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, 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
--------------------------
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>
SPECIAL NOTE REGARDING
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Except for the historical information
contained herein, the matters discussed herein are forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of PaineWebber R&D Partners II, L.P. or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions; fluctuations in the
value of securities for which only a limited, or no, public market exists;
dependence on the development of new technologies; dependence on timely
development and introduction of new and competitively priced products; the need
for regulatory approvals; the Sponsor Companies (hereinafter defined) having
insufficient funds to commercialize products to their maximum potential; the
restructuring of Sponsor Companies; the dependence of PaineWebber R&D Partners
II, L.P. on the skills of certain scientific personnel; and the dependence of
the Partnership on the General Partner (hereinafter defined).
<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 Paine
Webber 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, 1996, three of the ten Projects
with Centocor, Inc., Genzyme Corporation and Amgen Boulder, Inc. (formerly,
Synergen, Inc.) are currently ongoing programs. The remaining seven Projects
have either terminated or are near termination. (See Exhibit B, the Annual
Letter to the Limited Partners, for a detailed discussion of the current status
of the Partnership's active Projects.) In addition to investments in Projects,
as of December 31, 1996, 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-15 included in this filing on Form 10-K.
At a meeting of the Board of Directors of PWDC (the "Board") in January 1997,
the Board adopted the Policy Regarding Requests for Partner Lists attached as
Exhibit C.
PARTNERSHIP MANAGEMENT
The Partnership has contracted with 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 periodically 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 for 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 on all but one
Project. As of July 1, 1996, the Manager elected to discontinue the management
fee charged on this final Project.
<PAGE>
(ITEM 1 CONTINUED)
DISTRIBUTIONS
All distributions to the Partners of 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:
<TABLE>
<CAPTION>
Limited General
Partners Partner
<S> <C> <C>
I. Until the value of the aggregate distributions for each 99% 1%
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")
II. After Contribution Payout and until the value of the 80% 20%
aggregate distributions for each Unit equals $50,000
("Final Payout")
III. After Final Payout 75% 25%
</TABLE>
At December 31, 1996, the Partnership has made cash and security distributions,
as valued on the date of distribution, since inception of $1,866 and $7,206 per
Unit, respectively.
OTHER
At December 31, 1996, 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 (the "Court") 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 purposes 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 percentages of profits and
revenues from ReoPro that it pays to CP III investors. 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 percentages of ReoPro
profits and revenues that it pays to CP III investors. 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 percentages of future
ReoPro profits and revenues that Centocor must pay to CP III and its investors.
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, cross-claims against CP III, and third-party claims against PWG, PWDC
and PaineWebber Incorporated ("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 of 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. In July 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. Mr. Abdo and Centocor also moved
to disqualify the Partnership. In January 1997, the Court granted Mr. Abdo's
motion to amend his complaint to assert claims against the PWDC nominees. The
Court has not ruled on the motions to disqualify.
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 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.
ACTION AGAINST AMGEN BOULDER, INC.
In 1991, Synergen, Inc. (now Amgen Boulder, Inc.) formed Synergen Clinical
Partners, L.P. ("SCP") to fund the research and development of Interleukin-
Receptor Antagonist ("IL-lra") as a potential treatment of various
inflammatory diseases, with an emphasis on sepsis and rheumatoid arthritis.
The Partnership owns approximately 11% of the Class A limited partnership
interests of SCP. Synergen, Inc. terminated its research and development
program for sepsis in August 1994, and, in December 1994, Synergen, Inc.
was acquired by Amgen Inc. Research into the potential use of IL-lra for
rheumatoid arthritis is ongoing.
<PAGE>
(ITEM 3 CONTINUED)
In February 1995, a Class A limited partner commenced an action against the
general partner of SCP and others. Johnson v. Amgen Boulder, Inc., No. C95-0204R
(W.D. Wash.). The complaint alleged that the defendants caused or permitted the
release of misleading statements regarding the potential market for IL-lra,
preclinical and clinical trial results, and the possibility of IL-lra becoming
licensed for sale either in the United States or Europe. The complaint sought
damages on behalf of a class including limited partners of SCP and limited
partners of the Partnership.
In February 1997, the parties announced a proposed settlement of the Johnson
action, pursuant to which the defendants would pay $14,550,000, less attorney's
fees and costs, to class members, and the limited partners' interests in SCP
would be terminated. The settlement is conditioned on, among other things, the
approval of two-thirds of the current limited partnership interests in SCP and
final court approval. The General Partner has not yet determined whether to vote
the Partnership's interests in favor of the settlement. The court has scheduled
a hearing on May 23, 1997, to determine whether the proposed settlement is fair,
reasonable and adequate, and whether class counsel's petition for attorney's
fees and expenses should be granted.
IN RE: PAINEWEBBER LIMITED PARTNERSHIP LITIGATION
As previously disclosed on the Partnership's Form 10-K for the year ended
December 31, 1995, 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 agreed to settle the case. A
definitive settlement agreement and plan of allocation was signed in July 1996
and submitted to the United States District Court for the Southern District of
New York (the "US Court") for its approval. Under that settlement, PWI agreed to
pay the class $125 million (which had previously been deposited in escrow with
the US Court when the memorandum of understanding was signed) and certain
additional consideration. The additional consideration included the assignment
of fees and income attributable to the general partnership interest in the
Partnership as well as guarantees of certain minimum returns to class members.
In March 1997, the US Court approved the settlement as fair and reasonable.
