UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Limited Partnership Units
No voting stock has been issued by the Registrant. Neither a public nor
other market exists for the Units, and no such market is expected to develop,
therefore there was no quoted market price for the 8,257 Units.
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K (X).
<PAGE>
PART I
ITEM 1. BUSINESS.
PaineWebber R&D Partners II, L.P. (the "Partnership" or "Registrant") is a
Delaware limited partnership that commenced operations on September 30, 1987.
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. ("PWG"). 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 (the
"Projects") with technology companies ("Sponsor Companies") which are expected
to address significant market opportunities. The Partnership will terminate on
December 31, 2012, unless its term is extended or reduced by the General
Partner.
The Partnership has completely funded its ten Projects at an aggregate
investment of $65.2 million. As of December 31, 1995, three of the ten
Projects with Centocor, Inc., Genzyme Corporation and Amgen Boulder, Inc.
(formerly, Synergen, Inc.) are currently ongoing programs. The remaining seven
have either terminated or are near termination. (See Exhibit B, the President's
Letter to the Limited Partners, for a detailed discussion of the current status
of the Partnership's Projects). In addition to investments in Projects, as of
December 31, 1995, the Partnership owned warrants and marketable securities as
described in Notes 3 and 5 of the "Notes to the Financial Statements" on pages
F-9 through F-16 included in this filing on Form 10-K.
Partnership Management
The Partnership has delegated to the Manager, pursuant to a management
agreement (the "Management Contract"), responsibility for management and
administrative services necessary for the operation of the Partnership. The
Manager meets regularly with an Advisory Board that acts as special advisor to
the Manager in the management of the Partnership's Projects (see Exhibit A for
a brief biography of the Advisory Board Members). Fees and expenses of the
Advisory Board are paid by PWDC.
Under the Management Contract, the Manager is entitled to receive 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 General Partner and limited partners of the
Partnership (the "Limited Partners"; with the General Partner, the "Partners").
As of July 1, 1995, the Manager had eliminated the management fee charged for
nine of the Partnership's ten Projects.
<PAGE>
(ITEM 1 CONTINUED)
DISTRIBUTIONS
All distributions to the Partners from the Partnership have been 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:
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 December 31, 1995, the Partnership has made cash and security
distributions, as valued on the date of distribution, since inception of $1,585
and $7,297 per Unit, respectively.
OTHER
At December 31, 1995, the Partnership and the General Partner had no
employees, and PWDC Holding Company, the general partner of the General Partner,
had no employees other than its executive officers (see Item 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT). The Partnership is engaged in one
primary business segment, the management of investments in technology products
and companies.
ITEM 2. PROPERTIES.
The Partnership does not own or lease any office, manufacturing or laboratory
facilities.
ITEM 3. LEGAL PROCEEDINGS.
ACTION AGAINST CENTOCOR, INC.
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 known as ReoPro.
<PAGE>
(ITEM 3 CONTINUED)
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.
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 PWG and 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. PWG and PWDC have
denied the material allegations of the third-party claim. Centocor and CDC III
are seeking to amend their pleading to, among other things, add a third-party
claim against PaineWebber Incorporated ("PWI").
In September 1995, another limited partner of CP III, John Abdo, has
commenced an action in the Chancery Court of Delaware against Centocor, CDC III
and certain Centocor officers. Like the Partnership, that limited partner is
seeking to proceed on behalf of CP III. The claims in this action are similar
to those asserted in the Partnership's action, and is being coordinated with
the Partnership's action for discovery purposes.
PWDC has been advancing, and may continue to advance, the funds necessary
to pay the Partnership's legal fees and expenses relating to this litigation.
In the event of a recovery on behalf of CP III, the court may award legal fees
and expenses to the Partnership's counsel, and/or Mr. Abdo's counsel, to be
paid out of the recovery. It is anticipated that: the net proceeds of any
recovery will be distributed to the limited partners of CP III, including the
Partnership, on a pro rata basis; the Partnership and/or its counsel will
reimburse PWDC; and any remaining Partnership proceeds will be distributed to
the Partners of the Partnership on a pro rata basis.
IN RE: PAINEWEBBER PARTNERSHIP LITIGATION
As previously disclosed on the Partnership's Form 10-K for the year ended
December 31, 1994, PaineWebber Technologies II, L.P., the General Partner of
the Partnership, was named as a defendant in a class action lawsuit against PWI
and a number of its affiliates relating to PWI's sale of 70 direct investment
offerings, including the offering of interests in the Partnership. In January
1996, PWI signed a memorandum of understanding with the plaintiffs in the class
action outlining the terms under which the parties have agreed to settle the
case. Pursuant to that memorandum of understanding, PWI irrevocably deposited
$125 million into an escrow fund under the supervision of the United States
District Court for the Southern District of New York (the "Court") to be used
to resolve the litigation
<PAGE>
(ITEM 3 CONTINUED)
in accordance with a definitive settlement agreement and a plan of allocation
which the parties expect to submit to the Court for its consideration and
approval within the next several months. Until a definitive settlement and
plan of allocation is approved by the Court, there can be no assurance what, if
any, payment or non-monetary benefits will be made available to the
Partnership.
In February 1996, approximately 150 plaintiffs filed an action in
Sacramento, California Superior Court against PWI and various affiliated
entities, including the General Partner of the Partnership, concerning the
plaintiffs' purchases of various limited partnership interests. The complaint
alleges, among other things, that PWI and its related entities committed fraud
and misrepresentation and breached fiduciary duties allegedly owned to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating the
risks and failing to state material facts concerning the investments. The
complaint seeks compensatory damages of $15 million plus punitive damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no existing public market for the Units, and no such market is
expected to develop. Units are transferable subject to certain restrictions
set forth in the Partnership Agreement and applicable securities laws. As of
December 31, 1995, there were 6,388 Limited Partners.
The Partnership distributes to its Partners when available, the net
proceeds, if any, from royalty distributions, interest payments on portfolio
securities and from disposition of portfolio securities and any other cash or
other unrestricted securities of the Partnership in excess of amounts that are
necessary for the operation of the Partnership's business. The Partnership's
policy is to distribute common stock (or cash from the sale of common stock) to
the Partners once the restricted period on transfers has lapsed. The
Partnership's cash distributions to its Partners totaled $1,084,252 ($130 per
Unit; $10,842 to the general partnership interest) and $417,020 ($50 per Unit;
$4,170 to the general partnership interest) for the years ended December 31,
1995 and 1994, respectively. For the year ended December 31, 1995, the
Partnership distributed 1,518,074 shares of Cygnus, Inc. ("Cygnus") common
stock (182 shares per Unit; 15,300 shares to the general partnership interest)
valued at $12,903,629 ($1,547 per Unit; $130,050 to the general partnership
interest) on the date of distribution. For the year ended December 31, 1994,
the Partnership distributed 367,043 shares of Alkermes, Inc. ("Alkermes")
common stock (44 shares per Unit; 3,670 shares to the general partnership
interest) valued at $1,985,385 ($238 per Unit; $19,854 to the general
partnership interest) on the dates of distribution.
ITEM 6. SELECTED FINANCIAL DATA.
See the "Selected Financial Data (Unaudited)" on Page F-2 in this filing.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Partners' capital at December 31, 1995 was $5.1 million compared to $12.7
million at December 31, 1994, a decrease of $7.6 million. The decrease in
partners' capital was a result of net income from operations of $6.4 million
(as discussed in Results of Operations below) offset by the distribution to the
Partners of Cygnus common stock valued at $12.9 million on the date of
distribution and cash distributions of $1.1 million.
The Partnership's working capital is invested in marketable securities.
