United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(X) Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the fiscal year ended December 31, 1999
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
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
Title of each class which registered
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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 [ ]
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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 the Partnership 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 having insufficient funds to commercialize
products to their maximum potential; the restructuring of Sponsor Companies; the
dependence on the skills of certain scientific personnel; and the dependence of
the Partnership on the General Partner.
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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 has
been 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 were 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.
As of December 31, 1999, the Partnership has continuing activity with
Centocor, Inc. and Genzyme Corporation. (See Exhibit A, the Annual Letter to the
Limited Partners, for a detailed discussion of the current status of the
Partnership's active Projects.)
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 is entitled to receive an annual management fee. As of July 1, 1996, the
Manager elected to discontinue charging the management fee for services rendered
to the Partnership. Until September 1999, an Advisory Board had acted as special
advisor to the Manager. Fees and expenses of the Advisory Board were paid for by
PWDC.
3
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(Item 1 Continued)
Distributions
All distributions to the General Partner and the limited partners of the
Partnership (the "Limited Partners"; collectively, the "Partners") have been
made pro rata in accordance with their respective net capital contributions. The
following table sets forth the proportion of each distribution to be received by
the Limited Partners and the General Partner, respectively:
Limited General
Partners Partner
-------- --------
I. Until the value of the aggregate distributions
for each limited partnership unit ("Unit")
equals $10,000 plus simple interest on such
amount accrued at 7% per annum for each Unit
sold at the Initial Closing (6% per annum for
each subsequent Unit sold up to the 5,000th
Unit and 5% per annum for each Unit sold
thereafter) ("Contribution Payout"). At
December 31, 1999, Contribution Payout ranged
from $15,250 per Unit to $18,575 per Unit....... 99% 1%
II. After Contribution Payout and until the value
of the aggregate distributions for each Unit
equals $50,000 ("Final Payout")................. 80% 20%
III. After Final Payout.............................. 75% 25%
At December 31, 1999, the Partnership has made cash and security
distributions, as valued on the dates of distribution, since inception of $4,466
and $7,206 per Unit, respectively.
Profit and Loss Allocation
Profits and losses of the Partnership are allocated as follows: (i) until
cumulative profits and losses for each Unit equals Contribution Payout, 99% to
Limited Partners and 1% to the General Partner, (ii) after Contribution Payout
and until cumulative profits and losses for each Unit equals Final Payout, 80%
to Limited Partners and 20% to the General Partner, and (iii) after final
Payout, 75% to Limited Partners and 25% to the General Partner. As of December
31, 1999, the cumulative losses for the Partnership were $630 per Unit.
Other
As a former partner of Centocor Partners III, L.P. ("CP III") the
Partnership is entitled to receive from Centocor, Inc. ("Centocor") Contractual
Payments Interests (the "CPIs") relating primarily to the sale of ReoPro(TM).
The Partnership currently owns 22 Class A CPIs and 111 Class C CPIs. On February
17, 2000 the Partnership entered into an Amended and Restated Payment Interest
Purchase Agreement (the "DRI Purchase Agreement") with Drug Royalty USA, Inc.
("DRI"). Subject to the terms and conditions contained in the DRI Purchase
Agreement, the Partnership agreed to sell to DRI seven Class A CPIs and
thirty-seven Class C CPIs for an aggregate purchase price of $14,722,400 subject
to adjustment. The sale is subject to the fulfillment of certain conditions
including the consent of Centocor and the approval of the Limited Partners. The
DRI Purchase Agreement amended the agreement between the Partnership and DRI on
December 17, 1999 for the sale of ten Class A CPIs and fifty Class C CPIs. Also
on February 17, 2000, the Partnership entered into a
4
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(Item 1 Continued)
Contractual Payment Interest Purchase Agreement (the "Pharma Purchase
Agreement") with Pharmaceutical Partners, LLC and certain of its affiliates (the
"Pharma Purchaser") whereby the Partnership agreed to sell to the Pharma
Purchaser four Class A CPIs and nineteen Class C CPIs for a purchase price of
$7,638,800 subject to adjustment. Also, the Partnership agreed to make a
distribution in kind to the Pharma Purchaser (as the owner of 28.19% of the
Units) for an additional four Class A CPIs and twenty-two Class C CPIs. Upon
receipt of such distribution the Pharma Purchaser will waive any right as a
Limited Partner of the Partnership to receive a cash distribution from the
Partnership as a result of the transactions contemplated by the DRI Purchase
Agreement and the Pharma Purchase Agreement. The DRI Purchase Agreement and the
Pharma Purchase Agreement may be terminated by the parties if the closings of
the transactions thereunder do not occur prior to July 15, 2000.
On February 8, 1999, SkyRise Investors LLC commenced an offer to purchase
(the "Offer") up to 4.9% of the total Units (404 Units) of the Partnership at a
cash price of $2,200 per Unit subject to reduction for certain distributions and
expenses. Approximately 0.4% of the total Units were tendered pursuant to the
Offer. On March 3, 1999, PharmaInvest, L.L.C., on behalf of Pharmaceutical
Royalties, L.L.C. (one of the Pharma Purchasers) and Pharmaceutical Royalty
Investments Ltd. (collectively, the "Purchasers") commenced a tender offer to
purchase (the "Tender Offer") up to 3,000 Units of the Partnership at a cash
price per Unit of $6,000 subject to reduction for certain distributions.
Pursuant to the Tender Offer, 762.5 Units were tendered. As of December 31,
1999, the Purchasers and their affiliates (including the Pharma Purchaser) own
28.19% of the total units.
At December 31, 1999, 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 has been 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.
As previously disclosed on the Partnership's Form 10-K for the year ended
December 31, 1998, the Partnership commenced a derivative action in the Chancery
Court of Delaware (the "Court") in July 1995 against Centocor and Centocor
Development Corporation III ("CDC III"), a wholly-owned subsidiary of Centocor,
arising from certain agreements entered into by Centocor and Eli Lilly & Company
("Lilly") in July 1992.
In 1987 and 1988, the Partnership and others purchased limited partnership
interests in 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. The Partnership owned approximately 25% of the limited
partnership interests of CP III.
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
5
<PAGE>
(Item 3 Continued)
rights to Centoxin and an option to acquire exclusive marketing rights to
ReoPro. In 1993, Lilly became the distributor of ReoPro.
