UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996
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>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition (unaudited) 2
at September 30, 1996 and December 31, 1995
Statements of Operations
(unaudited) for the three months ended
September 30, 1996 and 1995 3
Statements of Operations
(unaudited) for the nine months ended
September 30, 1996 and 1995 3
Statement of Changes in Partners' Capital
(unaudited) for the nine months ended
September 30, 1996 4
Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 1996 and 1995 5
Notes to Financial Statements
(unaudited) 6-12
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
</TABLE>
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)
September 30, December 31,
1996 1995
- -----------------------------------------------------------------------------
Assets:
Cash $ 4,975 $ 5,858
Marketable securities, at market value 398,263 1,247,309
Investments, at fair value 2,167,500 3,791,626
Interest receivable - 5,518
Investments in product development projects 160,390 189,256
Royalty income receivable 16,000 26,158
------------- ----------
Total assets $ 2,747,128 $5,265,725
============= ==========
Liabilities and partners' capital:
Accrued liabilities $ 73,585 $ 97,486
Partners' capital 2,673,543 5,168,239
------------- ----------
Total liabilities and partners' capital $ 2,747,128 $ 5,265,725
============= ==========
- -----------------------------------------------------------------------------
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 September 30, 1996 1995
- -----------------------------------------------------------------------------
Revenues:
Interest income $ 15,290 $ 18,624
Income from product development project 16,000 29,132
Realized gain from sale of product development
projects 552,001 -
Unrealized appreciation of investments
and marketable securities 393,250 2,651,841
Equity in earnings of product development projects 264,128 82,820
------------- ----------
1,240,669 2,782,417
------------- ----------
Expenses:
Management fee - 47,953
General and administrative costs 46,878 70,098
------------- ----------
46,878 118,051
------------- ----------
Net income $ 1,193,791 $ 2,664,366
============= ==========
Net income per partnership unit:
Limited partners (based on 8,257 units) $ 143.13 $ 319.45
General partner $ 11,937.91 $ 26,643.66
- -----------------------------------------------------------------------------
For the nine months ended September 30, 1996 1995
- -----------------------------------------------------------------------------
Revenues:
Interest income $ 36,400 $ 68,874
Income from product development project 63,468 80,508
Realized gain on sale of product development
projects 552,001 -
Unrealized (depreciation) appreciation of
investments and marketable securities (1,562,050) 2,694,573
Realized gain on distribution of investments - 2,656,630
Realized loss on sale of marketable securities (53,421) -
Equity in earnings of product development projects 422,147 247,855
------------- -----------
(541,455) 5,748,440
------------- -----------
Expenses:
Management fee 137,010 299,117
General and administrative costs 150,207 224,834
------------- ----------
287,217 523,951
------------- ----------
Net income (loss) $ (828,672) $ 5,224,489
============= ==========
Net income (loss) per partnership unit:
Limited partners (based on 8,257 units) $ (99.36) $ 626.41
General partner $ (8,286.72) $ 52,244.89
- -----------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 4
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statement of Changes in Partners' Capital
(unaudited)
For the nine months ended Limited General
September 30, 1996 Partners Partner Total
- -----------------------------------------------------------------------------
Balance at January 1, 1996 $ 5,114,512 $ 53,727 $5,168,239
Net loss (820,385) (8,287) (828,672)
Cash distribution (1,651,400) (14,624) (1,666,024)
---------- --------- ----------
Balance at September 30, 1996 $2,642,727 $ 30,816 $2,673,543
========== ========= ==========
- -----------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 5
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
(unaudited)
For the nine months ended September 30, 1996 1995
- -----------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (828,672) $ 5,224,489
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Unrealized depreciation (appreciation) of
investments and marketable securities 1,562,050 (2,694,573)
Realized gain on distribution of investments - (2,656,630)
Equity in earnings of product development projects (422,147) (247,855)
Decrease in operating assets:
Marketable securities 861,996 1,010,090
Investments 49,126 91,970
Interest receivable 5,518 2,079
Royalty income receivable 10,158 13,340
Decrease in operating liabilities:
Accrued liabilities (23,901) (79,059)
----------- ----------
Cash provided by operating activities 1,214,128 663,851
----------- ----------
Cash flows from investing activities:
Distributions from product development project 451,013 252,608
----------- ----------
Cash flows from financing activities:
Distribution to partners (1,666,024) (917,444)
----------- ----------
Decrease in cash (883) (985)
Cash at beginning of period 5,858 6,703
----------- ----------
Cash at end of period $ 4,975 $ 5,718
============= ===========
- -------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the nine months ended
September 30, 1996 and 1995.
