UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
September 30, 1996
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from ______ to ______
Commission File Number 33-35938
PAINEWEBBER R&D PARTNERS III, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3588219
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 713-2000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
<PAGE>
Page 1
PAINEWEBBER R&D PARTNERS III, L.P.
(a Deleware Limited Partnership)
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition (unaudited)
at September 30, 1996 and December 31, 1995 2
Statements of Operations
(unaudited) for the three months ended
September 30, 1996 and 1995 3
Statements of Operations
(unaudited) for the nine months ended
September 30, 1996 and 1995 4
Statement of Changes in Partners' Capital
(unaudited) for the nine months ended
September 30, 1996 5
Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 1996 and 1995 6
Notes to Financial Statements
(unaudited) 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
All schedules are omitted either because they are not applicable or the
information required to be submitted has been included in the financial
statements or notes thereto.
<PAGE>
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Financial Condition
(unaudited)
September 30, December 31,
1996 1995
- -------------------------------------------------------------------------------
Assets:
Cash $ 1,534,605 $ 56,903
Marketable securities, at market value 1,242,200 1,432,382
Investments, at fair value 33,617,141 15,514,892
Interest receivable 3,988 37,739
Organization costs, net of accumulated
amortization of $125,724 at
September 30, 1996 and $115,104
at December 31, 1995 - 10,620
Investments in product development projects 300,597 826,167
Other assets - 35,723
----------- -----------
Total assets $ 36,698,531 $ 17,914,426
============ ============
Liabilities and partners' capital:
Payable to PaineWebber Development
Corporation $ 1,500 $ 5,721
Accrued liabilities 71,924 83,494
------------ ------------
73,424 89,215
------------ ------------
Partners' capital 36,625,107 17,825,211
------------ ------------
Total liabilities and partners' capital $ 36,698,531 $ 17,914,426
============ ============
- ------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 3
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Operations
(unaudited)
For the three months ended September 30, 1996 1995
- ------------------------------------------------------------------------------
Revenues:
Interest income $ 27,930 $ 41,012
Income from product development project - 18,000
Unrealized appreciation of marketable
securities and investments 2,673,519 6,028,284
Realized gain on sale of investments and
marketable securities 172,557 869
---------- ----------
2,874,006 6,088,165
---------- ----------
Expenses:
Expenditures under product development projects 10,683 482,874
Management fee 107,028 209,406
General and administrative costs 54,277 62,179
Amortization of organization costs - 6,286
---------- ----------
171,988 760,745
----------- ----------
Net income $ 2,702,018 $ 5,327,420
=========== ============
Net income per partnership unit:
Limited partners (based on 50,000 units) $ 53.50 $ 105.48
General partner $ 27,020.18 $ 53,274.20
- ------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 4
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Operations
(unaudited)
For the nine months ended September 30, 1996 1995
- ------------------------------------------------------------------------------
Revenues:
Interest income $ 84,404 $ 174,348
Income from product development project 19,500 146,208
Unrealized appreciation of marketable
securities and investments 19,643,303 9,504,526
Realized gain on sale of product development
project 6,000,000 -
Realized gain on sale of investments and
marketable securities 1,049,149 85,124
----------- -----------
26,796,356 9,910,206
----------- -----------
Expenses:
Expenditures under product development
projects 525,570 3,309,647
Management fee 462,306 648,252
General and administrative costs 129,277 198,392
Amortization of organization costs 10,620 18,858
---------- -----------
1,127,773 4,175,149
------------ ------------
Net income $ 25,668,583 $ 5,735,057
============ ============
Net income per partnership unit:
Limited partners (based on 50,000 units) $ 508.24 $ 113.55
General partner $ 256,685.83 $ 57,350.57
- ------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 5
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statement of Changes in Partners' Capital
(unaudited)
<TABLE>
<CAPTION>
Limited General
For the nine months ended September 30, 1996 Partners Partner Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1996 $ 17,648,545 $ 176,666 $ 17,825,211
Net income 25,411,897 256,686 25,668,583
Cash distribution (6,800,000) (68,687) (6,868,687)
------------- ------------ -------------
Balance at September 30, 1996 $ 36,260,442 $ 364,665 $ 36,625,107
============ ============ =============
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE>
Page 6
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
(unaudited)
For the nine months ended September 30, 1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 25,668,583 $ 5,735,057
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of organization costs 10,620 18,858
Unrealized appreciation of marketable
securities and investments (19,643,303) (9,504,526)
Expenditures under product development
projects 525,570 1,809,647
Decrease (increase) in operating assets:
Marketable securities 186,198 8,045,565
Note receivable - (1,000,000)
Interest receivable 33,751 44,642
Investments 1,545,038 -
Investments in product development projects - (3,587,300)
Other assets 35,723 750
(Decrease) increase in operating liabilities:
Liabilities under product development projects - (1,456,326)
Payable to PaineWebber Development Corporation (4,221) 1,500
Accrued liabilities (11,570) (107,552)
----------- ----------
Cash provided by operating activities 8,346,389 315
----------- ----------
Cash flows from financing activities:
Distributions to partners (6,868,687) -
----------- ----------
Increase in cash 1,477,702 315
Cash at beginning of period 56,903 1,044
------------- -----------
Cash at end of period $ 1,534,605 $ 1,359
============= ===========
----------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the nine months
ended September 30, 1996 and 1995.