Liquid assets at December 31, 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 cash distributions to Partners of $1.1 million. The
balance of working capital will be used for future distributions to the
Partners and the payment of management fees and administrative costs related to
managing the Partnership's investments.
<PAGE>
(Item 7 Continued)
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994:
Net income for the year ended December 31, 1995 was $6.4 million compared to
$9.4 million for the year ended December 31, 1994. The decrease of $3.0
million was due to a decrease in revenues of $3.6 million, the cumulative
effect of a change in accounting method of $0.4 million (see Results of
Operations for the year ended December 31, 1994 compared to the year ended
December 31, 1993), and a decline in expenses of $1.0 million.
Revenues for the year ended December 31, 1995 were $7.1 million compared to
$10.7 million for the same period in 1994. The decrease of $3.6 million was
primarily due to the recognition of gains on the sale of a Project of $8.9
million and the sale of a warrant of $0.7 million in 1994 (see Results of
Operations for the year ended December 31, 1994 compared to the year ended
December 31, 1993) offset by increases in 1995 in unrealized appreciation of
investments and marketable securities of $2.7 million and in realized gains on
distribution of investments and marketable securities of $3.2 million. In May
1995 the Partnership distributed 1,518,074 shares of Cygnus common stock to its
Partners. The market value of the shares on the date of distribution was $12.9
million ($8.50 per share) as compared to the carrying value at December 31,
1994, of $10.3 million ($6.75 per share). Accordingly, the Partnership
recognized a gain of $2.6 million upon the distribution. In 1994, the
Partnership distributed 367,043 shares of Alkermes common stock to its Partners
with an aggregate carrying value of $2.6 million ($7.00 per share). The market
value on the dates of distribution was a combined $2.0 million. The
Partnership recognized a realized loss of $0.6 million in 1994 relating to the
distribution of Alkermes common stock to its Partners.
Expenses for the year ended December 31, 1995 were $0.7 million compared to
$1.7 million for the year ended December 31, 1994. The decrease of $1.0
million is attributable to a decrease in expenditures under product development
projects of $0.8 million and a decrease of $0.2 million in management fees and
administrative costs. During 1994 the Partnership made product development
expenditures to Cygnus in the amount of $1.3 million and Synergen Clinical
Partners, L.P. in the amount of $0.7 million. The Partnership had accrued
payments of $0.6 million to Cygnus and $0.7 million to Synergen Clinical
Partners, L.P. at December 31, 1993. As of January 1, 1995, all of the
Partnership's Projects were fully funded. Management fees decreased as a result
of the Manager's decision to discontinue the management fee charged on three
additional Projects in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993:
Net income for the year ended December 31, 1994 was $9.4 million compared to
$1.4 million for the year ended December 31, 1993, a favorable variance of $8.0
million. The variance of $8.0 million was due to an increase in revenues of
$1.8 million, the cumulative effect of a change in accounting method of $0.4
million and a decline in expenses of $5.8 million.
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. The cumulative effect of adopting Statement No. 115 as
of January 1, 1994 was to increase net income for the year ended December 31,
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.
<PAGE>
(ITEM 7 CONTINUED)
Revenues for the year ended December 31, 1994 were $10.7 million
compared to $8.9 million for the same period in 1993, a favorable variance of
$1.8 million. The increase was primarily due to a gain on the sale of a
Project of $8.9 million, an increase in unrealized appreciation of investments
and marketable securities of $1.3 million and an increase in realized net gains
on sales of warrants and marketable securities of $0.5 million offset by a
decrease in realized gains on distribution of investments, marketable
securities and warrants of $8.7 million. 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
technology ("GMS") developed under research and development agreements between
Cygnus and the Partnership. In exchange for the technology rights, the
Partnership received Cygnus common stock with a carrying value to the
Partnership of $8.9 million. At December 31, 1994, the Partnership wrote-up
its investment in Cygnus to market value resulting in unrealized appreciation
of $1.3 million. Also, in 1994, the Partnership sold its warrant to purchase
100,000 shares of Rogers Corporation common stock for $0.7 million. The
warrant had a carrying value at the date of sale of $0. In January and August
1994, the Partnership distributed 166,841 shares and 200,202 shares,
respectively, of Alkermes common stock to its Partners with an aggregate
carrying value of $2.6 million ($7.00 per share). The market value on the date
of distribution was $1.3 million ($8.00 per share) in January 1994 and $0.7
million ($3.25 per share) in August 1994. The Partnership recognized a
realized loss of $0.6 million in 1994 relating to the distribution of Alkermes
common stock to its Partners. In 1993, the Partnership recognized realized
gains on the distribution of warrants and investments totaling $8.1 million.
Expenses for the year ended December 31, 1994 were $1.7 million compared
to $7.5 million for the year ended December 31, 1993, a decrease of $5.8
million. The variance is primarily attributable to a decrease in expenditures
under product development projects of $4.7 million and a decrease in management
fees of $1.0 million. During 1994, the Partnership made product development
expenditures to Cygnus in the amount of $1.3 million and Synergen Clinical
Partners, L.P. in the amount of $0.7 million. The Partnership had accrued
payments of $0.6 million to Cygnus and $0.7 million to Synergen Clinical
Partners, L.P. at December 31, 1993. Product development expenditures for the
year ended December 31, 1993 consisted of aggregate payments of $5.5 million to
CLI, Cadre Technologies, Inc., Synergen Clinical Partners, L.P., Genzyme
Development Partners, L.P. and Cygnus. Management fees decreased in 1994 by
$1.0 million because the Manager elected to discontinue the management fee
charged on four Projects commencing in January 1994.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information in response to this item may be found under the following
captions included in this filing on Form 10-K:
Report of Independent Auditors (Page F-4)
Statements of Financial Condition (Page F-5)
Statements of Operations (Page F-6)
Statements of Changes in Partners' Capital (Page F-7)
Statements of Cash Flows (Page F-8)
Notes to Financial Statements (Pages F-9 to F-16)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant has no directors or executive officers. The Registrant is
managed by PWDC Holding Company (the "Manager"), the general partner of
PaineWebber Technologies II, L.P. (the "General Partner"), which is the general
partner of the Partnership.
The Partnership has delegated to the Manager, pursuant to the Management
Contract, responsibility for management and administrative services necessary
for the operation of the Partnership. Based in part on discussions with the
Advisory Board, the Manager assesses and manages the Partnership's Projects.
As part of its ongoing role in all Projects, the Manager participates in a
steering committee or similar body with the Sponsor Companies with overall
responsibility for each Project during the development phase. The Manager makes
regular visits to the facilities of each Sponsor Company in order to monitor
the progress of its Projects, and its representatives take part in important
decisions with respect to development and commercial strategies. During the
commercialization phase, the Manager continues to review each Sponsor Company's
performance. In addition, the Manager actively monitors the industries in
which it undertakes Projects by attending trade shows, screening trade journals
and reviewing changes in legislative and regulatory conditions.
The following table sets forth certain information with respect to the
persons who are directors and executive officers of the Manager, as well as
PWDC, the parent company of the Manager. On December 31, 1991, the Manager
succeeded PWDC as the general partner of the General Partner. The following
table sets forth such persons' positions as directors and executive officers of
PWDC at December 31, 1995:
NAME AGE POSITION AND DATE APPOINTED
DIRECTORS (1)
Eugene M. Matalene, Jr. 48 Director since June 1993
Gerald F. Goertz, Jr. 38 Director since April 1995
Pierce R. Smith 52 Director since June 1993
James M. Voytko 45 Director since May 1994
EXECUTIVE OFFICERS (2)
Eugene M. Matalene, Jr. 48 President since June 1993
James M. Voytko 45 Executive Vice President since May 1994
Pierce R. Smith 52 Treasurer since August 1988
Dorothy F. Haughey 71 Secretary since July 1985
<PAGE>
(ITEM 10 CONTINUED)
The directors have a one-year term of office. The officers are elected by a
majority of the directors and hold office until their successors are chosen by
the directors.
