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, 1998
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
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, 1998
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition (unaudited) at
September 30, 1998 and December 31, 1997 2
Statements of Operations
(unaudited) for the three and nine months ended
September 30, 1998 and 1997 3-4
Statement of Changes in Partners' Capital
(unaudited) for the nine months ended
September 30, 1998 5
Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 1998 and 1997 6
Notes to Financial Statements 7-13
(unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-16
PART II. OTHER INFORMATION
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,
1998 1997
- - --------------------------------------------------------------------------------
Assets:
Marketable securities, at market value $ 7,847,593 $ 8,479,372
Investments, at fair value 1,000,000 2,150,000
Advances to product development projects 35,972 35,972
Royalty income receivable 9,928 9,928
----------- -----------
Total assets $ 8,893,493 $10,675,272
=========== ===========
Liabilities and partners' capital:
Payable to PaineWebber Development
Corporation $ - $ 3,613
Accrued liabilities 65,404 76,052
----------- -----------
65,404 79,665
Partners' capital 8,828,089 10,595,607
=========== ==========
Total liabilities and partners' capital $ 8,893,493 $10,675,272
=========== ===========
- - -------------------------------------------------------------------------------
See notes to financial statements.
2
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the three months ended September 30, 1998 1997
- - -------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C>
Interest income $ 14,758 $ 47,430
Income from product development projects - 940,967
Unrealized appreciation (depreciation) of marketable
securities and investments 1,094,099 (9,380,650)
Realized gain on sale of investments and
marketable securities 598,750 58,044
----------- ------------
1,707,607 (8,334,209)
----------- ------------
Expenses:
Expenditures under product development projects - 2,507
General and administrative costs 38,457 37,746
----------- ------------
38,457 40,253
----------- ------------
Net income (loss) $ 1,669,150 $ (8,374,462)
=========== ============
Net income (loss) per partnership unit:
Limited partners (based on 50,000 units) $ 33.05 $ (165.81)
General partner $ 16,691.50 $ (83,744.62)
- - -------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
3
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30, 1998 1997
- - ------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C>
Interest income $ 40,871 $ 162,662
Income from product development projects - 944,344
Unrealized depreciation of marketable
securities and investments (2,288,577) (3,099,813)
Realized gain on sale of investments and
marketable securities 598,750 10,105,118
----------- -----------
(1,648,956) 8,112,311
----------- -----------
Expenses:
Expenditures under product development projects - 20,584
General and administrative costs 118,562 108,428
----------- -----------
118,562 129,012
----------- -----------
Net income (loss) $(1,767,518) $ 7,983,299
=========== ===========
Net income (loss) per partnership unit:
Limited partners (based on 50,000 units) $ (35.00) $ 158.07
General partner $(17,675.18) $ 79,832.99
- - ------------------------------------------------------------------------------------------
</TABLE>
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)
<TABLE>
<CAPTION>
Limited General
For the nine months ended September 30, 1998 Partners Partner Total
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1998 $10,488,115 $ 107,492 $10,595,607
Net loss (1,749,843) (17,675) (1,767,518)
----------- --------- -----------
Balance at September 30, 1998 $ 8,738,272 $ 89,817 $ 8,828,089
=========== ========= ===========
- - --------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
5
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(unaudited)
For the nine months ended September 30, 1998 1997
- - --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (1,767,518) $ 7,983,299
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Unrealized depreciation of marketable
securities and investments 2,288,577 3,099,813
(Increase) decrease in operating assets:
Marketable securities (506,798) (173,621)
Investments - 17,912,750
Advances to product development projects - (923,760)
Decrease in operating liabilities:
Other liability - (87,267)
Payable to PaineWebber Development Corporation (3,613) -
Accrued liabilities (10,648) (33,437)
------------ -----------
Cash provided by operating activities - 27,777,777
------------ -----------
Cash flows from financing activities:
Distributions to partners - (27,777,777)
------------ -----------
Increase in cash - -
Cash at beginning of period - -
------------ -----------
Cash at end of period $ - $ -
============ ===========
- - --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the nine months ended
September 30, 1998 and 1997.
