Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 13-3437420
(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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
------------------- ----------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Limited Partnership Units
No voting stock has been issued by the Registrant. Neither a public nor
other market exists for the Units, and no such market is expected to develop,
therefore there was no quoted market price for the 50,000 Units.
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
----- -----
---------------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K (X).
SPECIAL NOTE REGARDING
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Except for the historical information
contained herein, the matters discussed herein are forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of PaineWebber R&D Partners III, L.P. or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions; fluctuations in the
value of securities for which only a limited, or no, public market exists;
dependence on the development of new technologies; dependence on timely
development and introduction of new and competitively priced products; the need
for regulatory approvals; the Sponsor Companies (hereinafter defined) having
insufficient funds to commercialize products to their maximum potential; the
restructuring of Sponsor Companies; the dependence of PaineWebber R&D Partners
III, L.P. on the skills of certain scientific personnel; and the dependence of
the Partnership on the General Partner (hereinafter defined).
PART I
ITEM 1. BUSINESS.
PaineWebber R&D Partners III, L.P. (the "Partnership" or "Registrant") is a
Delaware limited partnership that commenced operations on June 3, 1991, with a
total of $43.1 million available for investment. Paine Webber Development
Corporation ("PWDC" or "General Partner"), an indirect, wholly-owned subsidiary
of Paine Webber Group Inc. ("PWG"), is the general partner and manager of the
Partnership. 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 (the "Projects") with technology companies
("Sponsor Companies"), which are expected to address significant market
opportunities. The Partnership will terminate on December 15, 2015, unless its
term is extended or reduced by the General Partner.
The Partnership has completed the funding of its seven Projects at an
aggregate investment since inception of $32.5 million. (See Exhibit B, the
Annual Letter to the Limited Partners, for a detailed discussion of the current
status of the Partnership's Projects.) In addition to the Projects, as of
December 31, 1996, the Partnership owned equity investments, warrants and
marketable securities as described in Notes 3 and 5 of the "Notes to the
Financial Statements" included in this filing on Form 10-K.
At a meeting of the Board of Directors of PWDC in January 1997, the Board
adopted the Policy Regarding Requests for Partner Lists attached as Exhibit C.
PARTNERSHIP MANAGEMENT
The Partnership has contracted with the General Partner, pursuant to a
management agreement (the "Management Contract"), responsibility for management
and administrative services necessary for the operation of the Partnership. The
General Partner meets periodically with an Advisory Board that acts as special
advisor to the General Partner in the management of the Partnership's Projects
(see Exhibit A for a brief biography of the Advisory Board Members). All fees
and expenses of the Advisory Board are paid for by the General Partner.
Under the Management Contract, the General Partner is entitled to receive
an annual management fee for management and administrative services provided to
the Partnership. The management fee is equal to 2% of the aggregate gross
proceeds received by the Partnership, reduced by the Partnership's capital
commitments in Projects that have been concluded, and the final proceeds of
which, if any, have been distributed to the General Partner and limited partners
(the "Limited Partners", with the General Partner, the "Partners"). Commencing
in January 1995 the General Partner began eliminating the management fee charged
with respect to certain Projects. As of January 1, 1997, the General Partner has
elected to discontinue charging a management fee to the Partnership.
(ITEM 1 CONTINUED)
DISTRIBUTIONS
All distributions to the Partners from the Partnership have been made pro rata
in accordance with their respective capital contributions. The following table
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 99% 1%
limited partnership unit ("Unit") equals $1,000 plus
simple interest on such amount accrued at 5% per
annum ("Contribution Payout")
II. After Contribution Payout and until the value of the 80% 20%
aggregate distributions for each Unit equals $5,000
("Final Payout")
III. After Final Payout 75% 25%
At December 31, 1996, the Partnership has made cash and security distributions,
as valued on the date of distribution, since inception of $593 and $98 per Unit,
respectively.
OTHER
At December 31, 1996, the Partnership had no employees, and PWDC, the
General Partner, had no employees other than its executive officers (see Item
10. Directors and Executive Officers of the Registrant). The Partnership is
engaged in one primary business segment, the management of investments in
technology products and companies.
ITEM 2. PROPERTIES.
The Partnership does not own or lease any office, manufacturing or
laboratory facilities.
ITEM 3. LEGAL PROCEEDINGS.
IN RE: PAINEWEBBER LIMITED PARTNERSHIP LITIGATION
As previously disclosed on the Partnership's Form 10-K for the year ended
December 31, 1995, PWDC, the General Partner of the Partnership, was named as a
defendant in a class action lawsuit against PaineWebber Incorporated ("PWI") and
a number of its affiliates relating to PWI's sale of 70 direct investment
offerings, including the offering of interests in the Partnership. In January
1996, PWI signed a memorandum of understanding with the plaintiffs in the class
action outlining the terms under which the parties agreed to settle the case. A
definitive settlement agreement and plan of allocation was signed in July 1996
and submitted to the United States District Court for the Southern District of
New York (the "Court") for its approval. Under that settlement, PWI agreed to
pay the class $125 million (which had previously been deposited in escrow with
the Court when the memorandum of understanding was signed) and certain
additional consideration. The additional consideration included the assignment
(ITEM 3 CONTINUED)
of fees and income attributable to the general partnership interest in the
Partnership as well as guarantees of certain minimum returns to class members.
In March 1997, the Court approved the settlement as fair and reasonable.
In February 1996, approximately 150 plaintiffs filed an action entitled
ABBATE V. PAINEWEBBER INC. in Sacramento, California Superior Court against PWI
and various affiliated entities, including the General Partner of the
Partnership, concerning the plaintiffs' purchases of various limited partnership
interests. The complaint alleges, among other things, that PWI and its related
entities committed fraud and misrepresentation and breached fiduciary duties
allegedly owed to the plaintiffs by selling or promoting limited partnership
investments that were unsuitable for the plaintiffs and by overstating the
benefits, understating the risks and failing to state material facts concerning
the investments. The complaint seeks compensatory damages of $15 million plus
punitive damages. In June 1996, additional complaints similar to the ABBATE
action, but involving fewer plaintiffs, were filed in Sacramento, San Diego and
Arizona. In September 1996, the California Superior Court dismissed many of
ABBATE plaintiffs' claims as barred by the applicable statutes of limitation.
Certain of the other complaints were also dismissed with prejudice while others
remained pending. In March 1997, all of these actions were settled. The
settlement had no effect on the Partnership or the General Partner.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no existing public market for the Units, and no such market is
expected to develop. Units are transferable subject to certain restrictions as
set forth in the Partnership Agreement and applicable securities laws. As of
December 31, 1996, there were 4,786 Limited Partners.
The Partnership distributes to the Partners, when available, the net
proceeds from royalty distributions, interest payments on portfolio securities
and net proceeds from dispositions of portfolio securities and any other cash in
excess of amounts that are necessary for the operation of the Partnership's
business. The Partnership made cash distributions to its Partners of $24,895,837
($493 per Unit; $245,837 to the general partnership interest) and $5,050,505
($100 per Unit; $50,505 to the general partnership interest) for the years ended
December 31, 1996 and 1995, respectively. In addition, in 1995, the Partnership
distributed to its Partners 202,261 warrants of Alkermes, Inc. ("Alkermes") (4
warrants per Unit; 2,261 warrants to the general partnership interest). The
warrants were valued at $303,392 ($6 per Unit; $3,392 to the general partnership
interest) on the date of distribution. During the year ended December 31, 1994,
the Partnership distributed to its Partners 505,120 Cephalon, Inc. ("Cephalon")
warrants (10 warrants per Unit; 5,120 warrants to the general partnership
interest) valued at $3,121,642 ($62 per Unit; $31,642 to the general partnership
interest) on the date of distribution.
ITEM 6. SELECTED FINANCIAL DATA.
See the "Selected Financial Data (Unaudited)" on Page F-2 included in this
filing on this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Partners' capital of $32.4 million at December 31, 1996, increased by $14.6
million from $17.8 million at December 31, 1995. For the year ended December 31,
1996, the Partnership recognized net income of $39.5 million (as discussed in
Results of Operations below) which exceeded cash distributions to the partners
in the amount of $24.9 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. Liquid assets at December 31, 1996, totaled $0.9 million, a
decrease of $0.6 million from the balance of $1.5 million at December 31, 1995.
The decrease in liquid assets is primarily due to net proceeds received upon the
sale of various investments of $18.9 million and proceeds from the sale of a
product development project of $6.0 million offset by cash distributions to
Partners of $24.9 million and the payment of management fees and administrative
expenses of $0.7 million. The balance of the liquid assets at December 31, 1996,
is to be used primarily for the payment of administrative costs related to
managing the Partnership's business.
The Partnership adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("Statement No. 115") for investments held as of or acquired after
January 1, 1994. In accordance with Statement No. 115, prior period financial
statements have not been restated to reflect the change in accounting method.
There was no financial statement impact as of January 1, 1994 of adopting
Statement No. 115.
(ITEM 7 CONTINUED)
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995:
Net income for the years ended December 31, 1996 and 1995 was $39.5 million
and $5.3 million, respectively. The favorable variance of $34.2 million resulted
from an increase in revenues of $25.9 million and a decrease in expenses of $8.3
million.