In February 1996, approximately 150 plaintiffs filed an action entitled ABBATE
V. PAINEWEBBER INC. 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
owed 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. In June 1996, additional complaints similar to the ABBATE
action, but involving fewer plaintiffs, were filed in Sacramento, San Diego and
Arizona. In September 1996, the California Superior Court dismissed many of the
ABBATE plaintiffs' claims as barred by the applicable statutes of limitation.
Certain of the other complaints were also dismissed with prejudice while others
remained pending. In March 1997, all of these actions were settled. The
settlement had no effect on the Partnership or the General Partner.
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. Effective December 10, 1997, the General Partner
discontinued the right of Limited Partners to transfer Units, except for
transfers that may occur as a result of the laws of descent and distribution or
by operation of law. As of December 31, 1996, there were 6,341 Limited Partners.
The Partnership distributes to its Partners, when available, the net
proceeds from royalty distributions, interest payments on portfolio securities,
net proceeds from dispositions of portfolio securities and any other cash in
excess of amounts that are necessary for the operation of the Partnership's
business. The Partnership's policy has been to distribute common stock (or cash
from the sale of common stock) to the Partners once the restriction period on
saleability has lapsed. The Partnership's cash distributions to its Partners
totaled $2,341,597 ($281 per Unit; $21,380 to the general partnership interest)
for the year ended December 31, 1996. For the years ended December 31, 1995 and
1994, cash distributions to the Partners were $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), 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, 1996 was $3.0 million compared to $5.1 million
at December 31, 1995, a decrease of $2.1 million. The decrease in partners'
capital was a result of net income from operations of $0.2 million (as discussed
in Results of Operations below) offset by cash distributions to the Partners of
$2.3 million.
The Partnership's funds are invested in marketable securities until cash is
needed to pay for the ongoing management and administrative expenses of the
Partnership. Liquid assets at December 31, 1996 were $0.9 million compared to
$1.3 million at December 31, 1995, a decrease of $0.4 million. The decrease in
liquid assets is primarily due to cash distributions to Partners of $2.3 million
and the payment of management fees and administrative costs of $0.4 million
offset by the net proceeds upon the sale of product development projects of $0.5
million, distributions received from product development projects of $1.1
million and net proceeds from the sale of marketable securities and investments
of $0.7 million. The balance of working capital will be used for the payment of
administrative costs related to the Partnership's business.
<PAGE>
(ITEM 7 CONTINUED)
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995:
Net income for the years ended December 31, 1996 and 1995 was $0.2 million and
$6.4 million, respectively. The decrease of $6.2 million resulted from a
decrease in revenues of $6.5 million offset by a decrease in expenses of $0.3
million.
Revenues for the year ended December 31, 1996 were $0.6 million as compared to
$7.1 million for the year ended December 31, 1995. The decrease of $6.5 million
resulted primarily from an increase in loss upon the sale of investments and
marketable securities of $0.4 million and decreases in unrealized appreciation
of marketable securities and investments of $5.6 million and gain on
distribution of marketable securities and investments of $2.6 million (see
Results of Operations for the year ended December 31, 1995 compared to the year
ended December 31, 1994) offset by increases in gain from the sale of product
development projects of $0.5 million and income from product development
projects of $1.5 million. During 1996, the Partnership sold its equity
investments in Cygnus and Alkermes and realized an aggregate loss of $0.4
million. The Partnership recognized unrealized depreciation in 1996 of $1.6
million resulting primarily from a decrease of $2.0 million in the intrinsic
value of its warrant to purchase 255,000 shares of Cygnus stock offset by the
recording of its warrant to purchase 200,000 shares of OEC Medical Systems, Inc.
("OEC") stock at $0.5 million. The market value of Cygnus stock decreased from
$5.7 million ($22.375 per share) at December 31, 1995 to $3.7 million ($14.50
per share) at December 31, 1996. At December 31, 1996, the market value of OEC
stock of $15.00 per share exceeded the exercise price of the warrant of $12.70
per share. The Partnership recorded its investment in the OEC warrant at its
intrinsic value of $0.5 million. In 1995, the Partnership recognized unrealized
appreciation of marketable securities and investments of $4.0 million (see
Results of Operations for the year ended December 31, 1995 compared to the year
ended December 31, 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 of the technology developed under the product development
agreement between FOCUS and the Partnership. The Partnership received $0.5
million and recognized a gain of this amount. The Partnership recognized income
from product development projects of $1.9 million and $0.4 million,
respectively, for the years ended December 31, 1996 and 1995.
Expenses for the years ended December 31, 1996 and 1995 were $0.4 million and
$0.7 million, respectively. The decrease is a result primarily of the Manager's
decision to discontinue charging the Partnership a management fee effective July
1, 1996.
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, and a decline in expenses of $1.0
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, 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 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 offset by the recognition
of gains in 1994 on the sale of a Project of $8.9 million and the sale of a
warrant of $0.7 million. The Partnership recognized unrealized appreciation of
marketable securities and investments of $4.0 million and $1.3 million for the
years ended December 31, 1995 and 1994, respectively. Unrealized appreciation
for 1995 was attributable primarily to the Partnership's investment in a warrant
to purchase 300,000 shares of Cygnus. As of December 31, 1995, the market value
of Cygnus stock of $22.375 per share exceeded the exercise price of the warrant
of $9.90 per share. Accordingly, the Partnership recorded the warrant at its
intrinsic value of $3.8 million and recognized unrealized appreciation of this
amount. 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 $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. 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 market value as of the date of
sale aggregating $8.9 million and recognized a gain upon the sale of this
amount. Also, in 1994, the Partnership sold its warrant to purchase 100,000
shares of Roger Corporation stock with a carrying value of $0 for $0.7 million.
