UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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> Page 1
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
FORM 10-Q
JUNE 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition
(unaudited) at June 30, 1996 and December 2
31, 1995
Statements of Operations
(unaudited) for the three months ended
June 30, 1996 and 1995 3
Statements of Operations
(unaudited) for the six months ended
June 30, 1996 and 1995 3
Statement of Changes in Partners' Capital
(unaudited) for the six months ended
June 30, 1996 4
Statements of Cash Flows
(unaudited) for the six months ended
June 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
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>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Financial Condition
(unaudited)
June 30, December 31,
1996 1995
- -------------------------------------------------------------------------------
Assets:
Cash $ 4,552 $ 5,858
Marketable securities, at market value 1,257,615 1,247,309
Investments, at fair value 1,790,000 3,791,626
Interest receivable - 5,518
Investments in product development projects 165,966 189,256
Royalty income receivable 15,703 26,158
------------ ------------
Total assets $ 3,233,836 $ 5,265,725
============ ============
Liabilities and partners' capital:
Accrued liabilities $ 88,058 $ 97,486
Partners' capital 3,145,778 5,168,239
------------ ------------
Total liabilities and partners' capital $ 3,233,836 $ 5,265,725
============ ============
- -------------------------------------------------------------------------------
See notes to financial statements.
2
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Operations
(unaudited)
For the three months ended June 30, 1996 1995
- -------------------------------------------------------------------------------
Revenues:
Interest income $ 9,118 $ 21,928
Income from product development project 15,703 23,645
Unrealized (depreciation) appreciation of
investments and marketable securities (1,520,000) 28,848
Realized gain on distribution of investment - 1,138,556
Realized loss on sale of marketable securities (44,094) -
Equity in earnings of product development projects 161,032 169,184
------------ ---------
(1,378,241) 1,382,161
------------ ---------
Expenses:
Management fee 68,505 125,582
General and administrative costs 41,519 87,044
-------- ---------
110,024 212,626
-------- ---------
Net income (loss) $ (1,488,265) $ 1,169,535
======== =========
Net income (loss) per partnership unit:
Limited partners (based on 8,257 units) $ (178.44) $ 140.23
General partner $ (14,882.65) $11,695.35
- -------------------------------------------------------------------------------
For the six months ended June 30, 1996 1995
- -------------------------------------------------------------------------------
Revenues:
Interest income $ 21,111 $ 50,250
Income from product development project 47,468 51,376
Unrealized (depreciation) appreciation of
investments and marketable securities (1,955,300) 42,732
Realized gain on distribution of securities - 2,656,630
Realized loss on sale of marketable securities (53,421) -
Equity in earnings of product development
projects 158,019 165,035
------------ ----------
(1,782,123) 2,966,023
------------ ----------
Expenses:
Management fee 137,010 251,164
General and administrative costs 103,328 154,736
----------- ----------
240,338 405,900
----------- ----------
Net income (loss) $ (2,022,461) $ 2,560,123
=========== ==========
Net income (loss) per partnership unit:
Litmited partners (based on 8,257 units) $ (242.49) $ 306.95
General partner $ (20,224.61) $25,601.23
- ------------------------------------------------------------------------------
See notes to financial statements
3
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statement of Changes in Partners' Capital
(unaudited)
Limited General
For the six months ended June 30, 1996 Partners Partner Total
- -------------------------------------------------------------------------------
Balance at January 1, 1996 $ 5,114,512 $ 53,727 $ 5,168,239
Net loss (2,002,236) (20,225) (2,022,461)
------------ --------- -----------
Balance at June 30, 1996 $ 3,112,276 $ 33,502 $ 3,145,778
============ ========= ===========
- -------------------------------------------------------------------------------
See notes to financial statements.
