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, 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 [_]
---------------
<PAGE>
SPECIAL NOTE REGARDING
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Except for the historical information
contained herein, the matters discussed herein are forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of PaineWebber R&D Partners III, L.P. or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions; fluctuations in the
value of securities for which only a limited, or no, public market exists;
dependence on the development of new technologies; dependence on timely
development and introduction of new and competitively priced products; the need
for regulatory approvals; the Sponsor Companies (hereinafter defined) having
insufficient funds to commercialize products to their maximum potential; the
restructuring of Sponsor Companies; the dependence of PaineWebber R&D Partners
III, L.P. on the skills of certain scientific personnel; and the dependence of
the Partnership on the General Partner (hereinafter defined).
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Form 10-Q
June 30, 1997
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition (unaudited) at
June 30, 1997 and December 31, 1996 2
Statements of Operations
(unaudited) for the three months ended
June 30, 1997 and 1996 3
Statements of Operations
(unaudited) for the six months ended
June 30, 1997 and 1996 4
Statement of Changes in Partners' Capital
(unaudited) for the six months ended
June 30, 1997 5
Statements of Cash Flows
(unaudited) for the six months ended
June 30, 1997 and 1996 6
Notes to Financial Statements
(unaudited) 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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,
1997 1996
- --------------------------------------------------------------------------------
Assets:
Marketable securities, at market value $ 5,091,140 $ 911,375
Investments, at fair value 20,765,930 31,423,754
Advances to product development projects 283,274 297,974
Other asset 3,989 --
----------- -----------
Total assets $26,144,333 $32,633,103
=========== ===========
Liabilities and partners' capital:
Other liability $ -- $ 87,267
Payable to PaineWebber Development Corporation 3,613 3,613
Accrued liabilities 67,428 99,420
----------- -----------
71,041 190,300
----------- -----------
Partners' capital 26,073,292 32,442,803
----------- -----------
Total liabilities and partners' capital $26,144,333 $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 June 30, 1997 1996
- --------------------------------------------------------------------------------
Revenues:
Interest income $ 103,581 $ 35,754
Unrealized appreciation of marketable
securities and investments 2,255,391 10,660,836
Realized gain on sale of product development
project -- 6,000,000
Realized gain on sale of investments and
marketable securities 3,396,120 865,798
----------- -----------
5,755,092 17,562,388
----------- -----------
Expenses:
Expenditures under product development projects 14,700 212,723
Management fee -- 177,639
General and administrative costs 28,705 33,680
Amortization of organization costs -- 4,334
----------- -----------
43,405 428,376
----------- -----------
Net income $ 5,711,687 $17,134,012
=========== ===========
Net income per partnership unit:
Limited partners (based on 50,000 units) $ 113.09 $ 339.25
General partner $ 57,116.87 $171,340.12
- --------------------------------------------------------------------------------
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, 1997 1996
- --------------------------------------------------------------------------------
Revenues:
Interest income $ 115,232 $ 56,474
Income from product development project -- 19,500
Unrealized appreciation of marketable
securities and investments 6,627,631 16,980,578
Realized gain on sale of product development
project -- 6,000,000
Realized gain on sale of investments and
marketable securities 9,700,280 865,798
----------- -----------
16,443,143 23,922,350
----------- -----------
Expenses:
Expenditures under product development projects 14,700 514,887
Management fee -- 355,278
General and administrative costs 70,682 75,000
Amortization of organization costs -- 10,620
----------- -----------
85,382 955,785
----------- -----------
Net income $16,357,761 $22,966,565
=========== ===========
Net income per partnership unit:
Limited partners (based on 50,000 units) $ 323.88 $ 454.74
General partner $163,577.61 $229,665.65
- --------------------------------------------------------------------------------
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)
Limited General
For the six months ended June 30, 1997 Partners Partner Total
- -------------------------------------------------------------------------------
Balance at January 1, 1997 $ 32,116,840 $ 325,963 $ 32,442,803
Net income 16,194,183 163,578 16,357,761
Cash distribution to partners (22,500,000) (227,272) (22,727,272)
------------ --------- ------------
Balance at June 30, 1997 $ 25,811,023 $ 262,269 $ 26,073,292
============ ========= ============
- --------------------------------------------------------------------------------
Through June 30, 1997, allocations of net income (loss) were made 99% to the
Limited Partners and 1% to the General Partner since distributions had not
reached the Contribution Payout level as defined in Note 1. Distributions of
the June 30, 1997, capital account balances, as well as future net income
(loss), may be based on the preference distribution rates as described in
Note 1.