----------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Page 7
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
The financial information as of and for the periods ended September 30,
1996 and 1995 is unaudited. However, in the opinion of management of
PaineWebber R&D Partners III, L.P. (the "Partnership"), such information
includes all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation. The results of operations
reported for the interim periods ended September 30, 1996, are not
necessarily indicative of results to be expected for the year ended
December 31, 1996. These financial statements should be read in conjunction
with the most recent annual report of the Partnership on Form 10-K for
the year ended December 31, 1995, and the previously issued quarterly
reports for the quarters ended June 30 and March 31, 1996.
The Partnership is a Delaware limited partnership that commenced
operations on June 3, 1991. PaineWebber Development Corporation ("PWDC"
or the "General Partner"), an indirect, wholly owned subsidiary of
Paine Webber Group Inc., is the general partner and manager of the
Partnership. The Partnership will terminate on December 15, 2015,
unless its term is extended or reduced by the General Partner.
The principal objective of the Partnership is to provide long-term
capital appreciation to investors through investing in the development and
commercialization of new products with technology companies ("Sponsor
Companies"), which are expected to address significant market
opportunities. When the product development phase has been completed,
Sponsor Companies will generally have a license from the Partnership to
commercialize the products resulting from the product development project,
and the Partnership will generally have the right to receive payments based
upon the sale of such products. Sponsor Companies will generally have an
option to purchase from the Partnership the products or technology developed
for a predetermined price, payable through a one-time payment and/or a
series of payments based on product sales over a ten to twelve year period.
In connection with product development projects (the "Projects"), the
Partnership sought to obtain warrants to purchase the common stock of Sponsor
Companies. These warrants have the potential to provide additional
capital appreciation to the Partnership which is not directly dependent
upon the outcome of the Projects (see Note 5). In addition, the Partnership
invested as a limited partner in product development limited partnerships.
Such partnerships were formed to develop specific, new products through
contracts, similar to those described above, with Sponsor Companies. The
Sponsor Companies conduct the Projects and affiliates of the Sponsor Companies
serve as general partners of the partnerships. As such, the Partnership is
engaged in diverse Projects through contracts, participation in other
partnerships and investments in securities of Sponsor Companies.
The General Partner was able to engage in technology development projects
and other ventures to which the specified product development project
criteria and structure would not be applicable. The payments made to
technology development projects and other ventures do not exceed 20% of the
aggregate capital contributions of the Partnership.
As of September 30, 1996, the Partnership has fully funded its seven
Projects at an aggregate investment of $32.5 million (see Note 5). In
addition to the Projects, the Partnership has equity investments in Sponsor
Companies at a total cost of $8.05 million at September 30, 1996 (see Note 3).
<PAGE>
Page 8
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 1 Continued)
All distributions from the Partnership to the General Partner and the
limited partners of the Partnership (the "Limited Partners"; collectively,
the "Partners") will initially be made pro rata in accordance with their
respective capital contributions. The table below sets forth the proportion
of each distribution to be received by the Limited Partners and the General
Partner, respectively:
<TABLE>
<CAPTION>
Limited Partners General Partner
---------------- ---------------
<S> <C> <C> <C>
I. Until the value of the aggregate distributions for each
limited partnership Unit ("Unit") equals $1,000 plus
simple interest on such amount accrued at 5% per annum
("Contribution Payout") 99% 1%
II. After Contribution Payout and until the value of the
aggregate distributions for each Unit equals $5,000 ("Final 80% 20%
Payout")..................................
III. After Final Payout........................ 75% 25%
</TABLE>
For the nine months ended September 30, 1996, the Partnership made an
aggregate cash distribution of $6,868,687 ($136 per Unit; $68,687 to the
General Partner). At September 30, 1996, the Partnership had made cash and
security distributions since inception of $236 and $98 per Unit, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in conformity with generally accepted
accounting principles which require management to make estimates, such
estimates include the carrying value of non-marketable securities, and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain reclassifications have been made in prior year amounts to conform to
current year presentations.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("Statement No. 115"), the Partnership accounts for its
investments in restricted common stock (where the restriction period expires
in one year or less) at market value with unrealized gains and losses reflected
in the Statements of Operations during the period in which the change in value
occurs. Investments in restricted common stock, whereby the restriction
period exceeds one year, is accounted for at the lower of cost or fair value.