4
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
(unaudited)
For the six months ended June 30, 1996 1995
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (2,022,461) $ 2,560,123
Adjustments to reconcile net income (loss) to
cash (used for) provided by operating activities:
Unrealized depreciation (appreciation) of
investments and marketable securities 1,955,300 (42,732)
Realized gain on distribution of investment - (2,656,630)
Equity in earnings of product development projects (158,019) (165,035)
(Increase) decrease in operating assets:
Marketable securities (13,106) 999,169
Investments 49,126 91,970
Interest receivable 5,518 3,638
Royalty income receivable 10,455 18,827
Decrease in operating liabilities:
Accrued liabilities (9,428) (63,018)
---------- ----------
Cash (used for) provided by operating activities (182,615) 746,312
---------- ----------
Cash flows from investing activities:
Distributions from product development project 181,309 170,096
---------- ----------
Cash flows from financing activities:
Distributions to partners - (917,444)
---------- ----------
Decrease in cash (1,306) (1,036)
Cash at beginning of period 5,858 6,703
---------- ----------
Cash at end of period $ 4,552 $ 5,667
========== ===========
- ------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the six months
ended June 30, 1996 and 1995.
Supplemental schedule of non-cash activities:
- -------------------------------------------------------------------------------
For the six months ended June 30, 1996 1995
- -------------------------------------------------------------------------------
Distribution of investments to partners:
Cygnus Therapeutic Systems common stock $ - $ 12,903,629
- ------------------------------------------------------------------------------
See notes to financial statements.
5
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
The financial information as of and for the periods ended June 30, 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 June 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 report on Form 10-Q for the quarter ended 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:
6
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 1 CONTINUED)
LIMITED GENERAL
PARTNERS PARTNER
-------- -------
I. Until the value of the aggregate distributions
for each limited partnership unit ("Unit") equals
$10,000 plus simple interest on such amount accrued
at 7% per annum for each Unit sold at the Initial
Closing (6% per annum for each subsequent Unit
sold up to the 5,000th Unit and 5% per annum for each
Unit sold thereafter) ("Contribution Payout") 99% 1%
II. After Contribution Payout and until the value of
the aggregate distributions for each Unit equals
$50,000 ("Final Payout") 80% 20%
III. After Final Payout 75% 25%
For the six months ended June 30, 1996, the Partnership made no cash or
security distributions. At June 30, 1996, 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 accounted for its investments in restricted common stock
(where the restriction period expired in one year or less) held as of or
acquired after January 1, 1994, in accordance with the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities".
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:
7
<PAGE>
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:
JUNE 30, 1996 DECEMBER 31, 1995
---------------------- ------------------------
MARKET COST MARKET COST
---------- ---------- ------------- ---------
Money market fund $ 1,173,965 $1,173,965 $ 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) 83,650 37,324 - -
----------- ---------- ----------- ----------
$ 1,257,615 $1,211,289 $1,247,309 $1,048,476
----------- ----------- ----------- ----------
8
<PAGE>
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 six months ended June 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 June 30, 1996, Centocor common stock had a
market value of $29.875 per share as compared to $36.125 per share at March
31, 1996. Accordingly, the Partnership recognized unrealized depreciation of
$17,500 for the quarter ended June 30, 1996. In June 1996, the Partnership
sold 11,867 shares of Cygnus, Inc. ("Cygnus") with carrying values as of March
31, 1996 and December 31, 1995 of $247,724 ($20.875 per share) and $265,525
($22.375 per share), respectively. Proceeds, net of commissions, were
$203,630 resulting in a loss upon the sale for the three months and six months
ended June 30, 1996 of $44,094 and $61,895, respectively.
INVESTMENTS:
The Partnership held the following investments:
JUNE 30, 1996 DECEMBER 31, 1995
--------------- -------------------
Cygnus, Inc. $ 1,605,000 $ 3,742,500
Warrants to purchase 300,000 common shares
Centocor, Inc. - 49,126
Warrants to purchase 2,800 common shares
OEC Medical Systems, Inc. 185,000 -
Warrants to purchase 200,000
common shares
----------- -------------
$ 1,790,000 $ 3,791,626
============ ============
The Partnership records its warrants to purchase 300,000 common shares of
Cygnus (with an exercise price of $9.90 per share) and 200,000 common shares
of OEC Medical Systems, Inc. ("OEC") as investments with carrying values equal
to their intrinsic values (which approximate fair value) -- (See Note 5). The
market value of Cygnus stock as of June 30, 1996 was $15.25 per share as
compared to market values of $20.875 and $22.375 per share as of March 31,
1996 and December 31, 1995, respectively. Accordingly, the Partnership
recognized unrealized depreciation of $1,687,500 and $2,137,500 for the three
months and six months ended June 30, 1996, respectively. The market value of
OEC common stock at June 30, 1996 of $13.625 per share exceeded the exercise
price of the warrant of $12.70 per share resulting in the recognition
of unrealized appreciation of $185,000. 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).