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 SCP in the amount of
$0.7 million. The Partnership had accrued payments of $0.6 million to Cygnus and
$0.7 million to SCP 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.
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-15)
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, 1996:
NAME AGE POSITION AND DATE APPOINTED
DIRECTORS (1)
Dhananjay M. Pai 34 Director since December 1996
Gerald F. Goertz, Jr. 39 Director since April 1995
Pierce R. Smith 53 Director since June 1993 (3)
EXECUTIVE OFFICERS (2)
Dhananjay M. Pai 34 President since December 1996
Pierce R. Smith 53 Treasurer since August 1988 (3)
Dorothy F. Haughey 72 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. Pai was appointed to this position in December 1996 at PWDC Holding
Company; Mr. Smith was appointed to this position at PWDC Holding Company in
September 1993; Mr. Goertz was appointed to this position at PWDC Holding
Company in April 1995.
2) Mr. Pai was appointed to this position in December 1996 at PWDC Holding
Company; Mr. Smith and Ms. Haughey were appointed to these positions at PWDC
Holding Company in December 1991.
3) Mr. Smith resigned these positions at PWDC and PWDC Holding Company in
February 1997 and was replaced by William J. Nolan. Mr. Nolan is a
Managing Director in the Treasury Division of PWI.
<PAGE>
(ITEM 10 CONTINUED)
DIRECTORS
MR. PAI is a Managing Director of PWI. Before joining the Principal Transactions
Group of PWI in 1990, Mr. Pai was a vice president in the Investment Banking
Division of Drexel Burnham Lambert from 1988 to 1990. From 1983 to 1988, Mr. Pai
held various positions within the Finance Division of Drexel Burnham Lambert.
Mr. Pai is a Director and President of PaineWebber Capital, an Advisory Board
Member of Rifkin Acquisition Partners LLLP, and either a director or officer of
certain affiliates of PWI. He holds a Bachelor of Science degree from the
Wharton School of Business and a Master of Business Administration from New York
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 Master of Business Administration from Memphis State University in
1982.
MR. SMITH was 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.
<PAGE>
(ITEM 10 CONTINUED)
EXECUTIVE OFFICERS
MR. PAI, President, see "Directors" above.
MR. SMITH, Treasurer, see "Directors" above.
MS. HAUGHEY, Secretary, joined PWI in 1962. She is Secretary of PWI.
<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, is entitled to receive an annual management
fee for management and administrative services provided to the Partnership. As
of July 1, 1996, the Manager elected to discontinue the management fee charged
to the Partnership. See the section entitled "Related Party Transactions" under
the caption "Notes to Financial Statements" on pages F-9 through F-15 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, 1997 of more than five percent of the Registrant's
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 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-15 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-15)
REPORTS ON FORM 8-K
On October 1, 1996, the Partnership filed a report on Form 8-K relating to the
election of the President of Paine Webber Development Corporation and PWDC
Holding Company.
<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 31st day of March 1997.
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: Dhananjay M. Pai/s/
---------------------------
Dhananjay M. Pai
President and Principal Executive Officer
By: William J. Nolan/s/
---------------------------
William J. Nolan
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 31st day
of March 1997.
Dhananjay M. Pai/s/
- ---------------------------
Dhananjay M. Pai President
(principal executive officer) and Director
William J. Nolan/s/
- ---------------------------
William J. Nolan
Principal Financial and Accounting Officer and Director
Gerald F. Goertz, Jr./s/
- ---------------------------
Gerald F. Goertz, Jr.
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>
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, 1996 and 1995 F-5
Statements of Operations,
for the years ended December 31, 1996, 1995 and 1994 F-6
Statements of Changes in Partners' Capital,
for the years ended December 31, 1996, 1995 and 1994 F-7
Statements of Cash Flows,
for the years ended December 31, 1996, 1995 and 1994 F-8
Notes to Financial Statements F-9 to F-15
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.
F-1
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Results:
<S> <C> <C> <C> <C> <C>
Revenues $ 583,230 $ 7,133,197 $ 10,743,055 $ 8,957,023 $ 1,795,829
Net income (loss) (A) $ 226,748 $ 6,431,753 $ 9,385,257 $ 1,429,144 $ (9,317,951)
Net income (loss) per partnership unit (A):
Limited partners (B) $ 27.19 $ 771.16 $ 1,125.27 $ 171.36 $ (1,116.18)
General partner $ 2,267.48 $ 64,317.53 $ 93,852.57 $ 14,291.44 $(101,832.09)
Financial Condition:
Total assets $ 3,447,578 $ 5,265,725 $ 12,875,809 $ 7,121,082 $ 21,908,027
Partners' capital $ 3,053,390 $ 5,168,239 $ 12,724,367 $ 5,741,515 $ 20,807,391
Distributions to partners:
Cash $ 2,341,597 $ 1,084,252 $ 417,020 $ 4,628,895 $ 5,421,153
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.
F-2
<PAGE>
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 1996
4th Quarter $ 1,124,684 $ 1,055,418 $ 126.55 $ 10,554.18
3rd Quarter 1,240,669 1,193,791 143.13 11,937.91
2nd Quarter (1,378,241) (1,488,265) (178.44) (14,882.65)
1st Quarter (B) (403,882) (534,196) (64.05) (5,341.96)
- --------------------------------------------------------------------------------------------------------------------------
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 (C) 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
- --------------------------------------------------------------------------------------------------------------------------
</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,
1996, in the amount of $3,013.
