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, 1997
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
--- ---
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<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
FORM 10-Q
MARCH 31, 1997
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition (unaudited) at
March 31, 1997 and December 31, 1996 2
Statements of Operations
(unaudited) for the three months ended
March 31, 1997 and 1996 3
Statement of Changes in Partners' Capital
(unaudited) for the three months ended
March 31, 1997 3
Statements of Cash Flows
(unaudited) for the three months
ended March 31, 1997 and 1996 4
Notes to Financial Statements
(unaudited) 5-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
All schedules are omitted either because they are not applicable or the
information required to be submitted has been included in the financial
statements or notes thereto.
<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)
March 31, December 31,
1997 1996
----------- ------------
Assets:
Marketable securities, at market value $ 757,950 $ 911,375
Investments, at fair value 42,100,154 31,423,754
Advances to product development projects 297,974 297,974
---------- ----------
Total assets $43,156,078 $32,633,103
========== ==========
Liabilities and partners' capital:
Other liability $ -- $ 87,267
Payable to PaineWebber Development Corp. 3,613 3,613
Accrued liabilities 63,588 99,420
---------- ----------
67,201 190,300
Partners' capital 43,088,877 32,442,803
---------- ----------
Total liabilities and partners' capital $43,156,078 $32,633,103
========== ==========
- --------------------------------------------------------------------------------
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 March 31, 1997 1996
- ------------------------------------ ----------- -----------
Revenues:
Interest income $ 11,651 $ 20,720
Income from product development project -- 19,500
Unrealized appreciation of investments
and marketable securities 10,676,400 6,319,743
----------- -----------
10,688,051 6,359,963
----------- -----------
Expenses:
Expenditures under product development projects -- 302,164
Management fee -- 177,639
General and administrative costs 41,977 41,320
Amortization of organization costs -- 6,286
----------- -----------
41,977 527,409
----------- -----------
Net income $10,646,074 $ 5,832,554
=========== ===========
Net income per partnership unit:
Limited partners (based on 50,000 units) $ 210.79 $ 115.48
General partner $106,460.74 $ 58,325.54
- --------------------------------------------------------------------------------
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Changes in Partners' Capital
(unaudited)
Limited General
For the three months ended March 31, 1997 Partners Partner Total
- ----------------------------------------- ------------ --------- ------------
<S> <C> <C> <C>
Balance at January 1, 1997 $ 32,116,840 $ 325,963 $ 32,442,803
Net income 10,539,613 106,461 10,646,074
=========== ========= ===========
Balance at March 31, 1997 $ 42,656,453 $ 432,424 $ 43,088,877
=========== ========= ===========
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
3
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
(unaudited)
For the three months ended March 31, 1997 1996
- ------------------------------------ ------------ ------------
Cash flows from operating activities:
Net income $ 10,646,074 $ 5,832,554
Adjustments to reconcile net income to
cash provided by operating activities:
Unrealized appreciation of investments and
marketable securities (10,676,400) (6,319,743)
Amortization of organization costs -- 6,286
Decrease (increase) in operating assets:
Marketable securities 153,425 179,492
Interest receivable -- 25,770
Advances to product development projects -- 302,164
Other assets -- (19,500)
(Decrease) increase in operating liabilities:
Other liability (87,267) --
Payable to PaineWebber Development Corporation -- 500
Accrued liabilities (35,832) (4,893)
------------ ------------
Cash provided by operating activities -- 2,630
------------ ------------
Increase in cash -- 2,630
Cash at beginning of period -- 56,903
------------ ------------
Cash at end of period $ -- $ 59,533
============ ============
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the three months
ended March 31, 1997 and 1996.
- --------------------------------------------------------------------------------
See notes to financial statements.
4
<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 March 31, 1997
and 1996 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, 1997, are not necessarily indicative of results to be expected for the
year ended December 31, 1997. 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, 1996.
The Partnership is a Delaware limited partnership that commenced
operations on June 3, 1991. Paine Webber 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 including product development contracts,
participation in other partnerships and investments in securities of Sponsor
Companies.
5
<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") have been 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 General
Partners Partner
-------- -------
<S> <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 three months ended March 31, 1997, the Partnership made no cash or
security distributions. At March 31, 1997, the Partnership has made cash and
security distributions, as valued on the date of distribution, since inception
of $593 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 certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions include the
carrying value of non-marketable securities. Actual results could differ from
those estimates.
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, are accounted for at the lower of cost or fair value.
