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 March 31, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from ______ to ______
Commission File Number 33-35938
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>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Form 10-Q
March 31, 1996
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition
(unaudited) at March 31, 1996 and
December 31, 1995 2
Statements of Operations
(unaudited) for the three months ended
March 31, 1996 and 1995 3
Statement of Changes in Partners' Capital
(unaudited) for the three months ended
March 31, 1996 3
Statements of Cash Flows
(unaudited) for the three months ended
March 31, 1996 and 1995 4
Notes to Financial Statements
(unaudited) 5-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of 14-15
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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)
March 31, December 31,
1996 1995
- -------------------------------------------------------------------------------
Assets:
Cash $ 59,533 $ 56,903
Marketable securities, at market value 1,251,576 1,432,382
Investments, at fair value 21,835,949 15,514,892
Interest receivable 11,969 37,739
Organization costs, net of accumulated
amortization of $121,390 at March 31, 1996
and $115,104 at December 31, 1995 4,334 10,620
Investments in product development projects 524,003 826,167
Other assets 55,223 35,723
------------ -----------
Total assets $ 23,742,587 $17,914,426
============ ===========
Liabilities and partners' capital:
Payable to PaineWebber Development Corp. $ 6,221 $ 5,721
Accrued liabilities 78,601 83,494
------------ -----------
84,822 89,215
Partners' capital 23,657,765 17,825,211
------------ -----------
Total liabilities and partners' capital $ 23,742,587 $ 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 March 31, 1996 1995
- -------------------------------------------------------------------------------
Revenues:
Interest income $ 20,720 $ 97,906
Income from product development project 19,500 16,969
Unrealized appreciation of investments
and marketable securities 6,319,743 81,228
Net realized gain on sale of marketable securities - 31,767
------------ -----------
6,359,963 227,870
------------ -----------
Expenses:
Expenditures under product development projects 302,164 1,478,941
Management fee 177,639 219,423
General and administrative costs 41,320 48,863
Amortization of organization costs 6,286 6,286
------------ -----------
527,409 1,753,513
------------ -----------
Net income (loss) $ 5,832,554 $(1,525,643)
============ ===========
Net income (loss) per partnership unit:
Limited partners (based on 50,000 units) $ 115.48 $ (30.21)
General partner $ 58,325.54 $(15,256.43)
- -------------------------------------------------------------------------------
See notes to financial statements.
Statement of Changes in Partners' Capital
(unaudited)
For the three months Limited General
ended March 31, 1996 Partners Partner Total
- -------------------------------------------------------------------------------
Balance at December 31, 1995 $ 17,648,545 $ 176,666 $ 17,825,211
Net income 5,774,228 58,326 5,832,554
------------ ----------- ------------
Balance at March 31, 1996 $ 23,422,773 $ 234,992 $ 23,657,765
============ =========== ============
- -------------------------------------------------------------------------------
See notes to financial statements.
<PAGE> Page 4
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
(unaudited)
For the three months ended March 31, 1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 5,832,554 $(1,525,643)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Amortization of organization costs 6,286 6,286
Unrealized appreciation of investments and
marketable securities (6,319,743) (81,228)
Equity in earnings of product development projects 302,164 728,941
(Increase) decrease in operating assets:
Marketable securities 179,492 2,886,145
Interest receivable 25,770 27,871
Investments in product development projects - (1,038,425)
Other assets (19,500) 1,781
Increase (decrease) in operating liabilities:
Liabilities under product development projects - (1,002,327)
Payable to PaineWebber Development Corporation 500 500
Accrued liabilities (4,893) (3,894)
------------ -----------
Cash provided by operating activities 2,630 7
------------ -----------
Increase in cash 2,630 7
Cash at beginning of period 56,903 1,044
------------ -----------
Cash at end of period $ 59,533 $ 1,051
============ ===========
- -------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the three months
ended March 31, 1996 and 1995.