1) Mr. Matalene and Mr. Smith were appointed to these positions at
PWDC Holding Company in September 1993; Mr. Voytko was appointed to
this position at PWDC Holding Company in May 1994; Mr. Goertz was
appointed to this position at PWDC Holding Company in April 1995.
2) Mr. Matalene was appointed to this position at PWDC Holding
Company in September 1993; Mr. Voytko was appointed to this position at
PWDC Holding Company in May 1994 and Ms. Haughey were appointed to this
position at PWDC Holding Company in December 1991.
<PAGE>
(ITEM 10 CONTINUED)
DIRECTORS
MR. MATALENE is a Managing Director of PWI. Mr. Matalene joined the
Investment Banking Division of PWI in 1987. Prior to joining PWI, Mr. Matalene
worked at Drexel Burnham Lambert in the Investment Banking Division from 1986
to 1987. Before joining Drexel Burnham Lambert, he worked at Kidder, Peabody &
Co. in the Corporate Finance Department from 1979 through 1986. Mr. Matalene
is a Director of PaineWebber Properties, Incorporated, American Bankers
Insurance Group, Bankers American Life Insurance Company and Empire of
Carolina, Inc. His Bachelor of Arts degree is from University of North
Carolina at Chapel Hill. Mr. Matalene received a Master's degree in Business
Administration with honors from Columbia University.
MR. GOERTZ is a Senior Vice President and Director of Private Investments of
PWI. Prior to joining PWI in December 1990, Mr. Goertz was with CG Realty
Advisors and the Freeman Company. He received his Bachelor of Arts degree in
Business Administration in 1979 from Vanderbilt University and his Juris
Doctorate and Masters of Business Administration from Memphis State University
in 1982.
MR. SMITH is Treasurer of PWG and Executive Vice President and Treasurer of
PWI. Mr. Smith joined PWG in 1987. From 1982 to 1987, Mr. Smith was Senior
Vice President and Treasurer for Norwest Corporation, a multibank holding
company in Minneapolis. From 1980 to 1982, Mr. Smith was Vice President of the
Treasury Department for Mellon Bank in Pittsburgh and from 1973 to 1980 was
Vice President for various subsidiaries of Commercial Credit Company. Mr.
Smith received a Bachelor of Science degree in Electrical Engineering from Yale
University and a Master's degree in Business Administration from Stanford
University. He also served as a lieutenant in the United States Coast Guard.
MR. VOYTKO is Deputy Director and Chief Operating Officer of the Investment
Banking Division of PWI. He joined PWI in 1981 as a research analyst and
became Director of Research in 1988 overseeing equity, credit, high yield and
derivatives research. Prior to joining PWI he was director of the office of
the Chairman of the Interstate Commerce Commission in Washington, D.C. Mr.
Voytko is currently a director of Nexgen Microsystems and PaineWebber
Properties, Incorporated. Mr. Voytko received a Bachelor of Arts degree from
Carnegie Mellon University, a Master's degree in Public Administration from the
University of Washington and a Master's degree in Public Policy from Harvard
University.
<PAGE>
(Item 10 Continued)
EXECUTIVE OFFICERS
MR. MATALENE, President, see "Directors" above.
MR. VOYTKO, Executive Vice President, see "Directors" above.
MR. SMITH, Treasurer, see "Directors" above.
MS. HAUGHEY, Secretary, joined PWI in 1962. She is Assistant Secretary of
PWG.
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
No compensation was paid to executives of PWDC Holding Company by the
Registrant. PWDC Holding Company serves as the Manager for the Registrant, and
pursuant to a Management Contract, receives an annual management fee for
management and administrative services provided to the Partnership. See the
section entitled "Related Party Transactions" under the caption "Notes to
Financial Statements" on pages F-9 through F-16 included in this filing on Form
10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below lists all investors who are known to the Partnership to be
beneficial owners at March 1, 1996 of more than five percent of the
Registrant's Limited Partnership Units.
PERCENT OF
CLASS NAME AND ADDRESS AMOUNT CLASS
Limited Libby Owens Ford Co. 559 Units 6.77%
Partnership Pension Plan & Trust
Units Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
No member of management of the Manager or PWDC had any beneficial interest
in the Registrant's Limited Partnership Units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this item may be found in the section entitled
"Related Party Transactions" under the caption "Notes to Financial Statements"
on pages F-9 through F-16 included in this filing on Form 10-K.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are filed as part of the filing on Form 10-K.
FINANCIAL STATEMENTS
The financial statements, together with the report of Ernst & Young LLP, are
listed in the accompanying index to financial statements and notes to financial
statements appearing on page F-1.
Report of Independent Auditors (Page F-4)
Statements of Financial Condition (Page F-5)
Statements of Operations (F-6)
Statements of Changes in Partners' Capital (Page F-7)
Statements of Cash Flows (Page F-8)
Notes to Financial Statements (Pages F-9 to F-16)
<PAGE>
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 29th day of March
1996.
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
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated*, each on this 29th day of March
1996.
EUGENE M. MATALENE, JR. /S/
- --------------------------------------------
Eugene M. Matalene, Jr.
President (principal executive officer) and Director
PIERCE R. SMITH /S/
- --------------------------------------------
Pierce R. Smith
Principal Financial and Accounting Officer and Director
GERALD F. GOERTZ, JR./S/
- --------------------------------------------
Gerald F. Goertz, Jr.
Director
JAMES M. VOYTKO /S/
- --------------------------------------------
James M. Voytko
Director
* 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 F-1
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
INDEX TO FINANCIAL STATEMENTS
DESCRIPTION PAGE
Index to Financial Statements F-1
Selected Financial Data F-2
Quarterly Financial Information F-3
Report of Independent Auditors F-4
Statements of Financial Condition,
at December 31, 1995 and 1994 F-5
Statements of Operations,
for the years ended December 31, 1995, 1994 and 1993 F-6
Statements of Changes in Partners' Capital,
for the years ended December 31, 1995, 1994 and 1993 F-7
Statements of Cash Flows,
for the years ended December 31, 1995, 1994 and 1993 F-8
Notes to Financial Statements F-9 to F-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 F-2
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
<TABLE>
<CAPTION>
Selected Financial Data (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues $ 7,133,197 $10,743,055 $8,957,023 $ 1,795,829 $3,283,164
Net income (loss) (A) $ 6,431,753 $ 9,385,257 $1,429,144 $(9,317,951) $(14,703,417)
Net income (loss) per partnership unit (A):
Limited partners (B) $ 771.16 $ 1,125.27 $ 171.36 $ ( 1,116.18) $ (1,762.95)
General partner $ 64,317.53 $ 93,852.57 $14,291.44 $(101,832.09) $(147,034.17)
Financial Condition:
Total assets $ 5,265,725 $12,875,809 $7,121,082 $ 21,908,027 $ 41,472,611
Partners' capital $ 5,168,239 $12,724,367 $5,741,515 $ 20,807,391 $ 38,066,892
Distributions to partners:
Cash $ 1,084,252 $ 417,020 $4,628,895 $ 5,421,153 $ 834,024
Cygnus, Inc. common stock
(at market value) (C) $12,903,629 $ - $ - $ - $ -
Alkermes, Inc. common stock
(at market value) (C) $ - $ 1,985,385 $6,326,608 $ - $ -
Centocor, Inc. common stock
(at market value) (C) (D) $ - $ - $ 13,629 $ 2,520,397 $ -
Compression Labs, Inc. warrants
(at intrinsic value) (C) $ - $ - $5,525,888 $ - $ -
</TABLE>
- ------------------------------------------------------------------------------
(A) In 1994, amounts are reflective of the cumulative effect of adopting
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (refer to Note 2
of the "Notes to Financial Statements").