Revenues increased from $14.9 million in 1995 to $40.8 million in 1996
resulting primarily from increases in (i) unrealized appreciation of investments
of $17.4 million, (ii) the gain from the sale of a product development project
of $6.0 million, and (iii) the gain on the sale of marketable securities and
investments of $3.0 million offset by a decrease on the gain upon distribution
of warrants of $0.3 million (see Results of Operations for the year ended
December 31, 1995 compared to the year ended December 31, 1994). Unrealized
appreciation for the year ended December 31, 1996, was $27.2 million resulting
from the Partnership's investment of 2,100,000 shares of Biocompatibles
International plc ("Biocompatibles"). In accordance with Statement No. 115, the
Partnership recorded this investment at its market value of $29.3 million
($13.94 per share) as of December 31, 1996, as compared to its carrying value of
$2.1 million ($1.00 per share) at December 31, 1995. For the year ended December
31, 1995, the Partnership recognized unrealized appreciation of $9.8 million
(see Results of Operations for the year ended December 31, 1995 compared to
December 31, 1994). In 1996, the Partnership sold its rights, title and interest
in its callable warrant to purchase 500,000 shares of Athena Neurosciences, Inc.
("Athena") as well as its various product program agreements with Athena for a
purchase price of $6.0 million and recognized a gain of this amount from the
sale. The Partnership recognized a gain from the sale of investments of $7.5
million and $4.5 million for the years ended December 31, 1996 and 1995,
respectively. During 1996, the Partnership sold its investments of (i) 650,000
shares of Biocompatibles for proceeds of $5.3 million with a carrying value of
$4.8 million; (ii) 357,233 shares of GelTex Pharmaceuticals, Inc. ("GelTex") for
proceeds of $6.8 million with a carrying value of $4.4 million; (iii) 23,839
shares of Alkermes for net proceeds of $0.3 million with a carrying value of
$0.2 million; and (iv) 295,600 shares of Elan Corporation, plc for proceeds of
$8.3 million and a carrying value of $6.1 million. In addition, the Partnership
sold its entitlement to Biocompatibles Rights for total proceeds of $2.2 million
and recognized a gain on the sale of this amount.
Expenses for the years ended December 31, 1996 and 1995 were $1.3 million
and $9.6 million, respectively. The decrease of $8.3 million resulted primarily
from decreases in (i) expenditures under Projects of $5.6 million; (ii)
write-down of an investment of $2.3 million (see Results of Operations for the
year ended December 31, 1995 compared to December 31, 1994); and (iii)
management fees of $0.3 million. Expenditures under Projects for the years ended
December 31, 1996 and 1995 was $0.5 million and $6.1 million, respectively. In
1995, the Partnership accrued expenditures under Projects in the amount of $3.2
million. Also, in 1995, the Partnership funded its final commitment to a Project
in the amount of $2.9 million. Management fees were further reduced as a result
of the General Partner's decision to discontinue the management fee charged with
respect to certain Projects.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994:
Net income for the year ended December 31, 1995, was $5.3 million compared
to a net loss of $7.8 million for the year ended December 31, 1994. The
favorable variance of $13.1 million was due to an increase in revenues of $11.1
million and a decrease in expenditures of $2.0 million.
(ITEM 7 CONTINUED)
Revenues for the year ended December 31, 1995, were $14.9 million, an
increase of $11.1 million over revenues for the year ended December 31, 1994, of
$3.8 million. The favorable variance was due primarily to increases in 1995 in
unrealized appreciation of marketable securities and investments of $9.9 million
and in realized gains on the sale of marketable securities and investments of
$4.5 million off-set by declines in 1995 in interest income of $0.5 million and
realized gains on distributions of warrants of $2.8 million from 1994. In 1995,
Biocompatibles and GelTex completed initial public offerings ("IPOs") of their
common stock. In connection with the IPOs, the Partnership's investments of
convertible preferred stock of Biocompatibles and GelTex were converted to
common shares. At December 31, 1995, the Partnership's investment of 650,000
unrestricted shares of Biocompatibles had a market value of $4.8 million ($7.375
per share) as compared to a carrying value of $0.65 million ($1.00 per share).
The Partnership's investment of 357,233 shares of GelTex had a market value of
$4.4 million ($12.25 per share) and a carrying value of $1.0 million.
Accordingly, the Partnership recognized unrealized appreciation on its equity
investments in Biocompatibles and GelTex of $4.15 million and $3.4 million,
respectively. Also, as of December 31, 1995, the Partnership held exercisable
warrants to purchase common shares of Athena and Alkermes whereby the market
value for each of the common shares as of this date exceeded the exercise prices
of the warrants. The Partnership recorded its investments in these warrants at
their intrinsic values (the excess of the market price over the exercise price),
and accordingly, recognized unrealized appreciation of $2.1 million. In October
1995, the Partnership sold 750,000 shares of Biocompatibles common stock at an
aggregate sales price of $3.5 million and recognized a gain upon the sale of
$2.8 million. In November 1995, the Partnership exercised its warrant to
purchase 113,330 shares of Cephalon common shares at an aggregate exercise price
of $1.5 million and simultaneously sold the shares at a selling price of $3.1
million, net of commissions. Accordingly, the Partnership recognized a gain upon
sale of $1.6 million. The Partnership distributed to its Partners in 1995
warrants to purchase 202,261 shares of Alkermes common stock. The exercise price
of the warrants was $1.0 million ($5.00 per share) compared to the market value
of the shares on the date of distribution of $1.3 million ($6.50 per share). The
Partnership recognized a gain upon distribution of $0.3 million. In 1994, the
Partnership distributed to its Partners warrants to purchase 505,120 shares of
Cephalon common stock resulting in a realized gain upon distribution of $3.1
million. The decline in interest income of $0.5 million from 1994 to 1995 was
due to the decrease in marketable securities held by the Partnership. Marketable
securities were liquidated and the proceeds were used to pay the Project funding
commitments of the Partnership and to purchase an additional equity investment.
Expenses for the year ended December 31, 1995, were $9.6 million as
compared to $11.6 million for the year ended December 31, 1994. The decrease of
$2.0 million was due to a decrease in expenditures under Projects of $4.1
million and a decrease in management fees of $0.2 million offset by the
write-down of an investment in 1995 of $2.3 million. Expenditures under Projects
for both years consisted of the payment of commitments to Alkermes Clinical
Partners, L.P., Cephalon Clinical Partners. L.P., Repligen Clinical Partners,
L.P. and PharmaGenics, Inc. In addition, in 1994, the Partnership fully funded a
$4.0 million commitment for a new Project with Athena. The timing and the amount
of the expenditures are based on the terms of the agreements with the Sponsor
Companies. Management fees declined as a result of the General Partner's
decision to discontinue the management fee charged with respect to two
additional Projects. In 1995, GenPharm International, Inc. ("GenPharm") was
restructured resulting in a spin-off of its European subsidiary, Pharming BV. In
connection with the spin-off, the Partnership received 14,395 shares of Pharming
BV stock which the General Partner had valued at $1.2 million. In addition,
based on a review of the current and future financial prospects of GenPharm, the
General Partner has determined that the Partnership's investment in GenPharm's
convertible preferred stock, with a carrying value of $3.5 million, should be
valued at zero. Accordingly, the Partnership recognized a net write-down of its
GenPharm related investments in the amount of $2.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information in response to this item may be found under the following
captions included in this filing on Form 10-K:
Report of Independent Auditors (Page F-4)
Statements of Financial Condition (Page F-5)
Statements of Operations (Page F-6)
Statements of Changes in Partners' Capital (Page F-6)
Statements of Cash Flows (Page F-7)
Notes to Financial Statements (Pages F-8 to F-16)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant has no directors or executive officers. The Registrant is
managed by PWDC, which is the General Partner of the Partnership.
Pursuant to the Management Contract, the General Partner is responsible for
the management and administrative services necessary for the operation of the
Partnership. Based in part on discussions with the Advisory Board, the General
Partner assesses and manages the Partnership's Projects. As part of its ongoing
role in all Projects, the General Partner participates in a steering committee
or similar body with the Sponsor Companies with overall responsibility for each
Project during the development phase. The General Partner makes regular visits
to facilities of Sponsor Companies in order to monitor the progress of Projects,
and its representatives take part in important decisions with respect to
development and commercial strategies. During the commercialization phase, the
General Partner continues to review the Sponsor Companies' performance. In
addition, the General Partner monitors the industries in which it undertakes
Projects by attending trade shows, screening trade journals and reviewing
changes in legislative and regulatory conditions.
The following table sets forth certain information with respect to the
persons who are directors and executive officers of the General Partner as of
December 31, 1996:
NAME AGE POSITION AND DATE APPOINTED
- ---- --- ---------------------------
DIRECTORS
Dhananjay M. Pai 34 Director since December 1996
Gerald F. Goertz, Jr. 39 Director since April 1995
Pierce R. Smith 53 Director since June 1993 (1)
EXECUTIVE OFFICERS
Dhananjay M. Pai 34 President since December 1996
Pierce R. Smith 53 Treasurer since August 1988 (1)
Dorothy F. Haughey 72 Secretary since July 1985
The directors have a one-year term of office. The officers are elected by a
majority of the directors and hold office until their successors are chosen by
the directors.
(1) Mr. Smith resigned these positions in February 1997 and was replaced by
William J. Nolan. Mr. Nolan is a Managing Director in the Treasury Division of
PWI.
(ITEM 10 CONTINUED)
DIRECTORS
MR. PAI is a Managing Director of PWI. Before joining the Principal
Transactions Group of PWI in 1990, Mr. Pai was a Vice President in the
Investment Banking Division of Drexel Burnham Lambert from 1988 to 1990. From
1983 to 1988, Mr. Pai held various positions within the Finance Division of
Drexel Burnham Lambert. Mr. Pai is a Director and President of PaineWebber
Capital, an Advisory Board Member of Rifkin Acquisition Partners LLLP, and
either a Director or Officer of certain affiliates of PWI. He holds a Bachelor
of Science degree form Wharton School of Business and a Master of Business
Administration from New York University.