- -------------------------------------------------------------------------------
See notes to financial statements.
<PAGE> Page 5
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 March 31, 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 period ended
March 31, 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.
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 will 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 may engage in technology development projects and other
ventures to which the specified product development project criteria and
structure would not be applicable. The commitments to technology development
projects and other ventures do not exceed 20% of the aggregate capital
contributions of the Partnership.
As of March 31, 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 made equity investments in Sponsor Companies at a
total cost of $8,250,000 at March 31, 1996 (see Note 3).
<PAGE> Page 6
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
Payout")................................................. 80% 20%
III. After Final Payout....................................... 75% 25%
</TABLE>
For the quarter ended March 31, 1996, the Partnership made no cash or
security distributions. At March 31, 1996, the Partnership has made cash and
security distributions since inception of $100 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.
The Partnership accounts for investments held as of or acquired after
January 1, 1994, pursuant to the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("Statement No. 115). Prior to January 1, 1994, the
Partnership accounted for its investments in restricted common stock
(regardless of the restriction period) at the lower of cost or fair value.
Marketable securities consist of 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.
<PAGE> Page 7
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 2 CONTINUED)
These evaluations are based on available information and do not necessarily
represent the amount, if any, which might 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
are 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 investment portfolio of U.S. Treasury obligations (with maturities of
two years or less) and a money market fund is subject to fluctuations in value.
The Partnership held the following marketable securities, at market value:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- --------
<S> <C> <C>
U.S. Treasury obligations $ 602,455 $ 603,544
Money market fund 649,121 828,838
---------- ----------
$1,251,576 $1,432,382
========== ==========
</TABLE>
<PAGE> Page 8
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>
March 31, 1996 December 31, 1995
------------------------------- ---------------------------------
Carrying Value Cost Carrying Value Cost
---------------- ----------- ------------------ ------------
<S> <C> <C> <C> <C>
Biocompatibles International plc: $ 2,100,000 $ 2,100,000 $ 2,100,000 $ 2,100,000
2,100,000 Restricted
Common Shares
650,000 Unrestricted 4,594,604 650,000 4,793,750 650,000
Common Shares
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. 7,680,509 1,000,000 4,376,104 1,000,000
357,233 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. 98,336 0 70,038 0
Warrant to purchase
23,839 common shares
(See Note 5)
Athena Neurosciences, Inc. 5,212,500 0 2,025,000 0
Warrant to purchase
500,000 shares (see Note 5) ----------- ----------- ----------- ----------
$21,835,949 $8,250,000 $15,514,892 $8,250,000
----------- ----------- ----------- ----------
</TABLE>
<PAGE> Page 9
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 2,750,000
common shares for a period expiring in April 1997. The Partnership has
recorded these shares at their cost basis of $2,100,000 as of March 31, 1996
and December 31, 1995. The Partnership's investment of 650,000 unrestricted
shares of Biocompatibles had an aggregate market value of $4,594,604 ($7.069
per share) and $4,793,750 ($7.375 per share) as of March 31, 1996 and December
31, 1995, respectively. Accordingly, the Partnership recognized unrealized
depreciation of $199,146 for the quarter ended March 31, 1996, which has been
included in the accompanying Statements of Operations.
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. In addition, 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 with a carrying value of $3,500,000 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 has agreed
not to sell, assign, transfer or otherwise dispose of its investment of 357,233
common shares for a period expiring in August 1996. At March 31, 1996 and
December 31, 1995, the GelTex shares had an aggregate market value of
$7,680,509 ($21.50 per share), and $4,376,104 ($12.25 per share), respectively.
Accordingly, the Partnership recognized unrealized appreciation of $3,304,405
for the quarter ended March 31, 1996, in the accompanying Statements of
Operations.
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 March 31, 1996 and December 31, 1995, the Partnership held currently
exercisable warrants to purchase common shares of Athena Neurosciences, Inc.