The Partnership's complaint alleged, 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 was required to increase the percentages of profits and
revenues from ReoPro that it pays to CP III investors. Centocor, however, had
taken the position that only $500,000 of the $100 million must be shared with CP
III and that Centocor had no obligation to increase the percentages of ReoPro
profits and revenues that it pays to CP III investors. The Partnership sought to
proceed on behalf of CP III. The complaint sought 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 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 PaineWebber Incorporated
("PWI").
In April 1996 and July 1996, Mr. Abdo moved to amend his complaint to
assert claims on behalf of CP III against two of PWDC's nominees to the CDC III
Board of Directors. 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, in part, Mr. Abdo's motion to amend his complaint to assert
claims against the PWDC nominees. The Court did not rule on the motions to
disqualify.
In June 1997, the parties to the Partnership's action entered into an
agreement to settle the action. The agreement provides, among other things, for
Centocor to pay to CP III investors (including the Partnership, a former limited
partner in CP III) in the aggregate: $10.8 million, net of attorneys' fees and
expenses as may be awarded by the Court; an additional $5.0 million, if and when
cumulative world-wide sales of ReoPro exceed $600 million; and possible
additional payments totaling $2.2 million, depending upon regulatory
developments in Japan. The Partnership will only receive its allocable share of
these amounts if, and when, payments under the agreement are remitted by
Centocor.
The agreement further provides for revisions to the ReoPro royalties
payable by Centocor to CP III investors through 2007. Under the agreement, those
royalties would be paid based on revenues from end-sales by Lilly and other
distributors, as opposed to Centocor's revenues on its sales to distributors.
For 1997 and 1998, Centocor would pay an aggregate of 6.5% of the first $175
million of United States end-sale revenues, 3.25% of such revenues above $175
million, and 3.25% of foreign end-sales revenues. For 1999 through 2007,
Centocor would pay an aggregate of 6.5% of the first $250 million of United
States end-sale revenues, 4% of such revenues above $250 million, and 3.25% of
foreign end-sales revenues. Depending upon the future success of ReoPro, PWDC
believes that the adjustments may result in an increase over what Centocor would
have paid in the absence of the litigation and settlement. In any event, the
agreement provides that investors will not receive less than Centocor would
otherwise have paid based on Centocor's sales of ReoPro. As of December 31,
1999, the Partnership has not accrued income related to the Settlement.
6
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(Item 3 Continued)
On June 27, 1997, the Court entered an order: preliminarily approving the
settlement; providing for notice to a class consisting of all holders of CP III
Class A and C limited partnership interests as of the close of business on
January 31, 1997, and all holders of CP III Class B limited partnership
interests as of the close of business on May 31, 1997, and their transferees,
successors, and assigns, other than defendants; and designating the
Partnership's counsel as counsel for the class.
Mr. Abdo and Pharmaceutical Partners II, L.P., another former limited
partner of CP III, have objected to the proposed settlement. They asserted,
among other things, that the consideration was inadequate and that the proposed
allocations of the consideration among the classes of former limited partners of
CP III improperly favors the Partnership. On September 4, 1997, the Court held a
hearing on the objections and reserved decision. On March 15, 1999, the Court
issued a memorandum opinion and order approving the settlement as fair and
reasonable.
PWDC has been advancing the funds necessary to pay the Partnership's legal
fees and expenses relating to this litigation. On January 31, 2000, the Court
awarded legal fees and expenses approximating $1,476,000 to the Partnership's
counsel plus interest at the statutory rate. Legal fees and expenses in the
amount of $650,000 together with interest at the statutory rate was awarded to
counsel for the objectors.
On February 17, 2000, the Court signed an order of final judgment resolving
all settlement matters regarding this litigation which was subject to an appeal
period which expired on March 21, 2000 without an appeal being taken. 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 in
accordance with the distribution criteria as outlined in the section entitled
"Distributions" included in this filing on Form 10-K.
On March 24, 2000 the Partnership received $3,195,190 representing its
allocable share of the $10.8 million initial settlement payment, net of
attorney's fees and expenses. Future settlement payments to be received by the
Partnership cannot be estimated at this time.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
7
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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 February 9, 2000, 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, 1999, there were 4,860 Limited Partners.
The Partnership distributes to its Partners, when available, the net
proceeds from royalty distributions, 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 and market conditions are
favorable. For the year ended December 31, 1999, the Partnership made cash
distributions to the Partners aggregating $9,458,018 ($1,134 per Unit; $94,580
to the general partnership interest). The Partnership's cash distributions to
its Partners totaled $6,305,344 ($756 per Unit; $63,052 to the general
partnership interest) for the year ended December 31, 1998. For the year ended
December 31, 1997, cash distributions to the Partners were $5,921,686 ($710 per
Unit; $59,216 to the general partnership interest).
Item 6. Selected Financial Data.
See the "Selected Financial Data" 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, 1999 was $1.2 million compared to $2.8
million at December 31, 1998. The decrease of $1.6 million was a result of net
income of $7.9 million (as discussed in Results of Operations below) offset by
cash distributions to the Partners of $9.5 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 or for distribution to the Partners. Liquid assets at December 31,
1999 and 1998 were $0.2 million and $1.4 million, respectively. During 1999 the
Partnership sold marketable securities with a carrying value at December 31,
1998 of $1.2 million and distributed the proceeds to the Partners.
8
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(Item 7 Continued)
Results of Operations
Year ended December 31, 1999 compared to the year ended December 31, 1998:
Net income increased from $2.9 million for the year ended December 31, 1998
to $7.9 million for the year ended December 31, 1999 resulting primarily from an
increase in revenues.
Revenues for the years ended December 31, 1999 and 1998 were $8.1 million
and $3.0 million, respectively. The increase was due primarily to an increase in
net realized gain on sale of investments and marketable securities of $1.6
million as well as a favorable change in unrealized depreciation of investments
and marketable securities of $3.6 million. During 1999 the Partnership sold its
investment of 0.24 million shares of Cygnus, Inc. ("Cygnus") for aggregate
proceeds of $2.8 million ($11.6875 per share). The shares had a carrying value
as of December 31, 1998 of $1.2 million ($4.875 per share) and, accordingly, the
Partnership recognized a gain upon the sale of $1.6 million. The carrying value
of the shares as of December 31, 1997 was $4.8 million ($19.875 per share). The
Partnership recorded unrealized depreciation for the year ended December 31,
1998 of $3.6 million.
Expenses increased from $0.2 million for the year ended December 31, 1998
to $0.3 million for the same period in 1999.