(B) Based on 8,257 partnership units.
(C) At date of distribution.
(D) In 1993, the distribution was made to the General Partner; in 1992,
the distribution was made to the Limited Partners.
<PAGE> Page F-3
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
<TABLE>
<CAPTION>
Quarterly Financial Information (Unaudited)
- ---------------------------------------------------------------------------------------------------
Net Income (Loss)
Net Income Per Partnership Unit (A)
Revenues (Loss) Limited Partners General Partner
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Calendar 1995
4th Quarter $ 1,384,756 $ 1,207,265 $ 144.75 $ 12,072.65
3rd Quarter 2,782,417 2,664,366 319.45 26,643.66
2nd Quarter 1,382,161 1,169,535 140.23 11,695.35
1st Quarter (B) 1,583,863 1,390,587 166.73 13,905.87
Calendar 1994
4th Quarter $ 11,113,690 $ 10,957,899 $ 1,313.83 $ 109,578.99
3rd Quarter (201,661) (753,243) (90.31) (7,532.43)
2nd Quarter (415,930) (830,318) (99.56) (8,303.18)
1st Quarter 246,956 10,919 1.31 109.19
Calendar 1993
4th Quarter $ 7,293,620 $ (8,062) $ (7.15) $ (80.62)
3rd Quarter 6,753,555 5,110,231 618.91 51,102.31
2nd Quarter (5,170,152) (1,627,186) (195.10) (16,271.86)
1st Quarter 80,000 (2,045,839) (245.30) (20,458.39)
</TABLE>
- ----------------------------------------------------------------------------
(A) Based on 8,257 limited partnership units and a 1% general partnership
interest.
(B) Revenues have been restated from the reported amount at March 31, 1995,
in the amount of $4,149.
<PAGE> Page F-4
Report of Independent Auditors
To the Partners of PaineWebber R&D Partners II, L.P.:
We have audited the accompanying statements of financial condition of
PaineWebber R&D Partners II, L.P. as of December 31, 1995 and 1994, 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, 1995. These
financial statements are the responsibility of the Partnership's management.
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 management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PaineWebber R&D Partners II,
L.P. at December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles.
Ernst & Young, LLP
New York, New York
March 29, 1996
<PAGE> Page F-5
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Financial Condition
December 31, December 31,
1995 1994
- -------------------------------------------------------------------------------
Assets:
Cash $ 5,858 $ 6,703
Marketable securities, at market value 1,247,309 2,308,631
Investments, at fair value 3,791,626 10,327,102
Interest receivable 5,518 7,673
Investments in product development projects 189,256 183,228
Royalty income receivable 26,158 42,472
---------- -----------
Total assets $5,265,725 $12,875,809
========== ===========
Liabilities and partners' capital:
Accrued liabilities $ 97,486 $ 151,442
Partners' capital 5,168,239 12,724,367
---------- ----------
Total liabilities and partners' capital $5,265,725 $12,875,809
========== ===========
- -------------------------------------------------------------------------------
See notes to financial statements.
<PAGE> Page F-6
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Operations
<TABLE>
<CAPTION>
For the years ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest income $ 85,565 $ 104,484 $ 309,017
Realized gain on sale of product development
project - 8,988,403 -
Income from product development projects 395,195 187,219 312,544
Unrealized appreciation (depreciation) of
investments and marketable securities 3,995,807 1,322,966 (37,331)
Realized gain on distribution of warrants - - 5,525,888
Net realized gain (loss) on distribution of
investments and marketable securities 2,656,630 (583,917) 2,608,944
Net realized gain on sale of marketable securities - - 237,961
Realized gain on sale of warrant - 723,900 -
--------- ---------- ---------
7,133,197 10,743,055 8,957,023
--------- ---------- ---------
Expenses:
Expenditures under product development
projects - 854,637 5,566,742
Management fee 347,070 618,795 1,589,224
General and administrative costs 354,374 250,700 371,913
--------- --------- ---------
701,444 1,724,132 7,527,879
--------- --------- ---------
Net income before cumulative effect of change
in accounting method 6,431,753 9,018,923 1,429,144
Cumulative effect in change of accounting method - 366,334 -
------------ ----------- -----------
Net income $ 6,431,753 $ 9,385,257 $ 1,429,144
============ =========== ===========
Net income per partnership unit before cumulative effect of
change in accounting method:
Limited partners (based on 8,257 units) $ 771.16 $ 1,081.35 $ 171.36
General partner $ 64,317.53 $ 90,189.23 $ 14,291.44
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 per partnership unit:
Limited partners (based on 8,257 units) $ 771.16 $ 1,125.27 $ 171.36
General partner $ 64,317.53 $ 93,852.57 $ 14,291.44
</TABLE>
- ------------------------------------------------------------------------------
See notes to financial statements.
<PAGE> Page F-7
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Changes in Partners' Capital
<TABLE>
<CAPTION>
Limited General
Years ended December 31, 1995, 1994 and 1993 Partners Partner Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1993 $ 20,582,767 $ 224,624 $ 20,807,391
Net income 1,414,853 14,291 1,429,144
Distributions to partners:
Cash (4,582,606) (46,289) (4,628,895)
Compression Labs, Inc. warrants (5,470,629) (55,259) (5,525,888)
Alkermes, Inc. common stock (6,263,342) (63,266) (6,326,608)
Centocor, Inc. common stock - (13,629) (13,629)
---------- ------- ----------
Balance at December 31, 1993 5,681,043 60,472 5,741,515
Net income 9,291,404 93,853 9,385,257
Distributions to partners:
Cash (412,850) (4,170) (417,020)
Alkermes, Inc. common stock (1,965,531) (19,854) (1,985,385)
---------- ------- ----------
Balance at December 31, 1994 12,594,066 130,301 12,724,367
Net income 6,367,435 64,318 6,431,753
Distributions to partners:
Cash (1,073,410) (10,842) (1,084,252)
Cygnus, Inc. common stock (12,773,579) (130,050) (12,903,629)
------------ ------- ----------
Balance at December 31, 1995 $ 5,114,512 $ 53,727 $ 5,168,239
============ ============ ============
</TABLE>
- ------------------------------------------------------------------------------
See notes to financial statements.
<PAGE> Page F-8
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,431,753 $ 9,385,257 $ 1,429,144
Adjustments to reconcile net income to cash
provided by operating activities:
Realized gain on sale of product development project - (8,988,403) -
Unrealized (appreciation) depreciation of
investments and marketable securities (3,995,807) (1,322,966) 37,331
Realized gain on distribution of warrants - - (5,525,888)
Net realized (gain) loss on distribution of
investments and marketable securities (2,656,630) 583,917 (2,608,944)
Equity in earnings of product development projects (287,794) 177,539 -
Cumulative effect of change in accounting method - (366,334) -
Decrease (increase) in operating assets:
Marketable securities 1,345,606 2,111,780 9,721,232
Investments - - 23,616
Investments in product development projects - - 1,248,008
Interest receivable 2,155 6,750 2,045
Royalty income receivable 16,314 57,939 12,122
(Decrease) increase in operating liabilities:
Accrued liabilities (53,956) 24,991 (3,708)
Liabilities under product development projects - (1,253,116) 282,639
---------- ---------- ---------
Cash provided by operating activities 801,641 417,354 4,617,597
---------- ---------- ---------
Cash flows from financing activities:
Distributions to partners (1,084,252) (417,020) (4,628,895)
---------- ---------- ---------
Cash flows from investing activities:
Distributions from product development project 281,766 - -
---------- ---------- ---------
(Decrease) increase in cash (845) 334 (11,298)
Cash at beginning of year 6,703 6,369 17,667
---------- ----------- ---------
Cash at end of year $ 5,858 $ 6,703 $ 6,369
========== =========== =========
</TABLE>
- ------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the years ended
December 31, 1995, 1994 and 1993.
