10-Q 1 form10qq201.txt FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ______ TO ______ Commission File Number 33-14582 PAINEWEBBER R&D PARTNERS II, L.P. (Exact name of registrant as specified in its charter) DELAWARE 13-3437420 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (212) 713-2000 ---------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] ---------------------- 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; 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 PaineWebber R&D Partners II, L.P. on the General Partner (hereinafter defined). PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) FORM 10-Q JUNE 30, 2001 Table of Contents PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Statements of Financial Condition (unaudited) at 2 June 30, 2001 and December 31, 2000 Statements of Operations (unaudited) for the three months and six months ended June 30, 2001 and 2000 3 Statement of Changes in Partners' Capital (unaudited) for the six months ended June 30, 2001 4 Statements of Cash Flows (unaudited) for the six months ended June 30, 2001 and 2000 5 Notes to Financial Statements (unaudited) 6-10 Item 2. Management's Discussion and Analysis of Financial 11 Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 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. 1 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF FINANCIAL CONDITION (unaudited) June 30, December 31, 2001 2000 -------------------------------------------------------------------------------- Assets: Cash $ 6,998 $ 6,998 Marketable securities, at market value 8,289,005 1,018,977 Royalty income receivable 1,074,833 1,893,334 ------------ ----------- Total assets $ 9,370,836 $ 2,919,309 ============ =========== Liabilities and partners' capital: Accrued liabilities $ 59,375 $ 146,657 Partners' capital 9,311,461 2,772,652 ------------ ----------- Total liabilities and partners' capital $ 9,370,836 $ 2,919,309 ============ =========== -------------------------------------------------------------------------------- See notes to financial statements. 2 PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS (unaudited)

See notes to financial statements. 3 PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENT OF CHANGES IN PARTNERS' CAPITAL (unaudited)

See notes to financial statements. 4 PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (unaudited)

See notes to financial statements. 5 PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BUSINESS The financial information as of June 30, 2001 and for the periods ended June 30, 2001 and 2000 is unaudited. However, in the opinion of management of PaineWebber R&D Partners II, L.P. (the "Partnership"), such information includes all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The results of operations reported for the interim periods ended June 30, 2001, are not necessarily indicative of results to be expected for the year ended December 31, 2001. These financial statements should be read in conjunction with the most recent annual report of the Partnership on Form 10-K for the year ended December 31, 2000 and the previously issued quarterly report on Form 10-Q for the quarter ended March 31, 2001. 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 UBS Americas Inc. (formerly, Paine Webber Group Inc. ("PWG")).1 The General Partner intends to distribute the Partnership's assets to the Partners and dissolve the Partnership by December 31, 2001. 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. ------------------------ 1 On November 3, 2000, pursuant to the Agreement and Plan of Merger dated as of July 12, 2000 by and among PWG, UBS AG and UBS Americas Inc., PWG merged with and into UBS Americas Inc. The General Partner does not expect this transaction to have a material effect on the Partnership. 6 PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (NOTE 1 CONTINUED) The following table sets forth the proportion of each distribution to be received by limited partners of the Partnership (the "Limited Partners") and the General Partner (collectively the "Partners"). All distributions to the individual Limited Partners have been made pro rata in accordance with their individual capital contributions.

