10-Q 1 form10q301.txt FORM 10-Q FOR THE QUARTER ENDED 09/30/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q UNITED STATES SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ______ TO ______ Commission File Number 33-35938 PAINEWEBBER R&D PARTNERS III, L.P. (Exact name of registrant as specified in its charter) DELAWARE 13-3588219 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (212) 713-2000 -------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] -------------------- SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Except for the historical information contained herein, the matters discussed herein are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of PaineWebber R&D Partners III, L.P. or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; fluctuations in the value of securities for which only a limited, or no, public market exists; dependence on the development of new technologies; dependence on timely development and introduction of new and competitively priced products; the need for regulatory approvals; the Sponsor Companies (hereinafter defined) having insufficient funds to commercialize products to their maximum potential; the restructuring of Sponsor Companies; the dependence of PaineWebber R&D Partners III, L.P. on the skills of certain scientific personnel; and the dependence of PaineWebber R&D Partners III, L.P. on the General Partner (hereinafter defined). PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) FORM 10-Q SEPTEMBER 30, 2001 Table of Contents PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Statements of Financial Condition (unaudited) at September 30, 2001 and December 31, 2000 2 Statements of Operations (unaudited) for the three months and nine months ended September 30, 2001 and 2000 3 Statement of Changes in Partners' Capital (Deficit) (unaudited) for the nine months ended September 30, 2001 4 Statements of Cash Flows (unaudited) for the nine months ended September 30, 2001 and 2000 5 Notes to Financial Statements (unaudited) 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 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. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF FINANCIAL CONDITION (unaudited) SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------------------------------------------------------------------------- Assets: Marketable securities, at market value $ 4,544,195 $ 5,743,455 ----------- ----------- Total assets $ 4,544,195 $ 5,743,455 =========== =========== Liabilities and partners' capital: Accrued liabilities $ 73,452 $ 86,190 Partners' capital 4,470,743 5,657,265 ----------- ----------- Total liabilities and partners' capital $ 4,544,195 $ 5,743,455 =========== =========== -------------------------------------------------------------------------------- See notes to financial statements. 2 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS (unaudited) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 -------------------------------------------------------------------------------- Revenues: Interest income $ 3,843 $ 8,684 Unrealized (depreciation) appreciation of marketable securities (2,805,750) 241,059 ----------- ----------- (2,801,907) 249,743 ----------- ----------- Expenses: General and administrative costs 43,952 42,558 ----------- ----------- Net income (loss) $(2,845,859) $ 207,185 =========== =========== Net income (loss) per partnership unit: Limited partners (based on 50,000 units) $ (56) $ 4 General partner $ (28,459) $ 2,072 ================================================================================ For the nine months ended September 30, 2001 2000 -------------------------------------------------------------------------------- Revenues: Interest income $ 15,893 $ 203,608 Unrealized (depreciation) appreciation of marketable securities (1,072,799) 4,242,607 Realized gain on sale of marketable securities -- 9,465,802 ----------- ----------- (1,056,906) 13,912,017 ----------- ----------- Expenses: General and administrative costs 129,616 123,482 ----------- ----------- Net income (loss) $(1,186,522) $13,788,535 =========== =========== Net income (loss) per partnership unit: Limited partners (based on 50,000 units) $ (23) $ 273 General partner $ (11,865) $ 137,885 -------------------------------------------------------------------------------- See notes to financial statements. 3 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) (unaudited)