Year ended December 31, 1998 compared to the year ended December 31, 1997:
Net income for the years ended December 31, 1998 and 1997 was $2.9 million
and $9.1 million, respectively. The decrease of $6.2 million resulted from a
decrease in revenues of $6.4 million offset by a decrease in expenses of $0.2
million.
Revenues for the year ended December 31, 1998 were $3.0 million as compared
to $9.4 million for the year ended December 31, 1997. The decrease of $6.4
million resulted from an unfavorable change in unrealized appreciation
(depreciation) of marketable securities of $5.0 million, and decreases in income
from product development projects and realized gain on sale of investments and
marketable securities of $0.8 million and $0.6 million, respectively. Unrealized
(depreciation) appreciation of marketable securities for the years ended
December 31, 1998 and 1997 was $(3.6) million and $1.4 million, respectively,
resulting primarily from the Partnership's investment in Cygnus. For the year
ended December 31, 1998, the Partnership recorded its investment of 0.24 million
Cygnus shares at a market value of $1.2 million ($4.875 per share) as compared
to a market value of $4.8 million ($19.875 per share) at December 31, 1997. The
market value of Cygnus increased from $14.50 per share at December 31, 1996 to
$19.875 per share at December 31, 1997. The Partnership recognized unrealized
appreciation of $1.4 million on its investment of 0.255 million Cygnus shares
for the year ended December 31, 1997. Income from product development projects
was $6.6 million and $7.4 million for the years ended December 31, 1998 and
1997, respectively. For the years ended December 31, 1998 and 1997 the
Partnership received and/or accrued income due in connection with its investment
in CP III of $5.4 and $7.4 million, respectively. Also, during the year ended
December 31, 1998, the Partnership recognized income of $1.2 million in
connection with its investment in Synergen Clinical Partners, L.P. ("SCP")
representing the Partnership's share of a settlement payment as a former partner
of SCP. During the year ended December 31, 1997, the Partnership sold its
warrant to purchase 0.2 million shares of OEC Medical Systems, Inc. ("OEC") with
a carrying value as of December 31, 1996 of $0.5 million for
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(Item 7 Continued)
proceeds of $1.0 million and recognized a gain of $0.5 million from the sale.
Expenses decreased from $0.4 million for the year ended December 31, 1997 to
$0.2 million for the year ended December 31, 1998 resulting from the decreased
activity of the Partnership.
Year 2000
Currently, the Partnership utilizes computer programs, through services
provided by a third-party servicing agent. The servicing agent has informed the
Partnership that it has successfully completed a comprehensive plan achieving
Year 2000 compliance. The incremental costs associated with the plan were borne
by the servicing agent.
The Partnership has not been advised by the Sponsor Companies of any Year
2000 complications experienced by them. The Partnership will continue to monitor
the Sponsor Companies as it relates to this issue.
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.
10
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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.
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 and PWDC Holding Company at December 31, 1999:
Name Age Position and Date Appointed
---- --- ---------------------------
Directors
Dhananjay M. Pai 37 Director since December 1996
William J. Nolan 52 Director since February 1997
Stephen R. Dyer 40 Director since April 1999 of PWDC only
Executive Officers
Dhananjay M. Pai 37 President since December 1996
William J. Nolan 52 Treasurer since February 1997
Geraldine L. Banyai 59 Secretary since June 1999
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.
11
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(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, Inc. 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 Wharton School of Business and a Master of Business
Administration from New York University.
Mr. Nolan is Treasurer of Paine Webber Group Inc. and Executive Vice
President and Treasurer of PWI. He is a member of PaineWebber's Asset/Liability
Management Commitee. Prior to his employment with PWI in 1984, Mr. Nolan was
with Becker-Paribas and Bankers Trust Company. Mr. Nolan received a Bachelor of
Arts degree from Colgate University and a Master of Business Administration from
Stanford University Graduate School of Business.
Mr. Dyer is a Senior Vice President and Director of Private Investments of
PWI. Prior to joining PWI in 1988, Mr. Dyer had been employed at L.F. Rothschild
& Co., Incorporated and Thomson McKinnon Securities, Inc. He received his
Bachelor of Science degree from Boston College and a Masters of Business
Administration from Indiana University. Mr. Dyer is a Certified Public
Accountant.
Executive Officers
Mr. Pai, President, see "Directors" above.
Mr. Nolan, Treasurer, see "Directors" above.
Ms. Banyai, Secretary, joined PWI in June 1993 as Assistant Secretary of
PWI and was elected Secretary in March 1999. Ms. Banyai was elected Divisional
Vice President in April 1996 and Corporate Vice President in April 1997. In
November 1996, Ms. Banyai was elected Assistant Secretary of PWG. Prior to
joining PWI, Ms. Banyai was employed by the Philadelphia Savings Fund Society
("PSFS") in Philadelphia for 35 years and served as Vice President and Corporate
Secretary of PSFS and 28 of its subsidiaries.
12
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Item 11. Executive Compensation.
No compensation was paid to executive officers 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, 2000 of more than five percent of the Registrant's
Units.
Percent of
Class Name and Address Amount Class
- ------ ---------------- ------ -----
Limited Bioventure Investments, KFT 1,860 Units 22.53%
Partnership Budapest, Hungary
Units
Limited Pharmaceutical Royalties, LLC 468 Units 5.66%
Partnership New York, New York
Units
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.
13
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PART IV
Item 14. Exhibits, Financial Statement 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)
Report on Form 8-K
On December 18, 1999, the Partnership filed a report on Form 8-K relating
to the Contractual Payment Interest Purchase Agreement between DRI and the
Partnership for the sale of CP III contractual payment interests. On February
17, 2000, the Partnership filed a report on Form 8-K relating to the execution
of the Amended and Restated Contractual Payment Interest Purchase Agreement
between DRI and the Partnership as well as the execution of the Pharma Purchase
Agreement between the Partnership and the Pharma Purchaser. (See Item 1.
Business - Other).
On February 9, 2000, the Partnership filed a report on Form 8-K relating to
the discontinuance of 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.
On February 17, 2000, the Partnership filed a report on Form 8-K relating
to the execution of a final judgment by the Court resolving all settlement
matters in the ligitation with Centocor.
14
<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 30th day of March
2000.
PAINEWEBBER R&D PARTNERS II, L.P.
By: PaineWebber Technologies II, L.P.
(General Partner)
By: PWDC Holding Company
(General partner of the General Partner)
By: /s/ Dhananjay M. Pai
--------------------
Dhananjay M. Pai
President and Principal Executive Officer
By: /s/ Robert J. Chersi
--------------------
Robert J. Chersi
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 30th day of March 2000.