(C) Revenues have been restated from the reported amount at March 31, 1995, in
the amount of $4,149.
F-3
<PAGE>
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP/s/
- --------------------
Ernst & Young
New York, New York
March 21, 1997
F-4
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF FINANCIAL CONDITION
December 31, December 31,
1996 1995
- --------------------------------------------------------------------------------
Assets:
Cash $ 5,028 $ 5,858
Marketable securities, at market value 899,197 1,247,309
Investments, at fair value 1,633,000 3,791,626
Interest receivable -- 5,518
Advances to product development projects 135,519 169,289
Royalty income receivable 774,834 46,125
========== ==========
Total assets $3,447,578 $5,265,725
========== ==========
Liabilities and partners' capital:
Due to product development company $ 297,000 $ --
Accrued liabilities 97,188 97,486
Partners' capital 3,053,390 5,168,239
========== ==========
Total liabilities and partners' capital $3,447,578 $5,265,725
========== ==========
- --------------------------------------------------------------------------------
See notes to financial statements.
F-5
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest income $ 40,989 $ 85,565 $ 104,484
Net realized gain on sale of product development
projects 552,001 -- 8,988,403
Income from product development projects 1,908,249 395,195 187,219
Unrealized (depreciation) appreciation of
investments and marketable securities (1,534,475) 3,995,807 1,322,966
Net realized gain (loss) on distribution of
investments and marketable securities -- 2,656,630 (583,917)
Net realized loss on sale of investments and
marketable securities (383,534) -- --
Realized gain on sale of warrant -- -- 723,900
------------ ------------ ------------
583,230 7,133,197 10,743,055
------------ ------------ ------------
Expenses:
Expenditures under product development
projects -- -- 854,637
Management fee 137,010 347,070 618,795
General and administrative costs 219,472 354,374 250,700
------------ ------------ ------------
356,482 701,444 1,724,132
------------ ------------ ------------
Net income before cumulative effect of change
in accounting method 226,748 6,431,753 9,018,923
Cumulative effect in change of accounting method -- -- 366,334
============ ============ ============
Net income $ 226,748 $ 6,431,753 $ 9,385,257
============ ============ ============
Net income per partnership unit before cumulative
effect of change in accounting method:
Limited partners (based on 8,257 units) $ 27.19 $ 771.16 $ 1,081.35
General partner $ 2,267.48 $ 64,317.53 $ 90,189.23
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) $ 27.19 $ 771.16 $ 1,125.27
General partner $ 2,267.48 $ 64,317.53 $ 93,852.57
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
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, 1996, 1995 and 1994 Partners Partner Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1994 $ 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
Net income 224,481 2,267 226,748
Cash distributions to partners (2,320,217) (21,380) (2,341,597)
------------ ------------ ------------
Balance at December 31, 1996 $ 3,018,776 $ 34,614 $ 3,053,390
============ ============ ============
- -------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
F-7
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 226,748 $ 6,431,753 $ 9,385,257
Adjustments to reconcile net income to cash
provided by operating activities:
Realized gain on sale of product development project -- -- (8,988,403)
Unrealized depreciation (appreciation) of
investments and marketable securities 1,534,475 (3,995,807) (1,322,966)
Net realized (gain) loss on distribution of
investments and marketable securities -- (2,656,630) 583,917
Cumulative effect of change in accounting method -- -- (366,334)
Decrease (increase) in operating assets:
Marketable securities 361,762 1,345,606 2,111,780
Investments 610,501 -- --
Interest receivable 5,518 2,155 6,750
Advances to product development projects 33,770 13,939 177,539
Royalty income receivable (728,709) (3,653) 57,939
Increase (decrease) in operating liabilities:
Due to product development company 297,000 -- --
Accrued liabilities (298) (53,956) 24,991
Liabilities under product development projects -- -- (1,253,116)
----------- ----------- -----------
Cash provided by operating activities 2,340,767 1,083,407 417,354
----------- ----------- -----------
Cash flows from financing activities:
Distributions to partners (2,341,597) (1,084,252) (417,020)
----------- ----------- -----------
(Decrease) increase in cash (830) (845) 334
Cash at beginning of year 5,858 6,703 6,369
----------- ----------- -----------
Cash at end of year $ 5,028 $ 5,858 $ 6,703
=========== =========== ===========
- ------------------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the years ended
December 31, 1996, 1995 and 1994.
Supplemental schedule of non-cash activities:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distribution of investments to partners:
Cygnus, Inc. common stock $ -- $12,903,629 $ --
Alkermes, Inc. common stock -- -- 1,985,385
- ------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
F-8
<PAGE>
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 Paine Webber Development Corporation ("PWDC"),
an indirect, wholly owned subsidiary of Paine Webber Group Inc. ("PWG"). 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 was completed, the Sponsor Companies had the
option to license and commercialize the products resulting from the product
development project, and the Partnership had 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 including
product development 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:
F-9
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 1 CONTINUED)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS 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 99% 1%
Payout").................................................................