Marketable securities consist of readily marketable securities that
are valued at market value. Marketable securities are not considered cash
equivalents for the Statements of Cash Flows.
The Partnership's investments in convertible preferred stock are not
publicly traded and are subject to fluctuations in value dependent on the
underlying value of the issuing company. Non-publicly traded securities
are valued at cost, except when a decrease is required based on the General
Partner's evaluations. These evaluations are based on available information
and do not necessarily represent the amount, if any, which might
<PAGE>
Page 9
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 2 Continued)
ultimately be realized, since such an amount depends on future circumstances
and cannot reasonably be determined until the position is actually liquidated.
Realized and unrealized gains or losses are determined on a specific
identification method and are reflected in the Statements of Operations
during the period in which the change in value occurs.
The General Partner incurred offering and organizational costs in the
amount of $1,813,138 and $125,724, respectively, that were reimbursed at the
Partnership's closings. Offering expenses have been charged against partners'
capital. Organizational costs incurred during the formation of the
Partnership were amortized over a period of 60 months from the date of the
commencement of operations.
The Partnership invested in Projects, as more fully described in Note 5,
through one of two vehicles:
* Product Development Contracts
The Partnership paid amounts to Sponsor Companies under product
development contracts. Such amounts were expensed by the Partnership
when incurred by the Sponsor Companies. Income from the Sponsor
Companies is reflected in the Statements of Operations for the period in
which the income is earned.
* Product Development Limited Partnerships
The Partnership participates as a limited partner in product
development limited partnerships formed to develop specific products.
Such participations are accounted for using the equity method. Such
partnerships expense product development costs when incurred.
The Partnership carries warrants at a zero value in cases where the Sponsor
Company's stock is not publicly traded or the exercise period has not been
attained. To the extent that the Partnership's warrants are currently
exercisable and the Sponsor Company's stock is publicly traded, the warrants
are carried at intrinsic value (the excess of market price per share over the
exercise price per share), which approximates fair value.
3. MARKETABLE SECURITIES AND INVESTMENTS
MARKETABLE SECURITIES:
The money market fund consists of obligations with maturities of one year
or less that are subject to fluctuations in value.
The Partnership held the following marketable securities at:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
--------------------------------- --------------------------------
Market Cost Market Cost
-------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ ----- $ ----- $603,544 $599,560
Money market fund 1,242,200 1,242,200 828,838 828,838
------------- ---------- ------------- -----------
$1,242,200 $1,242,200 $1,432,382 $1,428,398
============= ========== ============ ===========
</TABLE>
<PAGE>
Page 10
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 3 Continued)
Investments:
The Partnership's investments in convertible preferred stock are not
publicly traded securities and are subject to fluctuations in value dependent
upon the Sponsor Companies' underlying value. The Partnership records these
non-public investments at the lower of cost or fair value. Fair value is
determined by the General Partner, in good faith, based on all appropriate
information available at the time. In accordance with Statement No. 115, the
Partnership records investments in restricted common stock (when the
restriction period expires in one year or less) at market value with unrealized
gains and losses reflected in the Statements of Operations during the period
in which the change in value occurs. Exercisable warrants held by the
Partnership whereby the market value of the underlying common shares exceeds
the exercise price of the warrant are recorded at their intrinsic value.
The Partnership held the following investments at:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------------------------ ------------------------------------
Carrying Value Cost Carrying Value Cost
--------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Biocompatibles International plc:
2,100,000 Restricted $16,134,054 $ 2,100,000 $ 2,100,000 $ 2,100,000
Common Shares
Unrestricted Common Shares 3,457,350 450,000 4,793,750 650,000
(450,000 shares and 650,000 shares
at September 30, 1996 and December
31, 1995, respectively)
GenPharm International, Inc. 0 ---- 0 ----
1,000,000 Shares of Series E
Convertible Preferred Stock
Pharming BV 1,150,000 3,500,000 1,150,000 3,500,000
14,395 Shares of Class A Stock
GelTex Pharmaceuticals, Inc. 7,144,659 1,000,000 4,376,104 1,000,000
357,233 Unrestricted Common
Shares
PharmaGenics, Inc. 1,000,000 1,000,000 1,000,000 1,000,000
480,242 Shares of Series C
Convertible Preferred Stock
Alkermes, Inc. ---- ---- 70,038 0
Warrant to purchase
23,839 common shares
Athena Neurosciences, Inc. ---- ---- 2,025,000 0
Warrant to purchase
500,000 shares (see Note 5)
Elan Corporation, plc
Warrant to purchase 295,600 Shares 4,731,078 0 ---- ----
(see Note 5) ----------- ---------- ----------- ----------
$33,617,141 $8,050,000 $15,514,892 $8,250,000
=========== ========== =========== ==========
</TABLE>
<PAGE>
Page 11
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 3 continued)
Biocompatibles International plc ("Biocompatibles") is a development stage
company engaged in the research, development and commercialization of coatings
and new materials which reduce compatibility problems associated with certain
medical devices. The Partnership has agreed not to sell, assign, transfer or
otherwise dispose of 2,100,000 shares of its remaining investment of 2,550,000
common shares for a period expiring in April 1997. At December 31, 1995, the
Partnership recorded these restricted shares at their cost basis of $2,100,000.