/s/ Dhananjay M. Pai
--------------------
Dhananjay M. Pai
President (principal executive officer) and Director
/s/ William J. Nolan
--------------------
William J. Nolan
Director
/s/ Stephen R. Dyer
-------------------
Stephen R. Dyer
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.
15
<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 (Unaudited) F-3
Report of Independent Auditors F-4
Statements of Financial Condition,
at December 31, 1999 and 1998 F-5
Statements of Operations,
for the years ended December 31, 1999, 1998 and 1997 F-6
Statements of Changes in Partners' Capital,
for the years ended December 31, 1999, 1998 and 1997 F-7
Statements of Cash Flows,
for the years ended December 31, 1999, 1998 and 1997 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
- --------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues $ 8,138,503 $ 3,059,554 $ 9,430,203 $ 583,230 $ 7,133,197
Net income $ 7,864,983 $ 2,887,660 $ 9,073,034 $ 226,748 $ 6,431,753
Net income per partnership unit:
Limited partners (A) $ 943.00 $ 346.23 $ 1,087.84 $ 27.19 $ 771.16
General partner $ 78,649.83 $ 28,876.60 $ 90,730.34 $ 2,267.48 $ 64,317.53
Financial Condition:
Total assets $ 1,302,103 $ 2,866,048 $ 6,283,508 $ 3,447,578 $ 5,265,725
Partners' capital $ 1,194,019 $ 2,787,054 $ 6,204,738 $ 3,053,390 $ 5,168,239
Distributions to partners:
Cash $ 9,458,018 $ 6,305,344 $ 5,921,686 $ 2,341,597 $ 1,084,252
Cygnus, Inc. common
stock (at market
value) (B) $ - $ - $ - $ - $ 12,903,629
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Based on 8,257 partnership units.
(B) At date of distribution.
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 1999
4th Quarter $ 1,454,152 $ 1,399,832 $ 167.84 $ 13,998.32
3rd Quarter 1,463,982 1,372,793 164.60 13,727.93
2nd Quarter 3,063,761 3,005,573 360.36 30,055.73
1st Quarter 2,156,608 2,086,785 250.20 20,867.85
- ----------------------------------------------------------------------------------------------
Calendar 1998
4th Quarter $ 1,813,835 $ 1,777,136 $ 213.08 $ 17,771.38
3rd Quarter (175,308) (218,039) (26.14) (2,180.39)
2nd Quarter (201,368) (246,384) (29.54) (2,463.84)
1st Quarter 1,622,395 1,574,947 188.83 15,749.45
- ----------------------------------------------------------------------------------------------
Calendar 1997
4th Quarter $ 894,589 $ 780,511 $ 93.57 $ 7,805.11
3rd Quarter 2,198,066 2,072,731 248.52 20,727.31
2nd Quarter 1,640,623 1,595,736 191.33 15,957.36
1st Quarter 4,696,925 4,624,056 554.42 46,240.56
- ----------------------------------------------------------------------------------------------
</TABLE>
(A) Based on 8,257 limited partnership units and a 1% general partnership
interest.
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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
- ---------------------
Ernst & Young LLP
New York, New York
March 27, 2000
F-4
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
Statements of Financial Condition
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 6,998 $ 6,998
Marketable securities, at market value 175,449 1,433,536
Royalty income receivable 1,119,656 1,425,514
--------------- --------------
Total assets $ 1,302,103 $ 2,866,048
=============== ==============
Liabilities and partners' capital:
Accrued liabilities $ 108,084 $ 78,994
Partners' capital 1,194,019 2,787,054
--------------- --------------
Total liabilities and partners' capital $ 1,302,103 $ 2,866,048
=============== ==============
- -----------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
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, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest income $ 26,080 $ 33,528 $ 74,879
Income from product development projects 6,477,573 6,627,965 7,412,556
Unrealized (depreciation) appreciation of
investments and marketable securities - (3,600,000) 1,370,627
Net realized gain (loss) on sale of
investments and marketable securities 1,634,850 (1,939) 572,141
--------------- -------------- ---------------
8,138,503 3,059,554 9,430,203
--------------- -------------- ---------------
Expenses:
Expenditures under product development
projects - - 20,483
General and administrative costs 273,520 171,894 336,686
--------------- -------------- ---------------
273,520 171,894 357,169
--------------- -------------- ---------------
Net income $ 7,864,983 $ 2,887,660 $ 9,073,034
=============== ============== ===============
Net income per partnership unit:
Limited partners (based on 8,257 units) $ 943.00 $ 346.23 $ 1,087.84
General partner $ 78,649.83 $ 28,876.60 $ 90,730.34
- -----------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
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, 1999, 1998 and 1997 Partners Partner Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 $ 3,018,776 $ 34,614 $ 3,053,390
Net income 8,982,304 90,730 9,073,034
Cash distributions to partners (5,862,470) (59,216) (5,921,686)
--------------- -------------- ---------------
Balance at December 31, 1997 6,138,610 66,128 6,204,738
Net income 2,858,783 28,877 2,887,660
Cash distributions to partners (6,242,292) (63,052) (6,305,344)
--------------- -------------- ---------------
Balance at December 31, 1998 2,755,101 31,953 2,787,054
Net income 7,786,333 78,650 7,864,983
Cash distributions to partners (9,363,438) (94,580) (9,458,018)
--------------- -------------- ---------------
Balance at December 31, 1999 $ 1,177,996 $ 16,023 $ 1,194,019
=============== ============== ===============
- -----------------------------------------------------------------------------------------------------
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, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,864,983 $ 2,887,660 $ 9,073,034
Adjustments to reconcile net income to cash
provided by operating activities:
Unrealized depreciation (appreciation) of
investments and marketable securities - 3,600,000 (1,370,627)
Decrease (increase) in operating assets:
Marketable securities 1,258,087 132,926 (1,723,638)
Investments - - 460,000
Advances to product development projects - - 135,519
Royalty income receivable 305,858 (320,466) (330,214)
Other assets - 5,000 (5,000)
Increase (decrease) in operating liabilities:
Due to product development company - - (297,000)
Accrued liabilities 29,090 224 (18,418)
--------------- -------------- ---------------
Cash provided by operating activities 9,458,018 6,305,344 5,923,656
--------------- -------------- ---------------
Cash flows from financing activities:
Distributions to partners (9,458,018) (6,305,344) (5,921,686)
--------------- -------------- ---------------
Increase (decrease) in cash - - 1,970
Cash at beginning of year 6,998 6,998 5,028
--------------- -------------- ---------------
Cash at end of year $ 6,998 $ 6,998 $ 6,998
=============== ============== ===============
- -----------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the years ended
December 31, 1999, 1998 and 1997.