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%
</TABLE>
For the year ended December 31, 1996, the Partnership made cash
distributions totaling $2,341,597 ($281 per Unit; $21,380 to the General
Partner). At December 31, 1996, the Partnership has made cash and security
distributions, as valued on the date of distribution, since inception of $1,866
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 certain 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:
F-10
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 2 CONTINUED)
o 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.
o Product Development Limited Partnerships The Partnership participates as a
limited partner in product development limited partnerships formed to
develop specific products. 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 Partnership held the following marketable securities:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Market Cost Market Cost
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Money market fund $ 799,097 $ 799,097 $ 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) 100,100 37,324 -- --
----------- ---------- ----------- -----------
$ 899,197 $ 836,421 $ 1,247,309 $ 1,048,476
=========== ========== =========== ===========
</TABLE>
F-11
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 3 CONTINUED)
In January 1996, the Partnership sold its investment of 3,227 common shares
of Alkermes, Inc. ("Alkermes") for proceeds, net of commissions, of $34,090 and
recognized a gain upon the sale for the year ended December 31, 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 December 31, 1996, Centocor common stock had a market
value of $35.75 per share as compared to $30.875 per share at December 31, 1995.
Accordingly, the Partnership recognized unrealized appreciation of $13,650 for
the year ended December 31, 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 year ended December 31, 1996 of
$61,895.
INVESTMENTS:
The Partnership held the following investments:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C> <C>
Cygnus, Inc.
Warrant to purchase: 300,000 common shares $ -- $3,742,500
255,000 common shares 1,173,000 --
OEC Medical Systems, Inc.
Warrant to purchase: 200,000 common shares 460,000 --
Centocor, Inc.
Warrant to purchase: 2,800 common shares -- 49,126
---------- ----------
$1,633,000 $3,791,626
========== ==========
</TABLE>
The Partnership records its warrants to purchase common shares of Cygnus
(with an exercise price of $9.90 per share) and OEC Medical Systems, Inc.
("OEC") (with an exercise share of $12.70 per share) as investments with
carrying values equal to their intrinsic values (which approximate fair value)
- -- (See Note 5). In 1996, the Partnership exercised its warrant to purchase
45,000 shares of Cygnus stock at an aggregate exercise price of $445,500 and
subsequently sold the shares for net proceeds of $676,762. The value of the
shares related to these warrants at December 31, 1995, was $1,006,875 ($22.375
per share). Accordingly, the Partnership recognized a loss upon the sale of
$330,113. The market value of Cygnus stock as of December 31, 1996 was $14.50
per share as compared to a market value of $22.375 per share as of December 31,
1995. Accordingly, the Partnership recognized unrealized depreciation of
$2,008,125 on its warrant to purchase 255,000 Cygnus shares for the year ended
December 31, 1996. At December 31, 1996, the market value of OEC stock of $15.00
per share exceeded the exercise price of the warrant of $12.70 per share. The
Partnership recorded its investment in the OEC warrant at its intrinsic value of
$460,000. At December 31, 1995, the Partnership recorded its investment in the
Centocor warrant at its intrinsic value of $17.545 per share. In February 1996,
the Partnership exercised its warrant for Centocor common shares (see Marketable
Securities).
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 and recognized a gain of this amount for the year
ended December 31, 1994. The Partnership recorded the Cygnus common stock as of
December 31, 1994, at a market value of $10,327,102 ($6.75 per share) and,
accordingly, recognized unrealized appreciation of $1,338,699. 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
F-12
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 3 CONTINUED)
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 and sold in 1996.
In 1994, the Partnership distributed 367,043 shares of Alkermes to its
Partners with an aggregate market value of on the date of the distribution of
$1,985,384. The carrying value as of December 31, 1993 was $2,569,301 ($7.00 per
share) and , accordingly, the Partnership recognized a loss upon the
distribution of $583,917.
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. As of
July 1, 1995, the Manager had eliminated the management fee charged on all but
one Project. Commencing July 1, 1996, the Manager elected to discontinue the
management fee charged on this final Project. The management fees paid by the
Partnership to the Manager were $137,010, $347,070 and $618,795 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The money market fund invested in by the Partnership 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 some of 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.
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.
F-13
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 5 CONTINUED)
On August 20, 1996, the Partnership terminated the product development program
with Compression Labs Incorporated.
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 December 31, 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
the intrinsic values which approximate fair value (see Note 3). At December 31,
1996, the Partnership owned the following warrants:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE 12/31/96
THAT CAN BE PRICE EXERCISE MARKET PRICE
PURCHASED PER SHARE PERIOD PER SHARE*
--------- --------- ------ ----------
<S> <C> <C> <C> <C>
Cayenne Software, Inc. (A) 193,000 $ 16.19 Current to 6/97 $ 3.813
Cygnus, Inc. (B) 255,000 $ 9.90 Current to 9/97 $ 14.500
OEC Medical Systems, Inc. (B) (C) - 200,000 $ 12.70 Current to 8/97 $ 15.000
Note 8
</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, 1996 may not be indicative of the ultimate values, if any, that
may be realized by the Partnership.
(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.
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 upon the
sale of this amount.
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.
F-14
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
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 (the "Court") 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 percentages of profits and revenues from ReoPro that it pays to CP
III investors. 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 percentages of ReoPro profits and revenues that it pays to CP
III investors. 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 percentages of future ReoPro profits and revenues that Centocor
must pay to CP III and its investors. 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 PWG, 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. Mr. Abdo and
Centocor also moved to disqualify the Partnership. The Court has granted Mr.
Abdo's motion to amend his complaint to assert claims against the PWDC nominees.
The Court has not ruled on the motions to disqualify.