("Athena"), and Alkermes, Inc. ("Alkermes") in which the market values of the
common shares as of these dates exceeded the exercise prices of the warrants.
Accordingly, the Partnership has recorded these warrants at their intrinsic
values which approximate fair value. The Partnership recognized unrealized
appreciation on these warrants of $3,215,798 for the quarter ended March 31,
1996, which has been included in the accompanying Statements of Operations.
<PAGE> Page 10
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 $177,639 and $219,423 for the
three months ended March 31, 1996 and 1995, respectively. Management fees paid
to the General Partner since January 1, 1995, were $1,035,297.
The Partnership's portfolio of a money market fund and U.S. Treasury
obligations 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 administration
expenses in the accompanying Statements of Operations. The fees for the
quarters ended March 31, 1996 and 1995 were $782 and $5,055, respectively. Fees
paid to MHII since January 1, 1995, aggregated $10,927.
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.
5. COMMITMENTS UNDER PRODUCT DEVELOPMENT PROJECTS
The Partnership has entered into three product development contracts and four
product development limited partnerships which have been fully funded as of
March 31, 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 to a Project to fund the further development of
Diastat<reg-trade-mark> which is a gel-like solution of diazepam indicated for
the treatment of acute repetitive seizures associated with epilepsy. The
Partnership
<PAGE> Page 11
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 5 continued)
funded $1.5 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<O^> 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<O^> 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., 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 March 18, 1996, Athena entered into a merger agreement with Elan
Corporation, plc ("Elan") whereby Athena will become a wholly-owned subsidiary
of Elan. Based on the closing price of Elan common shares on March 15, 1996 of
$61.75, the agreement values Athena at $18.25 per share. Under the terms of
the agreement, each share of Athena common stock will be exchanged for 0.2956
shares of Elan.
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 March 31, 1996 and December 31, 1995, the market
price per share of Alkermes and Athena exceeded the exercise price per share of
the warrant and, accordingly, the Partnership held these warrants as
investments with a carrying value equal to their intrinsic value which
approximates fair value (see Note 3). At March 31, 1996, the Partnership owned
the following warrants:
<PAGE> Page 12
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
<TABLE>
<CAPTION>
Number of Exercise 3/31/96
Shares that can Price Exercise Market Price
be Purchased per Share Period Per Share*
--------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Alkermes, Inc. (A) 23,839 $5.00 Current to 3/00 $ 9.125
Athena Neurosciences, Inc. (A) 500,000 $8.20 Current to 11/99 $ 18.625
Cadre Technologies Inc. 115,000 $8.00 Current to 7/98 (B)
Repligen Corporation (C) 133,000 $2.50 Current to 3/01 $ 1.063
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 March 31, 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) The intrinsic value of this warrant has been included in
Investments in the accompanying Statements of Financial Condition.
(B) At March 31, 1996, the common shares of Cadre were not publicly
traded. In December 1995, Cadre announced a merger agreement with
Bachman Information Systems, Inc. ("Bachman"). At that time of the
closing of the merger, Cadre warrants will convert into Bachman
warrants at a conversion ratio of 0.31496 Bachman warrants per Cadre
warrant.
(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 are (i) the exercise price will be 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 March 31, 1996, the common shares of PharmaGenics were not
publicly traded.
<PAGE> Page 13
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
In addition, the Partnership owns warrants (with a carrying value of zero)
to purchase 500,000 shares of Athena and 666,667 shares of PharmaGenics. The
exercise prices of these warrants will be calculated based on a predetermined
formula at a later date. If Athena and PharmaGenics elect to exercise the
purchase option agreement the warrants to purchase 500,000 and 666,667 shares
of Athena and PharmaGenics, respectively, 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.
7. SUBSEQUENT EVENT
On April 18, 1996, Repligen terminated its arrangements with Repligen
Clinical Partners, L.P. ("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 to sell 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 the
rPF4 technologies will be sold or that there will be any residual proceeds or
royalties available for distribution.
