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, 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
JUNE 30, 1998
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition (unaudited) at
June 30, 1998 and December 31, 1997 2
Statements of Operations
(unaudited) for the three and six months ended
June 30, 1998 and 1997 3-4
Statement of Changes in Partners' Capital
(unaudited) for the six months ended
June 30, 1998 5
Statements of Cash Flows
(unaudited) for the six months ended
June 30, 1998 and 1997 6
Notes to Financial Statements 7-12
(unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-14
PART II. OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Marketable securities, at market value $ 5,009,508 $ 8,479,372
Investments, at fair value 2,150,000 2,150,000
Advances to product development projects 35,972 35,972
Royalty income receivable 9,928 9,928
Prepaid expense 3,608 -
================= =================
Total assets $ 7,209,016 $ 10,675,272
================= =================
Liabilities and partners' capital:
Payable to PaineWebber Development Corporation $ - $ 3,613
Accrued liabilities 50,078 76,052
----------------- -----------------
50,078 79,665
Partners' capital 7,158,938 10,595,607
================= =================
Total liabilities and partners' capital $ 7,209,016 $ 10,675,272
================= =================
- --------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
2
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the three months ended June 30, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Interest income $ 12,634 $ 103,581
Unrealized (depreciation) appreciation of marketable
securities and investments (357,255) 2,255,391
Realized gain on sale of investments and
marketable securities - 3,396,120
----------------- -----------------
(344,621) 5,755,092
----------------- -----------------
Expenses:
Expenditures under product development projects - 14,700
General and administrative costs 42,366 28,705
----------------- -----------------
42,366 43,405
----------------- -----------------
Net income (loss) $ (386,987) $ 5,711,687
================= =================
Net income (loss) per partnership unit:
Limited partners (based on 50,000 units) $ (7.66) $ 113.09
General partner $ (3,869.87) $ 57,116.87
- --------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
3
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Interest income $ 26,112 $ 115,232
Income from product development project - -
Unrealized (depreciation) appreciation of marketable
securities and investments (3,382,676) 6,627,631
Realized gain on sale of investments and
marketable securities - 9,700,280
----------------- -----------------
(3,356,564) 16,443,143
----------------- -----------------
Expenses:
Expenditures under product development projects - 14,700
General and administrative costs 80,105 70,682
----------------- -----------------
80,105 85,382
----------------- -----------------
Net income (loss) $ (3,436,669) $ 16,357,761
================= =================
Net income (loss) per partnership unit:
Limited partners (based on 50,000 units) $ (68.05) $ 323.88
General partner $ (34,366.69) $ 163,577.61
- --------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
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 six months ended June 30, 1998 Partners Partner Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1998 $ 10,488,115 $ 107,492 $ 10,595,607
Net loss (3,402,302) (34,367) (3,436,669)
================= ================= ================
Balance at June 30, 1998 $ 7,085,813 $ 73,125 $ 7,158,938
================= ================= ================
- -----------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
5
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,436,669) $ 16,357,761
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Unrealized depreciation (appreciation) of marketable
securities and investments 3,382,676 (6,627,631)
Decrease (increase) in operating assets:
Marketable securities 87,188 (4,179,765)
Investments - 17,285,455
Advances to product development project - 14,700
Prepaid expense and other assets (3,608) (3,989)
Decrease in operating liabilities:
Other liability - (87,267)
Payable to PaineWebber Development Corporation (3,613) -
Accrued liabilities (25,974) (31,992)
----------------- -----------------
Cash provided by operating activities - 22,727,272
----------------- -----------------
Cash flows from financing activities:
Distributions to partners - (22,727,272)
----------------- -----------------
Decrease 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 six months ended
June 30, 1998 and 1997.
- --------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
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, 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
June 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 report
on Form 10-Q for the quarter ended March 31, 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 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 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:
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, 1998,
Contribution was $1,350 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, 1998, the Partnership made no cash or
security distributions. At June 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 June
30, 1998, the cumulative profits of the Partnership were $520 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.