4 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 -------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ (1,186,522) $ 13,788,535 Adjustments to reconcile net income (loss) to cash provided by operating activities: Unrealized depreciation (appreciation) of marketable securities 1,072,799 (4,242,607) Decrease in operating assets: Marketable securities 126,461 2,155,528 Decrease in operating liabilities: Accrued liabilities (12,738) (28,628) ------------ ------------ Cash provided by operating activities -- 11,672,828 ------------ ------------ Cash flows from financing activities: Distributions to partners -- (11,672,828) ------------ ------------ Cash at beginning of period -- -- ------------ ------------ Cash at end of period $ -- $ -- ============ ============ -------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: The Partnership paid no cash for interest or taxes during the nine months ended September 30, 2001 and 2000. -------------------------------------------------------------------------------- See notes to financial statements. 5 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BUSINESS The financial information as of September 30, 2001, and for the periods ended September 30, 2001 and 2000 is unaudited. However, in the opinion of management of PaineWebber R&D Partners III, L.P. (the "Partnership"), such information includes all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The results of operations reported for the interim periods ended September 30, 2001, are not necessarily indicative of results to be expected for the year ended December 31, 2001. These financial statements should be read in conjunction with the most recent annual report of the Partnership on Form 10-K for the year ended December 31, 2000 and the previously issued quarterly report on Form 10-Q for the quarter ended June 30, 2001. 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 UBS Americas Inc. (formerly Paine Webber Group Inc. ("PWG"))1 is the general partner and manager of the Partnership. The Partnership will terminate on December 15, 2015, unless its term is extended or reduced by the General Partner. The principal objective of the Partnership has been to provide long-term capital appreciation to investors through investing in the development and commercialization of new products with technology and biotechnology companies ("Sponsor Companies"), which have been expected to address significant market opportunities. The Partnership has been engaged in diverse product development projects (the "Projects") including product development contracts, participation in other partnerships and investments in securities of Sponsor Companies. Once the product development phase has been completed, the Sponsor Companies have had the option to license and commercialize the products resulting from the product development project, and the Partnership has had the right to receive payments based upon the sale of such products. The Partnership obtained warrants to purchase the common stock of Sponsor Companies to provide additional capital appreciation to the Partnership which was not directly dependent upon the outcome of the Projects (see Note 5). ------------------------ 1 On November 3, 2000, pursuant to the Agreement and Plan of Merger dated as of July 12, 2000 by and among PWG, UBS AG and UBS Americas Inc., PWG merged with and into UBS Americas Inc. The General Partner does not expect this transaction to have a material effect on the Partnership. 6 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (NOTE 1 CONTINUED) The following table sets forth the proportion of each distribution to be received by limited partners of the Partnership (the "Limited Partners") and the General Partner (collectively the "Partners"). All distributions to the individual Limited Partners have been made pro rata in accordance with their individual capital contributions.

For the three months and nine months ended September 30, 2001, the Partnership made no cash distributions. At September 30, 2001, the Partnership has made cash and security distributions, as valued on the dates of distribution, since inception of $1,483 and $98 per Unit, respectively. Aggregate distributions per Unit reached Contribution Payout as of June 30, 2000. Profits and losses of the Partnership are allocated as follows: (i) until cumulative profits and losses for each Unit equals Contribution Payout, 99% to Limited Partners and 1% to the General Partner, (ii) after Contribution Payout and until cumulative profits and losses for each unit equals Final Payout, 80% to Limited Partners and 20% to the General Partner, and (iii) after Final Payout, 75% to Limited Partners and 25% to the General Partner. As of September 30, 2001, the cumulative profits of the Partnership were $839 per Unit. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared in conformity with accounting principles generally accepted in the United States which require management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Marketable securities consist of a money market fund and common stock which are recorded at market value. Marketable securities are not considered cash equivalents for the Statements of Cash Flows. Realized and unrealized gains or losses are generally determined on a specific identification method and are reflected in the Statements of Operations during the period in which the sale or change in value occurs. 7 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (NOTE 2 CONTINUED) The Partnership invests in product development contracts with Sponsor Companies either directly or through product development limited partnerships. The Partnership expenses product development costs when incurred by the Sponsor Companies and such costs are reflected as expenditures under product development projects. Income received and/or accrued from investments in Projects is reflected in the Statements of Operations for the period in which the income is earned. 3. MARKETABLE SECURITIES The Partnership held the following marketable securities at:

