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, 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
June 30, 1996
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition 2
(unaudited) at June 30, 1996 and
December 31, 1995
Statements of Operations
(unaudited) for the three months ended
June 30, 1996 and 1995 3
Statements of Operations
(unaudited) for the six months ended
June 30, 1996 and 1995 4
Statement of Changes in Partners' Capital
(unaudited) for the six months ended
June 30, 1996 5
Statements of Cash Flows
(unaudited) for the six months ended
June 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 16-17
Operations
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>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Financial Condition
(unaudited)
June 30, December 31,
1996 1995
- -------------------------------------------------------------------------------
Assets:
Cash $ - $ 56,903
Marketable securities, at market value 8,175,390 1,432,382
Investments, at fair value 32,326,622 15,514,892
Interest receivable 23,581 37,739
Organization costs, net of accumulated
amortization of $125,724 at June 30, 1996
and $115,104 at December 31, 1995 - 10,620
Investments in product development projects 311,280 826,167
Other assets 17,723 35,723
------------ -----------
Total assets $ 40,854,596 $17,914,426
============ ===========
Liabilities and partners' capital:
Payable to PaineWebber Development Corporation $ 1,000 $ 5,721
Accrued liabilities 61,820 83,494
------------ -----------
62,820 89,215
------------ -----------
Partners' capital 40,791,776 17,825,211
------------ -----------
Total liabilities and partners' capital $ 40,854,596 $ 17,914,426
============ ===========
- -------------------------------------------------------------------------------
See notes to financial statements.
2
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Operations
(unaudited)
For the three months ended June 30, 1996 1995
- -------------------------------------------------------------------------------
Revenues:
Interest income $ 35,754 $ 35,429
Income from product development project - 111,239
Unrealized appreciation of marketable
securities and investments 10,660,836 3,395,014
Realized gain on sale of product development
project 6,000,000 -
Realized gain on sale of investments and
marketable securities 865,798 52,488
------------ -----------
17,562,388 3,594,170
------------ -----------
Expenses:
Expenditures under product development projects 212,723 1,347,832
Management fee 177,639 219,423
General and administrative costs 33,680 87,349
Amortization of organization costs 4,334 6,286
------------ -----------
428,376 1,660,890
------------ -----------
Net income $ 17,134,012 $ 1,933,280
============ ===========
Net income per partnership unit:
Limited partners (based on 50,000 units) $ 339.25 $ 38.28
General partner $ 171,340.12 $ 19,332.80
- -------------------------------------------------------------------------------
See notes to financial statements.
3
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Operations
(unaudited)
For the six months ended June 30, 1996 1995
_______________________________________________________________________________
Revenues:
Interest income $ 56,474 $ 133,336
Income from product development project 19,500 128,208
Unrealized appreciation of marketable
securities and investments 16,980,578 3,476,242
Realized gain on sale of product development
project 6,000,000 -
Realized gain on sale of investments and
marketable securities 865,798 84,255
---------- ---------
23,922,350 3,822,041
---------- ---------
Expenses:
Expenditures under product development projects 514,887 2,826,773
Management fee 355,278 438,846
General and administrative costs 75,000 136,213
Amortization of organization costs 10,620 12,572
---------- ---------
955,785 3,414,404
---------- ---------
Net income $ 22,966,565 $ 407,637
============ ==========
Net income per partnership unit:
Limited partners (based on 50,000 units) $ 454.74 $ 8.07
General partner $ 229,665.65 $ 4,076.37
- -----------------------------------------------------------------------------
See notes to financial statements
4
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statement of Changes in Partners' Capital
(unaudited)
For the six months Limited General
ended June 30, 1996 Partners Partner Total
- -------------------------------------------------------------------------------
Balance at January 1, 1996 $ 17,648,545 $ 176,666 $ 17,825,211
Net income 22,736,899 229,666 22,966,565
------------ ----------- ------------
Balance at June 30, 1996 $ 40,385,444 $ 406,332 $ 40,791,776
============ =========== ============
- -------------------------------------------------------------------------------
See notes to financial statements.
5
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
(unaudited)
For the six months ended June 30, 1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 22,966,565 $ 407,637
Adjustments to reconcile net income to
cash (used for) provided by operating activities:
Amortization of organization costs 10,620 12,572
Unrealized appreciation of marketable
securities and investments (16,980,578) (3,476,242)
Expenditures under product development projects 514,887 1,326,773
(Increase) decrease in operating assets:
Marketable securities (6,644,198) 6,428,955
Note receivable - (1,000,000)
Interest receivable 14,158 64,040
Investments 70,038 -
Investments in product development projects - (2,567,127)
Other assets 18,000 (92,489)
(Decrease) increase in operating liabilities:
Liabilities under product development projects - (1,002,327)
Payable to PaineWebber Development Corporation (4,721) 1,000
Accrued liabilities (21,674) (102,498)
------------ -----------
Cash (used for) provided by operating activities (56,903) 294
------------ -----------
(Decrease) increase in cash (56,903) 294
Cash at beginning of period 56,903 1,044
------------ -----------
Cash at end of period $ - $ 1,338
============ ===========
- -------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the six months
ended June 30, 1996 and 1995.
