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 SEPTEMBER 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, 10019
NEW YORK, NEW YORK (Zip code)
(Address of principal executive offices)
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
PaineWebber R&D Partners III, L.P. on the General Partner (hereinafter defined).
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
FORM 10-Q
SEPTEMBER 30, 1997
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition (unaudited) at
September 30, 1997 and December 31, 1996 2
Statements of Operations
(unaudited) for the three months ended
September 30, 1997 and 1996 3
Statements of Operations
(unaudited) for the nine months ended
September 30, 1997 and 1996 4
Statement of Changes in Partners' Capital
(unaudited) for the nine months ended
September 30, 1997 5
Statements of Cash Flows
(unaudited) for the nine months ended
September 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)
September 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
Assets:
Marketable securities, at market value $ 1,084,996 $ 911,375
Investments, at fair value 10,411,191 31,423,754
Advances to product development projects 1,221,734 297,974
=========== ===========
Total assets $12,717,921 $32,633,103
=========== ===========
Liabilities and partners' capital:
Other liability $ -- $ 87,267
Payable to PaineWebber Development Corporation 3,613 3,613
Accrued liabilities 65,983 99,420
----------- -----------
69,596 190,300
----------- -----------
Partners' capital 12,648,325 32,442,803
=========== ===========
Total liabilities and partners' capital $12,717,921 $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 September 30, 1997 1996
- --------------------------------------------------------------------------------
Revenues:
Interest income $ 47,430 $ 27,930
Income from product development projects 940,967 --
Unrealized (depreciation) appreciation
of marketable securities and investments (9,380,650) 2,673,519
Realized gain on sale of investments and
marketable securities 58,044 172,557
----------- ----------
(8,334,209) 2,874,006
----------- ----------
Expenses:
Expenditures under product development
projects 2,507 10,683
Management fee -- 107,028
General and administrative costs 37,746 54,277
----------- ----------
40,253 171,988
----------- ----------
Net income (loss) $(8,374,462) $2,702,018
=========== ==========
Net income (loss) per partnership unit:
Limited partners (based on 50,000 units) $ (165.81) $ 53.50
General partner $(83,744.62) $27,020.18
- --------------------------------------------------------------------------------
See notes to financial statements.
3
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(unaudited)
For the nine months ended September 30, 1997 1996
- --------------------------------------------------------------------------------
Revenues:
Interest income $ 162,662 $ 84,404
Income from product development projects 944,344 19,500
Unrealized (depreciation) appreciation
of marketable securities and investments (3,099,813) 19,643,303
Realized gain on sale of product development
project -- 6,000,000
Realized gain on sale of investments and
marketable securities 10,105,118 1,049,149
------------ -----------
8,112,311 26,796,356
------------ -----------
Expenses:
Expenditures under product
development projects 20,584 525,570
Management fee -- 462,306
General and administrative costs 108,428 129,277
Amortization of organization costs -- 10,620
------------ -----------
129,012 1,127,773
------------ -----------
Net income $ 7,983,299 $25,668,583
============ ===========
Net income per partnership unit:
Limited partners (based on 50,000 units) $ 158.07 $ 508.24
General partner $ 79,832.99 $256,685.83
- --------------------------------------------------------------------------------
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 nine months ended Limited General
September 30, 1997 Partners Partner Total
- --------------------------------------------------------------------------------
Balance at January 1, 1997 $ 32,116,840 $ 325,963 $ 32,442,803
Net income 7,903,466 79,833 7,983,299
Cash distributions (27,500,000) (277,777) (27,777,777)
============ ========= ============
Balance at September 30, 1997 $ 12,520,306 $ 128,019 $ 12,648,325
============ ========= ============
- --------------------------------------------------------------------------------
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 nine months ended September 30, 1997 1996
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 7,983,299 $ 25,668,583
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of organization costs -- 10,620
Unrealized depreciation (appreciation)
of marketable securities and investments 3,099,813 (19,643,303)
(Increase) decrease in operating assets:
Marketable securities (173,621) 186,198
Interest receivable -- 33,751
Investments 17,912,750 1,545,038
Advances to product development projects (923,760) 525,570
Other assets -- 35,723
Decrease in operating liabilities:
Other liability (87,267) --
Payable to PaineWebber Development
Corporation -- (4,221)
Accrued liabilities (33,437) (11,570)
------------ ------------
Cash provided by operating activities 27,777,777 8,346,389
------------ ------------
Cash flows from financing activities:
Distributions to partners (27,777,777) (6,868,687)
------------ ------------
Increase in cash -- 1,477,702
Cash at beginning of period -- 56,903
------------ ------------
Cash at end of period $ -- $ 1,534,605
============ ============
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the nine months ended
September 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 September 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
September 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
reports on Forms 10-Q for the quarters ended March 31 and June 30, 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. The
Partnership is engaged in diverse product development projects (the "Projects")
including product development contracts, participation in other partnerships and
investments in securities of Sponsor Companies. When the product development
phase has been completed, 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. 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).
