10-Q 1 form10q-q302.txt FORM 10-Q FOR THE QUARTER ENDED 09-30-02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 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, 2002 Table of Contents PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Statements of Financial Condition (unaudited) at September 30, 2002 and December 31, 2001 2 Statements of Operations (unaudited) for the three months and nine months ended September 30, 2002 and 2001 3 Statement of Changes in Partners' Capital (Deficit) (unaudited) for the nine months ended September 30, 2002 4 Statements of Cash Flows (unaudited) for the nine months ended September 30, 2002 and 2001 5 Notes to Financial Statements (unaudited) 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-11 Item 3. Quantitative and Qualitative Disclosures about Market Risks 12 Item 4. Controls and Procedures 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Certifications 15-18 All schedules are omitted either because they are not applicable or the information required to be submitted has been included in the financial statements or notes thereto. 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, 2002 2001 -------------------------------------------------------------------------------- Assets: Marketable securities, at market value $1,347,377 $4,783,593 ========== ========== Liabilities and partners' capital: Accrued liabilities $ 61,088 $ 92,681 Partners' capital 1,286,289 4,690,912 ---------- ---------- Total liabilities and partners' capital $1,347,377 $4,783,593 ========== ========== -------------------------------------------------------------------------------- See notes to financial statements. 2 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS (unaudited)

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)

See notes to financial statements. 4 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 -------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $(3,404,623) $(1,186,522) Adjustments to reconcile net loss to cash provided by operating activities: Unrealized depreciation of marketable securities 3,283,673 1,072,799 Decrease in operating assets: Marketable securities 152,543 126,461 Decrease in operating liabilities: Accrued liabilities (31,593) (12,738) ----------- ----------- Cash provided by operating activities -- -- ----------- ----------- Cash flows from financing activities: Distributions to partners -- -- ----------- ----------- 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, 2002 and 2001. -------------------------------------------------------------------------------- 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, 2002, and for the periods ended September 30, 2002 and 2001 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 period ended September 30, 2002, are not necessarily indicative of results to be expected for the year ended December 31, 2002. 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, 2001 and the previously issued quarterly reports on Forms 10-Q for the quarters ended March 31, 2002 and June 30, 2002. 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.) 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. 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 nine months ended September 30, 2002, the Partnership made no cash distributions. As of this date, 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, 2002, the cumulative profits of the Partnership were $775 per Unit. Pursuant to the terms of the Agreement of Limited Partnership, upon termination of the Partnership, the General Partner is required to pay to the Partnership an amount in cash equal to the debit balance in the General Partner's capital account. Such amount then becomes part of the assets of the Partnership. 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: SEPTEMBER 30, 2002 DECEMBER 31, 2001 ----------------------- ----------------------- CARRYING CARRYING VALUE COST VALUE COST ----- ---- ----- ---- Money market fund $ 248,072 $ 248,072 $ 400,615 $ 400,615 Genzyme Molecular Oncology (461,091 common shares) 456,481 646,609 3,688,728 646,609 Repligen Corporation (285,700 common shares) 642,824 901,433 694,250 901,433 ---------- ---------- ---------- ---------- $1,347,377 $1,796,114 $4,783,593 $1,948,657 ========== ========== ========== ========== As of September 30, 2002, the market value of Genzyme Molecular Oncology ("GMO") was $0.99 per share as compared to $2.52 per share and $8.00 per share as of June 30, 2002 and December 31, 2001, respectively. The Partnership recognized unrealized depreciation on its investment of 461,091 shares for the three months and nine months ended September 30, 2002 of $705,469 and $3,232,248, respectively. As of September 30, 2001 and June 30, 2001, the market value of GMO was $7.75 per share and $13.55 per share, respectively. The carrying value at December 31, 2000 was $9.1875 per share resulting in the recognition of unrealized depreciation of $2,674,328 and $662,819 for the three months and nine months ended September 30, 2001, respectively. The market value of Repligen Corporation ("Repligen") as of September 30, 2002 was $2.25 per share decreasing from $2.26 per share as of June 30, 2002 and $2.43 per share as of December 31, 2001. The Partnership recognized unrealized depreciation on its investment of 285,700 shares of $51,426 for the nine months ended September 30, 2002. 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 carrying value as of December 31, 2000 of $3.375 per share. Accordingly, the Partnership recognized unrealized depreciation for the three months and nine months ended September 30, 2001 of $131,422 and $409,980, respectively. 8 PAINEWEBBER R&D PARTNERS III, L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 4. RELATED PARTY TRANSACTIONS The money market fund invested in by the Partnership is managed by an affiliate of UBS PaineWebber Inc. ("PWI"). PWDC and PWI, and their 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, 2002 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. 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 $4.7 million at December 31, 2001 to $1.3 million at September 30, 2002 resulting from the recognition of a net loss of $3.4 million for the nine months ended September 30, 2002 (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 $4.8 million at December 31, 2001 to $1.3 million at September 30, 2002 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, 2002 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001: Net loss for the quarters ended September 30, 2002 and 2001 was $0.7 million and $2.8 million, respectively, resulting primarily from the recognition of unrealized depreciation of marketable securities. For the quarter ended September 30, 2002, the Partnership recognized unrealized depreciation of $0.7 million on its investments of 0.461 million shares of GMO. The market value of GMO decreased from $2.52 per share as of June 30, 2002 to $0.99 per share as of September 30, 2002. For the quarter ended September 30, 2001, the Partnership recognized unrealized depreciation of $2.8 million. GMO had a market value as of this date of $7.75 per share as compared to $13.55 per share as of June 30, 2001. Accordingly, the Partnership recognized unrealized depreciation of $2.7 million for this period. The Partnership recognized unrealized depreciation of $0.1 million upon the decrease of Repligen's market value from $2.40 per share as of June 30, 2001 to $1.94 per share at September 30, 2001. The Partnership had an investment of 0.285 million shares in Repligen. There were no material variances in expenses for the three months ended September 30, 2002 as compared to the same period in 2001. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001: For the nine months ended September 30, 2002, the Partnership recognized a net loss of $3.4 million as compared to a net loss of $1.2 million for this same period in 2001. The variance results primarily from an unfavorable change in unrealized depreciation of marketable securities. The Partnership recognized unrealized depreciation of $3.3 million for the nine months ended September 30, 2002 resulting primarily from its investment of 0.461 million shares of GMO. GMO's market value decreased from $8.00 per share at December 31, 2001 to $0.99 per share as of September 30, 2002. For this same period ended September 30, 2001, the Partnership recognized unrealized depreciation of $1.1 million. The market value of GMO as of this date was $7.75 per share as compared to a carrying value of $9.1875 per share as of December 31, 2000. The Partnership 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001: recognized unrealized depreciation of $0.7 million for the nine months ended September 30, 2001. 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. There were no material variances in expenses for the nine months ended September 30, 2002 as compared to the same period in 2001. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Substantially all of the Partnership's non-cash assets consist of 461,091 shares of GMO and 285,700 shares of Repligen. The Partnership acquired these shares in connection with its investments in Projects. The Partnership holds these shares until cash is needed for the payment of Partnership expenses or to make cash distributions to the Partners. The carrying values of investments subject to equity price risks are based on quoted market prices as of the balance sheet dates. Market prices are subject to fluctuation and, consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the issuer, the relative price of alternative investments and general market conditions. Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the security being sold. The table below summarizes the Partnership's equity price risks as of September 30, 2002 and 2001 and shows the effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates. The selected hypothetical change does not reflect what could be considered the best or worst case scenarios. Indeed, results could be far worse due to the nature of the equity markets.