- -----------------------------------------------------------------------------------------------------
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 has been to provide long-term
capital appreciation to investors through investing in the development and
commercialization of new products with technology companies ("Sponsor
Companies"), which have been expected to address significant market
opportunities. The Partnership has been engaged in diverse product development
projects (the "Projects") including product development contracts, participation
in other partnerships and investments in securities of the Sponsor Companies.
Once the product development phase has been completed, the Sponsor Companies
have had the option to license and commercialize the products resulting from the
product development project, and the Partnership has had the right to receive
payments based upon the sale of such products.
F-9
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(Note 1 Continued)
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 capital
contributions. The following table sets forth the proportion of each
distribution to be received by the Limited Partners and the General Partner,
respectively:
Limited General
Partners Partner
-------- -------
I. Until the value of the aggregate distributions for
each limited partnership unit ("Unit") equals $10,000
plus simple interest on such amount accrued at 7% per
annum for each Unit sold at the Initial Closing (6%
per annum for each subsequent Unit sold up to the
5,000th Unit and 5% per annum for each Unit sold
thereafter) ("Contribution Payout"). At December 31,
1999, Contribution Payout ranged from $15,250 per
Unit to $18,575 per Unit............................ 99% 1%
II. After Contribution Payout and until the value of the
aggregate distributions for each Unit equals $50,000
("Final Payout").................................... 80% 20%
III. After Final Payout.................................. 75% 25%
For the year ended December 31, 1999, the Partnership made cash
distributions totaling $9,458,018 ($1,134 per Unit; $94,580 to the General
Partner). At December 31, 1999, the Partnership has made cash and security
distributions, as valued on the dates of distribution, since inception of $4,466
and $7,206 per Unit, respectively.
Profits and losses of the Partnership are allocated as follows: (i) until
cumulative profits and losses for each Unit equals Contribution Payout, 99% to
Limited Partners and 1% to the General Partner, (ii) after Contribution Payout
and until cumulative profits and losses for each Unit equals Final Payout, 80%
to Limited Partners and 20% to the General Partner, and (iii) after Final
Payout, 75% to Limited Partners and 25% to the General Partner. As of December
31, 1999, the cumulative losses for the Partnership were $630 per Unit.
2. Summary of Significant Accounting Policies
The financial statements are prepared in conformity with accounting
principles generally accepted in the United States 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.
Marketable securities consist of a money market fund which is 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.
F-10
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(Note 2 Continued)
The Partnership has invested in product development contracts with Sponsor
Companies either directly or through product development limited partnerships.
The Partnership expenses product development costs when incurred by the Sponsor
Companies and such costs are reflected as expenditures under product development
projects in the accompanying Statements of Operations. Income received and/or
accrued from investments in Projects is reflected in the Statements of
Operations for the period in which the income is earned.
The Partnership carried warrants at a zero value in cases where the Sponsor
Company's stock was not publicly traded or the exercise period has not been
attained. To the extent the Partnership's warrants were currently exercisable
and the Sponsor Company's stock was publicly traded, the warrants were carried
at intrinsic value (the excess of market price per share over the exercise price
per share), which approximated fair value.
3. Marketable Securities and Investments
Marketable Securities:
The Partnership held the following marketable securities:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------- -------------------------
Market Cost Market Cost
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money market fund $ 175,449 $ 175,449 $ 263,534 $ 263,534
Cygnus, Inc.
(240,000 common shares) --- --- 1,170,002 2,376,000
----------- ----------- ----------- -----------
$ 175,449 $ 175,449 $ 1,433,536 $ 2,639,534
=========== =========== =========== ===========
</TABLE>
During the year ended December 31, 1999 the Partnership sold its investment
in Cygnus, Inc. ("Cygnus") for net proceeds of $2,804,852 ($11.6875 per share).
The carrying value of the shares at December 31, 1998 was $1,170,002 ($4.875 per
share). Accordingly, the Partnership recognized a gain upon the sale for the
year ended December 31, 1999 of $1,634,850. The Cygnus shares had a market value
of $19.875 per share as of December 31, 1997. Accordingly, the Partnership
recognized unrealized depreciation of $3,600,000 for the year ended December 31,
1998. The market value of the Cygnus stock at December 31, 1996, was $14.50 per
share and, accordingly, the Partnership recognized unrealized appreciation of
$1,370,627 on its investment of 255,000 Cygnus shares for the year ended
December 31, 1997.
Investments:
During 1997, the Partnership sold a warrant to purchase 200,000 common
shares of OEC Medical Systems, Inc. ("OEC") (with an exercise price of $12.70
per share) for proceeds of $1,000,000. The Partnership had recorded the warrant
at its intrinsic value of $460,000 as of December 31, 1996, and, accordingly,
the Partnership recognized a gain upon the sale of $540,000 for the year ended
December 31, 1997.
F-11
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
4. Related Party Transactions
The Manager is entitled to receive a management fee for services rendered
to the Partnership. Commencing July 1, 1996, the Manager elected to discontinue
the management fee charged to the Partnership.
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
In January 1998, the class action against the general partner of Synergen
Clinical Partners, L.P. ("SCP") and others on behalf of a class including
limited partners of SCP and limited partners of the Partnership (the "SCP
Class") reached a settlement which was approved by the court. The complaint
alleged, among other things, that the defendants caused or permitted the release
of misleading statements regarding the potential market for Interleukin-Receptor
Antagonist ("IL-1ra") (a potential treatment of inflammatory diseases). The
terms of the settlement included an initial payment to the SCP Class aggregating
$16.5 million (less attorney's fees and costs of $3.0 million) and the SCP Class
would be entitled to receive rights to additional payments of $9.0 million (if
the U.S. Food and Drug Administration approves an IL-1ra product for market) and
$50.0 million (if IL-1ra product sales exceed $650 million before the year
2020). On March 3, 1998, the Partnership received and recorded as income the
amount of $1,248,624 representing its share of the initial settlement payment as
a Class A limited partner of SCP, and simultaneously, SCP was terminated. If
remitted, all additional payments pursuant to the settlement will be made to the
Partners as part of the SCP Class and not to the Partnership.