Supplemental schedule of non-cash activities:
- -----------------------------------------------------------------------------
For the nine months ended September 30, 1996 1995
- -----------------------------------------------------------------------------
Distribution of investment to partners:
Cygnus Therapeutic Systems common stock $ - $ 12,903,629
- -----------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 6
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
The financial information as of and for the periods ended September
30, 1996 and 1995 is unaudited. However, in the opinion of management
of PaineWebber R&D Partners II, L.P. (the "Partnership"), such
information includes all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation. The results of
operations reported for the interim periods ended September 30, 1996,
are not necessarily indicative of results to be expected for the year
ended December 31, 1996. 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, 1995, and the previously
issued quarterly reports for the quarters ended June 30, 1996 and
March 31, 1996.
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 PaineWebber 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. 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 7
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 1 Continued)
<TABLE>
<CAPTION>
Limited Partners General Partner
<S> <C> <C> <C>
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 80% 20%
Payout")...................................................
III. After Final Payout......................................... 75% 25%
</TABLE>
For the three months ended September 30, 1996, the Partnership made a cash
distribution of $1,666,024 ($200 per Unit; $14,624 to the General Partner).
At September 30, 1996, the Partnership has made cash and security
distributions since inception of $1,785 and $7,206 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.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", the Partnership accounted for its investments in
restricted common stock (where the restriction period expired 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.
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 8
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. 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.
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.
The Partnership held the following marketable securities:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 December 31, 1995
------------------------------------- --------------------------------------
MARKET COST MARKET COST
----------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Money market fund $298,863 $ 298,863 $ 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
Centocor, Inc. common stock (2,800 shares) 99,400 37,324 -- --
-------- ---------- ---------- ----------
$398,263 $ 336,187 $1,247,309 $1,048,476
======== ========== ========== ==========
</TABLE>
<PAGE>
Page 9
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 3 Continued)
In January 1996, the Partnership sold its investment of 3,227 common
shares of Alkermes, Inc. for proceeds, net of commissions, of $34,090 and
recognized a gain upon the sale for the nine months ended September 30,
1996, of $8,474. In February 1996, the Partnership exercised its warrants
to purchase 2,800 common shares of Centocor, Inc. ("Centocor") at an
exercise price of $37,324 ($13.33 per share). At September 30, 1996,
Centocor common stock had a market value of $35.50 per share as compared to
$29.875 per share at June 30, 1996. Accordingly, the Partnership
recognized unrealized appreciation of $15,750 for the quarter ended
September 30, 1996. In June 1996, the Partnership sold 11,867 shares of
Cygnus, Inc. ("Cygnus") with a carrying value as of December 31, 1995 of
$265,525 ($22.375 per share). Proceeds, net of commissions, were $203,630
resulting in a loss upon the sale for the nine months ended September 30,
1996 of $61,895.
INVESTMENTS:
The Partnership held the following investments:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
----------------------- --------------------
<S> <C> <C>
Cygnus, Inc.
Warrants to purchase 300,000 common shares $2,167,500 $3,742,500
Centocor, Inc.