In accordance with Statement No. 115, during the quarter ended June 30, 1996,
the Partnership commenced recording its investment in these shares at their
market value. At September 30, 1996, the market value of the restricted shares
was $16,134,054 ($7.683 per share) as compared to their carrying values of
June 30, 1996 and December 31, 1995 of $14,521,254 ($6.915 per share) and
$2,100,000 ($1.00 per share), respectively. Accordingly, the Partnership
recognized unrealized appreciation for the three months and nine months ended
September 30, 1996 of $1,612,800 and $14,034,054, respectively. In September
1996, the Partnership sold 200,000 unrestricted shares of Biocompatibles at a
price, net of commissions, of $1,535,505 ($7.683 per share). The carrying
values of the shares at June 30, 1996 and December 31, 1995 were $1,383,000
($6.915 per share) and $1,475,000 ($7.375 per share), respectively.
Accordingly, the Partnership recognized a gain upon the sale of $152,505 and
$60,505, respectively, for the three months and nine months ended September
30, 1996. The Partnership's remaining investment of 450,000 unrestricted
shares had a market value at September 30, 1996 of $3,457,350 as compared to
carrying values at June 30, 1996 and December 31, 1995 of $3,111,750 and
$3,318,750, respectively. The Partnership recognized unrealized appreciation
of $345,600 and $138,600, respectively, for the three months and nine months
ended September 30, 1996. In connection with a Rights Issue by Biocompatibles
in April 1996, the Partnership was entitled to purchase one Right for every
six shares owned (aggregating 458,333 Rights) at a price of <pounds sterling>
3.60 per Right. Each Right was comprised of one new common share of
Biocompatibles and one warrant. In May 1996, the Partnership sold its
entitlement to the Rights at a price of <pounds sterling>1.25 per Right.
The Partnership received aggregate proceeds, net of commissions, of $865,798
(<pounds sterling>571,484) and recognized a gain of this amount from the sale
for the periods ended September 30, 1996.
GenPharm International, Inc. ("GenPharm") is a biotechnology company which
is pursuing the research and development of transgenic technology for human
medical applications. In 1995, GenPharm's restructuring resulted in a spin-off
of its European subsidiary, Pharming BV. In connection with the spin-off, the
Partnership received 14,395 shares of Pharming BV Class A stock which the
General Partner has valued at $1,150,000. Based on a review of the current
and future financial prospects of GenPharm, the General Partner has
determined that the Partnership's investment in GenPharm's convertible
preferred stock should be valued at zero.
GelTex Pharmaceuticals, Inc. ("GelTex") is a company formed to develop and
commercialize luminal therapies, which are based on the use of non-absorbable
therapeutic polymers to selectively eliminate substances from the
gastrointestinal tract before they are absorbed. The Partnership agreed not
to sell, assign, transfer or otherwise dispose of its investment of 357,233
common shares for a period which expired in August 1996. At September 30,
1996, the GelTex shares had an aggregate market value of $7,144,659 ($20.00
per share). The carrying value of the shares at June 30, 1996 was $6,698,118
($18.75 per share) and accordingly, the Partnership recognized unrealized
appreciation of $446,541 for the three months ended September 30, 1996. As
of December 31, 1995, the carrying value of the shares was $4,376,104 ($12.25
per share) and the Partnership recognized unrealized appreciation of
$2,768,555 for the nine months ended September 30, 1996.
<PAGE>
Page 12
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 3 Continued)
PharmaGenics, Inc. ("PharmaGenics") is an integrated drug discovery company
engaged in the research and development of pharmaceuticals for the treatment of
cancer as well as other human diseases. In 1995, the Partnership made a loan
in the amount of $1,000,000 to PharmaGenics which was subsequently converted
into 480,242 shares of Series C Convertible Preferred Stock.