Marketable securities consist of a money market fund that is 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, therefore, 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 of the project technology or Sponsor Company. These
evaluations are made based on currently available information and may not
necessarily represent the amount, if any, which may ultimately be realized. The
future value of these securities, if any, is dependent upon circumstances which
cannot reasonably be determined until the position is actually liquidated.
6
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 2 CONTINUED)
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:
o 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.
o PRODUCT DEVELOPMENT LIMITED PARTNERSHIPS
The Partnership participates as a limited partner in product
development limited partnerships formed to develop specific products.
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.
7
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
3. 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. The Partnership held the following investments at:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
------------------------- --------------------------
Carrying Value Cost Carrying Value Cost
-------------- ----------- -------------- ----------
Biocompatibles International plc:
<S> <C> <C> <C> <C>
2,100,000 Restricted $39,950,154 $ 2,100,000 $29,273,754 $ 2,100,000
Common Shares - (See Note 7)
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
PharmaGenics, Inc. 1,000,000 1,000,000 1,000,000 1,000,000
480,242 Shares of Series C
Convertible Preferred Stock
----------- ----------- ----------- -----------
$42,100,154 $ 6,600,000 $31,423,754 $ 6,600,000
=========== =========== =========== ===========
</TABLE>
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 its investment of 2,100,000 common shares for a period
expiring in April 1997. In accordance with Statement No. 115, the Partnership
records its investment in these shares at their market value. At March 31, 1997,
the market value of the shares was $39,950,154 ($19.02 per share) as compared to
$29,273,754 ($13.94 per share) as of December 31, 1996. Accordingly, the
Partnership recognized unrealized appreciation of $10,676,400 for the three
months ended March 31, 1997.
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 the spin-off
of its European subsidiary, Pharming BV. In connection with this 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 determined that the
Partnership's investment in GenPharm's convertible preferred stock should be
valued at zero.
8
<PAGE>
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 to PharmaGenics in the amount of $1,000,000 which was subsequently
converted into 480,242 shares of Series C Convertible Preferred Stock. In
February 1997, Genzyme Corp. ("Genzyme") signed a definitive agreement to
acquire PharmaGenics to form Genzyme Molecular Oncology ("GMO") in exchange for
a new series of Genzyme common stock. GMO stock will be distributed to
PharmaGenics' shareholders (including the Partnership) after the completion of
an initial public offering expected to occur during 1997.
As of March 31, 1996, the Partnership owned 357,233 common shares of
GelTex Pharmaceuticals, Inc. ("GelTex") with a market value of $7,680,509,
including unrealized appreciation of $3,304,405, for the quarter ended March 31,
1996. In addition, as of that date, 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 shares exceeded
the exercise prices of the warrants. The Partnership recorded these warrants at
their intrinsic value and, accordingly, recognized unrealized appreciation of
$3,215,798 for the three months ended March 31, 1996.
4. RELATED PARTY TRANSACTIONS
The General Partner received an annual management fee for management and
administrative services provided to the Partnership. The management fee was
payable quarterly in advance and was 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.
Commencing in July 1995 the General Partner eliminated the management fee
charged with respect to certain Projects. As of January 1, 1997, the General
Partner has elected to discontinue the management fee charged to the
Partnership. The management fees paid by the Partnership to the General Partner
were $0 and $177,639 for the three months ended March 31, 1997 and 1996,
respectively. Management fees paid to the General Partner since January 1, 1996,
were $569,334.
The Partnership's portfolio of marketable securities was managed by
Mitchell Hutchins Institutional Investors ("MHII"), an affiliate of PWDC. The
Partnership paid 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 three months ended March 31, 1997 and
1996 were $150 and $782, respectively. Management fees paid to MHII since
January 1, 1996 were $3,238.
PWDC and PaineWebber Incorporated, and its affiliates, have acted in an
investment banking capacity for several of the Sponsor Companies. In addition,
PWDC and its affiliates have direct limited partnership interests in some of the
same product development limited partnerships as the Partnership.
9
<PAGE>
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. These
seven Projects consist of the following: The Partnership provided $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 provided $4.0 million to Athena for a
Project to fund the further development of Diastat(R) which is a gel-like
solution of diazepam indicated for the treatment of acute repetitive seizures
associated with epilepsy. The Partnership provided $1.5 million to Cadre
Technologies, Inc. ("Cadre") for a Project which funded the development of
software development tools for database applications. The Partnership provided
$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 provided $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 provided $5.0 million to PharmaGenics for a Project
using PharmaGenics' screening technology to discover novel oligonucleotide
therapeutics. The Partnership provided $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 to the rPF4 technologies will remain with RCP. The general
partner of RCP is seeking third parties who may be willing to either purchase or
license the rPF4 technologies so that residual proceeds or royalties, if any,
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.