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, 1997 1996
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 16,357,761 $ 22,966,565
Adjustments to reconcile net income to
cash provided by (used for) operating
activities:
Amortization of organization costs -- 10,620
Unrealized appreciation of marketable
securities and investments (6,627,631) (16,980,578)
Expenditures under product development projects 14,700 514,887
(Increase) decrease in operating assets:
Marketable securities (4,179,765) (6,644,198)
Interest receivable -- 14,158
Investments 17,285,455 70,038
Other assets (3,989) 18,000
Decrease in operating liabilities:
Other liability (87,267) --
Payable to PaineWebber Development Corporation -- (4,721)
Accrued liabilities (31,992) (21,674)
------------ ------------
Cash provided by (used for) operating activities 22,727,272 (56,903)
------------ ------------
Cash flows from financing activities:
Distributions to partners (22,727,272) --
------------ ------------
Decrease in cash -- (56,903)
Cash at beginning of period -- 56,903
------------ ------------
Cash at end of period $ -- $ --
============ ============
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the six months ended
June 30, 1997 and 1996.
- --------------------------------------------------------------------------------
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, 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 periods ended
June 30, 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, and the previously issued quarterly report
on Form 10-Q for the quarter ended March 31, 1997.
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.
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") 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:
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")
At June 30, 1997, Contribution
Payout was $1,340 per Unit.. ........ 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%
During the quarter ended June 30, 1997, the Partnership made a cash
distribution of $22,727,272 ($450 per Unit; $227,272 to the General Partner). At
June 30, 1997, the Partnership has made cash and security distributions, as
valued on the dates of distribution, since inception of $1,043 and $98 per Unit,
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 (see Note
7 - Subsequent Events).
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
8
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 2 Continued)
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.
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 invests in product development contracts with Sponsor
Companies either directly or through product development limited partnerships.
The Partnership expenses product development costs when incurred by the Sponsor
Companies and such costs are reflected as expenditures under product development
projects in the accompanying Statements of Operations. Income received and/or
accrued from investments in Projects is reflected in the Statements of
Operations for the period in which the income is earned.
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.
9
<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>
June 30, 1997 December 31, 1996
---------------------------- ----------------------------
Carrying Value Cost Carrying Value Cost
-------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Biocompatibles International plc:
2,100,000 Restricted $ -- $ -- $ 29,273,754 $ 2,100,000
Common Shares
860,000 Unrestricted 18,615,930 860,000 -- --
Common Shares - (see Note 7)
GenPharm International, Inc. 0 -- 0 --
1,000,000 Shares of Series E
Convertible Preferred Stock
Genzyme Molecular Oncology 1,000,000 1,000,000 -- --
Division
713,091 Restricted Common Shares
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
480,242 Shares of Series C
Convertible Preferred Stock
------------ ----------- ------------ -----------
$ 20,765,930 $ 5,360,000 $ 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 had agreed not to sell, assign, transfer or
otherwise dispose of its investment of 2,100,000 common shares for a period
which expired in April 1997. During the quarter ended June 30, 1997, the
Partnership sold 1,240,000 shares for total proceeds of $26,985,734. The
carrying value of the shares sold, as of March 31, 1997 and December 31, 1996,
was $23,589,614 ($19.024 per share) and $17,285,454 ($13.94 per share),
respectively. Accordingly, the Partnership recognized a gain for the three
months and six months ended June 30, 1997, of $3,396,120 and $9,700,280,
respectively. The remaining investment of 860,000 shares has been recorded at
the market value of $21.646 per share as of June 30, 1997. The Partnership
recognized unrealized appreciation on these shares for the three months and six
months ended June 30, 1997, of $2,255,391 and $6,627,631,
10
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 3 Continued)
respectively. At June 30, 1996, in accordance with Statement No. 115, the
Partnership recorded its investment of 2,100,000 restricted shares at the market
value of $14,521,254 ($6.915 per share) as compared to a carrying value of
$2,100,000. Accordingly, the Partnership recognized unrealized appreciation of
$12,421,254 for the periods then ended. 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(pound) 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(pound) per Right. The Partnership
received aggregate proceeds, net of commissions, of $865,798 (571,484(pound))
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 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 valued at $1,150,000. Based on a review of the current and
future financial prospects of GenPharm at that time the General Partner
determined that the Partnership's investment in GenPharm's convertible preferred
stock was valued at zero. On May 5, 1997, GenPharm entered into an Agreement and
Plan of Reorganization with Medarex, Inc. ("Medarex") whereby GenPharm will
become a wholly-owned subsidiary of Medarex in exchange for Medarex common
stock. The transaction is expected to close during the third quarter of 1997 and
is subject to shareholder approval and the completion of certain regulatory
requirements.