9
<PAGE>
4. RELATED PARTY TRANSACTIONS
The Manager receives an annual management fee for management and
administrative services provided to the Partnership. The management fee is
payable quarterly in advance and is adjusted annually on the first day of each
fiscal year in an amount proportionate to the increase in the prior year in
the Consumer Price Index published by the United States Department of Labor.
The management fees paid by the Partnership to the Manager were $68,505 and
$125,582 for the three months ended June 30, 1996 and 1995, respectively, and
$137,010 and $251,164 for the six months ended June 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 affiliates 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 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 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. On May 6, 1996, Genzyme withdrew its Offer to purchase the assets
of GDP.
In March 1996, FOCUS Surgery, Inc. ("FOCUS") announced the signing of a
letter of intent with Takai Hospital Supply Co. ("Takai") for the sale of all of
the assets of FOCUS. Simultaneously, FOCUS filed for protection under Chapter
11 of the U.S. Bankruptcy Code. (See Subsequent Events - Note 8).
10
<PAGE>
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 June 30, 1996, the market prices per common share of
Cygnus and OEC 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 June 30, 1996, the Partnership owned the following warrants:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE 6/30/96
SHARES THAT CAN PRICE EXERCISE MARKET PRICE
BE PURCHASED PER SHARE PERIOD PER SHARE
<S> <C> <C> <C> <C>
Cadre Technologies, Inc. 625,000 $ 5.00 Current to 6/97 (A)
Cygnus, Inc. (B) 300,000 $ 9.90 Current to 9/97 $ 15.250
OEC Medical Systems, Inc. (B)(C) 200,000 $ 12.70 Current to 8/97 $ 13.625
</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 June
30, 1996, may not be indicative of the ultimate values, if any, that may be
realized by the Partnership.
(A) At June 30, 1996, the common stock of Cadre Technologies Inc.
("Cadre") was not publicly traded. (See Subsequent Events - Note 8).
(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.
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.
11
<PAGE>
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 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 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 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.
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.
8. SUBSEQUENT EVENTS
Effective July 1, 1996, the Manager elected to discontinue the management
fee charged to the Partnership.
On July 2, 1996, the Partnership and FOCUS entered into a Letter
Agreement whereby the Partnership consented to the sale by FOCUS to Takai of
the technology under the project agreement between FOCUS and the Partnership
free and clear of the Partnership's interests therein in return for a sum of
$562,000. On July 31, 1996, the agreement was approved by the U.S.
Bankruptcy Court in connection with FOCUS filing under Chapter 11 of the U.S.
Bankruptcy Code. The completion of the asset sale by FOCUS to Takai is
expected to be completed during the third quarter of 1996.
On July 19, 1996, Bachman Information Systems completed its merger with Cadre
to form Cayenne Software Inc. ("Cayenne"). As a result of the merger, the
Partnership's warrant to purchase 625,000 common shares of Cadre were
converted into a warrant to purchase 193,000 common shares of Cayenne at an
exercise price of $16.19 per share. At July 19, 1996, the market price of
Cayenne stock was $6.00 per share.
12
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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
$3.1 million at June 30, 1996, resulting from the recognition of a net loss of
$2.0 million for the six months ended June 30, 1996 (as more fully explained
in Results of Operations below).
The Partnership's working capital is invested in marketable securities
and a money market fund. Liquid assets at June 30, 1996 and December 31,
1995, were $1.3 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 June 30, 1996 compared to the three months ended June 30,
1995:
The Partnership recognized a net loss for the quarter ended June 30,
1996, of $1.5 million compared to net income of $1.2 million for the same period
in 1995. The unfavorable variance of $2.7 million was due to a decrease in
revenues of $2.8 million offset by a decrease in expenses of $0.1 million.