- -------------------------------------------------------------------------------
See notes to financial statements.
6
<PAGE>
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 June 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 June 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 report on Form 10-Q for the quarter ended 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 commitments to technology
development projects and other ventures do not exceed 20% of the aggregate
capital contributions of the Partnership.
As of June 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 made equity investments in Sponsor Companies at
a total cost of $8.25 million at June 30, 1996 (see Note 3).
7
<PAGE>
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:
LIMITED GENERAL
PARTNERS PARTNER
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%
For the six months ended June 30, 1996, the Partnership made no cash or
security distributions. At June 30, 1996, the Partnership had 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").
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.
8
<PAGE>
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:
JUNE 30, 1996 DECEMBER 31, 1995
-------------------- -------------------
MARKET COST MARKET COST
----------- -------- ---------- -------
Alkermes, Inc. common stock
(23,839 shares) $ 292,028 $ 119,195 $ -- $ --
U.S. Treasury obligations 600,000 600,000 603,544 599,560
Money market fund 7,283,362 7,283,362 828,838 828,838
---------- ---------- -------- ---------
$8,175,390 $8,002,557 $1,432,382 $1,428,398
---------- ---------- ---------- ----------
9
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 3 CONTINUED)
In June 1996, the Partnership exercised its warrants to purchase 23,839
common shares of Alkermes, Inc. ("Alkermes") at an aggregate exercise price
of $119,195 ($5.00 per share). The market value of the Alkermes stock at June
30, 1996, was $292,028 ($12.25 per share).
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:
JUNE 30, 1996 DECEMBER 31, 1995
------------------------ --------------------------
CARRYING VALUE COST CARRYING VALUE COST
-------------- -------- ------------------ ------
Biocompatibles International plc:
2,100,000 Restricted $ 14,521,254 $ 2,100,000 $ 2,100,000 $ 2,100,000
Common Shares
650,000 Unrestricted 4,494,750 650,000 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. 6,698,118 1,000,000 4,376,104 1,000,000
357,233 Restricted 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. -- 0 70,038 0
Warrant to purchase
23,839 common shares
Athena Neurosciences, Inc. 4,462,500 0 2,025,000 0
Warrant to purchase
500,000 shares (see Note 5)
---------- --------- ---------- ---------
$32,326,622 $8,250,000 $15,514,892 $8,250,000
10
<PAGE>
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. Prior to June
30, 1996, the Partnership recorded these restricted shares at their cost basis
of $2,100,000. As of June 30, 1996, in accordance with Statement No. 115, the
Partnership recorded its investment in these shares at a market value of
$14,521,254 ($6.915 per share) and recognized unrealized appreciation of
$12,421,254 for the three months ended June 30, 1996. The Partnership's
investment of 650,000 unrestricted shares of Biocompatibles had an aggregate
market value of $4,494,750 ($6.915 per share) as compared to carrying values
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 $99,854 and $299,000 for the three
months and six months ended June 30, 1996, respectively, which have been
included in the accompanying Statements of Operations. 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 3.60 GBP 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 1.25 GBP per Right. The Partnership
received aggregate proceeds, net of commissions, of $865,798 (571,484 GBP) and
recognized a gain of this amount from the sale for the periods ended June 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. As of December 31, 1995,
based on a review of the current and future financial prospects of GenPharm,
the General Partner 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 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 June 30, 1996,
the GelTex shares had an aggregate market value of $6,698,118 ($18.75 per
share). The carrying value of the shares at March 31, 1996 was $7,680,509
($21.50 per share) and accordingly, the Partnership recognized unrealized
depreciation of $982,391 for the three months ended June 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 $2,322,014
for the six months ended June 30, 1996.
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.
11
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 3 CONTINUED)
At June 30, 1996 and December 31, 1995, the Partnership held a
currently exercisable warrant to purchase common shares of Athena
Neurosciences, Inc. ("Athena") in which the market value of the common shares
as of these dates exceeded the exercise price of the warrant. Accordingly,
the Partnership has recorded this warrant at its intrinsic value which
approximates fair value. The Partnership recognized unrealized (depreciation)
appreciation of $(750,000) and $2,437,500 for the three months and six months
ended June 30, 1996, respectively, which has been included in the accompanying
Statements of Operations.