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. The Partnership funded
$5,000,000 in connection with its Project with PharmaGenics which the
Partnership expensed in previous years. 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 June 1997, the
Partnership exercised its option to exchange its rights, title and interests in
the various program agreements with PharmaGenics in return for 2,028,428
additional shares of PharmaGenics preferred stock. PharmaGenics preferred stock
was not publicly traded; therefore, no gain or loss was recognized on the
exchange. On June 18, 1997, the acquisition by Genzyme Corporation ("Genzyme")
of PharmaGenics to form Genzyme Molecular Oncology ("GMO") was completed. On
this date, the Partnership's total investment in PharmaGenics of 2,508,670
preferred shares was converted into 713,091 restricted common shares of GMO,
subject to certain adjustments. GMO common stock is not publicly traded;
therefore, the Partnership has recorded its investment in GMO stock at the
carrying value attributable to its investment in PharmaGenics preferred stock of
$1,000,000. It is anticipated that the Partnership will be entitled to sell its
GMO stock approximately nine months following the completion of an initial
public offering.
As of June 30, 1996, the Partnership owned 357,233 common shares of GelTex
Pharmaceuticals, Inc. ("GelTex") with a market value of $6,698,118 including
unrealized appreciation of $2,322,014 for the six months ended June 30, 1996. In
addition, as of that date, the Partnership held a currently exercisable warrant
to purchase common shares of Athena Neurosciences, Inc. ("Athena") in which the
market value of the shares exceeded the exercise price of the warrant. The
Partnership recorded this warrant at its intrinsic value and, accordingly,
recognized unrealized appreciation of $2,437,500 for the six months ended June
30, 1996.
11
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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. As of
January 1, 1997, the General Partner elected to discontinue the management fee
charged to the Partnership. The management fees paid by the Partnership to the
General Partner for the three months and six months ended June 30, 1996, were
$177,639 and $355,278, 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,
through October 1996. 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. 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.
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 other 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.
12
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 5 Continued)
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 a third party can be identified that is
interested in purchasing or licensing the rPF4 technologies or that there will
be any residual proceeds or royalties available for distribution.
On May 31, 1996, the Partnership sold, transferred and assigned its
rights, title, and interest in the callable warrant to purchase 500,000 shares
of Athena as well as its various program agreements with Athena for the
development of Diastat(R) 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 June 2, 1997, the Partnership exchanged its interests in its various
program agreements with PharmaGenics in return for additional shares of
PharmaGenics preferred stock. (see Note 3).
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, 1997, the Partnership owned the following warrants:
<TABLE>
<CAPTION>
Number of Exercise 6/30/97
Shares that can Price Exercise Market Price
be Purchased per Share Period Per Share*
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cayenne Software, Inc. 35,512 $ 25.91 Current to 7/98 $ 3.3125
Repligen Corporation 133,000 $ 2.50 Current to 3/01 $ 1.1875
252,700 $ 3.50 Current to 3/01
- ----------------------------------------------------------------------------------------------
</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 June 30,
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.
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.
13
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Note 5 Continued)
Upon the exercise by the Partnership of its exchange option with
PharmaGenics, the Partnership's warrant to purchase 1,000,000 shares of
PharmaGenics at an exercise price of $2.15 per share was terminated. In
addition, the Partnership's purchase option warrant to purchase 666,667
PharmaGenics' shares was cancelled upon the closing of the acquisition of
PharmaGenics by Genzyme.
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 June 30, 1997, the Partnership sold 45,000 shares of
Biocompatibles for net proceeds of approximately $1,032,000 (average price of
$22.94 per share).
Effective July 1, 1997, the General Partner removed the previously imposed
restrictions on the transferability of Units to permit, subject to the approval
of the General Partner, transfers in addition to those that occur as a result of
the laws of descent and distribution or by operation of law.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
Partners' capital decreased from $32.4 million at December 31, 1996, to
$26.1 million at June 30, 1997, resulting from the recognition of net income for
the six months ended June 30, 1997, of $16.4 million (as discussed in Results of
Operations below) offset by a cash distribution to Partners of $22.7 million.
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 $0.9 million at December 31, 1996 to $5.1 million at June
30, 1997. The increase of $4.2 million resulted primarily from proceeds received
upon the sale of investments of $27.0 million offset by a cash distribution to
Partners of $22.7 million.
Results of Operations
Three months ended June 30, 1997 compared to the three months ended June 30,
1996:
Net income for the three months ended June 30, 1997, was $5.7 million
compared to net income of $17.1 million for the three months ended June 30,
1996. The unfavorable variance of $11.4 million was due to a decrease in
revenues of $11.8 million offset by a decrease in expenses of $0.4 million.