At December 31, 1995, the Partnership held a currently exercisable warrant
to purchase 500,000 common shares of Athena Neurosciences, Inc. ("Athena") in
which the market value of the common shares of $12.25 per share exceeded the
exercise price of $8.20 per share. Accordingly, the Partnership recorded this
warrant at its intrinsic value of $2,025,000 which approximated fair value.
Upon the merger of Athena with Elan Corporation, plc ("Elan"), the
Partnership's warrant to purchase Athena shares was converted into a warrant
to purchase 295,600 Elan shares (see Note 5). The market value of Elan at
September 30, 1996, was $29.875 per share as compared to an exercises price
of $13.87 per share. Accordingly, the Partnership recorded the warrant at its
intrinsic value of $4,731,078 and recognized unrealized appreciation of
$2,706,078.
At December 31, 1995, the Partnership recorded its warrant to
purchase 23,839 shares of Alkermes, Inc. ("Alkermes") at its intrinsic value
of $70,038. In June 1996, the Partnership exercised this warrant at an
aggregate price of $119,195 ($5.00 per share) and sold the shares for
proceeds, net of commissions of $312,080. The Partnership recognized a gain
upon the sale of $122,847 for the nine months ended September 30, 1996.
4. Related Party Transactions
The General Partner receives an annual management fee for management and
administrative services provided to the Partnership. The management fee is
payable quarterly in advance and is adjusted annually on the first day of
each fiscal year in an amount proportionate to the increase for the prior
year in the Consumer Price Index published by the United States Department of
Labor. In addition, the General Partner received a project fee for formulating
and implementing the business strategy of the Partnership, paid at each closing
in an amount equal to 2% of the aggregate gross proceeds received by the
Partnership at such closing. The Partnership paid the General Partner
$1,000,000 at closings in 1991. In connection with the Partnership offering,
PaineWebber Incorporated ("PWI"), the sales agent, an affiliate of the General
Partner, received selling commissions of $3,966,210. The management fees paid
by the Partnership to the General Partner were $107,028 and $209,406 for the
three months ended September 30, 1996 and 1995, respectively, and $462,306 and
$648,252 for the nine months ended September 30, 1996 and 1995, respectively.
Management fees paid to the General Partner since January 1, 1995, were
$1,319,964.
The Partnership's portfolio of a money market fund is managed by Mitchell
Hutchins Institutional Investors ("MHII"), an affiliate of PWDC. The
Partnership pays MHII a fee with respect to such money management services
which has been included in general and administrative expenses in the
accompanying Statements of Operations. The fees for the quarters ended
September 30, 1996 and 1995 were $585 and $1,833, respectively, and for the
nine months ended September 30, 1996 and 1995 were $3,078 and $9,750,
respectively. Fees paid to MHII since January 1, 1995, aggregated $13,223.
PWDC and PWI, and its affiliates, have acted in an investment banking
capacity for several of the Sponsor Companies. In addition, PWDC and its
affiliates have direct limited partnership interests in the same product
development limited partnerships as the Partnership.
<PAGE>
Page 13
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
5. Product Development Projects
The Partnership entered into three product development contracts and four
product development limited partnerships which have been fully funded as of
September 30, 1996. These seven Projects consist of the following: The
Partnership funded $6.0 million to Alkermes Clinical Partners, L.P., a $46.0
million limited partnership formed to fund the development, clinical testing,
manufacturing and marketing of Receptor-Mediated Permeabilizers for use in the
treatment of diseases of the brain and central nervous system by enabling the
delivery of drugs across the blood brain barrier. The Partnership funded
$4.0 million to Athena for a Project to fund the further development of
Diastat which is a gel-like solution of diazepam indicated for the treatment
of acute repetitive seizures associated with epilepsy. The Partnership funded
$1.5 million to Cadre Technologies, Inc. ("Cadre") for a Project which funded
the development of software development tools for database applications. The
Partnership funded $6.0 million to Cephalon Clinical Partners, L.P., a $45.0
million limited partnership formed to fund the development, clinical testing,
manufacturing and marketing of Myotrophin<TM> for use in the treatment of
amyotrophic lateral sclerosis and certain peripheral neuropathies. The
Partnership funded $4.0 million to Gensia Clinical Partners, L.P., a $26.2
million limited partnership formed to fund the development, clinical testing,
manufacturing and marketing of the GenESA<TM> System, a product designed to
enhance the diagnosis of heart disease. The Partnership funded $5.0 million
to PharmaGenics for a Project using PharmaGenics' screening technology to
discover novel oligonucleotide therapeutics. The Partnership funded $6.0
million to Repligen Clinical Partners, L.P. ("RCP"), a $45.0 million limited
partnership formed to fund the development, clinical testing, manufacturing
and marketing of recombinant platelet factor-4 for use in certain cancer
applications and to reverse the effects of the anticoagulant heparin.