MR. GOERTZ is a Senior Vice President and Director of Private Investments
of PWI. Prior to joining PWI in December 1990, Mr. Goertz was with CG Realty
Advisors and the Freeman Company. He received his Bachelor of Arts degree in
Business Administration in 1979 from Vanderbilt University and his Juris
Doctorate and Master of Business Administration from Memphis State University in
1982.
MR. SMITH was Treasurer of PWG and Executive Vice President and Treasurer
of PWI. Mr. Smith joined PWG in 1987. From 1982 to 1987, Mr. Smith was Senior
Vice President and Treasurer for Norwest Corporation, a multibank holding
company in Minneapolis. From 1980 to 1982, Mr. Smith was Vice President of the
Treasury Department for Mellon Bank in Pittsburgh and from 1973 to 1980 was Vice
President for various subsidiaries of Commercial Credit Company. Mr. Smith
received a Bachelor of Science degree in Electrical Engineering from Yale
University and a Master's degree in Business Administration from Stanford
University. He also served as a lieutenant in the United States Coast Guard.
EXECUTIVE OFFICERS
MR. PAI, President, see "Directors" above.
MR. SMITH, Treasurer, see "Directors" above.
MS. HAUGHEY, Secretary, joined PWI in 1962. She is Secretary of PWI.
ITEM 11. EXECUTIVE COMPENSATION.
No compensation was paid directly to executive officers of PWDC by the
Registrant. PWDC serves as General Partner for the Registrant, and pursuant to a
Management Contract, 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. See the section entitled "Related Party
Transactions" under the caption "Notes to Financial Statements" on pages F-8
through F-16 included in this filing on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this item may be found in the section entitled
"Related Party Transactions" under the caption "Notes to Financial Statements"
on pages F-8 through F-16 included in this filing on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are filed as part of the filing on Form 10-K.
FINANCIAL STATEMENTS
The financial statements, together with the report of Ernst & Young LLP,
are listed in the accompanying index to financial statements and notes to
financial statements appearing on page F-1.
Report of Independent Auditors (Page F-4)
Statements of Financial Condition (Page F-5)
Statements of Operations (F-6)
Statements of Changes in Partners' Capital (Page F-6)
Statements of Cash Flows (Page F-7)
Notes to Financial Statements (Pages F-8 to F-16)
REPORTS ON FORM 8-K
On October 1, 1996, the Partnership filed a current report on Form 8-K
relating to the election of the President of Paine Webber Development
Corporation.
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 31st day of March
1997.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By: Dhananjay M. Pai/s/
------------------------------------------
Dhananjay M. Pai
President and Principal Executive Officer
By: William J. Nolan/s/
------------------------------------------
William J. Nolan
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated*, each on this 31st day of March 1997.
Dhananjay M. Pai/s/
- ------------------------------------------
Dhananjay M. Pai
President (principal executive officer) and Director
William J. Nolan/s/
- ------------------------------------------
William J. Nolan
Principal Financial and Accounting Officer and Director
Gerald F. Goertz, Jr. /s/
- ------------------------------------------
Gerald F. Goertz, Jr.
Director
* The capacities listed are with respect to PWDC, the General Partner of the
Registrant.
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
INDEX TO FINANCIAL STATEMENTS
Description Page
- ----------- ----
Index to Financial Statements F-1
Selected Financial Data F-2
Quarterly Financial Information F-3
Report of Independent Auditors F-4
Statements of Financial Condition,
at December 31, 1996 and 1995 F-5
Statements of Operations,
for the years ended December 31, 1996, 1995 and 1994 F-6
Statements of Changes in Partners' Capital,
for the years ended December 31, 1996, 1995 and 1994 F-6
Statements of Cash Flows,
for the years ended December 31, 1996, 1995 and 1994 F-7
Notes to Financial Statements F-8 to F-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.
F-1
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SELECTED FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Results:
Revenues $ 40,810,648 $ 14,856,172 $ 3,751,749 $ 3,014,763 $ 1,408,675
Net income (loss) $ 39,513,429 $ 5,306,891 $ (7,819,966) $ (6,338,119) $ (5,649,083)
Net income (loss) per partnership unit:
Limited partners (A) $ 782.37 $ 105.08 $ (154.84) $ (125.49) $ (111.85)
General partner $ 395,134.29 $ 53,068.91 $ (78,199.66) $ (63,381.19) $ (56,490.83)
Financial Condition:
Total assets $ 32,633,103 $ 17,914,426 $ 19,508,779 $ 31,142,666 $ 36,800,119
Partners' capital $ 32,442,803 $ 17,825,211 $ 17,872,217 $ 28,813,825 $ 36,679,409
Distributions to partners:
Cash $ 24,895,837 $ 5,050,505 $ -- $ -- $ --
Alkermes, Inc. warrants
(at intrinsic value) (B) $ -- $ 303,392 $ -- $ -- $ --
Cephalon, Inc. warrants
(at intrinsic value) (B) $ -- $ -- $ 3,121,642 $ -- $ --
Gensia, Inc. warrants
(at intrinsic value) (B) $ -- $ -- $ -- $ 1,527,465 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
(A) Based on 50,000 limited partnership units.
(B) The excess of market value per share at the date of distribution over the
exercise price per share.
F-2
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
Net Income (Loss)
Net Income Per Partnership Unit (A)
Revenues (Loss) Limited Partners General Partner
- ------------------------------------------------------------------ --------------------------------------
Calendar 1996
4th Quarter 14,014,291 13,844,845 274.14 138,448.45
3rd Quarter 2,874,006 2,702,018 53.50 27,020.18
2nd Quarter 17,562,388 17,134,012 339.25 171,340.12
1st Quarter 6,359,963 5,832,554 115.48 58,325.54
- -----------------------------------------------------------------------------------------------------------------
Calendar 1995
4th Quarter $ 4,945,967 $ (428,166) $ (8.47) $ (4,281.66)
3rd Quarter (B) 6,088,165 5,327,420 105.48 53,274.20
2nd Quarter (C) 3,594,170 1,933,280 38.28 19,332.80
1st Quarter 227,870 (1,525,643) (30.21) (15,256.43)
- -----------------------------------------------------------------------------------------------------------------
Calendar 1994
4th Quarter $ 137,335 $ (5,838,737) $ (115.61) $ (58,387.37)
3rd Quarter 193,731 (1,874,856) (37.12) (18,748.56)
2nd Quarter 267,594 (1,911,572) (37.85) (19,115.72)
1st Quarter 3,153,089 1,805,199 35.74 18,051.99
- -----------------------------------------------------------------------------------------------------------------
(A) Based on 50,000 partnership units and a 1% general partnership interest. (B)
Amounts have been restated from the amounts reported as of September 30,
1995.
(C) Amounts have been restated from the amounts reported as of June 30, 1995.
F-3
Report of Independent Auditors
To the Partners of PaineWebber R&D Partners III, L.P.
We have audited the accompanying statements of financial condition of
PaineWebber R&D Partners III, L.P. as of December 31, 1996 and 1995, and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PaineWebber R&D Partners III,
L.P. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP/s/
- -----------------------
Ernst & Young LLP
New York, New York
March 21, 1997
F-4
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF FINANCIAL CONDITION
December 31, December 31,
1996 1995
- -----------------------------------------------------------------------------------------
Assets:
Cash $ -- $ 56,903
Marketable securities, at market value 911,375 1,432,382
Investments, at fair value 31,423,754 15,514,892
Interest receivable -- 37,739
Organization costs, net of accumulated
amortization of $125,724 at December 31, 1996
and $115,104 at December 31, 1995 -- 10,620
Advances to product development projects 297,974 826,167
Other assets -- 35,723
=========== ===========
Total assets $32,633,103 $17,914,426
=========== ===========
Liabilities and partners' capital:
Accrued liabilities $ 99,420 $ 83,494
Payable to Paine Webber Development Corp. 3,613 5,721
Other liability 87,267 0
----------- -----------
190,300 89,215
Partners' capital 32,442,803 17,825,211
=========== ===========
Total liabilities and partners' capital $32,633,103 $17,914,426
=========== ===========
- -----------------------------------------------------------------------------------------
See notes to financial statements.
F-5
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
For the years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Revenues:
Interest income $ 170,677 $ 210,351 $ 729,190
Income from product development project 19,500 146,208 18,750
Unrealized appreciation (depreciation) of
marketable securities and investments 27,169,770 9,733,309 (117,526)
Realized gain from sale of product development
project 6,000,000 -- --
Realized gain on distribution of warrants -- 303,392 3,121,642
Net realized gain (loss) on sale of
marketable securities and investments 7,450,701 4,462,912 (307)
------------ ------------ ------------
40,810,648 14,856,172 3,751,749
------------ ------------ ------------
Expenses:
Expenditures under product development projects 528,193 6,074,149 10,210,247
Management fee 569,334 857,658 1,040,047
General and administrative costs 189,072 242,330 296,277
Amortization of organization costs 10,620 25,144 25,144
Write down of investment -- 2,350,000 --
------------ ------------ ------------
1,297,219 9,549,281 11,571,715
------------ ------------ ------------
Net income (loss) $ 39,513,429 $ 5,306,891 $ (7,819,966)
============ ============ ============
Net income (loss) per partnership unit:
Limited partners (based on 50,000 units) $ 782.37 $ 105.08 $ (154.84)
General partner $ 395,134.29 $ 53,068.91 $ (78,199.66)
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
Limited General
For the years ended December 31, 1996, 1995 and 1994 Partners Partner Total
- ---------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 $ 28,525,350 $ 288,475 $ 28,813,825
Distribution of Cephalon, Inc. warrants (3,090,000) (31,642) (3,121,642)
Net loss (7,741,766) (78,200) (7,819,966)
------------ ------------ ------------
Balance at December 31, 1994 17,693,584 178,633 17,872,217
Distributions to partners:
Cash (5,000,000) (50,505) (5,050,505)
Alkermes, Inc. warrants (300,000) (3,392) (303,392)
Net income 5,254,961 51,930 5,306,891
------------ ------------ ------------
Balance at December 31, 1995 17,648,545 176,666 17,825,211
Cash distribution to partners (24,650,000) (245,837) (24,895,837)
Net income 39,118,295 395,134 39,513,429
------------ ------------ ------------
Balance at December 31, 1996 $ 32,116,840 $ 325,963 $ 32,442,803
============ ============ ============
- ---------------------------------------------------------------------------------------------------------
See notes to financial statements.