On January 31, 1997, pursuant to the provisions of the Partnership Purchase
Option Agreement between Centocor, Inc. ("Centocor") and the Partnership,
Centocor exercised its option to purchase the limited partnership interests of
Centocor Partners III, L.P. ("CP III"), including those owned by the
Partnership. The Partnership is entitled to receive future quarterly payments
(the "CPIs") based on sales of ReoPro, a drug developed by CP III (See Note 8 -
Subsequent Events). For the year ended December 31, 1999, 1998 and 1997 the
Partnership received and/or accrued income from CP III in the amount of
$6,467,705, $5,365,598 and $7,377,329 respectively.
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.
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-12
<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 alleged, among other things that: at least $25 million of the $100
million paid by Lilly to Centocor represented profits from the sale of ReoPro, a
Centocor drug, that Centocor is required to share with CP III; and because of
the Lilly transaction, Centocor was required to increase the percentages of
profits and revenues from ReoPro that it pays to CP III investors. Centocor had
taken the position that only $500,000 of the $100 million had to be shared with
CP III and that Centocor had no obligation to increase the percentages of ReoPro
profits and revenues that it pays to CP III investors. The Partnership sought to
proceed on behalf of CP III. The complaint sought 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 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 and July 1996, Mr. Abdo moved to amend his complaint to assert
claims on behalf of CP III against two of PWDC's nominees to the CDC III Board
of Directors. On July 12, 1996, counsel chosen by Centocor to represent CP III
moved to disqualify the Partnership from serving as a plaintiff in this action,
alleging that Mr. Abdo should be the sole plaintiff because the Partnership has
conflicts of interest with CP III and its other limited partners, including
conflicts arising out of the alleged claims against the PWDC nominees. Mr. Abdo
and Centocor also moved to disqualify the Partnership. In January 1997, the
Court granted, in part, Mr. Abdo's motion to amend his complaint to assert
claims against the PWDC nominees.
In June 1997, the parties to the Partnership's action entered into an
agreement to settle the action. The agreement provides, among other things, for
Centocor to pay to CP III investors (including the Partnership, a former limited
partner in CP III) in the aggregate: $10.8 million, net of attorneys' fees and
expenses as may be awarded by the Court; an additional $5.0 million, if and when
cumulative world-wide sales of ReoPro exceed $600 million; and possible
additional payments totaling $2.2 million, depending upon regulatory
developments in Japan. The Partnership will only receive its allocable share of
these latter amounts if, and when, payments under the agreement are remitted by
Centocor.
The agreement further provides for revisions to the ReoPro royalties
payable by Centocor to CP III investors through 2007. Under the agreement, those
royalties would be paid based on revenues from end-sales by Lilly and other
distributors, as opposed to Centocor's revenues on its sales to distributors.
For 1997 and 1998, Centocor would pay an aggregate of 6.5% of the first $175
million of United States end-sale revenues, 3.25% of such revenues above $175
million, and 3.25% of foreign end-sales revenues. For 1999 through 2007,
Centocor would pay an aggregate of 6.5% of the first $250 million of United
States end-sale revenues, 4% of such revenues above $250 million, and 3.25% of
foreign end-sales revenues. The agreement provides that investors will not
receive less than Centocor would otherwise have paid based on Centocor's sales
of ReoPro. As of December 31, 1999, the Partnership has not accrued income
related to the settlement.
F-13
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(Note 7 Continued)
On June 27, 1997, the Court entered an order: preliminarily approving the
settlement; providing for notice to a class consisting of all holders of CP III
Class A and C limited partnership interests as of the close of business on
January 31, 1997, and all holders of CP III Class B limited partnership
interests as of the close of business on May 31, 1997, and their transferees,
successors, and assigns, other than defendants; and designating the
Partnership's counsel as counsel for the class.
Mr. Abdo and Pharmaceutical Partners, L.P., another former limited partner
of CP III, objected to the proposed settlement. They asserted, among other
things, that the consideration is inadequate and that the proposed allocations
of the consideration among the classes of former limited partners of CP III
improperly favors the Partnership. On September 4, 1997, the Court held a
hearing on the objections and reserved decision. On March 15, 1999, the Court
issued a memorandum opinion and order overruling the objections and approving
the settlement as fair and reasonable.
PWDC has been advancing the funds necessary to pay the Partnership's legal
fees and expenses relating to this litigation. 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 in accordance with the
distribution criteria outlined in Note 1. (See Note 8 - Subsequent Events).
8. Subsequent Events
On January 31, 2000, the Court awarded legal fees and expenses relating to
the Centocor litigation (See Note 7) approximating $1,476,000 to the
Partnership's counsel plus interest at the statutory rate. Legal fees and
expenses in the amount of $650,000 together with interest at the statutory rate
was awarded to counsel for the objectors. On February 17, 2000, the Court signed
an order of final judgment resolving all settlement matters regarding the
litigation with Centocor which was subject to an appeal period which expired on
March 21, 2000 without an appeal being taken. On March 24, 2000 the Partnership
received $3,195,190 representing its allocable share of the $10.8 million
initial settlement payment, net of attorney's fees and expenses. Future
settlement payments to be received by the Partnership cannot be estimated at
this time.
As of December 31, 1999, the Partnership owned 22 class A CPIs and 111
Class C CPIs. On February 17, 2000 the Partnership entered into an Amended and
Restated Payment Interest Purchase Agreement (the "DRI Purchase Agreement") with
Drug Royalty USA, Inc. ("DRI"). Subject to the terms and conditions contained in
the DRI Purchase Agreement, the Partnership agreed to sell to DRI seven Class A
and thirty-seven Class C CPIs for an aggregate purchase price of $14,722,400
subject to adjustment. The sale is subject to the fulfillment of certain
conditions including the consent of Centocor and the approval of the Limited
Partners. The DRI Purchase Agreement amended the agreement between the
Partnership and DRI on December 17, 1999 for the sale of ten Class A and fifty
Class C CPIs. Also on February 17, 2000, the Partnership entered into a
Contractual Payment Interest Purchase Agreement (the "Pharma Purchase
Agreement") with Pharmaceutical Partners, LLC and certain of its affiliates (the
"Pharma Purchaser") whereby the Partnership agreed to sell to the Pharma
Purchaser four Class A CPIs
F-14
<PAGE>
PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(Note 8 Continued)
and nineteen Class C CPIs for a purchase price of $7,638,800 subject to
adjustment. Also, the Partnership agreed to make a distribution in kind to the
Pharma Purchaser (as the owner of (28.17% of the Units) for an additional four
class A CPIs and twenty-two Class C CPIs. Upon receipt of such distribution the
Pharma Purchaser will waive any right as a Limited Partner of the Partnership to
receive a cash distribution from the Partnership as a result of the transactions
contemplated by the DRI Purchase Agreement and the Pharma Purchase Agreement.