On April 18, 1996, Repligen Corporation ("Repligen") terminated its
arrangements with RCP regarding the development and marketing of RCP's
recombinant platelet factor-4 ("rPF4") program. Repligen and RCP have
agreed that the rights of the rPF4 technologies will remain with RCP. The
general partner of RCP is seeking third parties who will purchase or license
the rPF4 technologies so that any residual proceeds or royalties may be
distributed to the partners of RCP (including the Partnership). However,
there can be no assurance that anyone will purchase or license the rPF4
technologies or that there will be any residual proceeds or royalties available
for distribution.
On May 31, 1996, the Partnership sold, transferred and assigned its rights,
title and interest in the callable warrant to purchase 500,000 shares of Athena
as well as its various program agreements with Athena for the development of
Diastat for a purchase price of $6,000,000 and recognized a gain of this
amount from the sale of this product development project for the periods ended
September 30, 1996.
If the Projects produce any product for commercial sale, the Sponsor
Companies have the option to license the Partnership's technology to
manufacture and market the products developed. In addition, the Sponsor
Companies have the option to purchase the Partnership's interest in the
technology. In consideration for granting such purchase options, the
Partnership has received warrants to purchase shares of common stock of certain
of the Sponsor Companies. At September 30, 1996, the Partnership owned the
following warrants:
<PAGE>
Page 14
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
<TABLE>
<CAPTION>
Number of Exercise 9/30/96
Shares that can Price Exercise Market Price
be Purchased per Share Period Per Share*
---------------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
Cayenne Software Inc. (A) 35,512 $25.91 Current to 7/98 $ 4.250
Elan Corporation, plc (B) 295,600 $13.87 Current to 11/99 $ 29.875
Repligen Corporation (C) 133,000 $ 2.50 Current to 3/01 $ 1.250
252,700 $ 3.50 Current to 3/01
PharmaGenics, Inc. 1,000,000 $ 2.15 7/96 to 6/01 (D)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*The share prices of these technology companies are generally highly
volatile and the shares are often thinly traded. The market prices listed
above may have changed significantly subsequent to September 30, 1996,
and/or may change significantly in the future. The market prices above may
not, therefore, be indicative of the ultimate values, if any, that may be
realized by the Partnership.
(A) On July 19, 1996, Cadre merged with Bachman Information Systems to
form Cayenne Software Inc. ("Cayenne"). As a result of the merger, the
Partnership's warrant to purchase 115,000 shares of Cadre at an
exercise price of $8.00 per share converted into a warrant to purchase
Cayenne shares.
(B) Upon the merger of Athena with Elan in July 1996, the Partnership's
core warrant to purchase 500,000 common shares of Athena at an exercise
price of $8.20 per share converted into a warrant to purchase 147,800
American Depository Shares (ADS) of Elan at an exercise price of
$27.74 per share. On August, 23, 1996, Elan announced a 2-for-1 stock
split.
(C) During the first quarter of 1995, the Partnership was notified of a
modification offer (the "Modification") by Repligen Corporation
("Repligen") to modify the Exchange Warrants. The principal terms of
the Modification were (i) the exercise price was reduced from $9.00
per share to $2.50 per share for 133,000 shares and $3.50 per share for
252,700 shares but will increase to $8.00 per share 90 days after the
Company notifies the Warrant holders that the NASDAQ National Market
closing price of Repligen's common stock is equal to or exceeds $12.00
per share for any 20 out of 30 consecutive trading days and (ii) the
exercise period under the Exchange Warrants will terminate on March 31,
2001 instead of March 31, 2000. In connection with the foregoing, the
initial royalty rate on future product revenues due to the Partnership
from Repligen will not change under the Modification and will remain at 9%.
(D) At September 30, 1996, the common shares of PharmaGenics were not
publicly traded.
<PAGE>
Page 15
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 5 Continued)
In addition, the Partnership owns a warrant (with a carrying value of zero)
to purchase 666,667 shares of PharmaGenics. The exercise price of this warrant
will be calculated based on a predetermined formula at a later date. If
PharmaGenics elects to exercise the purchase option agreement, the warrant
will be redeemed at zero value.
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
share of realized income or loss on their individual federal and state
income tax returns.
<PAGE>
Page 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Partners' capital increased from $17.8 million at December 31, 1995, to
$36.6 million at September 30, 1996, resulting from the recognition of net
income of $25.7 million (as discussed in Results of Operations below) offset
by a cash distribution to the Partners of $6.9 million for the nine months
ended September 30, 1996.
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 upon the remittance of cash distributions to the Partners.