ITEM 4. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The President and Principal Financial Officer of the General Partner, after evaluating the effectiveness of the Partnership's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q (the "Evaluation Date")), have concluded that as of the Evaluation Date, the Partnership's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Partnership would be made known to them by others within the General Partner or its affiliates, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared. (b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the Partnership's internal controls or in other factors that could significantly affect the Partnership's internal controls subsequent to the date of their evaluation, nor any significant deficiencies or material weaknesses in such internal controls requiring corrective actions. As a result, no corrective actions were taken. 12 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) EXHIBITS: 99.1 Certification by Robert J. Chersi pursuant to 18 U.S.S. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification by Stephen R. Dyer pursuant to 18 U.S.S. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b) REPORTS ON FORM 8-K: None 13 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 2002. 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 14 CERTIFICATIONS -------------- I, Stephen R. Dyer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PaineWebber R&D Partners III, L.P. (the "Partnership"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report; 4. The Partnership's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Partnership is made known to us by others within the Partnership, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Partnership's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Partnership's other certifying officers and I have disclosed, based on our most recent evaluation, to the Partnership's auditors and the audit committee of the board of directors of the Partnership's general partner (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership's ability to record, process, summarize and report financial data and have identified for the Partnership's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership's internal controls. 6. The Partnership's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Stephen R. Dyer --------------------------------------- Name: Stephen R. Dyer Title: President of PaineWebber Development Corp., General Partner of the Partnership 15 CERTIFICATIONS -------------- I, Robert J. Chersi, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PaineWebber R&D Partners III, L.P. (the "Partnership"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report; 4. The Partnership's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Partnership is made known to us by others within the Partnership, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Partnership's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Partnership's other certifying officers and I have disclosed, based on our most recent evaluation, to the Partnership's auditors and the audit committee of the board of directors of the Partnership's general partner (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership's ability to record, process, summarize and report financial data and have identified for the Partnership's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership's internal controls. 6. The Partnership's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Robert J. Chersi --------------------------------------- Name: Robert J. Chersi Title: Principal Financial Officer of PaineWebber Development Corp.,as General Partner of the Partnership 16

PAINEWEBBER R&D PARTNERS III L P 10-Q