3. MARKETABLE SECURITIES AND INVESTMENTS
MARKETABLE SECURITIES
The Partnership held the following marketable securities at:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------------------------------------------------------------------------------
Market Cost Market Cost
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Money market fund $ 970,719 $ 970,719 $ 1,057,907 $ 1,057,907
Biocompatibles International plc
(815,000 common shares) 1,621,386 815,000 6,620,596 815,000
Gensia Sicor, Inc.
(137,772 common shares) 551,088 936,850 800,869 936,850
Medarex, Inc.
(281,708 restricted common shares) 1,866,315 0 ---- ----
-------------- -------------- -------------- --------------
$ 5,009,508 $ 2,722,569 $ 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
9
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 3 CONTINUED)
compatibility problems associated with certain medical devices. The market value
of the shares at June 30, 1998, was $1.99 per share as compared to $2.875 and
$8.124 per share at March 31, 1998 and December 31, 1997, respectively.
Accordingly, the Partnership recognized unrealized depreciation on its
investment of 815,000 shares for the three and six months ended June 30, 1998,
of $721,275 and $4,999,210 respectively. 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 at June 30, 1997 of 860,000 shares was
recorded at the market value of $21.646 per share. 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, 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 June 30, 1998, the market value of Gensia
shares decreased to $4.00 per share as compared to $5.00 and $5.813 per share as
of March 31, 1998 and December 31, 1997, respectively. Accordingly, the
Partnership recognized unrealized depreciation of $137,772 and $249,781 for the
three and six months ended June 30, 1998, respectively.
Upon the acquisition of GenPharm International, Inc. ("GenPharm") by
Medarex, Inc. ("Medarex") in 1997, the Partnership's investment of 1,000,000
GenPharm convertible preferred shares was converted to 281,708 restricted shares
of Medarex. The Medarex shares 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 to marketable securities since the
restriction period was less than one year and recorded its investment in the
Medarex shares at a market value of $1,364,523 ($4.84375 per share). As of June
30, 1998, the market value of Medarex shares increased to $6.625. Accordingly,
the Partnership recognized unrealized appreciation of $501,792 and $1,866,316
for the three and six months ended June 30, 1998, respectively.
INVESTMENTS
The Partnership held the following investments at:
<TABLE>
<CAPTION>
June 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
Medarex, Inc. ---- ---- 0 ----
281,708 restricted common shares
(see Marketable Securities)
Pharming BV
14,395 restricted shares of Class A 1,150,000 3,500,000 1,150,000 3,500,000
stock --------- --------- --------- ---------
$ 2,150,000 $ 4,500,000 $ 2,150,000 $ 4,500,000
========= ========= ========= =========
</TABLE>
10
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 3 CONTINUED)
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.
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.
11
<PAGE>
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE 5 CONTINUED)
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, 1998, the Partnership owned the following warrants:
<TABLE>
<CAPTION>
Number of Exercise 6/30/98
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 $1.5000
Repligen Corporation 133,000 $ 2.50 Current to 3/01 $1.5938
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, 1998, 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.
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.
12
<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
$7.2 million at June 30, 1998, resulting from the recognition of a net loss for
the six months ended June 30, 1998, of $3.4 million (as discussed in Results of
Operations below).
The Partnership's funds are invested in marketable securities until
cash is needed to pay for the ongoing management and administrative expenses of
the Partnership or upon the remittance of cash distributions to the Partners.
Liquid assets decreased from $8.5 million at December 31, 1997 to $5.0 million
at June 30, 1998 resulting primarily from a decrease in the market values of
securities held as of these dates (as discussed in Results of Operations below).
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997:
Net loss for the three months ended June 30, 1998, was $0.4 million
compared to net income of $5.7 million for the three months ended June 30, 1997.
The unfavorable variance of $6.1 million was due to a decrease in revenues of
this amount.