- - --------------------------------------------------------------------------------
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,
1998 and 1997 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, 1998, are not necessarily indicative of results to be expected for
the year ended December 31, 1998. 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, 1997, and the previously issued quarterly
reports on Forms 10-Q for the quarters ended March 31 and June 30, 1998.
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 PaineWebber 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 has been to provide
long-term capital appreciation to investors through investing in the development
and commercialization of new products with technology and biotechnology
companies ("Sponsor Companies"), which have been expected to address significant
market opportunities. The Partnership has been engaged in diverse product
development projects (the "Projects") including product development contracts,
participation in other partnerships and investments in securities of Sponsor
Companies. Once the product development phase has been completed, the Sponsor
Companies have the option to license and commercialize the products resulting
from the product development project, and the Partnership has the right to
receive payments based upon the sale of such products. The Partnership obtained
warrants to purchase the common stock of Sponsor Companies to provide additional
capital appreciation to the Partnership which was 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:
<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"); At September
30, 1998, Contribution Payout was $1,363 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%
</TABLE>
During the quarter ended September 30, 1998, the Partnership made no
cash or security distributions. At September 30, 1998, 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.
Profits and losses of the Partnership are allocated as follows: (i)
until cumulative profits and losses for each Unit equals Contribution Payout,
99% to Limited Partners and 1% to the General Partner, (ii) after Contribution
Payout and until cumulative profits and losses for each unit equals Final
Payout, 80% to Limited Partners and 20% to the General Partner, and (iii) after
Final Payout, 75% to Limited Partners and 25% to the General Partner. As of
September 30, 1998, the cumulative profits of the Partnership were $553 per
Unit.
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.
8
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 2 CONTINUED)
Marketable securities consist of a money market fund and common stock
which are recorded at market value. Marketable securities are not considered
cash equivalents for the Statements of Cash Flows.
The Partnership's investments in stock of non-public companies are
subject to fluctuations in value dependent on the underlying value of the
issuing company. Non-publicly traded securities are valued at cost. The carrying
value of these securities is adjusted when changes in their fair values are
readily ascertainable. Downward adjustments relating to such securities are made
in the event that the value as determined by the General Partner's evaluations
of the project technology or Sponsor Company is deemed less than the carrying
value. These evaluations of value are made based on currently available
information and may not necessarily represent the amount, if any, which may
ultimately be realized.
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 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's warrants are currently exercisable and the Sponsor
Company's stock is publicly traded, therefore, 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. MARKETABLE SECURITIES AND INVESTMENTS
MARKETABLE SECURITIES
The Partnership held the following marketable securities at:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
MARKET COST MARKET COST
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money market fund $ 1,564,705 $ 1,564,705 $ 1,057,907 $ 1,057,907
Biocompatibles International plc
(815,000 common shares) 1,244,318 815,000 6,620,596 815,000
Gensia Sicor, Inc.
(137,772 common shares) 559,699 936,850 800,869 936,850
Medarex, Inc.
(281,708 restricted common shares) 1,109,225 ---- 0 ----
(441,207 unrestricted common shares) 1,737,253 ---- 0 ----
Pharming Group N.V.
(129,555 ordinary shares) 1,632,393 3,500,000 ---- ----
----------- ---------- ----------- -----------
$ 7,847,593 $ 6,816,555 $ 8,479,372 $ 2,809,757
=========== ========== =========== ===========
</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 market value of the shares at September 30, 1998,
was $1.527 per share as compared to $1.99 and $8.124 per share at June 30, 1998
and December 31, 1997, respectively. Accordingly, the Partnership recognized
unrealized depreciation on its investment of 815,000 shares for the three months
and nine months ended September 30, 1998, of $377,068 and $5,376,278
respectively. During the quarter ended September 30, 1997, the Partnership sold
45,000 shares of Biocompatibles with a carrying value as of June 30, 1997 of
$974,089 ($21.646 per share) for total proceeds of $1,032,133. 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 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
was 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.