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 September
30, 1997, Contribution Payout was
$1,312 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 September 30, 1997, the Partnership made a cash
distribution of $5,050,505 ($100 per Unit; $50,505 to the General Partner). For
the nine months ended September 30, 1997, the Partnership made cash
distributions of $27,777,777 ($550 per Unit; $277,777 to the General Partner).
At September 30, 1997, the Partnership has made cash and security distributions,
as valued on the dates of distribution, since inception of $1,143 and $98 per
Unit, respectively.
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.
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.
8
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 2 CONTINUED)
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.
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 held the following investments at:
<TABLE>
<CAPTION>
September 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
815,000 Unrestricted 8,261,191 815,000 -- --
Common Shares
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
----------- ----------- ----------- ----------
$10,411,191 $ 5,315,000 $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 September 30, 1997 the
Partnership sold 45,000 shares for total proceeds of $1,032,133. The carrying
value of the shares sold as of June 30, 1997 was $974,089 ($21.646 per share).
Accordingly, the Partnership recognized a gain for the three months ended
September 30, 1997, of $58,044. For the nine months ended September 30, 1997,
the Partnership sold 1,285,000 shares of Biocompatibles for aggregate proceeds
of $28,017,867. The carrying value of the shares at December 31, 1996 was
$17,912,749 ($13.94 per share) and, accordingly, the Partnership recognized a
gain for the nine months ended September 30, 1997, of $10,105,118. The remaining
investment of 815,000 shares has been recorded at the market value of $10.136
per share as of September 30, 1997. The Partnership recognized unrealized
depreciation on these shares for the three months and nine months ended
September 30, 1997, of $9,380,650 and $3,099,813, respectively. At September 30,
1996, in accordance with Statement No. 115, the Partnership recorded its
investment of 2,100,000 restricted shares at the market value of $16,134,054
($7.683 per share) as compared to a carrying value of $2,100,000. Accordingly,
the Partnership recognized unrealized appreciation of $14,034,054 for the nine
months then ended. In connection with a Rights Issue by Biocompatibles in April
1996, the Partnership was entitled to purchase one Right for every
10
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 3 CONTINUED)
six shares owned (aggregating 458,333 Rights) at a price of (pound)3.60 per
Right. In May 1996, the Partnership sold its entitlement to the Rights at a
price of (pound)1.25 per Right. The Partnership received aggregate proceeds, net
of commissions, of $865,798 ((pound)571,484) and recognized a gain of this
amount from the sale for the nine months ended September 30, 1996.
GenPharm International, Inc. ("GenPharm") is a biotechnology company which
is pursuing the research and development of transgenic technology for human
medical applications. In 1995, GenPharm's restructuring resulted in 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
(see note 7 - Subsequent Events).
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 prefered 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 September 30, 1996, the Partnership owned 357,233 common shares of
GelTex Pharmaceuticals, Inc. ("GelTex") with a market value of $7,144,659
including unrealized appreciation of $2,768,555 for the nine months ended
September 30, 1996. In addition, as of that date, the Partnership held a
currently exercisable warrant to purchase common shares of Elan Corporation, plc
("Elan") 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
recognized unrealized appreciation of $2,706,076 for the nine months ended
September 30, 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 of each
fiscal year in an amount proportionate to the increase for the prior year in the
11
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 4 CONTINUED)
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 nine months ended September 30, 1996,
were $107,028 and $462,306, 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
Of the Partnership's seven original Projects, the following three Projects
are currently active: a $6.0 million investment in 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;
a $6.0 million investment in 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; and a
$4.0 million investment in 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 remaining four Projects have been terminated or are near termination.