Warrants to purchase 2,800 common shares --- 49,126
---------- ----------
$2,167,500 $3,791,626
========== ==========
</TABLE>
The Partnership records its warrant to purchase 300,000 common shares of
Cygnus (with an exercise price of $9.90 per share) as an investment with a
carrying value equal to its intrinsic value (which approximates fair value) --
(See Note 5). The market value of Cygnus stock as of September 30, 1996 was
$17.125 per share as compared to a market value of $15.25 and $22.375 per share
as of June 30, 1996 and December 31, 1995, respectively. Accordingly, the
Partnership recognized unrealized appreciation of $562,500 for the three months
ended September 30, 1996, and unrealized depreciation of $1,575,000 for the
nine months ended September 30, 1996. At December 31, 1995, the Partnership
recorded its investment in Centocor warrants at their intrinsic value of
$17.545 per share. In February 1996, the Partnership exercised its warrants
for Centocor common shares (see Marketable Securities).
<PAGE>
Page 10
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. RELATED PARTY TRANSACTIONS
The Manager received an annual management fee for management and
administrative services provided to the Partnership. The management fee was
payable quarterly in advance and was 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.
Commencing July 1, 1996, the Manager elected to discontinue the management fee
charged to the Partnership. The management fees paid by the Partnership to
the Manager were $137,010 and $299,117 for the nine months ended September 30,
1996 and 1995, respectively. Aggregate management fees paid to the Manager
since January 1, 1995, were $484,080.
The Partnership's portfolio which consists of a money market fund is
managed by an affiliate of PaineWebber Incorporated ("PWI").
PWDC and PWI, 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. PRODUCT DEVELOPMENT PROJECTS
The Partnership entered into nine Projects (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) which have been fully funded.
In addition, the Partnership purchased $5.9 million of common stock of
Alkermes, Inc. which was distributed to its Partners in 1993 and 1994.
On July 2, 1996, the Partnership and FOCUS Surgery, Inc. ("FOCUS") entered
into a Letter Agreement whereby the Partnership consented to the sale by FOCUS
to Takai Hospital Supply Co. of the technology developed under the product
development agreement between FOCUS and the Partnership free and clear of the
Partnership's interests therein. In exchange, the Partnership received
$562,000 and recognized a gain upon the sale of the technology for this amount.
On August 20, 1996, the Partnership terminated the product development
program with Compression Labs Incorporated ("CLI").
<PAGE>
Page 11
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(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.
At September 30, 1996, the market price per common share of Cygnus exceeded the
exercise price per share of the warrant and, accordingly, the Partnership
recorded this warrant as an investment with a carrying value equal to the
intrinsic value which approximates fair value (see Note 3). At September 30,
1996, the Partnership owned the following warrants:
<TABLE>
<CAPTION>
Number of Shares Exercise 9/30/96
that can be Price Exercise Market Price
Purchased per Share Period per Share*
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cayenne Software Inc. 193,000 $ 16.19 Current to 6/97 $ 4.250
Cygnus, Inc. (B) 300,000 $ 9.90 Current to 9/97 $ 17.125
OEC Medical Systems, Inc. (C) 200,000 $ 12.70 Current to 8/97 $ 12.500
</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
September 30, 1996 may not be indicative of the ultimate values, if any, that
may be realized by the Partnership.
<TABLE>
<CAPTION>
<S> <C>
(A) On July 19, 1996, Cadre Technologies Inc. ("Cadre") merged with Bachman
Information Systems to form Cayenne Software Inc. ("Cayenne"). As a result of
the merger, the Partnership's warrant to purchase 625,000 common shares of Cadre
at an exercise price of $5.00 per share converted into a warrant to purchase
193,000 common shares of Cayenne.
(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 October 1993, Diasonics, Inc. completed a 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.
</TABLE>
6. INCOME TAXES
The Partnership is not subject to federal, state or local income taxes.
Accordingly, the individual Partners are required to report their distributive
shares of realized income and loss on their individual federal and state income
tax returns.
<PAGE>
Page 12
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
7. LEGAL PROCEEDING
On July 12, 1995, the Partnership commenced a derivative 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 to Centocor 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 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.
Centocor has answered the Partnership's complaint, as well as a similar
complaint filed by John E. Abdo, another limited partner of CP III, denying the
material allegations of those complaints and asserting purported affirmative
defenses and third-party claims against Paine Webber Group Inc., PWDC and PWI.