Supplemental schedule of non-cash activities:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distribution of investments to partners:
Cygnus, Inc. common stock $12,903,629 $ - $ -
Alkermes, Inc. common stock - 1,985,385 6,326,608
Compression Labs, Inc. warrants - - 5,525,888
Centocor, Inc. common stock - - 13,629
</TABLE>
- ------------------------------------------------------------------------------
See notes to financial statements.
<PAGE> Page F-9
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
PaineWebber R&D Partners II, L.P. (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 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 invested 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 have been 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:
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%
<PAGE> Page F-10
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(NOTE 1 CONTINUED)
During 1995, the Partnership made a cash distribution of $1,084,252 ($130 per
Unit; $10,842 to the General Partner) and a security distribution with a value
on the date of distribution of $12,903,629 ($1,547 per Unit; $130,050 to the
General Partner). At December 31, 1995, the Partnership has made cash and
security distributions since inception of $1,585 and $7,297 per Unit,
respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in conformity with generally accepted
accounting principles which require management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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 year ended December 31, 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:
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. Income from the Sponsor
Companies is reflected in the Statements of Operations for the
period in which the income is earned.
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.
Certain reclassifications have been made in prior year amounts to conform to
current year presentations.
<PAGE> Page F-11
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 December 31, 1995, the Partnership held the following marketable
securities:
MARKET COST
Money market fund $ 956,168 $ 956,168
Alkermes, Inc. common stock (3,227 shares) 25,616 22,589
Cygnus, Inc. common stock (11,867 shares) 265,525 69,719
----------- -----------
$1,247,309 $1,048,476
=========== ===========
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 6,857 22,589
shares) ---------- ----------
$2,308,631 $2,324,363
========== ==========
Alkermes, Inc. ("Alkermes") common stock had a market value of $7.938 and
$2.125 per share as of December 31, 1995 and 1994, respectively. Cygnus, Inc.
(formerly, Cygnus Therapeutic Systems) ("Cygnus") common stock had a market
value at December 31, 1995, of $22.375 (see section entitled "Investments").
In conjunction with a public offering by Cygnus of its common stock, the
Partnership 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.
On January 1, 1993, the Partnership distributed 1,848 shares of Centocor,
Inc. ("Centocor") common stock to the General Partner (which represented its 1%
allocable share of the total distribution of Centocor common stock made to the
Limited Partners in 1992). The market value of the Centocor common stock on
the date of distribution was $13,629 ($7.375 per share) compared to the
carrying value of $27,913 ($15.10 per share). A realized loss of $14,284 was
recorded upon the distribution. The remaining 13,236 shares of Centocor common
stock held by the Partnership were sold by the Partnership in November 1993.
The market value of the Centocor common stock on the date of the sale was
$178,686 ($13.50 per share) compared to the carrying value of $199,923 ($15.10
per share). A loss of $22,035, net of sales commission, was realized on the
sale.
<PAGE> Page F-12
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(Note 3 Continued)
INVESTMENTS:
The Partnership held the following investments as of December 31, 1995 and
1994:
1995 1994
---------- -----------
Cygnus, Inc.
Warrants to purchase
300,000 common shares $3,742,500 $ ------
Centocor, Inc.
Warrants to purchase
2,800 common shares 49,126 ------
Cygnus, Inc.
1,529,941 shares of
Restricted Common Stock ------ 10,327,102
----------- -----------
$3,791,626 $10,327,102
=========== ===========
At December 31, 1995, the Partnership recorded its warrants to purchase
300,000 and 2,800 common shares of Cygnus and Centocor, respectively, as
investments with carrying values equal to their intrinsic values (which
approximate fair value)-(see Note 5). Accordingly, the Partnership recognized
unrealized appreciation of $3,791,626 for the year ended December 31, 1995,
which has been included 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 technology ("GMS") 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) and, accordingly, recognized unrealized appreciation of
$1,338,699 which has been reflected in the Statements of Operations. 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 a realized gain upon the distribution
of $2,656,630 for the year ended December 31, 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.
<PAGE> Page F-13
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(NOTE 3 CONTINUED)
The Partnership distributed 617,230 shares of Alkermes common stock to its
Partners in October 1993. The market value of the Alkermes common stock on the
date of distribution was $6,326,608 ($10.25 per share) compared to the carrying
value at December 31, 1992, of $3,703,380 ($6.00 per share). A realized gain
of $2,623,228 was recognized on the distribution for the year ended December
31, 1993. 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 an aggregate carrying value at
December 31, 1993, of $2,569,301 ($7.00 per share). For the year ended December
31, 1994, an aggregate realized loss of $583,917 was recognized with respect to
the distributions.
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. As of July 1, 1995,
the Manager had eliminated the management fee charged for nine of the
Partnership's ten Projects. The management fees paid by the Partnership to the
Manager were $347,070, $618,795 and $1,589,224 for the years ended December 31,
1995, 1994 and 1993, respectively.
The Partnership's portfolio which consists 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.
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.; Genentech Clinical Partners IV, L.P.; Genzyme Development
Partners, L.P.; Rogers Corporation; and Synergen Clinical Partners, L.P). As
of December 31, 1995, all of the Projects were fully funded.
<PAGE> Page F-14
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(NOTE 5 CONTINUED)
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 December 31, 1995, the market prices per share of Cygnus and Centocor
common stock exceeded the exercise prices per share of the warrants and,
accordingly, the Partnership recorded these warrants as investments with
carrying values equal to their intrinsic values which approximate fair value
(see Note 3). At December 31, 1995, the Partnership owned the following
warrants:
<TABLE>
<CAPTION>
12/31/95
MARKET
NUMBER OF SHARES EXERCISE PRICE EXERCISE PRICE PER
THAT CAN BE PURCHASED PER SHARE PERIOD SHARE*
<S> <C> <C> <C> <C>
Cadre Technologies Inc. 625,000 $ 5.00 Current to 6/97 (A)
Centocor, Inc. (B) 2,800 $ 13.33 Current to 2/96 $30.875
Cygnus, Inc. (B) (C) 300,000 $ 9.90 Current to 9/97 $22.375
OEC Medical Systems, Inc. (D) 200,000 $ 12.70 Current to 8/97 $ 9.75
</TABLE>
*The share prices of these technology companies are generally highly volatile
and the shares are often thinly traded. The market prices indicated as of
December 31, 1995, may not be indicative of the ultimate values, if any, that
may be realized by the Partnership.
(A) At December 31, 1995, the common stock of Cadre Technologies Inc.
was not publicly traded. In December 1995, Cadre announced a merger
agreement with Bachman Information Systems, Inc. ("Bachman") expected
to close in April 1996. At that time the Cadre warrants will convert
into Bachman warrants at a conversion ratio that is still to be
finalized.
(B) The carrying value of this warrant at its intrinsic value has been
included in Investments in the accompanying Statements of Financial
Condition.
(C) 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 which expired on January 5, 1996.
(D) 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.
<PAGE> Page F-15
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(NOTE 5 CONTINUED)
In October 1994, the Partnership sold its warrant to purchase 100,000 shares
of common stock of Rogers Corporation for $723,900 and realized a gain of this
amount on the sale.