On April 18, 1996, Repligen Corporation ("Repligen") terminated its arrangements
with Repligen Clinical Partners, L.P. ("RCP") regarding the development and
marketing of RCP's recombinant platelet factor-4 ("rPF4") program in which the
Partnership funded $6.0 million. 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 Neurosciences, Inc. ("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 nine months ended September 30, 1996.
12
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
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). The Partnership expects no returns
resulting from its Project with Cadre Technologies, Inc. for the development of
software tools for database applications.
For the quarter ended September 30, 1997, the Partnership recognized
income from its investment in Gensia Clinical Partners, L.P. ("GCP") in the
amount of $936,540 which represented the Partnership's allocable share of income
recognized by GCP pursuant to the terms of certain product agreements between
GCP and Gensia, Inc. ("Gensia") (see note 7 - Subsequent Events).
If the Projects produce any product for commercial sale, the Sponsor
Companies have the option to license the Partnership's technology to manufacture
and market the products developed. In addition, the Sponsor Companies have the
option to purchase the Partnership's interest in the technology. In
consideration for granting such purchase options, the Partnership has received
warrants to purchase shares of common stock of certain of the Sponsor Companies.
At September 30, 1997, the Partnership owned the following warrants:
<TABLE>
<CAPTION>
Number of Exercise 9/30/97
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 $2.563
Repligen Corporation 133,000 $ 2.50 Current to 3/01 $1.156
252,700 $ 3.50 Current to 3/01
- --------------------------------------------------------------------------------------------
<FN>
* The share prices of these technology companies are generally highly
volatile and the shares are often thinly traded. The market prices
listed above may have changed significantly subsequent to September
30, 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.
</FN>
</TABLE>
Upon the exercise by the Partnership of its exchange option with
PharmaGenics in June 1997, 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.
13
<PAGE>
7. SUBSEQUENT EVENTS
In October 1997, GCP distributed to its partners, including the
Partnership, shares of Gensia common stock received by GCP from Gensia pursuant
to the terms of certain product agreements between GCP and Gensia. The
Partnership is entitled to receive approximately 137,000 saleable shares.
On October 23, 1997, the acquisition of GenPharm by Medarex was completed.
The Partnership, as a GenPharm shareholder, is entitled to receive approximately
281,000 Medarex shares which are expected to be issued during the fourth quarter
of 1997 and will be subject to certain lock-up restrictions through the end of
1998. The Partnership expects to be receiving additional Medarex shares in late
1998 subject to the receipt by GenPharm of certain fees and payments by third
parties.
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
$12.6 million at September 30, 1997, resulting from the recognition of net
income for the nine months ended September 30, 1997, of $8.0 million (as
discussed in Results of Operations below) offset by cash distributions to
Partners of $27.8 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 $1.1 million at
September 30, 1997. The increase of $0.2 million resulted primarily from
proceeds received upon the sale of investments of $28.0 million offset by cash
distributions to Partners of $27.8 million.
RESULTS OF OPERATIONS
Three months ended September 30, 1997 compared to the three months ended
- ------------------------------------------------------------------------
September 30, 1996:
- -------------------
Net loss for the three months ended September 30, 1997, was $(8.4) million
compared to net income of $2.7 million for the three months ended September 30,
1996. The unfavorable variance of $11.1 million was due to a decrease in
revenues of $11.2 million offset by a decrease in expenses of $0.1 million.