In April 1996, Mr. Abdo moved to amend his complaint to assert claims on
behalf of CP III against one of PWDC's two nominees on the CDC III Board of
Directors. In July 1996, Mr. Abdo moved to amend his complaint to assert
claims on behalf of CP III against a former director of CDC III nominated by
PWDC. On July 12, 1996, counsel chosen by Centocor to represent CP III moved
to disqualify the Partnership from serving as a plaintiff in this action,
alleging that Mr. Abdo should by the sole plaintiff because the Partnership has
conflicts of interest with CP III and its other limited partners, including
conflicts arising out of the alleged claims against the PWDC nominees. These
motions are pending.
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 CP III 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 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Partners' capital decreased from $5.1 million at December 31, 1995, to $2.7
million at September 30, 1996, resulting from the recognition of a net loss of
$0.8 million for the nine months ended September 30, 1996 (as more fully
explained in Results of Operations below) and a cash distribution to the
Partners of $1.6 million.
The Partnership's working capital is invested in marketable securities and a
money market fund. Liquid assets at September 30, 1996 and December 31, 1995,
were $0.4 million and $1.3 million, respectively. The decrease of $0.9 million
was due primarily to the cash distribution remitted to the Partners offset, in
part, by the net proceeds realized upon the sale of product development
projects of $0.6 million. The balance of liquid assets will be used for the
payment of administrative costs related to managing the Partnership's
investments.
RESULTS OF OPERATIONS
Three months ended September 30, 1996 compared to the three months ended
September 30, 1995:
The Partnership recognized net income for the quarters ended September 30,
1996 and 1995, of $1.2 million and $2.7 million, respectively. The decrease in
net income of $1.5 million was due primarily to a decrease in revenues of this
amount.
Revenues decreased from $2.8 million for the three months ended September
30, 1995 to $1.3 million for the same period in 1996. The decrease of $1.5
million resulted from a decline in unrealized appreciation of marketable
securities and investments of $2.3 million offset by increases in realized gain
from sale of product development projects of $0.6 million and equity in
earnings from product development projects of $0.2 million. At September 30,
1995, the Partnership recorded its warrant to purchase 300,000 shares of Cygnus
common stock with a market value of $18.375 per share and an exercise price of
$9.90 per share at its intrinsic value of $2.6 million. Accordingly, the
Partnership recognized unrealized appreciation of this amount for the three
months ended September 30, 1995. During the quarter ended September 30, 1996,
the Partnership recognized unrealized appreciation of $0.5 million resulting
from the increase in market value of Cygnus common stock from $15.25 per share
at June 30, 1996 to $17.125 per share at September 30, 1996. For this same
period, the Partnership recognized unrealized depreciation of $0.2 million
attributable to the Partnership's investment in a warrant to purchase 200,000
shares of OEC Medical Systems, Inc. For the three months ended September 30,
1996, the Partnership sold its interests in product development programs with
FOCUS and CLI for proceeds of $0.6 million and recognized a gain from the sales
of this amount. The Partnership recognized income from earnings generated by
its limited partnership investments of $0.3 million and $0.1 million for the
quarters ended September 30, 1996 and 1995, respectively.
Expenses of the Partnership decreased from $118,000 for the quarter ended
September 30, 1995 to $47,000 for the same period in 1996. Effective July 1,
1996 the Manager decided to discontinue the management fee charged to the
Partnership.
<PAGE>
Page 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995:
The Partnership recognized a net loss of $0.8 million for the nine months
ended September 30, 1996 as compared to net income of $5.2 million for this
same period in 1995. The unfavorable variance of $6.0 million resulted
from a decrease in revenues of $6.2 million offset by a decrease in
expenses of $0.2 million.