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 EVENT
On January 31, 1997, pursuant to the provisions of the Partnership Purchase
Option Agreement between Centocor and the Partnership, Centocor exercised its
option to purchase the limited partnership interests of CP III, including those
owned by the Partnership. The Partnership received an initial payment of
$3,325,000 and will receive future payments based on sales of certain products
developed by CP III.
On January 26, 1997, the Partnership sold to OEC its warrant to purchase
200,000 shares of OEC for a price of $1,000,000.
F-15
<PAGE>
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
Senior Research Fellow; Chairman, IC 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>
EXHIBIT B
PAINEWEBBER R&D PARTNERS II, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
LETTER TO LIMITED PARTNERS
To Our Limited Partners:
PaineWebber R&D Partners II, L.P. ("R&D Partners II" or the "Partnership") 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 1996, Genzyme Corporation ("Genzyme") received U.S.
Food and Drug Administration ("FDA") approval for Seprafilm(TM), the surgical
product based on hyaluronic acid ("HA"). Genzyme will market Seprafilm through
Deknatel Snowden Pencer, Inc., ("Deknatel") a surgical products supply company
that Genzyme acquired in July. Deknatel has an established sales force that
Genzyme believes will permit it to accelerate the market introduction of
Seprafilm into the U.S. surgical market. R&D Partners II will participate in a
royalty stream based upon the successful commercial introduction of Seprafilm.
In addition, Genzyme is developing two additional HA products: SepraGel(TM),
which targets the same application(s) as Seprafilm, and HAL-S(TM), which is a
liquid to be injected into arthritic joints.
Centocor, Inc., ("Centocor") released significant data on the status of the
clinical development of ReoPro(TM) in 1996. 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 1996,
researchers from two separate symposiums were able to demonstrate through their
research that ReoPro made a positive impact in patients undergoing angioplasty.
First, researchers from the Intervent 97 Cardiology Symposium released data on
Centocor's ReoPro, demonstrating that ReoPro significantly reduced the risk of
death, heart attack and revascularization in a six month follow-up study of
patients undergoing angioplasty. Clinical trials are currently underway
evaluating ReoPro with stents, and future trials are planned in conjunction with
acute myocardial infarction and for stroke patients. Researchers said the data
from the EPILOG and CAPTURE trials will be submitted to the FDA for expanded
label indications.
In August 1996, researchers from the European Society of Cardiology reported
that ReoPro reduced the need for additional surgery after angioplasty. The
trials the researchers described found that ReoPro greatly reduced the
complications from surgery. The trials were halted in December 1995, when the
strong effects of ReoPro became apparent. The trials demonstrated a 60%
reduction in the mortality rate among patients who had suffered from acute heart
attack or angina while undergoing an angioplasty procedure.
In August 1996, Genzyme received FDA marketing approval for Seprafilm
bioresorbable membrane. 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. No follow-up surgery is required to remove the
membrane. Genzyme's Sepracoat(TM) coating solution received
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
the Approval of Conformity Certificate ("CE Mark") in accordance with the
European Medical Devices Directive ("EMDD"), in August 1996. The CE Mark
indicates that the product meets quality standards established by the EMDD for
selling the product(s) in the European Economic Union, EEU. Sepracoat is not
commercially available in the U.S., where a Pre-Market Approval ("PMA") is
currently being reviewed by the FDA. 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 PMA for Sepracoat.
R&D Partners II was formed in 1987 and invested in a portfolio of ten product
development programs. Of the three ongoing programs, we expect that the programs
with Centocor and Genzyme to have the greatest likelihood of commercial success.
The remaining programs which are being sponsored by Amgen Boulder Inc., a
subsidiary of Amgen Inc. ("Amgen Boulder" formerly "Synergen, Inc.") completed a
European Phase II clinical trial in March 1996, of IL-1ra (previously
Antril(TM)), a product being developed for potential use in the treatment of
rheumatoid arthritis. The results from this trial demonstrated sufficient safety
and efficacy to scientifically justify commencement of an additional Phase II
trial. The current U.S. Phase II trial is being conducted by Amgen Inc.
The following development programs of R&D Partners II have concluded and have
generated significant returns. R&D Partners II committed $5.5 million to Cygnus,
Inc. ("Cygnus") and as a result of the 1994 buy-back of the GMS technology
received 1,529,941 shares of common stock from Cygnus or 182 shares of Cygnus
common stock per $10,000 investment, representing approximately $13.0 million in
value on the date of distribution. Since the distribution in May 1995 to limited
partners, the distributed Cygnus common stock has had a value ranging from
$1,547 to $4,709. 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 $3,009 per $10,000 investment in R&D
Partners II. The product development program with Genentech, Inc. ("Genentech")
was terminated in 1991 when the product development program was determined not
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 an aggregate value of $5.4 million when it was distributed
to investors in 1992. The available gain from the distributed Genentech warrant
has ranged from $650 to $1,076 per $10,000 investment in R&D Partners II.
The development programs with Cayenne Software, Inc. ("Cayenne") (formerly
Bachman Information Systems, Inc. and/or Cadre Technologies, Inc.), Compression
Labs, Inc. ("CLI"), Focus Surgery, Inc. ("Focus") and Rogers Corporation
("Rogers") have been either terminated or, are near termination and will not
generate any significant returns to the Partnership.
In December 1995, Bachman Information Systems, Inc. ("Bachman") announced the
merger agreement with Cadre Technologies, Inc. ("Cadre") which was completed on
July 19, 1996. The newly combined company was renamed Cayenne Software Inc.