In April 1996, the Partnership received 458,333 rights (the "Rights") to
purchase additional common shares of Biocompatibles and warrants to subscribe
to additional shares. On May 8, 1996, the Partnership sold the Rights, net of
commissions, for 571,484<pound-sterling> (1.25<pound-sterling> per Right). The
Partnership expects to receive proceeds of approximately $864,000 from the
sale.
<PAGE> Page 14
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
$23.6 million at March 31, 1996, resulting from the recognition of net income
of $5.8 million (as discussed in Results of Operations below) for the quarter
ended March 31, 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. Liquid assets decreased from $1.5 million at December 31, 1995 to
$1.3 million at March 31, 1996, as a result of the payment of management fees
and administrative costs of $0.2 million by the Partnership during the three
months ended March 31, 1996.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 compared to the three months ended March 31,
1995:
Net income for the three months ended March 31, 1996, was $5.8 million
compared to a net loss of $1.5 million for the three months ended March 31,
1995. The favorable variance of $7.3 million was due to an increase in
revenues of $6.1 million and a decrease in expenses of $1.2 million.
Revenues for the three months ended March 31, 1996, were $6.3 million
compared to $0.2 million for the three months ended March 31, 1995. The
favorable variance of $6.1 million was attributable to an increase in
unrealized appreciation of marketable securities and investments of $6.2
million for the quarter ended March 31, 1996 offset by a decline in interest
income of $0.1 million. At March 31, 1996, the Partnership recorded its
investment in 357,233 common shares of GelTex at its market value of $7.7
million ($21.50 per share) as compared to its carrying value at December 31,
1995, of $4.4 million ($12.25 per share). The Partnership recognized
unrealized appreciation of $3.3 million for the quarter ended March 31, 1996.
Also, as of this date, the Partnership wrote-down its investment in 650,000
common shares of Biocompatibles by $0.2 million from a carrying value of $4.8
million ($7.375 per share) at December 31, 1995 to $4.6 million ($7.069 per
share) at March 31, 1996. In addition, at March 31, 1996, the Partnership held
warrants to purchase common shares of Athena and Alkermes in which the market
value of the common shares as of that date exceeded the exercise price. The
Partnership recorded these warrants at their intrinsic values aggregating $5.3
million at March 31, 1996, compared to their carrying values of $2.1 million at
December 31, 1995. Accordingly, the Partnership recognized unrealized
appreciation in the amount of $3.2 million for the three months ended March 31,
1996. Interest income decreased in 1996 as compared to 1995 as a result of
decreased liquid asset balances maintained by the Partnership.
<PAGE> Page 15
(ITEM 2 CONTINUED)
Expenses for the quarter ended March 31, 1996, were $0.5 million compared to
$1.7 million for the quarter ended March 31, 1995, a decrease of $1.2 million
attributable primarily to the decrease in expenditures under Projects.
Expenditures under Projects for the three months ended March 31, 1995, of $1.5
million were attributable primarily to the recognition of its share of losses
generated from its investments in product development limited partnerships of
$0.7 million and the recognition of a commitment payment to PharmaGenics in the
amount of $0.8 million. Expenditures under Projects for the three months ended
March 31, 1996, of $0.3 million were attributable solely to the recognition of
its share of losses generated from its investments in product development
limited partnerships of this amount.
<PAGE> Page 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
None
b) REPORTS ON FORM 8-K:
None
<PAGE> Page 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 15th day
of May 1996.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By:
---------------------------------------
Eugene M. Matalene, Jr.
President and Principal Executive Officer
By:
--------------------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
<PAGE> Page 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 15th day
of May 1996.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By: Eugene M. Matalene, Jr. /s/
-----------------------------------------
Eugene M. Matalene, Jr.
President and Principal Executive Officer
By: Pierce R. Smith/s/
-----------------------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
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<NAME> PaineWebber R&D Partners III, L.P.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 59,533
<SECURITIES> 23,087,525
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