Revenues for the quarters ended June 30, 1998 and 1997 were $(0.4)
million and $5.7 million, respectively. The decrease of $6.1 million resulted
primarily from a decline in realized gain on sale of investments and marketable
securities of $3.4 million and an unfavorable change in unrealized appreciation
(depreciation) of marketable securities of $2.6 million. For the three months
ended June 30, 1998, the Partnership recognized net unrealized depreciation of
$0.3 million resulting from its investments of 0.815 million shares of
Biocompatibles, 0.138 shares of Gensia and 0.282 shares of Medarex. The market
value of Biocompatibles decreased from $2.875 per share at March 31, 1998 to
$1.99 per share as of June 30, 1998, resulting in unrealized depreciation of the
three months ended June 30, 1998 of $0.7 million. Likewise, the market value per
share of Gensia decreased as of these dates from $5.00 to $4.00 resulting in
unrealized depreciation for the three months ended June 30, 1998 of $0.1
million. The market value per share of Medarex increased from $4.84375 as of
March 31, 1998 to $6.625 per share as of June 30, 1998 resulting in the
recognition of unrealized appreciation of $0.5 million for the quarter ended
June 30, 1998. 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. Also during this quarter, 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.
There were no material variances in expenses for the quarter ended June
30, 1998 as compared to the same period in 1997.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997:
Net loss for the six months ended June 30, 1998, was $3.4 million
compared to net income of $16.4 million for the six months ended June 30, 1997.
The unfavorable variance of $19.8 million was due to a decrease in revenues of
this amount.
Revenues for the six months ended June 30, 1998 and 1997, were $(3.4)
million and $16.4 million, respectively. The decrease was due primarily to an
unfavorable change in unrealized appreciation (depreciation) of $10.0 million
and a decrease on the realized gain on the sale of investments and marketable
securities of $9.7 million. For the six months ended June 30, 1998, the
Partnership recognized net unrealized depreciation of $3.4 million resulting
from its investments of 0.815 million shares of Biocompatibles, 0.138 shares of
Gensia and 0.282 shares of Medarex. The market value of Biocompatibles decreased
from $8.124 per share at December 31, 1997 to $1.99 per share as of June 30,
1998, resulting in unrealized depreciation for the six months ended June 30,
1998 of $5.0 million. Likewise, the market value per share of Gensia decreased
as of these dates from $5.813 to $4.00 resulting in unrealized depreciation for
the six months ended June 30, 1998 of $0.3 million. During the six months ended
June 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 $6.625 per share at June 30, 1998 and,
accordingly, recognized unrealized appreciation of $1.9 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. 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.
There were no material variances in expenses for the quarter ended June
30, 1998 as compared to the same period in 1997.
YEAR 2000
Like other financial and business organizations around the world, the
Partnership could be adversely affected if the computer systems utilized by the
Partnership and other service providers do not properly process and calculate
date-related information from and after January 1, 2000. This is commonly known
as the "Year 2000 Problem". The Partnership currently, through services provided
by a third-party servicing agent, uses computer programs which represent the
calendar year portion of dates by their last two digits. These programs are
material to the Partnership's operations. The servicing agent has informed the
Partnership that it is in the process of executing a plan to modify or replace
significant applications as necessary to ensure Year 2000 compliance beginning
in March 1999. Annual incremental costs to complete these efforts will be borne
by the servicing agent. The Partnership intends to evaluate the Year 2000
problem as it relates to its investments in the Sponsor Companies. It is
expected that incremental costs will be borne by the Sponsor Companies. The
Partnership does not expect the potential disruption to operations to be
significant.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On April 27, 1998, Gensia and Gensia Automedics, Inc. announced their
decision not to exercise the Purchase Option Agreement granted by GCP (of which
the Partnership is a limited partner) to repurchase the technology associated
with the GenESA(TM) System.
At a meeting of the Board of Directors of PWDC in May 1998, the Policy
Regarding Requests for Partner Lists attached as Exhibit A was adopted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A) EXHIBITS:
None
B) REPORTS ON FORM 8-K:
None
15
<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 july authorized, on this 14th day of August
1998.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By: /s/ Dhananjay M. Pai/s/
------------------------
Dhananjay M. Pai
President
By: /s/ Anthony M. DiIorio
--------------------------
Anthony M. DiIorio
Principal Financial and Accounting Officer
16
<PAGE>
APPENDIX A
PAINEWEBBER R&D PARTNERS III, L.P.