At December 31, 1995, the Partnership recorded its warrant to purchase
23,839 shares of Alkermes at its intrinsic value of $70,038. In June 1996, the
Partnership exercised this warrant (see Marketable Securities).
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 June 30, 1996 and 1995, respectively, and $355,278 and
$438,846 for the six months ended June 30, 1996 and 1995, respectively.
Management fees paid to the General Partner since January 1, 1995, were
$1,212,936.
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
administrative expenses in the accompanying Statements of Operations. The
fees for the quarters ended June 30, 1996 and 1995 were $1,182 and $2,750,
respectively, and for the six months ended June 30, 1996 and 1995 were $2,493
and $7,805, respectively. Fees paid to MHII since January 1, 1995, aggregated
$12,109.
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. 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 June 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 to a Project to fund the further development of Diastat
which is a gel-like solution of diazepam indicated
12
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
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'
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'
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 March 18, 1996, Athena entered into a merger agreement with Elan
Corporation, plc ("Elan") whereby Athena will become a wholly-owned subsidiary
of Elan (see Note 7 - Subsequent Events). 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 June 30, 1996.
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 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.
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 June 30, 1996 and December 31, 1995, the
market price per share of Athena exceeded the exercise price per share of the
warrant and, accordingly, the Partnership held this warrant as an investment
with a carrying value equal to its intrinsic value which approximates fair
value (see Note 3). At June 30, 1996, the Partnership owned the following
warrants:
13
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
NUMBER OF EXERCISE 6/30/96
SHARES THAT CAN PRICE EXERCISE MARKET PRICE
BE PURCHASED PER SHARE PERIOD PER SHARE*
Athena Neurosciences, Inc. (A) 500,000 $8.20 Current to 11/99 $ 17.125
(Note 7)
Cadre Technologies Inc. 115,000 $8.00 Current to 7/98 (B)
(Note 7)
Repligen Corporation (C) 133,000 $2.50 Current to 3/01 $ 1.031
252,700 $3.50 Current to 3/01
PharmaGenics, Inc. 1,000,000 $2.15 7/96 to 6/01 (D)
- -------------------------------------------------------------------------------
* 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 June 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) The intrinsic value of this warrant has been included in Investments
in the accompanying Statements of Financial Condition.
(B) At June 30, 1996, the common shares of Cadre were not publicly traded
(see Note 7 - Subsequent Events).
(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 June 30, 1996, the common shares of PharmaGenics were not publicly
traded.
14
<PAGE>
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. The Partnership's callable warrant to
purchase 500,000 shares of Athena at an undetermined exercise price was
assigned to Elan in connection with the Partnership's sale of its interests in
the product development contract with Athena.
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 July 1, 1996, the merger between Athena and Elan was completed. As a
result of the merger, the Partnership's core warrant to purchase 500,000
common shares of Athena was converted to a warrant to purchase 147,800 Elan
American Depository Shares ("ADS") at an exercise price of $27.74 per ADS. At
July 1, 1996 the market price of ADS was $56.875.
On July 19, 1996, Bachman Information Systems completed its merger with
Cadre to form Cayenne Software Inc. ("Cayenne"). As a result of the merger,
the Partnership's warrant to purchase 115,000 common shares of Cadre will
convert into a warrant to purchase 35,512 common shares of Cayenne at an
exercise price of $25.91 per share. At July 19, 1996, the market price of
Cayenne stock was $6.00 per share.
15
<PAGE>
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
$40.8 million at June 30, 1996, resulting from the recognition of net income
of $23.0 million (as discussed in Results of Operations below) for the six
months ended June 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 $8.2 million
at June 30, 1996, primarily as a result of the sale by the Partnership of its
interests in Athena for $6.0 million and the sale by the Partnership of its
entitlement to Biocompatibles' Rights for $0.9 million (see Results of
Operations) offset by the payment of management fees and administrative costs.
RESULTS OF OPERATIONS
Three months ended June 30, 1996 compared to the three months ended June 30,
1995:
Net income for the three months ended June 30, 1996, was $17.1 million
compared to net income of $1.9 million for the three months ended June 30,
1995. The favorable variance of $15.2 million was due to an increase in
revenues of $14.0 million and a decrease in expenses of $1.2 million.