Liquid assets increased from $1.5 million at December 31, 1995 to $2.8 million
at September 30, 1996, primarily as a result of the sale by the Partnership of
its interests in Athena for $6.0 million, the partial sale of its investment
in Biocompatibles' stock for $1.5 million and the sale of its entitlement to
Biocompatibles' Rights for $0.9 million (see Results of Operations) offset by
a cash distribution to the Partners of $6.9 million and the payment of
management fees and administrative costs.
Results of Operations
Three months ended September 30, 1996 compared to the three months ended
September 30, 1995:
Net income for the three months ended September 30, 1996, was $2.7 million
compared to net income of $5.3 million for the three months ended September
30, 1995. The unfavorable variance of $2.6 million was due to a decrease in
revenues of $3.2 million offset by a decrease in expenses of $0.6 million.
Revenues for the three months ended September 30, 1996 were $2.9 million
consisting of unrealized appreciation of marketable securities and investments
of $2.7 million and realized gain on sale of investments of $0.2 million.
Revenues for the three months ended September 30, 1995 were $6.1 million
consisting primarily of unrealized appreciation of marketable securities and
investments. During the quarter ended September 30, 1995, the Partnership
recognized unrealized appreciation of $3.3 million on its investment of
1.4 million unrestricted Biocompatibles' shares to reflect an increase in market
value from $2.67 per share at June 30, 1995 to $5.00 per share. In addition,
the Partnership recognized unrealized appreciation of $2.8 million with respect
to its warrants to purchase Athena, Cephalon, Inc. and Alkermes common stock.
At September 30, 1995, the market values of these stocks exceeded the exercise
prices of the warrants and, accordingly, the Partnership recorded its
investments in the warrants at their intrinsic values. For the three months
ended September 30, 1996, the Partnership recognized unrealized appreciation
of $2.0 million on its investment of 2,550,000 unrestricted shares of
Biocompatibles. At September 30, 1996, the market value per share was $7.683
as compared to a market value of $6.915 per share at June 30, 1996. In
addition, the Partnership recorded unrealized appreciation of $0.4 on its
investment of 357,233 unrestricted shares of GelTex reflecting an increase
in market value from $18.75 per share at June 30, 1996 to $20.00 per share
at September 30, 1996. The Partnership also recognized unrealized appreciation
of $0.3 million with respect to its investment in a warrant to purchase Elan
shares. At September 30, 1996, the market value of Elan shares exceeded the
exercise price of the warrant, and therefore, the Partnership recorded the
warrant at its intrinsic value. During the third quarter of 1996, the
Partnership sold 200,000 shares of Biocompatibles and 23,839 shares of
Alkermes and recognized an aggregate gain upon the sales of $0.2 million.
Expenses for the quarter ended September 30, 1996 were $0.2 million, a
decrease of $0.6 million from September 30, 1995, resulting primarily from
a decrease in expenditures under product development projects of $0.5 million
and a decrease in management fees of $0.1 million. During the three months
ended September 30, 1995, the Partnership recognized its allocable share of
the losses generated from its investments in product development limited
partnerships of $0.5 million. Losses generated by these same partnerships
were minimal for the same period in 1996.
<PAGE>
Page 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995:
Net income for the nine months ended September 30, 1996 and 1995 was $25.7
million and $5.7 million, respectively. The favorable variance of $20.0
million resulted from an increase in revenues of $16.9 million and a decrease
in expenses of $3.1 million.
Revenues for the nine months ended September 30, 1996 were $26.8 million
as compared to $9.9 million for the same period in 1995. The increase of
$16.9 million was due primarily to an increase in the gain upon the sale of
a product development project of $6.0 million, an increase in gain on sale of
marketable securities and investments of $1.1 million and an increase in
unrealized appreciation of marketable securities and investments of
$10.1 million. In May 1996 the Partnership sold its interests in the
product development program with Athena for the development of Diastat
for a purchase price of $6.0 million and recognized a gain upon the sale
of this amount. During the nine months ended September 30, 1996, the
Partnership recognized a gain upon the sale of investments and marketable
securities of $1.1 million. The Partnership sold its entitlement to 458,333
Biocompatibles' Rights and recognized a gain from the sale equal to the
proceeds realized on $0.9 million. In addition, the Partnership sold 200,000
shares of Biocompatibles' and 23,839 shares of Alkermes and recognized
an aggregate gain of $0.2 million upon the sales. Unrealized appreciation of
marketable securities and investments was $19.6 million and $9.5 million for
the nine months ended September 30, 1996 and 1995, respectively. During 1996,
in accordance with Statement No. 115, the Partnership recorded its investment
in 2.1 million restricted shares of Biocompatibles at a market value of $16.1
million ($7.683 per share) as compared to its cost basis of $2.1 million.