The DRI Purchase Agreement and the Pharma Purchase Agreement may be terminated
by the parties if the closing of the transactions thereunder do not occur prior
to July 15, 2000. The Partnership currently owns 22 Class A CPIs and 111 Class C
CPIs.
F-15
<PAGE>
PaineWebber R&D Partners II Exhibit A
Annual Report 1999
Letter to Limited Partners
To Our Limited Partners:
PaineWebber R&D Partners II, L.P.'s ("R&D Partners II" or the "Partnership")
sponsor companies continued to see clinical advancements throughout the year.
Centocor, Inc. ("Centocor") reported their anti-platelet drug ReoPro(R) improved
the clinical function in patients with acute ischemic stroke. Amgen Inc.
("Amgen") submitted a license application to the U.S. Food and Drug
Administration ("FDA") for the use of Kineret(R) (IL-1ra) in treating rheumatoid
arthritis. Cygnus, Inc. ("Cygnus") received a unanimous recommendation for
approval by the FDA for its GlucoWatch(R) monitor. Genzyme Surgical Products
began pivotal clinical trials evaluating their hyaluronic acid ("HA") products
for the reduction of adhesions following cardiac surgeries.
Amgen reported a record-breaking year, with total product sales reaching $3
billion, an increase of 21%, from $ 2.5 billion in 1998. Amgen submitted a
regulatory license application for the use of Kineret in treating rheumatoid
arthritis. Amgen also submitted simultaneous NESP (novel erythropoiesis
stimulating protein) applications with the FDA and the European Medicines
Evaluations Agency. The dual regulatory applications broadly cover renal disease
and cover patients with chronic renal insufficiency, also known as patients with
chronic renal failure requiring dialysis. NESP is a non-naturally occurring
recombinant protein being explored for its potential to stimulate the production
of red blood cells.
In October, Centocor and Johnson & Johnson ("J&J") completed their $4.9 billion
merger. Centocor retains its name and operates as a direct, wholly-owned
subsidiary of J&J. R&D Partners II will continue to receive royalty payments
based on the sales of ReoPro through the year 2007.
Centocor's ReoPro is being evaluated in three clinical trials using the
combination therapy with its "clot buster" Retavase (a fibrinolytic administered
for the treatment of heart attacks to improve blood flow in the heart). Centocor
is also in two separate clinical trials utilizing ReoPro alone for the treatment
of acute coronary syndrome and stroke.
Genzyme Corporation announced during 1999 that Genzyme Surgical Products, a
division of Genzyme Corporation with its own stock, began trading on the NASDAQ
National Market under the ticker symbol "GZSP." Genzyme General created the
surgical products division to focus more resources and attention on building its
"biosurgery" business. Biosurgery is the convergence of mechanical and
biological approaches to surgery and intervention procedures. The HA products
include the Seprafilm(R) Bioresorbable Membrane which is approved for use in
colorectal procedures to reduce the risks and burden of adhesive disease. Other
HA products in research and development stages include: Sepramesh(TM) adhesion
barrier - hernia repair in clinical development,; Seprafilm(R)II adhesion
barrier - abdominal surgery and Sepracoat(TM) adhesion barrier - atrial
fibrulations both in preclinical stages; Sepragel(TM) adhesion barrier -
abdominal and pelvic surgery in
<PAGE>
Phase II clinical trials; and Seprafilm(R)II adhesion barrier - cardiac surgery
currently in Phase III clinical trials.
Cash distributions since inception of the Partnership total $4,466 per $10,000
investment through December 31, 1999. We expect cash distributions to continue,
provided that products from the ongoing product development programs continue to
meet with commercial success. In addition to the potential returns from the
product development programs, investors have received common stock and warrants
from R&D Partners II. The total value of the distributed common stock and
warrants from the Partnership have ranged from $7,206 as valued on the date of
distribution to $19,401 per $10,000 investment.
Included in the Product Portfolio Status section are more detailed discussions
on the companies, status of the product development programs and specific
information concerning the securities associated with each investment. Please
refer to prior annual reports for information pertaining to the Partnership's
terminated or concluded investments. The information contained therein has been
obtained from public and other sources believed by the Partnership to be
accurate, although the Partnership has not verified such information and
therefore neither the General Partner of the Partnership, the Partnership nor
their affiliates can assume any responsibility for the accuracy of such
information.
Thank you for your continued interest in R&D Partners II.
Sincerely,
Robin Stanley
Vice President
Paine Webber Development Corporation
<PAGE>
Product Portfolio Status
Amgen Inc.
----------
Company
Amgen Inc. ("Amgen") acquired Synergen, Inc. ("Synergen") in December 1994.
Amgen is continuing the development of IL-1ra or Kineret(R) (previously Antril)
for the treatment of rheumatoid arthritis ("RA") which was being conducted by
Synergen before the acquisition took place. Following an approximate six month
period during which Amgen considered a number of corporate partnering
alternatives, the company announced in April 1998 that it had decided to retain
its principal product candidates, STNF-RI and IL-1ra, and relocated their
respective development programs to Thousand Oaks, CA. Amgen announced it had
discontinued the discovery research programs on several other inflammation
products.
Program
R&D Partners II committed $4.5 million to Synergen Clinical Partners, L.P.
("SCP"), a $52.5 million limited partnership formed to fund the development and
human clinical trials of the recombinant form of IL-1ra, a naturally occurring
anti-inflammatory human protein that may play a significant role in the
treatment of RA.
Under the terms of the court-approved settlement agreement dated January 16,
1998, in connection with the class action litigation on behalf of limited
partners in SCP (the "Class"), the Class, as a whole, received approximately
$13.8 million. The limited partners of R&D Partners II received approximately
$1.2 million in the aggregate, which resulted in a payment of $150 per $10,000
investment and was included in the April 1998 distribution. In addition, the
Class received rights to contingent payments in the future if the FDA approves
an IL-1ra product for the market and also if sales of an IL-1ra product exceed
$650 million before 2020. Amgen submitted an NDA during the fourth quarter 1999
with the FDA for Kineret for treatment of RA. Kineret appears to directly and
selectively block the harmful effects of interleukin-1 (IL-1). IL-1 is a central
mediator of bone and cartilage destruction and inflammation in rheumatoid
arthritis.
Warrant
R&D Partners II distributed the Synergen warrant to investors in March 1993. As
a consequence of the acquisition of Synergen by Amgen, the warrant was rendered
valueless.