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, 1997, the Partnership owned the following warrants:
10
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
<TABLE>
<CAPTION>
Number of Exercise 3/31/97
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
Repligen Corporation (B) 133,000 $ 2.50 Current to 3/01 $ 1.469
252,700 $ 3.50 Current to 3/01
PharmaGenics, Inc. (C) 1,000,000 $ 2.15 Current to 6/01 (D)
666,667 $ 2.15 3/99 to 3/03 (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,
1997, 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) 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 Repligen 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%.
(C) Upon the adoption and approval of the Merger Agreement between
Genzyme and PharmaGenics, the Partnership's warrants to purchase
PharmaGenics' shares will be cancelled.
(D) At March 31, 1997, the common shares of PharmaGenics were not
publicly traded.
11
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 EVENTS
Subsequent to March 31, 1997, the Partnership sold 1,085,000 shares of
Biocompatibles for net proceeds of $23,571,894 (average price of $21.725 per
share). The Partnership will recognize a gain from the sale for the three months
and six months ended June 30, 1997, of $2,930,981 and $8,447,121, respectively.
Effective April 22, 1997, the General Partner discontinued the right of
Limited Partners to transfer Units except for transfers that may occur as a
result of the laws of descent and distribution or by operation of law.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Partners' capital increased from $32.4 million at December 31, 1996, to
$43.1 million at March 31, 1997, resulting from the recognition of net income of
$10.7 million (as discussed in Results of Operations below).
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 decreased from $0.9 million at December 31, 1996 to $0.8 million at March
31, 1997, primarily as a result of the payment of general and administrative
costs.
RESULTS OF OPERATIONS
Three months ended March 31, 1997 compared to the three months ended March 31,
1996:
Net income for the three months ended March 31, 1997, was $10.6 million
compared to net income of $5.8 million for the three months ended March 31,
1996. The favorable variance of $4.8 million was due to an increase in revenues
of $4.3 million and a decrease in expenses of $0.5 million.
Revenues for the quarters ended March 31, 1997 and 1996, consisting
primarily of unrealized appreciation of investments and marketable securities,
were $10.7 million and $6.4 million, respectively. As of March 31, 1997, the
Partnership recorded unrealized appreciation of $10.7 million on its investment
of 2,100,000 shares of Biocompatibles. The market value of the shares increased
from $29.3 million ($13.94 per share) at December 31, 1996, to $40.0 million
($19.02 per share) as of March 31, 1997. As of March 31, 1996, the Partnership
owned 357,233 shares of GelTex with a market value of $7.7 million ($21.50 per
share) as compared to a carrying value of $4.4 million ($12.25 per share) at
December 31, 1995. Accordingly, for the three months ended March 31, 1996, the
Partnership recognized unrealized appreciation of $3.3 million. In addition, at
March 31, 1996, the Partnership held warrants to purchase common shares of
Athena and Alkermes whereby the market values of the shares exceed the exercise
prices of the warrant. The Partnership recorded these warrants at their
intrinsic values and recognized unrealized appreciation of $3.2 million for the
quarter ended March 31, 1996.
Expenses for the three months ended March 31, 1997 and 1996 were $0.05
million and $0.5 million, respectively. The decrease was due primarily to (i) a
decrease in management fees of $0.2 million resulting from the General Partner's
decision to eliminate the management fee charged to the Partnership effective
January 1, 1997, and (ii) a decrease in expenditures under Projects of $0.3
million. For the three months ended March 31, 1996, the Partnership accrued
expenditures under Projects of this amount.
13
<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, 1996. In
March 1997, the United States District Court for the Southern
District of New York (the "District Court") approved a definitive
settlement agreement and plan of allocation signed in July 1996 as
fair and reasonable. One investor, who had objected to the
settlement in the District Court, has appealed to the United States
Court of Appeals for the Second Circuit from the District Court's
approval of the settlement.
ITEM 5. OTHER INFORMATION
Effective April 22, 1997, the General Partner discontinued the
right of Limited Partners to transfer Units except for transfers that
may occur as a result of the laws of descent and distribution or by
operation of law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS:
None
b) REPORTS ON FORM 8-K:
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 15th day of May
1997.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By: /s/Dhananjay M. Pai
------------------------
Dhananjay M. Pai
President
By: /s/Anthony M. DiIorio
------------------------
Anthony M. DiIorio
Principal Financial and Accounting Officer
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<NAME> PAINEWEBBER R&D PARTNERS III, L.P.
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