During 1997, the Partnership received 137,772 common shares of Gensia
Sicor, Inc. ("Gensia") with a market value on the date of distribution of $6.80
per share as a distribution from its limited partnership investment in Gensia
Clinical Partners, L.P. ("GCP"). As of September 30, 1998, the market value of
Gensia shares was $4.0625 per share as compared to $4.00 and $5.813 per share as
of June 30,
10
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 3 CONTINUED)
1998 and December 31, 1997, respectively. Accordingly, the Partnership
recognized unrealized appreciation (depreciation) of $8,611 and $(241,170) for
the three months and nine months ended September 30, 1998, respectively.
In 1997, upon the acquisition of GenPharm International, Inc.
("GenPharm") by Medarex, Inc. ("Medarex"), the Partnership's investment of
1,000,000 GenPharm convertible preferred shares was converted to 281,708
restricted shares of Medarex. The Partnership (as a former GenPharm shareholder)
also received certain contingent payment rights (the "Rights") entitling the
Partnership to additional Medarex shares to be received prior to December 31,
1998. The Medarex shares received in 1997 are saleable on or after January 1,
1999. In accordance with Statement No. 115, at March 31, 1998, the Partnership
reclassified the securities from investments (where they had been recorded at a
zero value) to marketable securities since the restriction period was less than
one year and recorded its investment in the Medarex shares at market value. The
market value of the shares at September 30, 1998, was $1,109,225 ($3.9375 per
share) as compared to $1,866,315 ($6.625 per share) at June 30, 1998.
Accordingly, the Partnership recognized unrealized depreciation of $757,090 for
the three months ended September 30, 1998. In July 1998, pursuant to an Offer to
Purchase by a third party, the Partnership partially assigned its interest in
the Rights for cash proceeds of $598,750 and recognized income from the sale of
this amount for the quarter ended September 30, 1998. In September 1998, the
Partnership received 441,207 unrestricted Medarex shares in connection with its
remaining interest in the Rights. The Partnership recorded the shares as of
September 30, 1998, at the aggregate market value of $1,737,253 and recognized
unrealized appreciation of this amount for the quarter ended September 30, 1998.
A restructuring by GenPharm in 1995 resulted in the spin-off of its
European subsidiary, Pharming BV. In connection with this spin-off, the
Partnership (as a shareholder of GenPharm) received 14,395 shares of Pharming BV
Class A restricted stock which the General Partner valued at $1,150,000 based on
the current and future financial prospects of Pharming BV at that time. In
connection with an initial public offering in July 1998, the company was renamed
Pharming Group N.V. ("Pharming") and the Partnership's investment was converted
into 129,555 ordinary shares (after a 9:1 stock split). The shares are not
saleable until January 1, 1999. At September 30, 1998, in accordance with
Statement No. 115, the Partnership reclassified the securities from investments
to marketable securities and recorded its investment at a market value of
$1,632,393 ($12.60 per share) as compared to a carrying value of $1,150,000 as
of June 30, 1998. Accordingly, the Partnership recognized unrealized
appreciation of $482,393 for the three months ended September 30, 1998.
11
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 3 CONTINUED)
INVESTMENTS
The Partnership held the following investments at:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
---------------------------- -------------- -----------
Carrying Value Cost Carrying Value Cost
----------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Genzyme Molecular Oncology $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000
Division
713,091 restricted common shares
Pharming BV
14,395 restricted shares of Class ---- ---- 1,150,000 3,500,000
A stock (see Marketable Securities) ----------- ---------- ----------- -----------
$ 1,000,000 $ 1,000,000 $ 2,150,000 $ 4,500,000
=========== =========== ============ ===========
</TABLE>
Upon the acquisition by Genzyme Corporation ("Genzyme") of
PharmaGenics, Inc. ("PharmaGenics") to form Genzyme Molecular Oncology ("GMO"),
the Partnership's total investment in PharmaGenics 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
recorded its investment in GMO stock at the carrying value attributable to its
original investment in PharmaGenics preferred stock of $1,000,000. Pursuant to
the terms of the acquisition, the Partnership will be entitled to sell its GMO
stock approximately nine months following the completion of an initial public
offering by GMO.
4. RELATED PARTY TRANSACTIONS
The General Partner is entitled to receive an annual management fee for
management and administrative services provided to the Partnership. As of
January 1, 1997, the General Partner elected to discontinue the management fee
charged to the Partnership.