Revenues for the nine months ended September 30, 1996 and 1995 were ($0.5)
million and $5.7 million, respectively. The decline was due primarily to a
decrease in realized gain on distribution of investments of $2.7 million and a
decrease in unrealized appreciation of investments and marketable securities of
$4.3 million offset by an increase in the sale of product development projects
of $0.6 million (see three months ended September 30, 1996 compared to the
three months ended September 30, 1995). In 1995 the Partnership distributed to
its Partners 1,518,074 shares of Cygnus common stock with a market value on the
date of distribution of $12.9 million ($8.50 per share). The carrying value of
the shares as of December 31, 1994 was $10.2 million ($6.75 per share) and,
accordingly, the Partnership recognized a gain upon the distribution of $2.7
million. Unrealized appreciation for the nine months ended September 30, 1995,
was $2.6 million primarily attributable to its investment in a warrant to
purchase 300,000 shares of Cygnus (see three months ended September 30, 1996
compared to three months ended September 30, 1995). During the nine months
ended September 30, 1996, the market value of Cygnus declined from $22.375 per
share at December 31, 1995 to $17.125 per share at September 30, 1996 resulting
in the recognition of unrealized depreciation of $1.6 million.
Expenses of the Partnership, consisting of management fees and general and
administrative costs, decreased from $0.5 million as of September 30, 1995 to
$0.3 million as of September 30, 1996. The decrease results, in part, from the
Manager's decision to discontinue the management fee charged to the Partnership
effective July 1, 1996.
<PAGE>
Page 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ACTION AGAINST CENTOCOR, INC. AND CENTOCOR DEVELOPMENT CORPORATION III
Information regarding this action was disclosed on the Partnership's
Form 10-K for the year ended December 31, 1995 and Forms 10-Q for the
quarters ended June 30, 1996 and March 31, 1996.
IN RE: PAINEWEBBER PARTNERSHIP LITIGATION
Information regarding this action was disclosed on the
Partnership's Form 10-K for the year ended December 31, 1995 and Form
10-Q for the quarter ended June 30, 1996. On July 17, 1996, the United
States District Court for the Southern District of New York (the
"Court") granted preliminary approval of the proposed settlement of the
class action litigation. As part of the class action settlement, PWI
agreed to pay $125 million and additional consideration to class
members. A final hearing on the proposed settlement commenced on
October 25, 1996, and is scheduled to continue in November 1996.
ACTION ENTITLED ABBATE V. PAINEWEBBER INC.
Information regarding this action filed in Sacremento, California
Superior Court against PWI and various affiliated entities was
disclosed on the Partnership's Form 10-K for the year ended December 31,
1995. In September, the California Superior Court dismissed many of the
plaintiffs claims as barred by the applicable statutes of limitation.
In June, 1996, additional complaints, similar to ABBATE VS. PAINEWEBBER
INC. but involving fewer plaintiffs, have been filed in Sacramento, San
Diego and Arizona. Certain of these complaints have been dismissed
with prejudice while others remain pending.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
None
b) REPORTS ON FORM 8-K:
On October 1, 1996, the Partnership filed a current report on Form 8-K
relating to the election of a President of PaineWebber Development
Corporation and PWDC Holding Company.
<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 November 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: /s/ Dhananjay M. Pai
--------------------------------------
Dhananjay M. Pai
President
By: /s/ Pierce R. Smith
--------------------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
*The capacities listed are with respect to PWDC Holding Company, the Manager,
as well as the general partner of the General Partner of the Registrant.
<PAGE>
Page 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 November 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: /s/ Dhananjay M. Pai
--------------------------------------
Dhananjay M. Pai
President
By: /s/ Pierce R. Smith
--------------------------------------
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.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000814576
<NAME> PAINEWEBBER R&D PARTNERS II, L.P.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,975
<SECURITIES> 2,565,763
<RECEIVABLES> 16,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,586,738
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,747,128
<CURRENT-LIABILITIES> 73,585
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 2,673,543
<TOTAL-LIABILITY-AND-EQUITY> 2,747,128
<SALES> 0
<TOTAL-REVENUES> (541,455)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 287,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (828,672)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (828,672)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