(NNM: CAYN). The Cadre warrant converted into Cayenne warrants at 23 warrants
per $10,000 unit with an exercise price
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
of $16.19 per share and expires in June 1997. The product sales of Ensemble have
peaked and the company expects sales to cease in 1-2 years. R&D Partners II has
received $843,000 from product sales but does not expect any significant future
payment from this program. R&D Partners II committed $5.4 million to Ensemble,
the computer software program which was being developed by Cadre.
In August 1996, the product development program with CLI was terminated. R&D
Partners committed $12.5 million to the development of high-performance
compression and decompression devices ("Codecs") for the video-phone market.
Codecs devices compress and decompress data required to transmit a digital video
signal over several medium. CLI terminated its video-phone marketing agreement
with AT&T because of pricing and functionality problems of the product. Limited
partners received CLI warrants which expired December 16, 1996. The available
gain has ranged from $663 to $1,153 per $10,000 investment in R&D Partners II.
During 1996, Focus announced the signing of a Letter of Intent with Takai
Hospital Supply Co. for the sale of its assets of Focus for $1.25mm and,
simultaneously, filed for protection under Chapter 11 of the U.S. Bankruptcy
Code. In August 1996, R&D Partners II received $563,000 for its technology
rights under the development program. R&D Partners II holds warrants to purchase
the common stock of OEC Medical Systems, Inc. ("OEC") in connection with the
Focus program. 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 the potential of returns from the product development programs,
investors have received common stock and warrants from R&D Partners II. With the
overall improvement in the stock market in 1996, the total value of the
distributed equity securities (common stock and warrants) from the Partnership
ranged from $7,206 to $15,185 per $10,000 investment. The aggregate value of the
distributed common stock and warrants, based on the respective dates of
distribution, is $7,206.
Cash distributions since inception of the Partnership to date total $1,866 per
$10,000 investment.
In 1996, R&D Partners II made cash distributions totaling $281 per $10,000
investment. We expect cash distributions to continue provided that products from
the ongoing product development programs meet with commercial success.
The "Company Section" of the Annual Report will contain updated information only
on programs that are currently active.
Thank you for your continued interest in R&D Partners II.
Sincerely,
Robin Stanley
Vice President
PaineWebber Development Corporation
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
PRODUCT PORTFOLIO STATUS
AMGEN BOULDER INC.
COMPANY
Amgen Boulder Inc. ("Amgen Boulder," formerly Synergen, Inc. ("Synergen")), a
wholly-owned subsidiary of Amgen Inc., 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 for all
outstanding shares of Synergen common stock. Amgen Boulder has continued the
clinical development of IL-1ra (previously Antril(TM)) which was being conducted
by Synergen before the acquisition took place. In March 1996, Amgen completed
the European Phase II clinical trial of IL-1ra in rheumatoid arthritis and
announced they will continue developing the product. Amgen has committed to
provide funding for the development program through June 1997.
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 IL-1ra, the recombinant form of Interleukin-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 IL-1ra are now held by Amgen Inc.
In October 1996, the results from the IL-1ra Phase II clinical trial were
presented at the American College of Rheumatology in Orlando. Findings from the
study demonstrated that IL-1ra has mild to moderate anti-inflammatory activity
which may have a clinical benefit in patients with severe active disease. IL-1ra
also slowed disease progression when compared to placebo as measured by
radiographic assessment. An additional dose evaluation study for rheumatoid
arthritis is currently ongoing in Europe and a U.S.
combination study commenced in January 1997.
WARRANT
R&D Partners II distributed the Synergen warrant to investors in March 1993. As
a consequence of the acquisition of the company, the warrant was rendered
valueless.
CENTOCOR, INC.
COMPANY
Centocor, Inc., ("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.
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
In 1996, Centocor released data at three important symposiums regarding the
development of its lead product, ReoPro(TM), an anticlotting drug intended to
reduce acute cardiac ischemic complications in patients undergoing angioplasty.
In March 1996, researchers at the American College of Cardiology meeting, said
that the Epilog trial demonstrated a 68% reduction in the death rate and heart
attacks among all patients with unstable angina. "Epilog" refers to Evaluation
in percutaneous transluminal coronary angioplasty or PTCA to improve Long-Term
Outcome with ReoPro GPIIb/IIIa Blockade and is a randomized, double blind
placebo controlled trial. Positive data from the Capture trial was also
presented at the American College of Cardiology meeting in March. The Epilog and
Capture trials were halted in December 1995 due to positive interim analysis
results. Centocor plans to file a Product License Application in the first half
of 1997 with the data from the two trials and for expanded label indications.
At the European Society of Cardiology meeting in August 1996, researchers
reported that ReoPro cut the need for additional surgery following angioplasty.
The long term data released on the Epic trial showed a decrease in complications
in patients using the drug out to three years. The Capture trial showed a
reduced death rate, myocardial infarction and need for urgent intervention at 30
days following angioplasty.
Data was also released at the Intervent 97 Cardiology symposium, that showed
ReoPro significantly reduced the risk of death, heart attack and
revascularization, in a six-month follow-up study of patients undergoing
angioplasty. The Epilog trial data showed a decrease in the number of deaths and
heart attacks by 46% in patients six months after surgery. The most common
complication associated with ReoPro as seen in the Epic trial was bleeding. The
trial results demonstrated that bleeding in patients was reduced to placebo
levels by adjusting the dosing of ReoPro and heparin as well as improved
catheter and catheter-site management.