The money market fund invested in by the Partnership is managed by an
affiliate of PaineWebber Incorporated ("PWI").
PWDC and PWI, and its affiliates, have acted in an investment banking
capacity for several of the Sponsor Companies. In addition, PWDC and its
affiliates have direct limited partnership interests in some of the same product
development limited partnerships as the Partnership.
5. PRODUCT DEVELOPMENT PROJECTS
Of the Partnership's seven original Projects, the following two
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;
and 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.
12
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
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").
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, 1998, the Partnership owned warrants to purchase 133,000 shares
and 252,700 shares of Repligen Corporation at an exercise price of $2.50 per
share and $3.50 per share, respectively. The exercise period expires March 2001.
The market value of Repligen Corporation stock at September 30, 1998 was $1.3125
per share. The Partnership's warrant to purchase 35,512 shares of Cayenne
Software, Inc. at an exercise price of $25.91 per share expired in July 1998.
The Partnership did not exercise the warrant since, during the exercise period,
the market price of the stock never exceeded the exercise price.
Upon the exercise by the Partnership of its exchange option with
PharmaGenics in 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 canceled 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>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Partners' capital decreased from $10.6 million at December 31, 1997, to
$ 8.8 million at September 30, 1998, resulting from the recognition of a net
loss for the nine months ended September 30, 1998, of $1.8 million (as discussed
in Results of Operations below).
The Partnership's funds are invested in a money market fund and
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 $8.5 million at
December 31, 1997 to $7.8 million at September 30, 1998 resulting primarily from
a decrease in the market values of marketable securities held as of these dates
of $5.6 million offset by the receipt of additional shares of Medarex with a
market value at September 30, 1998 of $1.7 million, the reclassification of
securities from investments to marketable securties aggregating $2.7 million
(which includes unrealized appreciation of $1.6 million) and the receipt of $0.6
million from the sale of an investment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997:
Net income for the three months ended September 30, 1998, was $1.7
million compared to a net loss of $8.4 million for the three months ended
September 30, 1997. The variance of $10.1 million was due to an increase in
revenues of this amount.
Revenues for the quarters ended September 30, 1998 and 1997 were $1.7
million and $(8.4) million, respectively. The increase of $10.1 million resulted
primarily from an increase in realized gains on sale of investments and
marketable securities of $0.5 million and a favorable change in unrealized
appreciation (depreciation) of marketable securities of $10.5 million, offset by
a decrease in income from product development projects of $0.9 million. For the
three months ended September 30, 1998, the Partnership recognized net unrealized
appreciation of $1.1 million resulting from its investments of 0.815 million
shares of Biocompatibles, 0.130 million shares of Pharming, and 0.723 million
shares of Medarex. The market value of Biocompatibles decreased from $1.99 per
share at June 30, 1998 to $1.527 per share as of September 30, 1998, resulting
in unrealized depreciation for the three months ended September 30, 1998 of $0.4
million. Likewise, the market value of Medarex decreased from $6.625 per share
at June 30, 1998 to $3.9375 per share as of September 30, 1998, resulting in
unrealized depreciation for the three months ended September 30, 1998 of $0.7
million on the Partnership's investment of 0.282 million shares. During the
quarter ended September 30, 1998, the Partnership (as a former GenPharm
shareholder) received 0.441 million additional Medarex shares and recorded the
shares at September 30, 1998 at an aggregate market value of $1.7 million
recognizing unrealized appreciation of this amount. Also for this period, in
connection with an initial public offering in July 1998, the Partnership's
investment in Pharming Class A stock was converted into ordinary shares with a
restriction period expiring January 1, 1999. In accordance with Statement No.
115, the Partnership recorded the shares at an aggregate market value of $1.6
million ($12.60 per share) as compared to a carrying value of $1.1 million and
recognized unrealized appreciation of $0.5 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, 1997, the Partnership recognized income from product
development projects of $0.9 million resulting from its investment in
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Gensia Clinical Partners, L.P. During the three months ended September 30, 1998,
the Partnership partially sold its Rights as a former stockholder of GenPharm
and received proceeds of $0.6 million upon the sale. Accordingly, the
Partnership recognized income of this amount for this period.