F-6
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 39,513,429 $ 5,306,891 $ (7,819,966)
Adjustments to reconcile net income (loss) to
cash provided by (used for) operating activities:
Amortization of organization costs 10,620 25,144 25,144
Unrealized (appreciation) depreciation
of marketable securities and investments (27,169,770) (9,733,309) 117,526
Realized gain on distribution of warrants -- (303,392) (3,121,642)
Write down of investment -- 2,350,000 --
Decrease (increase) in operating assets:
Marketable securities 517,023 9,578,818 11,942,414
Investments 11,264,892 (250,000) (500,000)
Interest receivable 37,739 41,960 (17,853)
Advances to product development projects 528,193 (363,151) (463,016)
Other assets 35,723 750 (34,691)
(Decrease) increase in operating liabilities:
Liabilities under product development projects -- (1,456,326) (717,470)
Payable to PaineWebber Development Corporation (2,108) 3,327 (5,299)
Accrued liabilities 15,926 (94,348) 30,490
Other liability 87,267 -- --
------------ ------------ ------------
Cash provided by (used for) operating activities 24,838,934 5,106,364 (564,363)
------------ ------------ ------------
Cash flows from financing activities:
Distributions to partners (24,895,837) (5,050,505) --
------------ ------------ ------------
(Decrease) increase in cash (56,903) 55,859 (564,363)
Cash at beginning of period 56,903 1,044 565,407
------------ ------------ ------------
Cash at end of period $ -- $ 56,903 $ 1,044
============ ============ ============
- ------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the years ended
December 31, 1996, 1995 and 1994.
Supplemental schedule of non-cash activities:
- ------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Distribution of investments to partners:
Alkermes, Inc. warrants $ -- $ 303,392 $ --
Cephalon, Inc. warrants -- -- 3,121,642
- ------------------------------------------------------------------------------------------------------
See notes to financial statements.
F-7
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
PaineWebber R&D Partners III, L.P (the "Partnership") is a Delaware limited
partnership that commenced operations on June 3, 1991. Paine Webber Development
Corporation ("PWDC" or the "General Partner"), an indirect, wholly-owned
subsidiary of Paine Webber Group Inc., is the general partner and manager of the
Partnership. The Partnership will terminate on December 15, 2015, unless its
term is extended or reduced by the General Partner.
The principal objective of the Partnership is to provide long-term capital
appreciation to investors through investing in the development and
commercialization of new products with technology companies ("Sponsor
Companies"), which are expected to address significant market opportunities.
When the product development phase has been completed, Sponsor Companies will
generally have a license from the Partnership to commercialize the products
resulting from the product development project, and the Partnership will
generally have the right to receive payments based upon the sale of such
products. Sponsor Companies will generally have an option to purchase from the
Partnership the products or technology developed for a predetermined price,
payable through a one-time payment and/or a series of payments based on product
sales over a ten to twelve year period. In connection with product development
projects (the "Projects"), the Partnership sought to obtain warrants to purchase
the common stock of Sponsor Companies. These warrants have the potential to
provide additional capital appreciation to the Partnership which is not directly
dependent upon the outcome of the Projects (see Note 5). In addition, the
Partnership invested as a limited partner in product development limited
partnerships. Such partnerships were formed to develop specific, new products
through contracts, similar to those described above, with Sponsor Companies. The
Sponsor Companies conduct the Projects and affiliates of the Sponsor Companies
serve as general partners of the partnerships. As such, the Partnership is
engaged in diverse Projects including product development contracts,
participation in other partnerships and investments in securities of Sponsor
Companies.
As of December 31, 1996, the Partnership has fully funded its seven
Projects at an aggregate investment of $32.5 million (see Note 5). In addition
to these Projects, the Partnership has invested in the securities of several
other Sponsor Companies (see Note 3).
F-8
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(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")......... 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%
For the year ended December 31, 1996, the Partnership made cash
distributions totaling $24,895,837 ($493 per Unit; $245,837 to the General
Partner). At December 31, 1996, the Partnership has made cash and security
distributions, as valued on the date of distribution, since inception of $593
and $98 per Unit, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in conformity with generally accepted
accounting principles which require management to make certain estimates. Such
estimates include the carrying value of non-marketable securities and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. 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, is accounted for at the lower of cost or fair value.
Marketable securities consist of readily marketable securities that are
valued at market value. Marketable securities are not considered cash
equivalents for the Statements of Cash Flows.
The Partnership's investments in convertible preferred stock are not
publicly traded and, therefore, are subject to fluctuations in value dependent
on the underlying value of the issuing company. Non-publicly traded securities
are valued at cost, except when a decrease is required based on the General
Partner's evaluations of the project technology or Sponsor Company. These
evaluations are made based on currently available information and may not
necessarily represent the amount, if any, which may ultimately be realized. The
future value of these securities, if any, are dependent upon circumstances which
cannot reasonably be determined until the position is actually liquidated.
F-9
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 2 CONTINUED)
Realized and unrealized gains or losses are determined on a specific
identification method and are reflected in the Statements of Operations during
the period in which the change in value occurs.
The General Partner incurred offering and organizational costs in the
amount of $1,813,138 and $125,724, respectively, that were reimbursed at the
Partnership's closings. Offering expenses have been charged against partners'
capital. Organizational costs incurred during the formation of the Partnership
were amortized over a period of 60 months from the date of the commencement of
operations.
The Partnership invested in Projects, as more fully described in Note 5,
through one of two vehicles:
o Product Development Contracts
The Partnership paid amounts to Sponsor Companies under product
development contracts. Such amounts were expensed by the Partnership
when incurred by the Sponsor Companies. Income from the Sponsor
Companies is reflected in the Statements of Operations for the
period in which the income is earned.
o Product Development Limited Partnerships
The Partnership participates as a limited partner in product
development limited partnerships formed to develop specific products.
Such partnerships expense product development costs when incurred.
The Partnership carries warrants at a zero value in cases where the Sponsor
Company's stock is not publicly traded or the exercise period has not been
attained. To the extent that the Partnership's warrants are currently
exercisable and the Sponsor Company's stock is publicly traded, the warrants are
carried at intrinsic value (the excess of market price per share over the
exercise price per share), which approximates fair value.