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(TM). Development efforts for Capiscint have been ceased.
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 filed with the FDA in 1996 requesting marketing approval of
ReoPro with a broad-based label. ReoPro is currently being sold in the U.S. and
in certain foreign countries by Centocor's marketing partner, Eli Lilly & Co.
("Lilly").
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
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
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 $2,346 to $3,781 per $10,000 investment
in R&D Partners II.
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(R)
and Cerezyme(R) replacement enzymes for the treatment of Gaucher disease. It
also develops and markets surgical and diagnostic products, genetic diagnostic
services, and pharmaceuticals.
In 1996, Genzyme received FDA approval for its hyaluronic acid ("HA")-based
surgical aid, Seprafilm(TM) for broad label use in abdominal and pelvic surgery.
Genzyme also closed its acquisition of Deknatel Snowden Pencer Inc.,
("Deknatel") a privately held surgical products company. Genzyme is utilizing
Deknatel's sales and marketing force to launch Seprafilm in the U.S. surgical
market. In August 1996, Sepracoat(TM) received the Approval of Conformity
Certificate ("CE Mark") in accordance with the European Medical Devices
Directive. Sepracoat is a bioresorbable, tissue protective solution that can be
applied at the beginning and throughout abdominal, pelvic, and thoracic surgical
procedures. It is also designed to reduce the incidence, extent and severity of
newly-formed postoperative adhesions, or internal scar tissues. Sepracoat
compliments Genzyme's other anti-adhesion product, Seprafilm. Genzyme is
developing two additional HA products: HAL-S(TM), Synovial Fluid Replacement, a
liquid used for injection into arthritic joints; and SepraGel(TM), a
bioresorbable gel, another adhesion reduction product.
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. The 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.
WARRANT
R&D Partners II distributed the Genzyme warrant 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
expired October 31, 1996. Due to the stock split in July 1996, for every one
warrant exercised, investors received two shares of Genzyme common stock. Based
on the closing price of $49.50 per share on the date of distribution, the
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
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 $1,883 per $10,000 investment in R&D Partners
II.
<PAGE>
EXHIBIT C PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
POLICY REGARDING REQUESTS FOR PARTNER LISTS
In accordance with the provisions of the Delaware Revised Uniform Limited
Partnership Act (the "Act"), and without limiting its rights under the
Partnership Agreement or the Act, as each may be amended from time to time, the
General Partner of the Partnership has established standards applicable to
requests for lists of Limited Partners. These standards have been established in
order to assure (1) that the lists are not used for an improper or inappropriate
purpose or in any way that might be detrimental to the Partnership or the
Limited Partners; (2) that the Limited Partners have sufficient information and
opportunity to decide how they should react in response to any solicitation or
other communication addressed to them; and (3) that the Partnership and the
Limited Partners do not face an increased risk of adverse tax consequences as a
direct or indirect result of any such solicitation or communication.
The General Partner requires any request to be made in writing by a record
holder of limited partner interests with standing to request the list, to comply
strictly with all applicable requirements of law and the Partnership Agreement,
to state the purpose for which the request is made with sufficient specificity
to enable the General Partner to make the determinations specified above, and to
include an undertaking under oath by the person requesting the list and the
persons or entities on whose behalf it is requested (1) to hold the list in
strict confidence, and not to give any information derived from the list to any
third party for any purpose whatsoever, (2) to reimburse the Partnership for
costs incurred in connection with the request and for a list, including
confirming compliance with the undertakings required hereby and (3) to submit to
the jurisdiction of the courts of the State of Delaware in any dispute arising
in connection with such request and to appoint and maintain RL&F Service Corp.,
One Rodney Square, Tenth Floor, Wilmington, New Castle County, Delaware 19801
(whose reasonable fees and expenses will be paid by the Partnership) as such
person's or entity's agent in the State of Delaware for acceptance of legal
process in connection therewith. In addition, in the case of requests made for
the purpose of soliciting tenders of the Limited Partners' interests or units in
the Partnership or soliciting proxies or consents from Limited Partners or
facilitating, assisting or supporting any such solicitation, the General Partner
will, if and to the extent required by applicable law and the Partnership
Agreement, make lists available or agree to disseminate such solicitations on
behalf of requesting Limited Partners only upon receipt of an undertaking under
oath by the person requesting the list and the persons or entities on whose
behalf it is requested (1) to conduct the solicitation in accordance with the
requirements of the Securities and Exchange Act of 1934 and the rules of the
Securities and Exchange Commission thereunder, including full disclosure of all
material facts and, in the case of any tender offer, rights of proration and
withdrawal rights, irrespective of the number of interests or units sought, and
(2) to refrain from acquiring interests or units of any number if the General
Partners, based upon advice from counsel, conclude that such acquisition would
increase the risk of adverse tax consequences to the Partnership or the
Partners.
The General Partner shall endeavor to inform the requesting party within
30 days of receipt of the requisite undertakings whether they consider that the
proposed use of the list is improper or inappropriate or would increase the risk
of such adverse tax consequences, and may request such further assurances as may
be necessary in order to enable them to make any of the determinations specified
above.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000814576
<NAME> PAINEWEBBER R&D PARTNERS II, L.P.
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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<RECEIVABLES> 774,834
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 3,447,578
<SALES> 0
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<CGS> 0
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<OTHER-EXPENSES> 356,482
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</TABLE>