POLICY REGARDING REQUESTS FOR PARTNER LISTS
This is to inform you that in accordance with the provisions of the Delaware
Revised Uniform Limited Partnership Act (the "Act"), and without limiting its
rights under the Partnership Agreement or the Act, as each may be amended from
time to time, the Administrative General Partner of the Partnership has
established standards applicable to requests for lists of Limited Partners.
These standards were established in order to support the following objectives:
(1) that the lists not be used for an improper or inappropriate purpose or in a
way that might be detrimental to the Partnership or the Limited Partners; (2)
that the Limited Partners be given sufficient information and opportunity to
decide how they should react in response to any solicitation or other
communication addressed to them; and (3) that the Partnership and the Limited
Partners not face an increased risk of adverse tax consequences as a direct or
indirect result of any such solicitation or communication.
The Administrative General Partner requires any request to be made in writing by
a record holder of limited partner interests with standing to request the list,
to comply strictly with all applicable requirements of law and the Partnership
Agreement, to state the purpose for which the request is made with sufficient
specificity to enable the Administrative General Partner to make the
determinations specified above, and to include an undertaking under oath by the
person requesting the list and the persons or entities on whose behalf it is
requested (1) to hold the list in strict confidence, and not to give any
information derived from the list to any third party for any purpose whatsoever
(other than a mailing house with corresponding obligations of confidentiality),
(2) to reimburse the Partnership for costs reasonably incurred in connection
with the request and for the list, including confirming compliance with the
undertakings required hereby and (3) to submit to the jurisdiction of the courts
of the State of Delaware in any dispute arising in connection with such request
and to appoint and maintain RL&F Service Corp., One Rodney Square, Tenth Floor,
Wilmington, New Castle County, Delaware 19801 (whose reasonable fees and
expenses will be paid by the Partnership) as such person's or entity's agent in
the State of Delaware for acceptance of legal process in connection herewith. In
addition, in the case of requests made for the purpose of soliciting tenders of
the Limited Partners' interests or units in the Partnership or soliciting
proxies or consents from Limited Partners or facilitating, assisting or
supporting any such solicitation, the Administrative General Partner will, if
and to the extent required by applicable law and the Partnership Agreement, make
lists available or agree to disseminate such solicitations on behalf of
requesting Limited Partners only upon receipt of an undertaking under oath by
the person requesting the list and the persons or entities on whose behalf it is
requested (1) to conduct the solicitation in accordance with the requirements of
the Securities Exchange Act of 1934 and the rules of the Securities and Exchange
Commission thereunder, including full disclosure of all material facts and (2)
to provide a copy of any such solicitation materials to the Administrative
General Partner no later than the mailing of such materials to the Limited
Partners. It is the view of the Administrative General Partner that the federal
securities laws require that any tender offer for limited partner interests or
units in the Partnership include rights of proration and withdrawal rights,
irrespective of the number of interests or units sought. In accordance with the
Partnership Agreement the Administrative General Partner reserves the right to
refrain from transferring limited partner interests or units for any reason,
including if the Administrative General Partner, based upon advise from counsel,
concludes that such acquisition would increase the risk of adverse tax
consequences to the Partnership or to the Limited Partners. The Administrative
General Partner shall endeavor to respond with reasonable promptness to any such
request and reserves its rights to request such further assurances as may be
necessary in order to enable it to make any of the determinations specified
above and to enforce this Policy on a case-by-case basis as it deems in the best
interests of the Partnership and its Limited Partners.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000865936
<NAME> PAINEWEBBER R&D PARTNERS III, L.P.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 5,009,508
<RECEIVABLES> 9,928
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,189,580
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,209,016
<CURRENT-LIABILITIES> 50,078
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 7,158,938
<TOTAL-LIABILITY-AND-EQUITY> 7,209,016
<SALES> 0
<TOTAL-REVENUES> (344,621)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 42,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (386,987)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (386,987)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