3. MARKETABLE SECURITIES AND INVESTMENTS
MARKETABLE SECURITIES:
The Partnership held the following marketable securities at:
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ -----------------------------
MARKET COST MARKET Cost
U.S. Treasury obligations $ ----- $ ----- $ 603,544 $ 599,560
Money market fund 911,375 911,375 828,838 828,838
------------ ------------ ------------ ------------
$ 911,375 $ 911,375 $ 1,432,382 $ 1,428,398
============ ============ ============ ============
F-10
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 3 CONTINUED)
INVESTMENTS:
The Partnership's investments in convertible preferred stock are not
publicly traded securities and are subject to fluctuations in value dependent
upon the Sponsor Companies' underlying value. The Partnership records these
non-public investments at the lower of cost or fair value. Fair value is
determined by the General Partner, in good faith, based on all appropriate
information available at the time. In accordance with Statement No. 115, the
Partnership records investments in restricted common stock (when the restriction
period expires in one year or less) at market value with unrealized gains and
losses reflected in the Statements of Operations during the period in which the
change in value occurs. Exercisable warrants held by the Partnership whereby the
market value of the underlying common shares exceeds the exercise price of the
warrant are recorded at their intrinsic value. The Partnership held the
following investments at:
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------- -------------------------------
CARRYING VALUE COST CARRYING VALUE COST
-------------- ---- -------------- ----
Biocompatibles International plc:
2,100,000 Restricted $29,273,754 $ 2,100,000 $ 2,100,000 $ 2,100,000
Common Shares
650,000 Unrestricted -- -- 4,793,750 650,000
Common Shares
GenPharm International, Inc. -- -- -- --
1,000,000 Shares of Series E
Convertible Preferred Stock
Pharming BV 1,150,000 3,500,000 1,150,000 3,500,000
14,395 Shares of Class A Stock
GelTex Pharmaceuticals, Inc. -- -- 4,376,104 1,000,000
357,233 Unrestricted Common Shares
PharmaGenics, Inc. 1,000,000 1,000,000 1,000,000 1,000,000
480,242 Shares of Series C
Convertible Preferred Stock
Alkermes, Inc. -- -- 70,038 --
Warrant to purchase
23,839 common shares
Athena Neurosciences, Inc. -- -- 2,025,000 --
Core Warrant to purchase
500,000 shares
----------- ----------- ----------- -----------
$31,423,754 $ 6,600,000 $15,514,892 $ 8,250,000
=========== =========== =========== ===========
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. On April 13, 1995, Biocompatibles completed an initial public
offering ("IPO") on the London Stock Exchange. In connection with the IPO, the
Partnership's 350,000 shares of Series C Convertible Preferred Stock were
converted to 350,000 common shares (140,000 shares of which were
F-11
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 3 CONTINUED)
unrestricted). Concurrent with the IPO, the common shares split 10-for-1
resulting in a Partnership investment of 3,500,000 common shares. In 1995, the
Partnership sold 750,000 unrestricted shares generating proceeds, net of
commissions, of $3,537,782. The carrying value of such 750,000 shares at
December 31, 1994, was $750,000. The Partnership recognized a gain upon the sale
of $2,787,782 which has been included in the accompanying Statements of
Operations. During 1996, the Partnership sold 650,000 unrestricted shares of
Biocompatibles at a price, net of commissions, of $5,291,129 (average price per
share of $8.14). The carrying value of the shares including unrealized
appreciation of $4,143,750 for the year ended December 31, 1995 was $4,793,750
($7.375 per share). Accordingly, the Partnership recognized a gain upon the sale
of $497,379 for the year ended December 31, 1996. The Partnership has agreed not
to sell, assign, transfer or otherwise dispose of its remaining investment of
2,100,000 common shares for a period to expire in April 1997. At December 31,
1995, the Partnership recorded these restricted shares at their cost basis of
$2,100,000. In accordance with Statement No. 115, during the quarter ended June
30, 1996, the Partnership commenced recording its investment in these shares at
their market value. At December 31, 1996, the market value of the restricted
shares was $29,273,754 ($13.94 per share). The Partnership recognized unrealized
appreciation of $27,173,754 for the year ended December 31, 1996. In connection
with a Rights Issue by Biocompatibles in April 1996, the Partnership was
entitled to purchase one Right for every six shares owned (aggregating 458,333
Rights). Each Right was comprised of one new common share of Biocompatibles and
one warrant. In May 1996, the Partnership sold its entitlement to the Rights at
a price of (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 year ended December 31, 1996. A second Rights Issue
by Biocompatibles in November 1996 entitled the Partnership to purchase four
Rights for every 23 shares owned (aggregating 365,217 Rights). In December 1996,
the Partnership sold its entitlement to the Rights at a price of (pound)2.20 per
Right for aggregate proceeds, net of commissions, of $1,339,815
((pound)803,477). The Partnership recognized a gain of this amount for the year
ended December 31, 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 has valued at $1,150,000. Based on a review of the current and
future financial prospects of GenPharm, the General Partner determined that the
Partnership's investment in GenPharm's convertible preferred stock should be
valued at zero. Accordingly, the Partnership recognized a net write-down of its
GenPharm related investments of $2,350,000 for the year ended December 31, 1995.
GelTex Pharmaceuticals, Inc. ("GelTex") is a company formed to develop and
commercialize luminal therapies, which are based on the use of non-absorbable
therapeutic polymers to selectively eliminate substances from the
gastrointestinal tract before they are absorbed. In connection with a GelTex IPO
in November 1995, the Partnership's shares of GelTex Convertible Preferred Stock
were converted to 357,233 common shares. In 1996, the Partnership sold its
shares for proceeds of $6,805,351 (average price per share of $19.05). The
Partnership recorded the shares for the year ended December 31, 1995, at their
market value of $4,376,104 ($12.25 per share) with related unrealized
appreciation of $3,376,104. Upon the sale the Partnership recognized a gain of
$2,429,247 for the year ended December 31, 1996.
PharmaGenics, Inc. ("PharmaGenics") is an integrated drug discovery company
engaged in the research and development of pharmaceuticals for the treatment of
cancer as well as other human diseases. In 1995, the Partnership made a loan to
PharmaGenics in the amount of $1,000,000 which was subsequently converted into
F-12
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 3 CONTINUED)
480,242 shares of Series C Convertible Preferred Stock. In addition, the
Partnership's commitment to further fund research and development expenses under
its contract with PharmaGenics was reduced by $1,000,000.
At December 31, 1995, the Partnership held an exercisable warrant to
purchase 500,000 common shares of Athena Neurosciences, Inc. ("Athena") in which
the market value of the common shares of $12.25 per share exceeded the exercise
price of $8.20 per share. Accordingly, for the year ended December 31, 1995, the
Partnership recorded this warrant at its intrinsic value of $2,025,000 and
recognized unrealized appreciation of this amount. As a result of a merger
between Athena and Elan Corporation, plc ("Elan"), the Partnership's warrant to
purchase Athena shares was converted into a warrant to purchase 295,600 Elan
shares. In 1996, the Partnership exercised its Elan warrant at an aggregate
exercise price of $4,099,972 ($13.87 per share) and subsequently sold the shares
for proceeds of $8,320,588 (average price per share of $28.15). The Partnership
recognized a gain of $2,195,616 upon the sale for the year ended December 31,
1996.
For the year ended December 31, 1995, the Partnership recorded its
exercisable warrant to purchase 23,839 shares of Alkermes, Inc. ("Alkermes") at
its intrinsic value of $70,038 and recognized unrealized appreciation of this
amount. In June 1996, the Partnership exercised this warrant at an aggregate
price of $119,195 ($5.00 per share) and sold the shares for proceeds, net of
commissions, of $312,080. The Partnership recognized a gain upon the sale of
$122,847 for the year ended December 31, 1996.
4. RELATED PARTY TRANSACTIONS
The General Partner received an annual management fee for management and
administrative services provided to the Partnership. The management fee was
payable quarterly in advance and was adjusted annually on the first day of each
fiscal year in an amount proportionate to the increase for the prior year in the
Consumer Price Index published by the United States Department of Labor. In
addition, the General Partner received a project fee for formulating and
implementing the business strategy of the Partnership, paid at each closing in
an amount equal to 2% of the aggregate gross proceeds received by the
Partnership at such closing. The Partnership paid the General Partner $1,000,000
at closings in 1991. In connection with the Partnership offering, PaineWebber
Incorporated ("PWI"), the sales agent, an affiliate of the General Partner,
received selling commissions of $3,966,210. The management fees paid by the
Partnership to the General Partner were $569,334, $857,658 and $1,040,047 for
the years ended December 31, 1996, 1995 and 1994, respectively. Commencing in
July 1995 the General Partner eliminated the management fee charged with respect
to certain Projects. As of January 1, 1997, the General Partner has elected to
discontinue the management fee charged to the Partnership.
The Partnership's portfolio of marketable securities was managed by
Mitchell Hutchins Institutional Investors ("MHII"), an affiliate of PWDC. The
Partnership paid MHII a fee with respect to such money management services which
has been included in general and administrative expenses in the accompanying
Statements of Operations. The fees for the years ended December 31, 1996, 1995
and 1994 were $3,088, $10,145 and $41,896, respectively.
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.
F-13
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
5. PRODUCT DEVELOPMENT PROJECTS
The Partnership entered into three product development contracts and four
product development limited partnerships which were fully funded as of December
31, 1995. These seven Projects consist of the following: The Partnership
provided $6.0 million to Alkermes Clinical Partners, L.P., a $46.0 million
limited partnership formed to fund the development, clinical testing,
manufacturing and marketing of Receptor-Mediated Permeabilizers for use in the
treatment of diseases of the brain and central nervous system by enabling the
delivery of drugs across the blood brain barrier. The Partnership provided $4.0
million to Athena for a Project to fund the further development of Diastat(R)
which is a gel-like solution of diazepam indicated for the treatment of acute
repetitive seizures associated with epilepsy. The Partnership provided $1.5
million to Cadre Technologies, Inc. ("Cadre") for a Project which funded the
development of software development tools for database applications. The
Partnership provided $6.0 million to Cephalon Clinical Partners, L.P., a $45.0
million limited partnership formed to fund the development, clinical testing,
manufacturing and marketing of MyotrophinO for use in the treatment of
amyotrophic lateral sclerosis and certain peripheral neuropathies. The
Partnership provided $4.0 million to Gensia Clinical Partners, L.P., a $26.2
million limited partnership formed to fund the development, clinical testing,
manufacturing and marketing of the GenESAO System, a product designed to enhance
the diagnosis of heart disease. The Partnership provided $5.0 million to
PharmaGenics for a Project using PharmaGenics' screening technology to discover
novel oligonucleotide therapeutics. The Partnership provided $6.0 million to
Repligen Clinical Partners, L.P. ("RCP"), a $45.0 million limited partnership
formed to fund the development, clinical testing, manufacturing and marketing of
recombinant platelet factor-4 for use in certain cancer applications and to
reverse the effects of the anticoagulant heparin.
On April 18, 1996, Repligen Corporation ("Repligen") terminated its
arrangements with RCP regarding the development and marketing of RCP's
recombinant platelet factor-4 ("rPF4") program. Repligen and RCP have agreed
that the rights to the rPF4 technologies will remain with RCP. The general
partner of RCP is seeking third parties who may be willing to either purchase or
license the rPF4 technologies so that residual proceeds or royalties, if any,
may be distributed to the partners of RCP (including the Partnership). However,
there can be no assurance that anyone will purchase or license the rPF4
technologies or that there will be any residual proceeds or royalties available
for distribution.
On May 31, 1996, the Partnership sold, transferred and assigned its rights,
title and interest in the callable warrant to purchase 500,000 shares of Athena
as well as its various product 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
year ended December 31, 1996.