Revenues decreased primarily as a result of decreases in unrealized
appreciation of marketable securities and investments of $8.4 million and
realized gain on sale of product development project of $6.0 million offset by
an increase in realized gain on sale of investments of $2.5 million. For the
quarter ended June 30, 1997, the Partnership recognized unrealized appreciation
of $2.3 million on its investment of 0.86 million Biocompatibles shares as a
result of an increase in the market value of the shares from $19.024 per share
as of March 31, 1997 to $21.646 per share at June 30, 1997. 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 0.65 million
unrestricted common shares of Biocompatibles, 0.4 million restricted common
shares of GelTex and a warrant to purchase 0.5 million shares of Athena which
reflects a decline in the market values of these securities from March 31, 1996
to June 30, 1996. For the quarter ended June 30, 1996, the Partnership
recognized gain on sale of a product development project of $6.0 million. On May
31, 1996, the Partnership sold its interests in the product development program
with Athena for the development of Diastat(R) for a purchase price of $6.0
million. During the three months ended June 30, 1997, the Partnership sold 1.2
million shares of Biocompatibles for proceeds of $27.0 million. The carrying
value of the shares at March 31, 1997, was $23.6 million and, accordingly, the
Partnership recognized a gain from the sale of $3.4 million. For this same
period in 1996 the Partnership sold its entitlement to 0.5 million
Biocompatibles' Rights for an aggregate price of $0.9 million and recognized a
gain of this amount upon the sale.
15
<PAGE>
(Item 2 Continued)
Expenses decreased as a result of decreases in expenditures under product
development projects of $0.2 million and management fees of $0.2 million. For
the quarter ended June 30, 1996, the Partnership accrued expenditures under
Projects of $0.2 million. Also, for the quarter ended June 30, 1996, the
Partnership accrued management fees of $0.2 million. Effective January 1, 1997,
the General Partner eliminated the management fee charged to the Partnership.
Six months ended June 30, 1997 compared to the six months ended June 30, 1996:
Net income for the six months ended June 30, 1997 and 1996 was $16.4
million and $23.0 million, respectively. The decrease of $6.6 million was a
result of a decrease in revenues of $7.5 million offset by a decrease in
expenses of $0.9 million.
The decrease in revenues was primarily a result of a decrease in
unrealized appreciation of marketable securities and investments of $10.4
million and a decrease in realized gain on sale of product development project
of $6.0 million (see Results of Operations - Three months ended June 30, 1997 as
compared to the three months ended June 30, 1996) offset by an increase in
realized gain on sale of investments of $8.8 million. Unrealized appreciation
for the six months ended June 30, 1997, was $6.6 million resulting from the
Partnership's investment of 0.86 million Biocompatibles shares. The market value
of the shares increased from $12.0 million ($13.94 per share) at December 31,
1996 to $18.6 million ($21.646 per share) at June 30, 1997. For the six months
ended June 30, 1996, unrealized appreciation of marketable securities and
investments was $17.0 million 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, 1997 compared to the
three months ended June 30, 1996). In addition, the Partnership recognized
unrealized appreciation aggregating $4.6 million on its investments of 0.4
million shares of GelTex and its warrant to purchase 0.5 million shares of
Athena resulting in the increase in the market value of these investments from
December 31, 1995 to June 30, 1996. During the six months ended June 30, 1997,
the Partnership sold 1.2 million shares of Biocompatibles for proceeds of $27.0
million. The carrying value of the shares at December 31, 1996, was $17.3
million. The Partnership recognized a gain on the sale of $9.7 million. For this
same period in 1996 the Partnership sold its entitlement to 0.5 million
Biocompatibles' Rights for an aggregate price of $0.9 million and recognized a
gain of this amount on the sale.
The decrease in expenses resulted from decreases of $0.5 million in
expenditures under product development projects and $0.4 million in mangement
fees. For the six months ended June 30, 1996, the Partnership accrued
expenditures under Projects of $0.5 million and management fees of $0.4 million.
Effective January 1, 1997, the General Partner discontinued charging the
Partnership a management fee.
16
<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, and
the Partnership's Form 10-Q for the quarter ended March 31, 1997.
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. Effective July 1, 1997, the General Partner
removed the restrictions on the transferability of Units subject to
the consent of the General Partner.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
None
b) Reports on Form 8-K:
On July 23, 1997, the Partnership filed a current report
on Form 8-K relating to the General Partner's removal of the
restrictions on the transferability of Units to permit,
subject to the approval of the General Partner, transfers in
additions to those that occur as a result of the laws of
descent and distribution or by operation of law.
17
<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
1997.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By: Dhananjay M. Pai/s/
-----------------------------
Dhananjay M. Pai
President
By: Anthony M. DiIorio/s/
-----------------------------
Anthony M. DiIorio
Principal Financial and Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000865936
<NAME> PAINEWEBBER R&D PARTNERS III, L.P.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 25,857,070
<RECEIVABLES> 3,989
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,091,140
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,144,333
<CURRENT-LIABILITIES> 71,041
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 26,073,292
<TOTAL-LIABILITY-AND-EQUITY> 26,144,333
<SALES> 0
<TOTAL-REVENUES> 16,443,143
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 85,382
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,357,761
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,357,761
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