Accordingly, the Partnership recognized unrealized appreciation of $14.0
million for the nine months ended September 30, 1996. In addition, the
Partnership recognized unrealized appreciation of $2.8 million with respect to
its investment of 357,233 shares of GelTex to reflect an increase in market
value of $12.25 per share at December 31, 1995 to $20 per share at September
30, 1996. At December 31, 1996, the Partnership's warrant to purchase 500,000
Athena shares was recorded at its intrinsic value of $2.0 million. Upon the
merger of Athena with Elan the warrant to purchase Athena shares was converted
into a warrant to purchase Elan shares. At September 30, 1996 the Partnership
recorded the Elan warrant at its intrinsic value of $4.7 million and recognized
unrealized appreciation of $2.7 million. At September 30, 1995, the Partnership
recorded its investment in 1.4 million unrestricted Biocompatibles shares at a
market value of $7.0 million ($5.00 per share) as compared to a cost basis of
$1.4 million and recognized unrealized appreciation of $5.6 million. In
addition, at September 30, 1995, the market values of Athena, Cephalon, Inc.,
and Alkermes exceeded the respective exercise prices of the Partnership's
warrants to purchase these stocks. Accordingly, the Partnership recorded the
warrants at their intrinsic values of $3.8 million and recognized unrealized
appreciation of this amount.
Expenses for the nine months ended September 30, 1996 and 1995 were
$1.1 million and $4.2 million, respectively. The decrease of $3.1 million is
primarily a result of a decrease in expenditures under product development
projects of $2.8 million and a decrease in management fees of $0.2 million.
Expenditures under product development projects for the nine months ended
September 30, 1996 was $0.5 million resulting from the recognition by the
Partnership of its allocable share of the losses generated from its investments
in product development limited partnerships. For the same period in 1995,
expenditures in product development projects were $3.3 million resulting from
the recognition of losses generated by the Partnership's investments in product
development projects of $1.8 million and the remittance of commitments under
its product development contract with PharmaGenics in the amount of $1.5
million. The timing and amounts of commitments under product development
contracts are based on terms of the agreements with the Sponsor Companies.
<PAGE>
Page 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- ------ ------------------
In re: PaineWebber Partnership Litigation
-----------------------------------------
Information regarding this action was disclosed on the Partnership's Form
10-K for the year ended December 31, 1995 and the Form 10-Q for the quarter
ended June 30, 1996. On July 17, 1996, the United States District Court for
the Southern District of New York (the "Court") granted preliminary approval
of the proposed settlement of the class action litigation. As part of the
class action settlement, PWI agreed to pay $125 million and additional
consideration to class members. A final hearing on the proposed settlement
commenced on October 25, 1996, and is scheduled to continue in November 1996.
Action Entitled Abbate vs. PaineWebber Inc.
-------------------------------------------
Information regarding this action filed in Sacramento, California
Superior Court against PWI and various affiliated entities was disclosed on
the Partnership's Form 10-K for the year ended December 31, 1995. In September
1996, the California Superior Court dismissed many of the plaintiffs claims as
barred by the applicable statutes of limitation. In June 1996, additional
complaints, similar to Abbate vs. PaineWebber Inc. but involving fewer
plaintiffs, have been filed in Sacramento, San Diego and Arizona. Certain of
these complaints have been dismissed with prejudice while others remain pending.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
a) Exhibits:
None
b) Reports on Form 8-K:
On October 1, 1996, the Partnership filed a current report on Form
8-K relating to the election of a President of PaineWebber Development
Corporation.
<PAGE>
Page 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 14th day
of November 1996.
PAINEWEBBER R&D PARTNERS III, L.P.
By:
PaineWebber Development Corporation
(General Partner)
By:
- ---------------------------
Dhananjay M. Pai
Executive Vice President
By:
- ---------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
<PAGE>
Page 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 14th day
of November 1996.
PAINEWEBBER R&D PARTNERS III, L.P.
By:
PaineWebber Development Corporation
(General Partner)
By:
Dhananjay M. Pai
- --------------------------
Dhananjay M. Pai
Executive Vice President
By:
Pierce R. Smith/s/
- --------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000865936
<NAME> PaineWebber R&D Partners III, L.P.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,534,605
<SECURITIES> 34,859,341
<RECEIVABLES> 3,988
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,780,793
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,698,531
<CURRENT-LIABILITIES> 73,424
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 36,625,107
<TOTAL-LIABILITY-AND-EQUITY> 36,698,531
<SALES> 0
<TOTAL-REVENUES> 2,874,006
<CGS> 0
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<OTHER-EXPENSES> 171,988
<LOSS-PROVISION> 0
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<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