Revenues for the quarter ended June 30, 1996 were $(1.4) million
consisting primarily of the recognition of unrealized depreciation of
marketable securities and investments as compared to revenues for the quarter
ended June 30, 1995, of $1.4 million consisting primarily of realized gain on
the distribution of an investment. As of June 30, 1996, the Partnership wrote
down its investment in a warrant to purchase 300,000 common shares of Cygnus by
$1.7 million to reflect a decrease in the market value of Cygnus common stock
from $20.875 at March 31, 1996, to $15.25 at June 30, 1996. In addition, the
market price of OEC common shares at June 30, 1996, of $13.625 per share
exceeded the exercise price of $12.70 per share of the warrant held by the
Partnership. Accordingly, the Partnership recorded the warrant at its
intrinsic value of $0.2 million and thus recognized unrealized appreciation of
this amount. In May 1995, the Partnership distributed to its Partners
1,518,074 shares of Cygnus common stock. The market value of the stock on the
date of distribution was $12.9 million ($8.50 per share) compared to the
carrying value as of March 31, 1995, of $11.8 million ($7.75 per share)
Accordingly, the Partnership recognized a gain upon distribution for the
quarter ended June 30, 1995, of $1.1 million.
Expenses of the Partnership, consisting of management fees and general
and administrative costs, decreased from $0.2 million for the quarter ended June
30, 1995 to $0.1 million for the same period in 1996. The decrease results,
in part, from the General Partner's decision to eliminate the management fee
charged on certain Projects.
13
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 2. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Six months ended June 30, 1996 compared to the six months ended June 30,
1995:
The Partnership recognized a net loss of $2.0 million for the six
months ended June 30, 1996 as compared to net income of $2.6 million for this
same period in 1995. The unfavorable variance of $4.6 million resulted from a
decrease in revenues of $4.8 million offset by a decrease in expenses of $0.2
million.
Revenues for the six months ended June 30, 1996 were $(1.8) million
consisting primarily of the recognition of unrealized depreciation on
investments as compared to $3.0 million for the six months ended June 30, 1995
consisting primarily of realized gain on the distribution of an investment.
As of June 30, 1996, the Partnership recognized unrealized depreciation of
$2.1 million on its warrant to purchase 300,000 share of Cygnus common stock
which was offset by the recognition of unrealized appreciation of $0.2 million
on its warrant to purchase 200,000 shares of OEC common stock. The market
price of Cygnus stock decreased from $22.375 per share at December 31, 1995 to
$15.25 at June 30, 1996, and accordingly the Partnership recognized unrealized
depreciation of $2.1 million. As of June 30, 1996, the market price of OEC
common shares of $13.625 exceeded the exercise price per share of the warrant
of $12.70. The Partnership recorded the warrant at its intrinsic value of
$0.2 million. In May 1995, the Partnership distributed to its Partners
1,518,074 shares of Cygnus common stock with a market value as of the date of
distribution of $12.9 million ($8.50 per share). The carrying value of the
shares at December 31, 1994 was $10.2 million ($6.75 per share) resulting in a
gain upon distribution of $2.7 million.
Expenses of the Partnership, consisting of management fees and general
and administrative costs, decreased from $0.4 million as of June 30, 1995 to
$0.2 million as of June 30, 1996. The decrease results, in part, from the
General Partner's decision to eliminate the management fee charged on certain
Projects.
14
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 Form 10-Q for the quarter
ended March 31, 1996. 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 be 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.
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. 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. The order entered by
the Court provides for notice to be mailed to class members and schedules a
final hearing on the proposed settlement for October 25, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS:
None
b) REPORTS ON FORM 8-K:
On June 7, 1996, the Partnership filed a current report on Form 8-K
relating to the resignation of the President of PaineWebber Development
Corporation and PWDC Holding Company.
15
<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 15th day
of August 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:
-------------------------
James M. Voytko
Executive Vice President
By:
--------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
* The capacities listed are with respect to PWDC Holding Company, the
Manager, as well as the general partner of the General Partner of the
Registrant.
17
<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 15th day
of August 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: James M. Voytko /s/
-------------------------
James M. Voytko
Executive Vice President
By: Pierce R. Smith/s/
--------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
* The capacities listed are with respect to PWDC Holding Company, the
Manager, as well as the general partner of the General Partner of the
Registrant.
17
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