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 December 31, 1996, the Partnership owned the following warrants:
F-14
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 5 CONTINUED)
NUMBER OF EXERCISE 12/31/96
SHARES THAT CAN PRICE EXERCISE MARKET PRICE
BE PURCHASED PER SHARE PERIOD PER SHARE*
------------ --------- ------ ----------
Cayenne Software Inc. (A) 35,512 $ 25.91 Current to 7/98 $3.813
Repligen Corporation (B) 133,000 $ 2.50 Current to 3/01 $1.188
252,700 $ 3.50 Current to 3/01
PharmaGenics, Inc. 1,000,000 $ 2.15 Current to 6/01 (C)
- -----------------------------------------------------------------------------------------------
* 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 December 31, 1996, and/or may change
significantly in the future. The market prices above may not, therefore, be
indicative of the ultimate values, if any, that may be realized by the
Partnership.
(A) On July 19, 1996, Cadre merged with Bachman Information Systems to form
Cayenne Software Inc. ("Cayenne"). As a result of the merger, the
Partnership's warrant to purchase 115,000 shares of Cadre at an
exercise price of $8.00 per share converted into a warrant to purchase
Cayenne shares.
(B) During the first quarter of 1995, the Partnership was notified of a
modification offer (the "Modification") by Repligen Corporation
("Repligen") to modify the Exchange Warrants. The principal terms of
the Modification were (i) the exercise price was reduced from $9.00 per
share to $2.50 per share for 133,000 shares and $3.50 per share for
252,700 shares but will increase to $8.00 per share 90 days after
Repligen notifies the Warrant holders that the NASDAQ National Market
closing price of Repligen's common stock is equal to or exceeds $12.00
per share for any 20 out of 30 consecutive trading days and (ii) the
exercise period under the Exchange Warrants will terminate on March 31,
2001 instead of March 31, 2000. In connection with the foregoing, the
initial royalty rate on future product revenues due to the Partnership
from Repligen will not change under the Modification and will remain at
9%.
(C) At December 31, 1996, the common shares of PharmaGenics were not
publicly traded.
In addition, the Partnership owns a warrant (with a carrying value of zero)
to purchase 666,667 shares of PharmaGenics at an exercise price of $2.15. If
PharmaGenics elects to exercise the purchase option agreement, the warrant will
be redeemed at zero value.
On October 23, 1995, the Partnership distributed to its Partners a warrant
to purchase 202,261 shares of Alkermes common stock. The intrinsic value of the
warrant on the date of distribution was $303,392 ($1.50 per share) and,
accordingly, the Partnership recognized a gain of this amount. In November 1995,
the Partnership exercised its warrant to purchase 113,330 shares of Cephalon,
Inc. ("Cephalon") common stock at an aggregate exercise price of $1,536,128. The
shares were subsequently sold by the Partnership for total proceeds, net of
commissions, of $3,100,947 (average price per share of $27.362). Accordingly,
the Partnership recognized a gain of $1,564,819 for the year ended December 31,
1995. Of the 113,300 warrants exercised, 6,930 warrants represented the
fractional portion allocable to the Limited Partners that was not distributed in
1994. The gain
F-15
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(NOTE 5 CONTINUED)
attributable to the exercise of these warrants and the sale of the shares in the
amount of $113,856 has been allocated solely to the Limited Partners in the
accompanying Statements of Changes in Partners' Capital.
In January 1994, the Partnership distributed to its Partners a warrant to
purchase 505,120 shares of Cephalon common stock. The intrinsic value of the
warrant to purchase Cephalon common stock on the date of distribution was
$3,121,642 ($6.18 per share) and, accordingly, the Partnership recognized a gain
of this amount.
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.
F-16
EXHIBIT A
ADVISORY BOARD BIOGRAPHIES
ADMIRAL BOBBY R. INMAN U.S. NAVY (RET.)
Chairman, Executive Committee of Science Applications International Corporation;
former Chairman and Chief Executive Officer, Westmark Systems, Inc.; former
Chairman, President and Chief Executive Officer, Microelectronics & Computer
Technology Corporation; Director, Fluor Corporation, Science Applications
International Corporation, Southwestern Bell Corporation, Temple-Inland and
Xerox Corporation.
ALFRED J. COYLE
Advisory Director, PaineWebber Incorporated; former Director, American DualVest
Fund, Cubic Corp., Leaseway Transportation Corp., Oilfield Services Corp. of
America and Radiation Dynamics.
RICHARD HODGSON
Co-founder and Director, Intel Corporation; Director, I-Stat Corp., Ibis
Technology Inc., McCowan Associates and several private technology companies.
EUGENE KLEINER
Founding partner, Kleiner, Perkins, Caufield & Byers; Co-founder, Fairchild
Semiconductor Corporation; Director, Andros Corporation, Resound, Inc. and
several private technology companies; Trustee, Polytechnic University in New
York.
ANTONIE T. KNOPPERS, M.D.
Former President, Chief Operating Officer and Vice Chairman, Merck & Co.;
Director, Centocor, Inc; former Chairman, U.S. Council of the International
Chamber of Commerce.
DR. GEORGE KOZMETSKY, D.C.S.
Executive Associate for Economic Affairs, The University of Texas System; IC
Senior Research Fellow; Chairman, IC Advisory Board.
JOSHUA LEDERBERG, PH.D.
Nobel Laureate; university professor and former President, Rockefeller
University; Director, Chemical Industry Institute for Toxicology, Dreyfus
Foundation and Council for Foreign Relations.
EXHIBIT B
PAINEWEBBER R&D PARTNERS III, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
LETTER TO LIMITED PARTNERS
To Our Limited Partners:
Two sponsor companies in PaineWebber R&D Partners III, L.P. (the "Partnership"
or "R&D Partners III") made significant announcements during the year. First,
Elan Corporation plc ("Elan") purchased R&D Partners III's rights to Athena
Neurosciences, Inc.'s ("Athena") Diastat development program. Also, Bachman
Information Systems, Inc. completed its acquisition of Cadre Technologies, Inc.
("Cadre") in July. The combined companies have been renamed Cayenne Software,
Inc. ("Cayenne"). In addition, R&D Partners III made cash distributions totaling
$4,930 per $10,000 investment in the partnership during the year.
In June 1996, Elan purchased the exclusive U.S. market license for Athena's
Diastat product for $6.0 million from R&D Partners III. Also in June, Elan and
Athena jointly announced that the stockholders of each company approved the
merger of Elan and Athena. Under the merger agreement, Athena became a
wholly-owned subsidiary of Elan, and Athena stockholders received 0.2956 Elan
American Depository Shares ("ADSs") for each common share of Athena that they
owned upon completion of the merger. Diastat is a viscous formulation of
diazepam which was tested for its use in the treatment of a severe epilepsy
condition afflicting children and young adults known as acute repetitive
seizures. Athena warrants held by R&D Partners III were converted into Elan
warrants under the merger agreement with an exercise price of $13.87. The
warrants were exercised and cash was distributed to investors in the amount of
$835.70 per $10,000 investment in R&D III.
R&D III distributed $16.7 million on December 13, 1996; the cash distribution to
investors was in the amount of $3,300 per $10,000 investment. The major portion
of the distribution ($6.8 million) resulted from the sale of 357,233 shares of
GelTex Pharmaceuticals, Inc., at approximately $19.80 per share. R&D Partners
III sold 650,000 ordinary shares of Biocompatibles International plc
("Biocompatibles") resulting in distributed proceeds of $5.2 million. R&D III
purchased $3.5 million of Biocompatibles convertible preferred stock at a price
of $1.00 per share in a private placement in 1993. R&D III retains 2.1 million
shares of Biocompatibles ordinary shares which are subject to certain sale
restrictions until April 1997. The balance of the distribution resulted from the
exercise of 295,600 Elan warrants and sale of the common shares generating
proceeds of $4.2 million and from the exercise of 23,839 Alkermes, Inc. warrants
and sale of the common shares resulting in proceeds of $312,080 with these
proceeds being distributed to investors as part of this December 13
distribution. On December 27, 1996 R&D III made a second cash distribution from
the sale of the Biocompatibles rights of approximately $270 per $10,000
investment.
R&D III was formed in 1991 and invested in a portfolio of six product
development programs as well as four equity investments in private placements.
The objective of each product development program is to obtain attractive
returns for investors by accelerating the development and commercialization of
new products. In addition to cash distributions derived from revenues of product
sales in each program, investors may benefit by the growth of the companies
through the issuance of warrants to purchase the companies' common stock. In
each
PAINEWEBBER R&D PARTNERS III, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
program, the management team of PaineWebber Development Corporation works
closely with the sponsor companies to monitor the progress of each product
development program.
In addition to the six product development programs, R&D III has made four
equity investments in privately-held companies. R&D III invested $3.5 million in
Biocompatibles International plc, a U.K.-based, development stage company
engaged in the research, development and commercialization of coatings and new
materials which reduce compatibility problems associated with certain medical
devices. Biocompatibles completed a $27.5 million initial public offering in
April 1995 of ordinary shares on the London Stock Exchange. Simultaneous with
the offering , R&D's convertible preferred shares were converted into ordinary
shares and these shares then split ten-for-one. R&D III invested $3.5 million in
GenPharm International, Inc., ("GenPharm"), a privately-held biotechnology
company pursuing the development of transgenic animals for human medical
applications. In 1995, GenPharm completed a restructuring, which was
percipitated by Cell Genesys, Inc.'s patent lawsuit against it, by spinning off
its European subsidiary, Pharming BV. The pending lawsuit against GenPharm has
been recently dropped by Cell Genesys. R&D III currently owns 14,395 shares of
Pharming BV Class A common stock. R&D III also invested $1.0 million in GelTex
Pharmaceuticals, Inc., a biopharmaceutical company formed to develop and
commercialize luminal therapies, which are based on the use of non-absorbable,
therapeutic polymers to selectively eliminate substances from the
gastrointestinal tract before they are absorbed. GelTex completed its initial
public offering in November 1995 at a price of $10.00 per share. In addition,
R&D III made a $1.0 million equity investment in 1995 and received 480,242
shares of PharmaGenics, Inc. ("PGI") Series C Convertible Preferred Stock. PGI
is a drug discovery company in which R&D III has committed $5.0 million to a
product development program with the company (see Product Portfolio Status for
update).