Effective May 31, 2001, the Partnership distributed to the Partners its rights to receive contingent payments from Centocor, Inc. and Genzyme Corporation (see Note 5). The General Partner valued these rights as of this date at $2,601 per Unit. As of June 30, 2001, the Partnership has made cash and security distributions, as valued on the dates of distribution, since inception of $5,856 and $9,807 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 June 30, 2001, the cumulative profit for the Partnership was $1,733 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. 7 PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (NOTE 2 CONTINUED) The Partnership has invested in product development contracts with Sponsor Companies either directly or through product development limited partnerships. The Partnership has expensed product development costs when incurred by the Sponsor Companies. Income received and/or accrued from investments in Projects is reflected in the Statements of Operations for the period in which the income has been earned. 3. MARKETABLE SECURITIES As of June 30, 2001 and December 31, 2000, the Partnership had invested $8,289,005 and $1,018,977, respectively, in a money market fund. 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 UBS PaineWebber Inc. ("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 had direct limited partnership interests in some of the same Projects as the Partnership. 5. PRODUCT DEVELOPMENT PROJECTS 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"). The Partnership owned 22 Class A limited partnership units and 111 Class C limited partnership units. As a result, the Partnership is entitled to receive future quarterly payments (the "Centocor CPIs") through 2007 based on sales of ReoPro(TM), a drug developed by CP III. For the quarter ended June 30, 2001 the Partnership accrued income due from the Centocor CPIs of $1,033,333 which represents income for the two months ended May 31, 2001. (See discussion of Partner distribution in this note.) For the three months ended June 30, 2000, the Partnership accrued income from the Centocor CPIs of $1,550,000 which was prior to an estimate adjustment of approximately $587,000 as of March 31, 2000. For the six months ended June 30, 2001 and 2000, the Partnership recognized income from CP III of $2,551,212 and $3,163,970, respectively. Pursuant to the terms of the Partnership Purchase Agreement among Genzyme Corporation ("Genzyme"), Genzyme Development Partners ("GDP"), Genzyme Development Corporation and the Class A Limited Partners of GDP (including the Partnership), Genzyme exercised its option to purchase the Class A limited partnership interests of GDP on January 12, 2001. The purchase price consisted of 8 PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (NOTE 5 CONTINUED) an advance payment price of $35,000 per Class A limited partnership interest plus royalties on the sale of Sepra products for ten years (the "Genzyme CPIs") commencing with the first calendar quarter of 2001. In January 2001 the Partnership received $3,885,000 as the owner of 111 Class A limited partnership interests and recognized income from product development projects of this amount. For the three months and six months ended June 30, 2001 the Partnership accrued and/or received income from the Genzyme CPIs in the amount of $41,500 and $103,532, respectively. Effective May 31, 2001, the Partnership distributed the Centocor CPIs and Genzyme CPIs to its Partners in accordance with the distribution provisions pursuant to its Partnership Agreement as summarized in Note 1. PWDC will act as agent to receive future Centocor CPI and Genzyme CPI payments and make quarterly distributions to the Partners with the exception of Partners owning more than 5% of the Units (who will receive their allocable share of the Centocor CPI and Genzyme CPI payments directly from Centocor and Genzyme). On June 29, 2001, the Partnership and the other parties to the Amended and Restated Contractual Payment Interest Purchase Agreement dated April 4, 2000, agreed that in exchange for the release of any Partnership liabilities relating to the termination of that agreement, those other parties (who are holders of 5% or more of the Units) will receive future Centocor CPI and Genzyme CPI payments directly from Centocor and Genzyme. 6. INCOME TAXES The Partnership is not subject to federal, state or local income taxes. Accordingly, individual Partners are required to report their distributive share of realized income and loss on their respective federal and state income tax returns. 