There were no material variances in expenses for the quarter ended
September 30, 1998 as compared to the same period in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997:
Net loss for the nine months ended September 30, 1998, was $1.8 million
compared to net income of $8.0 million for the nine months ended September 30,
1997. The unfavorable variance of $9.8 million was due to a decrease in revenues
of this amount.
Revenues for the nine months ended September 30, 1998 and 1997, were
$(1.7) million and $8.1 million, respectively. The decrease was due primarily to
a decrease in income from product development projects of $0.9 million (see
Results of Operations - Three months ended September 30, 1998 compared to the
three months ended September 30, 1997) and a decrease in realized gains on the
sale of investments and marketable securities of $9.5 million offset by a
favorable change in unrealized appreciation (depreciation) of $0.8 million. For
the nine months ended September 30, 1998, the Partnership recognized net
unrealized depreciation of $2.3 million resulting from its investments of 0.815
million shares of Biocompatibles, 0.138 million shares of Gensia, 0.723 million
shares of Medarex and 0.13 million shares of Pharming. The market value of
Biocompatibles decreased from $8.124 per share at December 31, 1997 to $1.527
per share as of September 30, 1998, resulting in unrealized depreciation for the
nine months ended September 30, 1998 of $5.4 million. Likewise, the market value
per share of Gensia decreased as of these dates from $5.813 to $4.063 resulting
in unrealized depreciation for the nine months ended September 30, 1998 of $0.2
million. During the nine months ended September 30, 1998, in accordance with
Statement No.115, the Partnership recorded its investment in Medarex restricted
shares (with a restriction period of less than one year) at a market value of
$3.9375 per share at September 30, 1998 and, accordingly, recognized unrealized
appreciation of $2.8 million. Previously, such shares were recorded at zero
value. The Partnership recognized unrealized appreciation on its investment in
Pharming of $0.5 million (see Results of Operations - Three months ended
September 30, 1998 compared to the three months ended September 30, 1997). For
the nine months ended September 30, 1997, the Partnership recognized unrealized
depreciation of $3.1 million on its investment in 0.815 million shares of
Biocompatibles to reflect a decease in the market value from December 31, 1996
of $13.94 per share to $10.136 per share at September 30, 1997. Realized gains
on the sale of marketable securities and investments was $10.1 million for the
nine months ended September 30, 1997. During this period, 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, 1998, the Partnership recognized a realized gain of
$0.6 millon from the sale of Medarex rights.
There were no material variances in expenses for the nine months ended
September 30, 1998 as compared to the same period in 1997.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Calculations
performed with these abbreviated date fields may misinterpret the Year 2000 as
1900 resulting in erroneous calculations or program failures. Currently, the
Partnership utilizes computer programs, through services provided by a
third-party servicing agent, that can adversely affect the Partnership's
operations if they are not Year 2000 compliant. The servicing agent has informed
the Partnership that it is executing a plan to modify or replace significant
applications as necessary to ensure Year 2000 compliance. Programming changes
and initial testing are in progress and expected to be completed by year-end.
Final testing is expected to be completed by May 1999. Conversion of client
databases will commence in May 1999. The servicing agent has not quantified the
extent to which their plan has been completed to date. Incremental costs
associated with the development and implementation of the above plan have been,
and will continue to be, borne by the servicing agent. The status of the
Partnership's investments in Sponsor Companies could be adversely affected if
the computer systems of the Sponsor Companies are not Year 2000 compliant. Based
on the most recent available public disclosure of those Sponsor Companies in
which the Partnership has investments of value, these Sponsor Companies have
stated that they have undertaken programs to insure Year 2000 compliance. As of
the dates of disclosure, the Sponsor Companies do not expect that the Year 2000
Issue will adversely effect their future financial condition. However, they
cannot provide assurances that unanticipated problems or costs will not arise.
To date, the Partnership has no contingency plan in place but intends to
evaluate in March 1999 the status of the Year 2000 Issue with third parties to
determine whether such a plan is necessary.
16
<PAGE>
PART II OTHER INFORMATION
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 16th day of
November 1998.
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
18
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