Revenues decreased as a result of a decrease in unrealized appreciation of
marketable securities and investments of $12.1 million offset by an increase in
income from product development projects of $0.9 million. For the quarter ended
September 30, 1997, the Partnership recognized unrealized depreciation of $9.4
million on its investment of 0.815 million shares of Biocompatibles as a result
of a decrease in the market value of the shares from $21.646 per share as of
June 30, 1997 to $10.136 per share at September 30, 1997. During the quarter
ended September 30, 1996, the Partnership recognized unrealized appreciation of
marketable securities and investments of $2.7 million. For the three months
ended September 30, 1996, the Partnership recognized unrealized appreciation of
$2.0 million on its investment of 2.55 million shares of Biocompatibles. At
September 30, 1996, the market value per share was $7.683 as compared to a
market value of $6.915 per share at June 30, 1996. In addition, the Partnership
recorded unrealized appreciation of $0.4 on its investment of 0.36 million
unrestricted shares of GelTex reflecting an increase in market value from $18.75
per share at June 30, 1996 to $20.00 per share at September 30, 1996. The
Partnership also recognized unrealized appreciation of $0.3 million with respect
to its investment in a warrant to purchase Elan shares. At September 30, 1996,
the market value of Elan shares exceeded the exercise price of the warrant, and
therefore, the Partnership recorded the warrant at its intrinsic value. During
the quarter ended September 30, 1997, the Partnership recognized income from
product development projects of $0.9 million resulting from its investment in
Gensia Clinical Partners, L.P.
Expenses decreased primarily as a result of the General Partner's decision
to discontinue charging a management fee to the Partnership.
15
<PAGE>
(ITEM 2 CONTINUED)
Nine months ended September 30, 1997 compared to the nine months ended September
- --------------------------------------------------------------------------------
30, 1996:
- ---------
Net income for the nine months ended September 30, 1997 and 1996 was $8.0
million and $25.7 million, respectively. The decrease of $17.7 million was a
result of a decrease in revenues of $18.7 million offset by a decrease in
expenses of $1.0 million.
The decrease in revenues is due to a decrease in unrealized appreciation
of marketable securities and investments of $22.7 million and a decrease in gain
on sale of product development projects of $6.0 million offset by an increase in
realized gain on sale of marketable securities and investments of $9.1 million
and an increase in income from product development projects of $0.9 million (see
three months ended September 30, 1997 compared to the three months ended
September 30, 1996). Unrealized (depreciation) appreciation for the nine months
ended September 30, 1997 and 1996 was $(3.1) million and $19.6 million,
respectively. The Partnership recognized unrealized depreciation of $3.1 million
on its investment in 0.815 million shares of Biocompatibles to reflect a
decrease in the market value from December 31, 1996 of $13.94 per share to
$10.136 per share at September 30, 1997. During 1996, in accordance with
Statement No. 115, the Partnership recorded its investment in 2.1 million
restricted shares of Biocompatibles at a market value of $16.1 million ($7.683
per share) as compared to its cost basis of $2.1 million. Accordingly, the
Partnership recognized unrealized appreciation of $14.0 million for the nine
months ended September 30, 1996. In addition, the Partnership recognized
unrealized appreciation of $2.8 million with respect to its investment of 0.36
million shares of GelTex to reflect an increase in market value of $12.25 per
share at December 31, 1995 to $20 per share at September 30, 1996. At September
30, 1996, the Partnership recorded its investment in a warrant to purchase Elan
common stock at its intrinsic value of $4.7 million and recognized unrealized
appreciation of $2.7 million for the nine months then ended. In May 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 and
recognized a gain upon the sale of this amount. Realized gain on sale of
marketable securities and investments was $10.1 million and $1.0 million for the
nine months ended September 30, 1997 and 1996, respectively, For the nine months
ended September 30, 1997, the Partnership sold 1.285 million shares of
Biocompatibles with an aggregate carrying value at December 31, 1996 of $17.9
million for proceeds of $28.0 million. For the nine months ended September 30,
1996, the Partnership recognized gains on the sale of Biocompatibles Rights and
Alkermes, Inc. common stock aggregating $1.0 million.
Expenses decreased primarily as a result of the General Partner's decision
to discontinue charging a management fee to the Partnership.
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:
None
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
November 1997.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By:
-------------------------------
Dhananjay M. Pai
President
By:
-------------------------------
Anthony M. DiIorio
Principal Financial and Accounting Officer
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
November 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
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