Revenues for the three months ended June 30, 1996, were $17.6 million
compared to $3.6 million for the three months ended June 30, 1995. The
favorable variance of $14.0 million was primarily attributable to increases in
unrealized appreciation of marketable securities and investments of $7.3
million, gain on sale of product development project of $6.0 million and gain
on sale of investments and marketable securities of $0.8 million. During the
quarter ended June 30, 1996, the Partnership recognized unrealized
appreciation of marketable securities and investments of $10.7 million. At
June 30, 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 $14.5 million ($6.915 per share) as compared to a carrying value of
$2.1 million at December 31, 1995, and, accordingly, the Partnership
recognized unrealized appreciation of $12.4 million. The Partnership also
recognized unrealized depreciation aggregating $1.7 million on its investments
of unrestricted common shares of Biocompatibles, restricted common shares of
GelTex and a warrant to purchase 500,000 shares of Athena which reflects a
decline in the market values of these securities from March 31, 1996 to June
30, 1996. In the quarter ended June 30, 1995, the Partnership recognized
unrealized appreciation of investments and marketable securities of $3.4
million. At June 30, 1995, the Partnership recorded its investment of 1.4
million unrestricted common shares of Biocompatibles at a market value of
$2.67 per share resulting in an aggregate market value of $3.8 million as
compared to an aggregate carrying cost of $1.4 million. Accordingly, the
Partnership recognized unrealized appreciation of $2.4 million for the three
months ended June 30, 1995. In addition, at June 30, 1995, the Partnership
held warrants to purchase commons shares of Athena and Cephalon, Inc. 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 value
resulting in the recognition of unrealized appreciation in the amount of $1.0
million for the three months ended June 30, 1995. On May 31, 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 of this amount upon the sale of the product development
project. Also, in May 1996, the Partnership sold its entitlement to 458,333
Biocompatibles' Rights for an aggregate price of $0.9 million and recognized a
gain of this amount upon the sale of investments and marketable securities.
During the three months ended June 30, 1995, the Partnership recognized income
of $0.1 million from the sale of marketable securities.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Expenses for the quarter ended June 30, 1996 were $0.4 million, a decrease
of $1.2 million from June 30, 1995, resulting primarily from a decrease in
expenditures under product development projects of $1.1 million. During the
three months ended June 30, 1996 and 1995, the Partnership recognized its
allocable share of the losses generated from its investments in product
development limited partnerships of $0.2 million and $0.6 million,
respectively. In addition, in 1995, the Partnership funded a commitment under
its product development contract with PharmaGenics in the amount of $0.7
million. The timing and amounts of commitments under product development
contracts are based on terms of the agreements with the Sponsor Companies.
Six months ended June 30, 1996 compared to the six months ended June 30,
1995:
Net income for the six months ended June 30, 1996 and 1995 was $23.0 million
and $0.4 million, respectively. The favorable variance of $22.6 million
resulted from an increase in revenues of $20.1 million and a decrease in
expenses of $2.5 million.
Revenues for the six months ended June 30, 1996 were $23.9 million as
compared to $3.8 million for the same period in 1995. The increase of $20.1
million was due primarily to an increase in the gain upon the sale of product
development project of $6.0 million, an increase in gain on sale of marketable
securities and investments of $0.8 million (See Results of Operations - three
months ended June 30, 1996 compared to the three months ended June 30, 1995)
and an increase in unrealized appreciation of marketable securities and
investments of $13.5 million. Unrealized appreciation of marketable
securities and investments was $17.0 million as of June 30, 1996, resulting
from the recognition of unrealized appreciation of $12.4 million upon the
recording of its investment in 2.1 million restricted shares of Biocompatibles
in accordance with Statement No. 115 (see Results of Operations - three months
ended June 30, 1996 compared to the three months ended June 30, 1995). In
addition, the Partnership recognized unrealized appreciation aggregating $4.6
million on its investments of GelTex and Alkermes common stock and its warrant
to purchase shares of Athena resulting from the increase in the market value
of these investments from December 31, 1995 to June 30, 1996. Unrealized
appreciation recognized for the six months ended June 30, 1995 was $3.5
million (see Results of Operations - three months ended June 30, 1996 compared
to the three months ended June 30, 1995).
Expenses for the six months ended June 30, 1996 and 1995 were $1.0
million and $3.4 million, respectively. The decrease of $2.4 million is
primarily a result of a decrease in expenditures under product development
projects of $2.3 million. Expenditures under product development projects for
the six months ended June 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 was $2.8
million resulting from the recognition of losses generated by the
Partnership's investments in product development projects of $1.3 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.
17
<PAGE>
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. 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. The order entered by
the court provides for notice to be mailed to class members and schedules a
final hearing on the proposed Settlement for October 25, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS:
None
b) REPORTS ON FORM 8-K:
On June 7, 1996, the Partnership filed a current report
on Form 8-K relating to the resignation of the President of
PaineWebber Development Corporation.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 14th day of
August 1996.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By:
-----------------------
James M. Voytko
Executive Vice President
By:
------------------------
Pierce R. Smith
Principal Financial and Accounting Officer
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 14th day of
August 1996.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By: James M. Voytko/s/
-----------------------
James M. Voytko
Executive Vice President
By: Pierce R. Smith/s/
-----------------------
Pierce R. Smith
Principal Financial and Accounting Officer
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