As of June 30, 2000, the Partnership sold 252,000 shares of Genzyme Molecular Oncology ("GMO") for proceeds of $8,968,599 (average price per share of $35.59). The shares had a carrying value as of December 31, 1999 of $1,764,000 ($7.00 per share) and, accordingly, the Partnership recognized a gain from the sale of $7,204,599 for the nine months then ended. At September 30, 2000 and June 30, 2000, the market value of GMO was $13.875 per share. The Partnership recognized unrealized appreciation on its remaining investment of 461,091 shares of $3,170,000 for the nine months ended September 30, 2000. As of September 30, 2001 and June 30, 2001, the market value of the Partnership's investment was $7.75 per share and $13.55 per share, respectively, as compared to a carrying value at December 31, 2000 of $9.1875 per share. The Partnership recognized unrealized depreciation of $2,674,328 and $662,819 for the three months and nine months ended September 30, 2001, respectively. At December 31, 1999 the Partnership owned warrants to purchase 133,000 and 252,700 shares of Repligen Corporation ("Repligen") at exercise prices of $2.50 per share and $3.50 per share, respectively. The market value of Repligen as of this date was $3.125 per share. The Partnership recorded its warrant to purchase 133,000 shares at the intrinsic value of $83,124. In March 2000 the Partnership exercised the warrants at an aggregate exercise price of $1,216,950. The Partnership sold 100,000 shares for aggregate proceeds of $1,584,026 (average price per share of $15.84). The Partnership recognized a gain from the sale for the nine months ended September 30, 2000 of $1,246,957. At September 30, 2000 and June 30, 2000, the market value of Repligen was $7.125 per share and $6.28125 per share, respectively. The Partnership recognized unrealized appreciation for the three months and nine months ended September 30, 2000 on its remaining investment of 285,700 shares of $241,059 and $1,072,606, respectively. As of September 30, 2001 and June 30, 2001, the market value of Repligen was $1.94 and $2.40 per share as compared to a 8 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (NOTE 3 CONTINUED) carrying value of $3.375 per share as of December 31, 2000. The Partnership recognized unrealized depreciation for the three months and nine months ended September 30, 2001 of $131,422 and $409,980, respectively. In March 2000, the Partnership sold its investment of 7,293 shares of Alkermes, Inc. ("Alkermes") for proceeds of $1,372,515 ($188.20 per share). The carrying value of the shares was $358,269 ($49.125 per share) and, accordingly, the Partnership recognized a gain from the sale of $1,014,246 for the nine months ended September 30, 2000. 4. RELATED PARTY TRANSACTIONS The General Partner is entitled to receive an annual management fee for management and administrative services provided to the Partnership. As of January 1, 1997, the General Partner elected to discontinue the management fee charged to the Partnership. The money market fund invested in by the Partnership is managed by an affiliate of UBS PaineWebber Inc. ("PWI"). PWDC and PWI, and its affiliates, have acted in an investment banking capacity for several of the Sponsor Companies. In addition, PWDC and its affiliates have direct limited partnership interests in some of the same product development limited partnerships as the Partnership. 5. PRODUCT DEVELOPMENT PROJECTS Of the Partnership's seven original Projects, the following two Projects are currently active: a $6.0 million investment in Alkermes Clinical Partners, L.P., a $46.0 million limited partnership formed to fund the development, clinical testing, manufacturing and marketing of Receptor-Mediated Permeabilizers for use in the treatment of diseases of the brain and central nervous system by enabling the delivery of drugs across the blood brain barrier; and a $6.0 million investment in Cephalon Clinical Partners, L.P., a $45.0 million limited partnership formed to fund the development, clinical testing, manufacturing and marketing of Myotrophin(TM) for use in the treatment of amyotrophic lateral sclerosis and certain other peripheral neuropathies. As of September 30, 2001 the Partnership is carrying these investments at zero. 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. As of September 30, 2001, the Partnership had exercised all of its warrants. 6. INCOME TAXES The Partnership is not subject to federal, state or local income taxes. Accordingly, individual Partners are required to report their distributive share of realized income or loss on their respective federal and state income tax returns. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES Partners' capital decreased from $5.7 million at December 31, 2000 to $4.5 million at September 30, 2001 resulting from the recognition of a net loss of $1.2 million for the nine months ended September 30, 2001 (as discussed in the Results of Operations below). The Partnership's funds are invested in a money market fund and marketable securities until cash is needed for the payment of ongoing management and administrative expenses incurred or remittance of cash distributions to Partners. Liquid assets decreased from $5.7 million at December 31, 2000 to $4.5 million at September 30, 2001 resulting primarily from a decrease in the market values of marketable securities held as of these dates. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000: Net income (loss) for the quarters ended September 30, 2001 and 2000 was $(2.8) million and $0.2 million, respectively, resulting primarily from net revenues of these amounts. Net revenues decreased as a result of an unfavorable change in unrealized appreciation (depreciation) of marketable securities of $3.0 million. The market value of GMO at September 30, 2001 was $7.75 per share as compared to a carrying value of $13.55 per share as of June 30, 2001. The Partnership recognized unrealized depreciation of $2.7 million on its investment of 0.461 million shares. The market value of Repligen decreased from $2.40 per share at June 30, 2001 to $1.94 per share at September 30, 2001 resulting in unrealized depreciation of $0.1 million on an investment of 0.285 million shares. As of September 30, 2000, the market value of Repligen was $7.125 per share as compared to June 30, 2000 carrying value of $6.28125 per share. The Partnership recognized unrealized apppreciation of $0.2 million on its investment of 0.285 million shares. The market value of GMO did not change from June 30, 2001 to September 30, 2001. There were no material variances in expenses for the three months ended September 30, 2001 as compared to the same period in 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000: Net income (loss) for the nine months ended September 30, 2001 and 2000 was $(1.2) million and $13.8 million. Net revenues decreased by $15.0 million resulting primarily from decreases in realized gains on sales of marketable securities of $9.5 million and an unfavorable change in unrealized appreciation (depreciation) of marketable securities of $5.3 million. During the nine months ended September 30, 2000, the Partnership sold 0.252 million shares of GMO for proceeds of $9.0 million (average price per share of $35.59) with a carrying value of $1.8 million ($7.00 per share) at December 31, 1999 and recognized a gain of $7.2 million. Also, the Partnership sold 0.1 million shares of Repligen for proceeds of $1.6 million (average price per share of $15.84) and recognized a gain of $1.3 million. The Partnership exercised its warrant for 7,293 shares of Alkermes at $5.00 per share bringing the carrying value to $49.124 per share and sold 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. the shares for $188.20 per share recognizing a gain of $1.0 million. Unrealized (depreciation) appreciation of marketable securities for the nine months ended September 30, 2001 and 2000 was $(1.1) million and $4.3 million, respectively. The market value of GMO at September 30, 2001 was $7.75 per share as compared to a carrying value of $9.1875 per share as of December 31, 2000. The Partnership recognized unrealized depreciation of $0.7 million on its investment of 0.461 million shares. The market value of Repligen decreased from $3.375 per share at December 31, 2000 to $1.94 per share at September 30, 2001 resulting in unrealized depreciation of $0.4 million on an investment of 0.285 million shares. At September 30, 2000, the market value of GMO was $13.875 per share as compared to a carrying value of $7.00 per share at December 31, 1999. The Partnership recognized unrealized appreciation of $3.2 million on its investment of 0.461 million shares for the nine months ended September 30, 2000. Also, as of this date, the market value of Repligen was $7.125 per share as compared to a weighted average carrying value of $3.37069 per share at December 31, 1999. Thus, the Partnership recognized unrealized appreciation of $1.1 million on its investment of 0.285 million shares. 11 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) EXHIBITS: None b) REPORTS ON FORM 8-K: None 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 14th day of November 2001. PAINEWEBBER R&D PARTNERS III, L.P. By: PaineWebber Development Corporation (General Partner) By: /s/ Stephen R. Dyer ----------------------------------- Stephen R. Dyer President By: /s/ Robert J. Chersi ----------------------------------- Robert J. Chersi Principal Financial and Accounting Officer 13

PAINEWEBBER R&D PARTNERS III L P 10-Q