- Synergen Clinical Partners, L.P.
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 June 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 are carried at zero value as of June 30, 1995
and December 31, 1994. At June 30, 1995, the Partnership owned the following
warrants:
<PAGE>
Page 12
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 5 Continued)
<TABLE>
<CAPTION> 6/30/95
Number of Shares Exercise Price Exercise Market Price
that can be Purchased Per Share Period Per Share *
--------------------- -------------- -------- ------------
<S> <C> <C> <C> <C>
Cadre Technologies Inc. 625,000 $ 5.00 Current to 6/97 (A)
Centocor, Inc. 2,800 $13.33 Current to 2/96 $14.313
Cygnus Therapeutic Systems 300,000 $ 9.90 Current to 9/97 $ 9.875
OEC Medical Systems, Inc. (B) 200,000 $12.70 Current to 8/97 $ 7.75
* The share prices of these technology companies are generally highly volatile
and the shares are often thinly traded. The market prices indicated as of June
30, 1995, may not be indicative of the ultimate values, if any, that may be
realized by the Partnership.
(A) At June 30, 1995, the common stock of Cadre Technologies Inc. was not
publicly traded.
(B) 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.
7. SUBSEQUENT EVENT
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 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Partners' capital at June 30, 1995 was $1.5 million compared to $12.7 million
at December 31, 1994, a decrease of $11.2 million. The decrease in partners'
capital was a result of cash and security distributions to the Partners of
$13.8 million offset by net income from operations of $2.6 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 June 30, 1995, were $1.3 million compared
to $2.3 million at December 31, 1994, a decrease of $1.0 million. The decrease
in liquid assets is primarily due to a cash distribution to Partners
aggregating $0.9 million. 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 JUNE 30, 1995 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1994:
Net income for the quarter ended June 30, 1995, was $1.2 million compared to
a net loss of $0.8 million for the same period in 1994. The favorable variance
of $2.0 million was due to an increase in revenues of $1.8 million and a
decline in expenses of $0.2 million.
Revenues for the three months ended June 30, 1995, were $1.4 million compared
to $(0.4) million for the three months ended June 30, 1994, a favorable
variance of $1.8 million. The increase was primarily due to the recognition of
a realized gain on distribution of investment of $1.1 million during the
quarter ended June 30, 1995, and the recognition of unrealized depreciation of
investments and marketable securities of $0.5 million during the quarter ended
June 30, 1994. 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 $12.9 million ($8.50 per share) compared
to the carrying value as of March 31, 1995, of $11.8 million ($7.75 per share).
Accordingly, the Partnership recognized a gain of $1.1 million upon the
distribution. During the quarter ended June 30, 1994, the Partnership
recognized unrealized depreciation of $0.5 million related to its investment of
196,250 shares of Alkermes common stock. The aggregate market value of the
196,250 shares of Alkermes common stock on June 30, 1994, was $0.9 million
($4.625 per share) compared to the carrying value of $1.4 million ($7.00 per
share).
Expenses for the three months ended June 30, 1995, were $0.2 million compared
to $0.4 million for the same period in 1994, a decrease of $0.2 million. The
variance is attributable to a decrease in expenditures under product
development projects of this amount. During the second quarter of 1994, the
Partnership accrued $0.2 million for payments due to Cygnus. As of June 30,
1995 all of the Partnership's Projects have been fully funded.
<PAGE>
Page 14
ITEM 2 (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1994:
Net income for the six months ended June 30, 1995, was $2.6 million compared
to a net loss of $0.8 million for the same six month period in 1994. The
favorable variance of $3.4 million was due to an increase in revenues of $3.2
million and a decline in expenses of $0.6 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 six months ended June 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 six months ended June 30, 1995, were $3.0 million compared
to $(0.2) million for the six months ended June 30, 1994, a favorable variance
of $3.2 million. The increase was primarily due to an increase in unrealized
appreciation of investments and marketable securities of $0.5 million (see
Results of Operations - Three months ended June 30, 1995 compared to three
months ended June 30, 1994) and an increase in realized gain on distribution of
investments of $2.5 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 1994 the Partnership distributed 166,841 shares of
the Alkermes common stock to its Partners. The aggregate market value of the
166,841 of Alkermes common stock on the date of distribution was $1.3 million
($8.00 per share) compared to the carrying value of $1.1 million ($7.00 per
share) resulting in the recognition of a gain upon distribution in the amount
of $0.2 million.
Expenses decreased to $0.4 million for the six months ended June 30, 1995,
compared to $1.0 million for the same period in 1994. The favorable variance
of $0.6 million was attributable to a decrease in product development
expenditures of this amount. Product development expenditures were $0.6
million for the six months ended June 30, 1994 compared to zero for the six
months ended June 30, 1995. During the first half of 1994 the Partnership
accrued $0.4 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.
<PAGE>
Page 15
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
IN RE PAINEWEBBER PARTNERSHIP LITIGATION
Information on a class action was disclosed on the Partnership's Form
10-Q for the quarter ended March 31, 1995. On May 30, 1995, the court
certified class action treatment of the plaintiffs' claims.
ACTION AGAINST CENTOCOR
In July 1995, the Partnership commenced an action in the Chancery
Court of Delaware against Centocor, Inc. ("Centocor") and Centocor
Development Corporation III ("CDC III"), a wholly-owned subsidiary of
Centocor, arising out of Centocor's July 1992 transaction with Eli Lilly
& Company ("Lilly").
In 1987 and 1988, the Partnership and others purchased limited
partnership interests in Centocor Partners III, L.P. ("CP III"), a
limited partnership of which CDC III is the general partner, which was
established to develop and sell CentoRX, a Centocor drug now know as
ReoPro.
In July 1992, Centocor entered into a set of agreements with Lilly
for the stated purpose of Lilly making an equity investment in Centocor
and furthering the testing and eventual distribution of Centoxin, another
Centocor drug. Pursuant to those agreements, Lilly paid Centocor a total
of $100 million and Centocor conveyed to Lilly, among other things, two
million shares of Centocor common stock, exclusive marketing rights to
Centoxin, and an option to acquire exclusive marketing rights to ReoPro.
The Partnership's complaint alleges, among other things, that: at
least $25 million of the $100 million paid by Lilly represents profits
from the sale of ReoPro that Centocor is required to share with CP III;
and because of the Lilly transaction, Centocor is required to increase
the percentage of its profits from ReoPro that it pays to CP III.
Centocor, however, has taken the position that only $500,000 of the $100
million must be shared with CP III and that Centocor has no obligation to
increase the percentage of its ReoPro profits that it pays to CP III.
The Partnership is seeking to proceed on behalf of CP III. The complaint
seeks to require Centocor and CDC III to pay damages to CP III and to
increase the percentage of future ReoPro profits that Centocor must pay
to CP III.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
None
b) REPORTS ON FORM 8-K:
On July 12, 1995, the Partnership filed a current report on form 8-K
relating to the Partnership's commencement of an action against
Centocor and CPIII in the Chancery Court of Delaware.
<PAGE>
Page 16
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
August 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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