7. LEGAL PROCEEDING On July 12, 1995, the Partnership commenced a derivative action against Centocor and Centocor Development Corporation III in the Chancery Court of Delaware (the "Court") arising from certain agreements entered into by Centocor and Eli Lilly & Company in July 1992. In June 1997, the parties to the Partnership's action entered into an agreement to settle the action which provided, 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 (the "Initial Payment"); an additional $5.0 million, if and when cumulative world-wide sales of ReoPro exceed $600 million (the "Milestone Payment"); and possible additional payments totaling $2.2 million, depending upon regulatory developments in Japan. The agreement further provided for revisions to the ReoPro royalties payable by Centocor to CP III investors through 2007 (the "Retroactive Payments"). On March 15, 1999, the Court issued a memorandum opinion and order approving the settlement as fair and reasonable. On January 31, 2000, the Court awarded legal fees and expenses relating to the Centocor litigation of approximately $1,476,000 to the Partnership's counsel plus interest at the statutory rate. PWDC, which had advanced the funds necessary to pay the Partnership's legal fees and expenses relating to this litigation, was reimbursed its applicable share of this award in the amount of $1,244,000. Legal fees and expenses in the amount of $650,000 together with interest at the statutory rate was awarded to counsel for certain objectors to the settlement. On February 17, 2000, the Court signed an order of final 9 PAINEWEBBER R&D PARTNERS II, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (NOTE 7 CONTINUED) judgment resolving all settlement matters regarding the litigation with Centocor. During the six months ended June 30, 2000, the Partnership received $3,195,190 representing its allocable share of the Initial Payment and the amount of $4,064,308 representing the Partnership's allocable share of the Milestone Payment and the Retroactive Payments due for the years 1997 through 1999. These settlement payments of $7,259,498 have been included as income from product development projects in the accompanying financial statements. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ----------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Partners' capital increased from $2.8 million at December 31, 2000, to $9.3 million at June 30, 2001, resulting from the recognition of net income of $6.5 million (as more fully explained in Results of Operations below). The Partnership's funds are invested in a money market fund until cash is needed to pay for the expenses incurred in connection with the dissolution of the Partnership or upon the remittance of cash distributions to the Partners. Liquid assets increased from $1.0 million at December 31, 2000 to $8.3 million at June 30, 2001, resulting primarily from the sale by the Partnership of its interest in GDP for proceeds of $3.9 million and the receipt of quarterly payments due from the Centocor and Genzyme CPIs aggregating $3.5 million. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2000: ---------------------------------------- Net income for the quarters ended June 30, 2001 and 2000 was $1.0 million and $0.9 million, respectively. The increase in net income was due to an increase in income from product development projects of $0.1 million and a decrease in expenses of the same amount. Revenues for the three months ended June 30, 2001 and 2000 were $1.1 million and $1.0 million, respectively. For the quarter ended June 30, 2001, the Partnership accrued $1.1 million with respect to income due from Sponsor Companies as of this date. For this same period in 2000, the Partnership accrued $1.6 million relating to income due from Sponsor Companies which was offset by an estimate adjustment of income for the previous quarter of $0.6 million. Expenses decreased from $0.126 million for the quarter ended June 30, 2000 to $0.065 million for this same period in 2001 resulting primarily from a decrease in the Partnership's legal expenses. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000: -------------------------------------- Net income for the six months ended June 30, 2001 and 2000 was $6.5 million and $10.2 million, respectively. The unfavorable variance of $3.7 million resulted from a decrease in revenues of $3.9 million offset by a decrease in expenses of $0.2 million. Revenues for the six months ended June 30, 2001 and 2000 were $6.7 million and $10.5 million, respectively, consisting primarily of income from product development projects. For the six months ended June 30, 2001 the Partnership received and/or accrued income from product development projects in the amount of $6.5 million. The Partnership received proceeds of $3.9 million upon the sale of its interest in GDP and recognized income of $2.7 million from the Genzyme CPIs and Centocor CPIs. During this same period in 2000 the Partnership received payments due pursuant to a settlement agreement with Centocor in the amount of $7.3 million. Also, the Partnership received and/or accrued quarterly payments from the Centocor CPIs in the amount of $3.2 million resulting in total income from product development projects of $10.5 million. Expenses for the six months ended June 30, 2001 and 2000 were $0.124 million and $0.291 million, respectively. The decrease was due primarily to decreased legal fees incurred with respect to the proposed sale of the Centocor CPIs to third parties in 2000. 11 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. --------------------------------- a) EXHIBITS: None b) REPORTS ON FORM 8-K: None 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 14th day of August 2001. 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/ Stephen R. Dyer ------------------------------ Stephen R. Dyer President* By: /s/ Robert J. Chersi ------------------------------ Robert J. Chersi Principal Financial and Accounting Officer* * The capacities listed are with respect to PWDC Holding Company, the Manager, as well as PWDC, the parent company of the Manager. 13

PAINEWEBBER R&D PARTNERS II LP 10-Q