In 1993, the Partnership distributed to its Partners substantially all of
the warrants to purchase common stock received from investments with
Compression Labs, Incorporated ("CLI") and Synergen, Inc. The CLI warrant to
purchase 884,142 shares of CLI common stock was valued at $5,525,888 at the
date of distribution and, accordingly, the Partnership recognized a gain of
this amount in 1993. The remaining warrant to purchase 5,858 shares of CLI
common stock was exercised by the Partnership and the common stock was
subsequently sold in November 1993. A gain of $32,596 was realized by the
Partnership on the sale of the CLI common stock. The Synergen, Inc. warrant
distribution was valued at $0 at the date of distribution.
In April 1993, the Partnership exercised its warrant to purchase 18,433
shares of Genentech, Inc. ("Genentech") common stock at an exercise price of
$23.26 per share. Pursuant to Genentech's restructuring of the terms of the
warrant, the Partnership received $36.00 in cash and one share of Genentech
common stock for every two shares it originally would have received.
Accordingly, upon exercise of the warrant, the Partnership received 9,217
shares of Genentech common stock and $331,830 in cash. The 9,217 shares were
subsequently sold and the Partnership realized a gain in 1993 of $227,400 on
the sale of the Genentech common stock.
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. LEGAL PROCEEDING
On July 12, 1995, the Partnership commenced an action against Centocor and
Centocor Development Corporation III ("CDC III") in the Chancery Court of
Delaware arising from certain agreements entered into by Centocor and Eli Lilly
& Company ("Lilly") in July 1992. 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, a Centocor drug, that Centocor is
required to share with Centocor Partners III, L.P. ("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 itself and all other limited partners 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. There can
be no assurance that the Partnership's claim will be successful.
PWDC has been advancing, and may continue to advance, the funds necessary to
pay the Partnership's legal fees and expenses relating to this litigation. In
the event of a recovery on behalf of CP III, the court may award legal fees and
expenses to the Partnership's counsel, to be paid out of the recovery. It is
anticipated that: the net proceeds of any recovery will be distributed to the
limited partners of CP III, including the Partnership, on a pro rata basis; the
Partnership and/or its counsel will reimburse PWDC; and any remaining
Partnership proceeds will be distributed to the Partners of the Partnership on
a pro rata basis.
<PAGE> Page F-16
8. SUBSEQUENT EVENTS
On January 31, 1996, Genzyme Corporation ("Genzyme") made an offer (the
"Offer") to the general partner of Genzyme Development Partners, L.P. ("GDP")
(of which the Partnership owns a limited partnership interest) to acquire the
assets of GDP in exchange for common shares of Genzyme (the "Acquisition").
The Offer was made in lieu of Genzyme's existing option to purchase the
outstanding partnership interests in GDP for a lump-sum cash payment and
certain future royalty payments. The Offer is conditioned upon the approval of
the general partner of GDP, affirmation by a vote of a two-thirds interest of
the limited partners of GDP and certain assurances regarding the accounting
treatment of the Acquisition for Genzyme. If the Acquisition is approved, the
common shares of Genzyme will be distributed to the limited partners of GDP
(including the Partnership).
In March 1996, FOCUS Surgery, Inc. ("FOCUS") announced the signing of a
letter of intent with Takai Hospital Supply Co. for the sale of all of the
assets of FOCUS. Simultaneously, FOCUS filed for protection under Chapter 11
of the U.S. Bankruptcy Code. The Partnership will continue to maintain its
rights to the technology under the project agreement with FOCUS but does not
anticipate realizing any further revenues therefrom.
EXHIBIT A
ADVISORY BOARD BIOGRAPHIES
ADMIRAL BOBBY R. INMAN U.S. NAVY (RET.)
Chairman, Executive Committee of Science Applications International
Corporation; former Chairman and Chief Executive Officer, Westmark Systems,
Inc.; former Chairman, President and Chief Executive Officer, Microelectronics
& Computer Technology Corporation; Director, Fluor Corporation, Science
Applications International Corporation, Southwestern Bell Corporation, Temple-
Inland and Xerox Corporation.
ALFRED J. COYLE
Advisory Director, PaineWebber Incorporated; former Director, American DualVest
Fund, Cubic Corp., Leaseway Transportation Corp., Oilfield Services Corp. of
America and Radiation Dynamics.
RICHARD HODGSON
Co-founder and Director, Intel Corporation; Director, I-Stat Corp., Ibis
Technology Inc., McCowan Associates and several private technology companies.
EUGENE KLEINER
Founding partner, Kleiner Perkins Caufield & Byers; Co-founder, Fairchild
Semiconductor Corporation; Director, Andros Corporation, Resound, Inc. and
several private technology companies; Trustee, Polytechnic University in New
York.
ANTONIE T. KNOPPERS, M.D.
Former President, Chief Operating Officer and Vice Chairman, Merck & Co.;
Director, Centocor, Inc.; former Chairman, U.S. Council of the International
Chamber of Commerce.
DR. GEORGE KOZMETSKY, D.C.S.
Executive Associate for Economic Affairs, The University of Texas System;
IC{2} Senior Research Fellow; Chairman, IC{2 } Advisory Board.
JOSHUA LEDERBERG, PH.D.
Nobel Laureate; university professor and former President, Rockefeller
University; Director, Chemical Industry Institute for Toxicology, Dreyfus
Foundation and Council for Foreign Relations.
Page 1
EXHIBIT B
PAINEWEBBER R&D PARTNERS II, L.P.
LETTER TO LIMITED PARTNERS
To Our Limited Partners:
PaineWebber R&D Partners II, L.P. ("R&D Partners II" or the "Partnership")
is nearing its final stage with the potential commercialization of three of
its products on the near horizon. R&D Partners II was structured as a
diversified portfolio of product development programs with the expectation
that a portion of the products under development would become commercially
successful. In 1995, products in programs with two biotechnology
companies, Centocor, Inc. ("Centocor") and Genzyme Corporation ("Genzyme")
yielded exciting results in late-stage clinical trials. Both companies are
now preparing to file data with the U.S. Food and Drug Administration
("FDA") for review of their respective products. If any or all of the
three products receive marketing approval from the FDA and begin to
generate revenues, the sponsor companies are obligated to make cash
payments to R&D Partners II.
Centocor made two separate announcements regarding the status of the
clinical development of ReoPro<trademark> in December 1995. ReoPro is an
anticlotting drug intended to reduce acute cardiac ischemic complications
in patients undergoing angioplasty. ReoPro received marketing approval
from the FDA in 1994 for use in the reduction of acute cardiac
complications, but only in patients undergoing angioplasty procedures who
are at high risk for abrupt artery closure. In 1995, Centocor announced
results of two separate trials of ReoPro targeted toward the larger,
general angioplasty market.
First, Centocor announced positive findings at its first interim analysis
of 1,500 patients in the 4,800-patient Epilog trial for ReoPro. According
to Centocor, the data from the Epilog trial provides strong evidence for
protection from death and heart attack, even in routine elective coronary
angioplasty procedures. Second, Centocor announced that it halted the
1,400-patient Capture trial for ReoPro due to positive findings at an
interim analysis of 1,050 patients. The Capture trial was being conducted
in refractory unstable angina patients scheduled for percutaneous
transluminal coronary angioplasty. Both of the interim analyses results
were reviewed by independent Safety and Efficacy Monitoring Committees
which analyzed the data for the trials' primary endpoints: death,
myocardial infarction and, in the Capture trial, the need for urgent
intervention within 30 days. The committees concluded that the trials
should be stopped since efficacy exceeded the current stopping rule.
Centocor plans to file a New Drug Application ("NDA") with the FDA by the
end of 1996.