Centocor, Inc.
--------------
Company
Centocor, Inc. ("Centocor") is a health care company specializing in the
development and commercialization of therapeutic products to meet critical human
health care needs. As the leader in monoclonal antibody technology, Centocor's
innovative products focus on the management of three major disease areas:
cardiovascular, autoimmune and cancer. In October 1999, Centocor and Johnson &
Johnson ("J&J") completed their $4.9 billion merger, net of cash acquired, after
Centocor shareholders voted to approve the merger. Centocor will retain its name
and function as a wholly-owned subsidiary of J&J.
<PAGE>
Program
R&D Partners II committed $12 million to Centocor Partners III, L.P. ("CPIII"),
a $54.2 million limited partnership formed to conduct the development and human
clinical trials of two monoclonal antibody-based products, ReoPro(R) and
Capiscint. Development efforts for Capiscint(TM) ceased. ReoPro is currently
being sold in the U.S. by Centocor's marketing partner, Eli Lilly and Company
("Lilly").
ReoPro received marketing approval from the FDA in 1994 for use in the reduction
of acute cardiac complications, but only in the patients undergoing angioplasty
procedures who are at risk for abrupt artery closure. Centocor is reviewing
clinical trials combining ReoPro with a reduced dose of their "clot buster"
Retavase(R) in acute myocardial infarction. The results were presented at the
21st Annual Congress of the European Society of Cardiology and are taken from
the SPEED (Strategies for Patency Enhancement in the Emergency Department, also
known as the GUSTO IV Pilot Trial) trial.
ReoPro is also being studied in patients with acute ischemic stroke. Data was
presented at the Eighth Annual European Stroke Meeting which showed that ReoPro
improved patients' clinical function even when administered up to 24 hours after
first symptoms, with no increased risk of major intracranial bleeding. Earlier
in 1999, Centocor and Pharmacia & Upjohn announced that they were expanding
clinical trials of ReoPro to assess its use with the clot-busting drug
Fragmin(R) in treating heart attack patients. ReoPro prevents platelets from
clustering together to form blood clots. Fragmin, co-promoted by its developer
Pharmacia & Upjohn and Centocor, breaks up already existing clots.
In March 1999, the court approved the settlement of the litigation commenced by
R&D Partners II against Centocor, arising out of Centocor's transaction with Eli
Lilly and Company. The court's approval of the settlement becomes effective when
the court's order and final judgment are either finally affirmed on appeal or,
by lapse of time or otherwise, shall no longer be subject to appeal.
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 $14.155 per share
through February 1993 and $16.655 per share from March 1993 through February
1995. Based on the closing price of $31.75 per share on the date of distribution
and the initial exercise price of $14.155 per share, a warrant to purchase 116
shares of Centocor common stock had a value of $2,041 per $10,000 unit. In June
1992, R&D Partners II distributed 22 shares of Centocor common stock per $10,000
investment, 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 on the dates of distribution to $3,772 per $10,000 investment
in R&D Partners II.
<PAGE>
Genzyme Corporation
-------------------
Company
Genzyme Corporation ("Genzyme") is committed to redefining patient care
worldwide through the introduction of innovative products and services for major
unmet medical needs. With nearly 600 products and services already on the
market, Genzyme has a solid, profitable revenue base. The division also has a
broad research and development pipeline intended to maintain a high rate of
earnings growth. Genzyme has four operating units: Therapeutics, Genetics
Services, Diagnostic Products and Pharmaceuticals.
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 hyaluronic acid ("HA").
The products are designed to reduce the incidence and severity of adhesions, a
serious post-operative complication. The HA product line was moved to Genzyme
Surgical Products division ("GZSP") to sharpen their focus on the `biosurgery'
market, which is being created by the increasing convergence of mechanical and
biological approaches to surgery. GZSP's biomaterials products include
Seprafilm(R)Bioresorbable Membrane, which is used in colorectal procedures to
reduce the risks and burden of adhesive disease, and several additional
adhesion-prevention products now marketed in Europe, including Sepracoat(R)
Coating Solution and Seprafilm(R) II, a second generation product with improved
elasticity and ease of use.
In the first quarter 1999, Seprafilm received the European CE Mark approval for
the use in reducing the incidence of adhesions following cardiac surgery. The
approval expands the indication for Seprafilm in Europe and represents the first
step in Genzyme's program to develop and introduce anti-adhesions products for
the cardiovascular market. GZSP began enrolling pediatric patients in a pivotal
clinical trial to evaluate the use of CV-Seprafilm(TM) (previously referred to
as Seprafilm II Adhesion Barrier for this application) in open-heart surgery.
GZSP also began a clinical trial evaluating the use of Sepracoat(TM)Coating
Solution, a biomaterials product, in reducing atrial fibrillation following
cardiac surgery. Protecting cardiac tissues from desiccation and abrasive damage
from handling during surgery may decrease post-operative atrial fibrillation.
Sepracoat is designed to form a temporary, viscous, protective barrier when
applied to tissue surfaces.
GZSP is also developing Sepramesh(TM), a mesh product that is coated with a
sodium hyaluronic-based layer for use in hernia repairs. GZSP reports it filed a
510(k) application in December 1999 and hopes to receive marketing approval from
the FDA for Sepramesh in early 2000. Preclinical studies for Sepragel(TM)
Bioresorbable Gel in laproscopic surgery were completed during the quarter. GZSP
continues to assess its clinical trial strategy for the use of Sepragel(TM) in
laproscopic surgery and Seprafilm Adhesion Barrier in abdominal surgery. GZSP
believes that its anti-adhesion technologies will have many applications beyond
general and gynecological surgery. For example, GZSP is currently investigating
the use of Genzyme's anti-adhesion products in sinus and orthopedic surgery.
Warrant
R&D Partners II distributed the warrant in June 1992. Per $10,000 investment,
investors received a warrant to purchase 22 shares of Genzyme common stock at
$16.01 per share and
<PAGE>
a warrant to purchase 10 shares at $22.91 per share. Both warrants expired
October 31, 1996. Due to the stock split in July 1996, for every warrant
exercise, investors received two shares of Genzyme common stock. Based on the
closing price of $24.75 per share on the date of distribution (as adjusted for
the stock split), the distributed warrants to purchase Genzyme common stock had
a value of approximately $1,003. The available gain from the distributed Genzyme
warrants has ranged from $1,003 at distribution to $1,883 per $10,000 investment
in R&D Partners II.
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