In addition to potential returns from product development programs and equity
investments, investors have received warrants from R&D III, allowing investors
to purchase the common stock of certain sponsor companies at predetermined
prices. To date, R&D III has made three distributions of warrants. In October
1995, investors received a warrant to purchase 40 shares of Alkermes, Inc.
("Alkermes") common stock per $10,000 investment in R&D III. The Alkermes
warrant is exercisable at a price of $5.00 per share through March 31, 2000. In
January 1994, investors received a warrant to purchase 100 shares of Cephalon
common stock per $10,000 investment in R&D III. The Cephalon warrant is
exercisable at a price of $11.32 per share through August 31, 1997 and at a
price of $13.82 per share from September 1, 1997 through August 31, 1999. In
August 1993, investors received a warrant to purchase 60 shares of Gensia common
stock per $10,000 investment in R&D III. The Gensia warrant is exercisable at a
price of $19.47 per share from August 1, 1996 through July 1998. In 1996, the
total value of the distributed warrants from R&D III ranged from $0 to $4,694
per $10,000 investment. The value of the distributed warrants based on the
respective dates of distribution is $980 per $10,000 investment in R&D III.
Thank you for your continued interest in R&D III.
Sincerely,
Robin Stanley
Vice President
PaineWebber Development Corporation
PAINEWEBBER R&D PARTNERS III, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
PRODUCT PORTFOLIO STATUS
ALKERMES, INC.
COMPANY
Alkermes, Inc. ("Alkermes") is developing innovative products based on
sophisticated drug delivery techniques for the treatment of central nervous
system disorders and for enhancing the effectiveness of existing
biopharmaceutical products. Alkermes lead products are ProLease(R), Medisorb(R)
and RMP-7(TM) which focus on two drug delivery opportunities: (i) controlled,
sustained release of injectable drugs lasting several days to several weeks; and
(ii) the delivery of drugs into the brain past the blood-brain barrier.
In December 1996, Alkermes announced the results of the two European Phase II
RMP-7 clinical trials designed to test the safety and efficacy of intravenous
RMP-7 and the chemotherapeutic agent carboplatin for treatment of patients with
recurrent, malignant brain tumors. The results showed that the drug combination
was well tolerated and provided positive responses as measured by patients'
neurological impairment, performance status and tumor volume.
Alkermes announced a new collaboration with R.W. Johnson Pharmaceutical Research
Institute ("PRI") a division of Johnson & Johnson for ProLease. Their objective
is to apply ProLease to a proprietary PRI compound being utilized for the
treatment of hormone disorders, enabling a single injection to last for several
weeks. In addition to the collaboration with PRI, Alkermes expanded their
current collaboration with Genentech Inc. for human growth hormone ("hGH").
Results from the Phase I clinical trial show that a single injection of ProLease
elevated hormone levels for as long as three to four weeks.
PROGRAM
R&D III committed $6.0 million to a $46.0 million limited partnership formed to
complete the development and human clinical trials of receptor mediated
permeabilizers ("RMPs"). In clinical studies completed to date, RMP-7 has been
shown to be safe when administered to volunteers and patients, and to increase
temporarily the permeability of the blood-brain barrier. Alkermes is currently
conducting Phase II clinical trials in the U.S. of RMP-7 delivered in
combination with carboplatin for the treatment of glioma, a type of primary
brain tumor. The Phase II studies are designed to test the efficacy of the
combination of RMP-7 and carboplatin in treating brain tumor. U.S. Phase II
trials are expected to be completed in the first half of 1997.
WARRANT
R&D III distributed the Alkermes warrant in August 1995. Investors received a
warrant to purchase 40 shares of Alkermes common stock per $10,000 investment in
R&D III with an exercise price of $5.00 per share through March 31, 2000. Based
on the closing price of $6.50 per share on the date of distribution, a warrant
to purchase 40 shares of Alkermes common stock had a value of approximately $60
per $10,000 unit. The available gain from the distributed Alkermes warrant has
ranged from $30 to $820 per $10,000 investment in R&D III.
ATHENA NEUROSCIENCES, INC.
COMPANY
Athena Neurosciences, Inc. ("Athena") and Elan Corporation plc ("Elan")
announced in June 1996, that the stockholders of each company approved the
merger of Elan and Athena. Under the merger agreement, Athena became a
wholly-owned subsidiary of Elan. Under the terms of the
PAINEWEBBER R&D PARTNERS III, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
agreement, Athena stockholders received 0.2956 Elan American Depository Shares
or ADSs for each common share of Athena they owned upon completion of the
merger. Elan subsequently effected a 2-for-1 stock split on August 23, 1996.
In June 1996, Elan purchased R&D III's rights in the Diastat development program
for $6 million. A cash distribution was made to R&D III investors for $1,180 per
$10,000 investment from the Diastat program acquisition. Elan announced in
December 1996, that they received an approved letter from the FDA for Diastat,
(diazepam solution for rectal administration) the anti-convulsant, to commence
marketing the product in the U.S.
market.
PROGRAM
R&D III committed $4.0 million to a product development program with Athena to
fund the further development of Diastat. Diastat is a treatment for young adults
and children with epilepsy who suffer from acute repetitive seizures. The panel
found the data submitted by Athena in the December 1995 NDA helped support the
FDA approval. Diastat will offer the convenience of at-home administration to
help control increased seizure activity, thereby enabling patients and families
to avoid visits to the emergency room and the economic and emotional costs
related to those visits. Diastat is a new proprietary gel formulation of
diazepam and is now available for those who require intermittent use of diazepam
to control bouts of increased seizure activity.
WARRANT
The R&D III callable warrant to purchase an additional 500,000 shares was
canceled upon exercise of the program purchase option by Elan on behalf of
Athena in June 1996. R&D III exercised the converted Elan warrants and
simultaneously sold the common stock resulting in a cash distribution in
December 1996 of $835.70 per $10,000 investment in R&D III. This will be the
last Product Portfolio Status report on Athena, since the consummation of the
merger and the complete exercise of the converted Elan warrants resulting in the
final cash payment to R&D III investors in this program.
CAYENNE SOFTWARE, INC.
COMPANY
Cayenne Software, Inc. ("Cayenne") is a publicly traded company, NNM: CAYN,
which supplies modeling, database design and development solutions for
commercial and technical application and database development. The new company
Cayenne Software, Inc. resulted from the July 1996 merger between the privately
held company Cadre Technologies Inc.("Cadre") and Bachman Information Systems,
Inc. ("Bachman").
PROGRAM
R&D III committed $1.5 million to Cadre's product development program which
funded the generation of software development tools for database applications.
R&D III does not expect any returns from this program.
WARRANT
In July 1996, Cadre warrants were converted into Cayenne warrants with the
Partnership owning a warrant to purchase 35,512 Cayenne common shares at a price
of $25.91 per share. Warrants from this transaction have not been distributed to
investors. The stock price of Cayenne closed on December 31, 1996 at a price of
$3.81.
PAINEWEBBER R&D PARTNERS III, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
CEPHALON, INC.
COMPANY
Cephalon, Inc. ("Cephalon") discovers and develops pharmaceutical products for
the treatment of neurological disorders. The company focuses primarily on
neurodegenerative diseases, which are characterized by the death of neurons, the
specialized conducting cells of the nervous system. Cephalon's product
development programs are directed toward promoting neuronal survival using
neurotrophic factors and various classes of small molecules.
Cephalon received significant news specifically in the development of
Myotrophin(TM). Myotrophin is a recombinant form of insulin-like growth factor,
a naturally occurring neurotrophic factor which is believed to participate in
the nervous system's normal attempt to recover from injury. The FDA granted
treament IND status for Myotrophin in June 1996. The panel based its decision on
the positive data from the U.S. clinical trial. The treatment IND program makes
investigational drugs available where no comparable or satisfactory therapies
exist. Cephalon and U.S. partner Chiron Corporation said that all U.S. patients
diagnosed with ALS are eligible to register for the Myotrophin treatment IND
expanded access program. Recently, the two companies submitted an NDA to the FDA
for clearance to market the drug in the United States. The agency has indicated
that it will give the NDA an expedited review.
PROGRAM
R&D III committed $6.0 million to Cephalon Clinical Partners, L.P., a $45.0
million limited partnership formed to fund the development and human clinical
trials of Myotrophin for use in the treatment of ALS and certain peripheral
neuropathies. In clinical studies conducted to date, Myotrophin has demonstrated
the ability to promote the survival of neurons and to enhance the regeneration
of peripheral nerves, suggesting its potential use as a therapeutic agent for
ALS and certain peripheral neuropathies. ALS is a fatal disorder of the nervous
system characterized by the chronic, progressive degeneration of motor neurons.
Peripheral neuropathy refers to a family of disorders of the peripheral nervous
system characterized by a degeneration of peripheral motor and sensory nerves.