Genzyme has submitted Pre-Market Approval ("PMA") applications with the FDA
for review of two of the products in R&D Partners II's program,
Seprafilm<trademark> and Sepracoat<trademark>. The PMA application for
Seprafilm will be for use in both abdominal and pelvic operations based on
data from a pivotal multi-center study and a previous trial in abdominal
surgery. Genzyme is developing Seprafilm to inhibit adhesion formation in
a wide range of abdominal and pelvic
<PAGE> Page 2
PAINEWEBBER R&D PARTNERS II, L.P.
operations. Seprafilm is a hyaluronic acid ("HA")-based bioresorbable film
which is applied after surgery around traumatized tissues to prevent
adhesions prior to closure of the surgical site. The results of the
gynecologic surgery study, announced in September, revealed that
gynecologic surgery patients treated with Seprafilm had significantly fewer
postoperative uterine adhesions than did an untreated control group. The
study also revealed that adhesions in the Seprafilm group covered
significantly less surface area of the uterus, and uterine adhesions in the
Seprafilm group were significantly less extensive and severe.
In January 1996, Genzyme filed a PMA with the FDA to market Sepracoat for
use in abdominal, gynecologic and cardiovascular surgical procedures.
Genzyme's Sepracoat is a second formulation of Genzyme's HA-based surgical
products used to coat exposed organs during surgery. According to Genzyme,
the data of this separate trial revealed that patients using Sepracoat
have a significantly lower incidence of postoperative adhesions than did
patients who received placebo in a randomized blinded clinical trial.
Genzyme was notified by the FDA that the regulatory agency will expedite
its review of the PMAs for both Sepracoat and Seprafilm.
R&D Partners II was formed in 1987 and invested in a portfolio of ten
product development programs. Of the ongoing programs, we expect that
those with Centocor and Genzyme will be the most successful. The remaining
ongoing program that is being sponsored by Amgen Boulder Inc. ("Amgen
Boulder" formerly "Synergen, Inc.") is conducting a Phase II clinical trial
of Antril<trademark>, a product sponsored by R&D Partners II, for potential
use in the treatment of rheumatoid arthritis which is expected to be
completed in 1996. The results from this trial will indicate to Amgen
Boulder whether or not it will proceed into a Phase III trial of Antril
for this disease.
The following programs of R&D Partners II which have concluded generated
significant returns. The program with Cygnus, Inc. ("Cygnus") was
purchased back by Cygnus in 1994. R&D Partners II committed $5.5 million
to Cygnus and received 1,529,941 shares of common stock from Cygnus,
representing approximately $13.0 million in value on the date of
distribution (May 16, 1995). Since the distribution of 182 shares of
Cygnus common stock per $10,000 investment in R&D Partners II, the value of
the Cygnus common stock has ranged from $1,025 to $4,301. R&D Partners II
invested $5.9 million in the common stock of Alkermes, Inc.("Alkermes")
which was distributed to investors as it became unrestricted. The
available gain from the 118 shares of distributed Alkermes common stock has
ranged from $997 to $1,218 per $10,000 investment in R&D Partners II. The
product development program with Genentech, Inc. ("Genentech") was
terminated in 1991 when the product under development was deemed unlikely
to be commercially viable. R&D Partners II invested approximately $5.0
million in the Genentech program. The Partnership retained its warrant
connected with the program which had a value of $5.4 million when it was
distributed to investors. The available gain from the distributed
Genentech warrant has ranged from $378 to $819 per $10,000 investment in
R&D Partners II.
R&D Partners II's less successful programs include those with Cadre
Technologies, Inc. ("Cadre"), Compression Labs, Inc. ("CLI"), Focus
Surgery, Inc. ("Focus") and Rogers
<PAGE> Page 3
PAINEWEBBER R&D PARTNERS II, L.P.
Corporation ("Rogers"), all of which have been either terminated or are
near termination. In the program with Cadre, product sales of
Ensemble<trademark> peaked at a low level and are expected by Cadre to
continue to decline. R&D Partners II received $843,000 in payments from
Cadre based on sales of Ensemble but expects only minimal future revenues
from this program. R&D Partners II holds a warrant to purchase 625,000
shares of Cadre common stock. In December 1995, Bachman Information
Systems, Inc. ("Bachman") announced a merger agreement with Cadre with an
expected closing in April 1996. The Cadre warrant will convert into
Bachman warrants at a conversion ratio that is yet to be finalized. The
program with CLI suffered a serious setback when the AT&T Videophone which
applied the technology developed by R&D Partners II, was not commercially
viable due to pricing and functionality problems and further marketing
efforts for the product were abandoned by the company. The available gain
from the distributed CLI warrants ranged from $0 to $1,153 per $10,000
investment in R&D Partners II. In the program with Focus{1}, Focus has
announced the signing of a letter of intent with Takai Hospital Supply Co.
for the sale of all of the assets of Focus. Simultaneously, Focus filed
for protection under Chapter 11 of the U.S. Bankruptcy Code. R&D Partners
II will continue to maintain its rights to the technology developed under
the Focus program agreement. R&D Partners II holds warrants to purchase
the common stock of OEC Medical Systems, Inc. ("OEC") in connection with
the Focus program. If the stock price of OEC exceeds the warrant strike
price of $12.70 per share, the warrants will be distributed to investors.
On the date of this writing, OEC common stock traded at a price of $10.625
per share under the symbol "OXE" on the New York Stock Exchange. R&D
Partners II program with Rogers to develop multichip modules was terminated
in 1990. In 1994, R&D Partners II sold the Rogers warrant for $723,900 and
distributed proceeds to limited partners.
In addition to potential returns from product development programs,
investors have received stock and warrants from R&D Partners II . With the
overall improvement in the value of biotechnology stocks in general in
1995, the distributed common stock and warrants offered investors the
opportunity to realize substantial gains. In 1995, the total value of the
distributed equity from the Partnership ranged{2} from $2,338 to $9,213 per
$10,000 investment. The value of the distributed common stock and warrants
based on the respective dates of distribution is $7,297.
Cash distributions from inception of the Partnership to date total $1,585
per $10,000 investment.
**FOOTNOTES**
{1} R&D Partners II originally invested in Diasonics, Inc. which
completed a major restructuring in 1993 resulting in three separately
traded companies: Focus, Inc., OEC Medical Systems, Inc. and Diasonics
Ultrasound. R&D Partners II's product development program is with Focus
Surgery, Inc. and its warrant is to purchase the common stock of OEC
Medical Systems, Inc.
{2} The value of distributed warrants varies depending on the market
price of the underlying common stock when an individual investor sells the
common stock.
<PAGE> Page 4
PAINEWEBBER R&D PARTNERS II, L.P.
For 1995, R&D Partners II made cash distributions totalling $130 per
$10,000 investment. We expect cash distributions to continue if products
from the ongoing product development programs are approved for marketing
and generate revenues.
Thank you for your continued interest in R&D Partners II. In an effort to
further reduce expenses, we have changed the format of reporting.
Sincerely,
Eugene M. Matalene, Jr.
President
PaineWebber Development Corporation
<PAGE> Page 5
AMGEN BOULDER INC.
COMPANY
Amgen Boulder Inc. ("Amgen Boulder," formerly Synergen, Inc. ("Synergen")) was
formed as a result of Amgen Inc.'s ("Amgen") acquisition of Synergen in
December 1994. The company's research is targeted toward products for
inflammatory disorders and neurological diseases. Amgen acquired Synergen
through a cash tender offer of $9.25 per share of all outstanding shares of
Synergen common stock. Amgen Boulder has continued the clinical development
of Antril<trademark> which was being conducted by Synergen before the
acquisition took place. Currently, a Phase II clinical trial of Antril in
rheumatoid arthritis patients is underway in Europe.
PROGRAM
R&D Partners II committed $4.5 million to Synergen Clinical Partners, L.P., a
$52.5 million limited partnership, formed to fund the development and human
clinical trials of Antril, the recombinant form of IL-1ra, a naturally
occurring anti-inflammatory human protein that may play a significant role in
the treatment of rheumatoid arthritis. Synergen Clinical Partners, L.P.'s
interests in Antril are now held by Amgen Boulder.
Preliminary findings from the first Phase II clinical trial of Antril indicate
it may have anti-inflammatory activity and may have a clinical benefit in
patients with a long history of the disease. A second Phase II trial for
rheumatoid arthritis is currently ongoing in Europe and is expected to be
completed in the early 1996.
WARRANT
R&D Partners II distributed the Synergen warrant to investors in March 1993.
As a consequence of the acquisition of the company, there is no longer
outstanding Synergen common stock.
<PAGE> Page 6
CENTOCOR, INC.{3}
COMPANY
Centocor is a biotechnology company committed to developing innovative
therapeutic and diagnostic products to advance medical practice. Centocor
concentrates on research, development, and manufacturing, with a technological
emphasis on monoclonal antibodies and peptides. It collaborates extensively
with academic institutions and other biotechnology companies, which provide
product development, and with major healthcare corporations, which
commercialize Centocor products.
In 1995, Centocor made two important announcements regarding the clinical
development of its lead product, ReoPro<trademark>, an anticlotting drug
intended to reduce acute cardiac ischemic complications in patients undergoing
angioplasty. Two trials testing ReoPro were separately halted after interim
analyses revealed positive findings. The Epilog trial provided strong
evidence for patients' protection from death and heart attack, even in routine
elective coronary angioplasty procedures. The Capture trial was being
conducted in refractory unstable angina patients scheduled for percutaneous
transluminal coronary angioplasty. Both of the interim analyses results were
reviewed by independent Safety and Efficacy Monitoring Committees which
analyzed the data for the trials' primary endpoints: death, myocardial
infarction and, in the Capture trial, the need for urgent intervention within
30 days. The committees concluded that the trials should be stopped since
efficacy exceeded the current stopping rule. Centocor plans to file a Product
License Application with the FDA by the end of 1996.
PROGRAM
R&D Partners II committed $12.0 million to Centocor Partners III, L.P., a
$54.2 million limited partnership formed to conduct the development and human
clinical trials of two monoclonal antibody-based products: ReoPro and
Capiscint<trademark>. Development efforts for Capiscint have been ceased.
ReoPro is currently being sold in the U.S. by Centocor's marketing partner,
Eli Lilly & Co. ("Lilly").
ReoPro received marketing approval from the FDA in 1994 for use in the
reduction of acute cardiac complications in patients undergoing angioplasty
procedures who are at high risk for abrupt artery closure. In 1995, Centocor
announced results of two separate trials of ReoPro targeted toward the larger,
general angioplasty market. Centocor plans to make the appropriate filings
with the FDA in 1996 requesting marketing approval of ReoPro with a broad-
based label. R&D Partners II is entitled to receive payments based on
Centocor's revenues from ReoPro.
**FOOTNOTES**
{3}In July 1995, R&D Partners II commenced an action against Centocor
arising out of Centocor's transaction with Lilly. Centocor entered into a set
of agreements with Lilly on July 15, 1992, for the stated purposes of Lilly
making an equity investment in Centocor and furthering the testing and
eventual distribution of Centoxin, a 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<trademark>. R&D Partners II believes, among other
things, that part of the $100 million paid by Lilly constitutes revenues to
Centocor from the licensing, sublicensing and/or sale of ReoPro, and that
Centocor is obligated to pay a percentage of that part to the limited partners
of Centocor Partners III, L.P. It is impossible to project when the Centocor
issue will be resolved. Our intention is to fairly represent the limited
partners' best interests in a timely manner.
<PAGE> Page 7
WARRANT
R&D Partners II distributed the Centocor warrant in March 1992. Investors
received a warrant to purchase 116 shares of Centocor common stock per $10,000
investment in R&D Partners II with an exercise price of $14.115 per share
through February 1993 and $16.655 per share from March 1993 through February
1995. Based on the closing price of $32.50 per share on the date of
distribution and the initial exercise price of $14.115 per share, a warrant to
purchase 116 shares of Centocor common stock had a value of approximately
$2,133 per $10,000 unit . In June 1992, R&D Partners II distributed 22 shares
of Centocor common stock per $10,000 unit which had a value of approximately
$305 on the date of distribution. The available gain from the distributed
Centocor warrant and common stock has ranged from $116 to $3,781 per $10,000
investment in R&D Partners II.
<PAGE> Page 8
GENZYME CORPORATION
COMPANY
Genzyme Corporation ("Genzyme") is an international, diversified health care
products company with a focus on developing innovative products and services
for major unmet medical needs. The company's General Division markets
Ceredase<reg-trade-mark> and Cerezyme<reg-trade-mark> replacement enzymes for
the treatment of Gaucher disease. It also develops and markets surgical and
diagnostic products, genetic diagnostic services, and pharmaceuticals.
In 1995, Genzyme announced positive findings from its pivotal multi-center
clinical studies testing two of its HA-based surgical aids,
Seprafilm<trademark> and Sepracoat<trademark>. In the Seprafilm study, Genzyme
found that gynecologic surgery patients treated with Seprafilm bioresorbable
membrane had 37% fewer adhesions to the uterus than patients who were not
treated with the membrane and in the abdominal study, patients treated with
Seprafilm had 63% fewer adhesions than the untreated group. Additionally, 51%
of patients treated with Seprafilm developed no adhesions to the area where
the product was placed. In the Sepracoat study, testing the product for use
in abdominal, gynecologic and cardiovascular surgical procedures, the data
revealed that patients using Sepracoat had a significantly lower incidence of
postoperative adhesions than did patients who received placebo. Genzyme
submitted PMA applications with the FDA for review of Seprafilm and Sepracoat
in October 1995 and January 1996, respectively. Seprafilm is a HA-based
bioresorbable film which is applied after surgery around traumatized tissues
to prevent adhesions prior to closure of the surgical site. Sepracoat is a
second formulation of Genzyme's HA-based surgical products used to coat
exposed organs during surgery. Genzyme was notified by the FDA that the
regulatory agency will expedite its review of the PMAs for both products.
PROGRAM
R&D Partners II committed $5.0 million to Genzyme Development Partners, L.P.
("GDP"), a $36.8 million limited partnership formed to conduct the development
and human clinical trials of surgical products based on HA. These products
are designed to reduce the incidence and severity of adhesions, a serious
post-operative complication.
Under the terms of the GDP agreement, upon the triggering of certain events,
Genzyme has the option to purchase the GDP interests under which GDP is
entitled to receive 10% of revenues from sales of the products in the U.S. and
Canada and, under certain conditions, 6% of sales in Europe, for ten years
following the exercise of the purchase option. In February, Genzyme proposed
an alternative offer to GDP limited partners under which Genzyme would acquire
all the assets of GDP for approximately $93.0 million. A Special Committee of
the Independent Directors of the General Partner of GDP, which includes
officers of PaineWebber, Inc., is considering the offer but, as of March 6,
1996, has not endorsed or rejected the offer.
WARRANT
R&D Partners II distributed the Genzyme warrants in June 1992. Investors
received a warrant to purchase 22 shares at $16.01 per share and a warrant to
purchase 10 shares at $22.91 per share, per $10,000 investment in R&D Partners
II, all exercisable through October 1996. Based on the closing price of
$49.50 per share on the date of distribution, the distributed warrants to
purchase 32 shares of Genzyme common stock had a value of approximately
$1,003. The available gain from the distributed Genzyme warrants has ranged
from $187 to $1,851 per $10,000 investment in R&D Partners II.
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