In October 1996, Cephalon announced they exercised their option to expand their
license to include non-neurological and neurological applications with Sibia
Neuroscience Inc. The license previously covered certain proprietary
technologies related to the development and production of recombinant
insulin-like growth factors, which Cephalon uses in the production of IGF-1 or
Myotrophin, for neurological applications.
WARRANT
R&D III distributed the Cephalon warrant in January 1994. Investors received a
warrant to purchase 100 shares of Cephalon common stock per $10,000 investment
in R&D III with an exercise price of $11.32 per share through August 1997 and
$13.82 per share from September 1997 through August 1999. Based on the closing
price of $17.50 per share on the date of distribution and the initial exercise
price of $11.32 per share, a warrant to purchase 100 shares of Cephalon common
stock had a value of approximately $618 per $10,000 unit. The available gain
from the distributed Cephalon warrant has ranged from $0 to $3,018 per $10,000
investment in R&D III.
PAINEWEBBER R&D PARTNERS III, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
GENSIA, INC.
COMPANY
Gensia, Inc. ("Gensia") focuses on the development, manufacture and marketing of
health care products for the acute care and alternate site markets. Gensia also
conducts preclinical research and development on pharmaceutical products for the
treatment of cardiovascular, neurological and inflammatory diseases as well as
diabetes. Gensia Laboratories, Ltd., a subsidiary of Gensia, develops,
manufactures and markets multisource (generic) injectable drugs. Gensia
currently markets 25 multisource injectable drugs and has 13 ANDAs under review
at the FDA.
In November 1996, Gensia entered into a definitive agreement to acquire three
pharmaceutical companies from Rakepoll Finance N.V. in exchange for common
shares. Gensia will issue new shares of Gensia common stock to acquire the three
pharmaceutical companies: Sicor S.p.A. of Milan, Italy; Sintesis Lerma S.A. de
C.V.; and Lemery S.A. de C.V., both of Mexico. The new company will be called
Gensia Sicor Inc. and will be headquartered in San Diego. Gensia intends to
reorganize its research and development programs as a new public company called
Metabasis Therapeutics, subject to certain consents and availability of
financing. Gensia is planning to transfer all medical device assets, including
the GenESA(R) System, into a subsidiary to be called Gensia Automedics Inc. The
transaction was recently approved by a shareholder vote at a special meeting of
stockholders on February 26, 1997.
PROGRAM
R&D III committed $4.0 million to a $26.3 million limited partnership formed to
complete the development and human clinical trials of the GenESA System, a
product designed to enhance the diagnosis of cardiovascular disease. The GenESA
System combines a drug, arbutamine, and a computer-controlled drug
administration system designed to pharmacologically stress the heart. It is
expected that this system will aid in the diagnosis of patients who are
suspected of having cardiovascular disease but who are unable to undergo a
traditional exercise stress test due to an inability to exercise adequately.
Arbutamine is a drug developed to stimulate the heart pharmacologically and
thereby elicit certain cardiovascular responses caused by exercise.
In November 1996, Gensia filed an amendment to its new drug application, or NDA,
in the U.S. for the GenESA System. Gensia believes the additional clinical data
in the NDA amendment is supportive of the approval of the GenESA System. Gensia
has received approval of the GenESA System from the European Committee for
Proprietary Medicinal Products and from nine member countries of the European
community. Gensia Europe has commenced selling the GenESA System in the United
Kingdom and Germany. Gensia continues to believe that the GenESA System provides
significant clinical benefit when used in the diagnosis of coronary artery
disease in patients unable to exercise adequately. Gensia hopes to receive U.S.
approval of the GenESA System during 1997.
WARRANT
R&D III distributed the Gensia warrant in August 1993. Investors received a
warrant to purchase 60 shares of Gensia common stock per $10,000 investment in
R&D III with an exercise price of $17.47 per share, which expired July 1996 and
$19.47 per share from August 1996 through July 1998. Based on the closing price
of $22.50 on the date of distribution and the initial exercise price of $17.47
per share, a warrant to purchase 60 shares of Gensia common stock had a value of
approximately $302 per $10,000 unit. The available gain from the distributed
Gensia warrant has ranged from $0 to $857 per $10,000 investment in R&D III.
PAINEWEBBER R&D PARTNERS III, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
PHARMAGENICS, INC.
COMPANY
PharmaGenics, Inc. ("PGI") recently announced that Genzyme Corporation
("Genzyme") has signed a definitive agreement to acquire PGI in exchange for
shares, subject to adjustment, of a new Genzyme tracking stock. PGI's programs
and technologies will be combined with several oncology projects within
Genzyme's General Division to form Genzyme Molecular Oncology, a new division of
the corporation. This new unit will develop and commercialize molecular
approaches to cancer diagnosis and therapy by integrating four key technologies:
genomics, gene therapy, genetic diagnostics, and a small-molecule combinatorial
chemistry drug discovery program.
PGI, established in 1990, has benefited from leading-edge cancer research being
conducted by its collaborators Drs. Bert Vogelstein and Kenneth Kinzler of The
Johns Hopkins University School of Medicine. PGI has also built a portfolio of
rights to specific cancer-related genes and has generated proprietary screens to
identify small-molecule drug discovery targets. Genzyme Molecular Oncology will
combine the strengths of these four key technologies which will include PGI's
proprietary SAGE (serial analysis of gene expression) a powerful
high-throughput, high-efficiency method of simultaneously measuring levels of
gene expression.
The unit begins operations with extensive academic and medical collaborations
with groups such as the National Cancer Institute, the Imperial Cancer Research
Fund, The Johns Hopkins University, Dana Farber Cancer Center and Memorial Sloan
Kettering Cancer Institute.
PROGRAM
R&D III committed $5.0 million to a product development program with PGI
utilizing PGI's combinatorial chemistry technology to discover novel
therapeutics selected from combinatorial chemistry libraries for up to four
targets. In addition, R&D III made a $1.0 million equity investment in 1995 and
received 480,242 shares of PharmaGenics Series C Convertible Preferred Stock.
WARRANTS
R&D III holds a Core Warrant to purchase 1,000,000 shares of PGI common stock
exercisable from July 1, 1996 to June 30, 2001 (if PGI does not complete an
initial public offering of its common stock by July 1, 1996) and a Callable
Warrant to purchase 666,667 shares of PGI common stock that is exercisable under
certain conditions in connection with PharmaGenics' purchase option and an
initial public offering. The exercise price of the Core and Callable Warrants is
$2.15 per share.
REPLIGEN CORPORATION
COMPANY
Prior to restructuring in March 1996, Repligen Corporation ("Repligen") has
developed pharmaceutical products primarily in the areas of cancer, inflammatory
disease and cardiovascular conditions. In April 1996, Repligen communicated to
investors in the Repligen Clinical Partners, L.P. ("RCP") that the company had
terminated the research funding program with recombinant Platelet Factor-4
("rPF4"), the product being developed with funding from RCP, the partnership in
which R&D III had participated. Repligen stated in a letter to shareholders in
April 1996, that rPF4 had been evaluated in several clinical trials and showed
an excellent safety profile and potentially useful clinical activity.
PAINEWEBBER R&D PARTNERS III, L.P. ANNUAL REPORT 1996
- --------------------------------------------------------------------------------
PROGRAM
R&D III committed $6.0 million to Repligen Clinical Partners, L.P. ("RCP"), a
$45.0 million limited partnership formed to fund the further clinical
development of rPF4. rPF4 is being developed to reverse the effects of heparin,
a drug commonly used in patients undergoing heart surgery and in other
situations to prevent the formation of blood clots. rPF4 may also retard the
growth of solid tumors by inhibiting the formation of new blood vessels
necessary for tumors to grow.
Since the RCP funds have been depleted and Repligen was not successful in
attempts to raise additional funds for the rPF4 program, Repligen has returned
rights to rPF4 to RCP in exchange for the termination of the research program.
The Board of Directors of the general partner of RCP are exploring various
alternatives to maximize the value of the rPF4 technology to limited partners.
WARRANTS
R&D III holds a warrant to purchase 385,700 shares of Repligen common stock.
133,000 shares are exercisable at $2.50 per share and 252,700 are exercisable at
$3.50 per share. The warrant is exercisable from April 1, 1995 through March 31,
2001.
EXHIBIT C PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
POLICY REGARDING REQUESTS FOR PARTNER LISTS
-------------------------------------------
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
General Partner of the Partnership has established standards applicable to
requests for lists of Limited Partners. These standards have been established in
order to assure (1) that the lists are not used for an improper or inappropriate
purpose or in any way that might be detrimental to the Partnership or the
Limited Partners; (2) that the Limited Partners have 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 do not face an increased risk of adverse tax consequences as a
direct or indirect result of any such solicitation or communication.
The 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 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, (2) to reimburse the Partnership for
costs incurred in connection with the request and for a 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 therewith. 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 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 and Exchange Act of 1934 and the rules of the
Securities and Exchange Commission thereunder, including full disclosure of all
material facts and, in the case of any tender offer, rights of proration and
withdrawal rights, irrespective of the number of interests or units sought, and
(2) to refrain from acquiring interests or units of any number if the General
Partners, based upon advice from counsel, conclude that such acquisition would
increase the risk of adverse tax consequences to the Partnership or the
Partners.
The General Partner shall endeavor to inform the requesting party within
30 days of receipt of the requisite undertakings whether they consider that the
proposed use of the list is improper or inappropriate or would increase the risk
of such adverse tax consequences, and may request such further assurances as may
be necessary in order to enable them to make any of the determinations specified
above.