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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 JUNE 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
JUNE 30, 2002
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Statements of Financial Condition (unaudited) at June 30, 2002
and December 31, 2001 2
Statements of Operations
(unaudited) for the six months ended June 30, 2002 and 2001
3
Statement of Changes in Partners' Capital (Deficit) (unaudited)
for the six months ended June 30, 2002 4
Statements of Cash Flows
(unaudited) for the six months ended June 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
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)
- --------------------------------------------------------------------------------
June 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
Assets:
Marketable securities, at market value $2,108,138 $4,783,593
========== ==========
Liabilities and partners' capital:
Accrued liabilities $ 72,704 $ 92,681
Partners' capital 2,035,434 4,690,912
---------- ----------
Total liabilities and partners' capital $2,108,138 $4,783,593
========== ==========
- --------------------------------------------------------------------------------
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 June 30, 2002 2001
- --------------------------------------------------------------------------------
Revenues:
Interest income $ 1,271 $ 5,266
Unrealized (depreciation) appreciation
of marketable securities (1,938,071) 2,308,074
----------- -----------
(1,936,800) 2,313,340
----------- -----------
Expenses:
General and administrative costs 53,341 43,631
----------- -----------
Net income (loss) $(1,990,141) $ 2,269,709
=========== ===========
Net income (loss) per partnership unit:
Limited partners (based on 50,000 units) $ (39.40) $ 44.94
General partner $(19,901.41) $ 22,697.09
- --------------------------------------------------------------------------------
For the six months ended June 30, 2002 2001
- --------------------------------------------------------------------------------
Revenues:
Interest income $ 2,586 $ 12,050
Unrealized (depreciation) appreciation
of marketable securities (2,575,347) 1,732,951
----------- -----------
(2,572,761) 1,745,001
----------- -----------
Expenses:
General and administrative costs 82,717 85,664
----------- -----------
Net income (loss) $(2,655,478) $ 1,659,337
=========== ===========
Net income (loss) per partnership unit:
Limited partners (based on 50,000 units) $ (52.58) $ 32.85
General partner $(26,554.78) $ 16,593.37
- --------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------
Limited General
For the six months ended June 30, 2002 Partners Partner Total
- ------------------------------------------------------------------------------------------
Balance at January 1, 2002 $ 6,198,567 $(1,507,655) $ 4,690,912
Net loss (2,628,923) (26,555) (2,655,478)
----------- ----------- -----------
Balance at June 30, 2002 $ 3,569,644 $(1,534,210) $ 2,035,434
=========== =========== ===========
- ------------------------------------------------------------------------------------------
See notes to financial statements.
4
PAINEWEBBER R&D PARTNERS III, L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(unaudited)
- ----------------------------------------------------------------------------------------------------------
For the six months ended June 30, 2002 2001
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(2,655,478) $ 1,659,337
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Unrealized (depreciation) appreciation of marketable securities 2,575,347 (1,732,951)
Decrease in operating asset:
Marketable securities 100,108 101,919
Decrease in operating liabilities:
Accrued liabilities (19,977) (28,305)
----------- -----------
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 six months ended
June 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 June 30, 2002, and for the periods ended
June 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 June 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 report on Form 10-Q for the quarter ended March 31, 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. ("PWG")) 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.
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") Contribution
Payout as of June 30, 2002 is $1,550 per
Unit............................................ 99% 1%
II. After Contribution Payout and until the
value of the aggregate distributions for
each Unit equals $5,000 ("Final Payout")........ 80% 20%
III. After Final Payout.............................. 75% 25%
For the six months ended June 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 have reached
Contribution Payout.
Profits and losses of the Partnership are allocated as follows: (i) until
cumulative profits and losses for each Unit equals Contribution Payout, 99% to
Limited Partners and 1% to the General Partner, (ii) after Contribution Payout
and until cumulative profits and losses for each unit equals Final Payout, 80%
to Limited Partners and 20% to the General Partner, and (iii) after Final
Payout, 75% to Limited Partners and 25% to the General Partner. As of June 30,
2002, the cumulative profits of the Partnership were $790 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:
JUNE 30, 2002 DECEMBER 31, 2001
----------------------- -----------------------
CARRYING CARRYING
VALUE COST VALUE COST
---------- ---------- ---------- ----------
Money market fund $ 300,507 $ 300,507 $ 400,615 $ 400,615
Genzyme Molecular Oncology
(461,091 common shares) 1,161,950 646,609 3,688,728 646,609
Repligen Corporation
(285,700 common shares) 645,681 901,433 694,250 901,433
---------- ---------- ---------- ----------
$2,108,138 $1,848,549 $4,783,593 $1,948,657
========== ========== ========== ==========
As of June 30, 2002, the market value of Genzyme Molecular Oncology
("GMO") was $2.52 per share as compared to $5.80 per share and $8.00 per share
as of March 31, 2002 and December 31, 2001, respectively. The Partnership
recognized unrealized depreciation on its investment of 461,091 shares for the
three months and six months ended June 30, 2002 of $1,512,378 and $2,526,778,
respectively. As of June 30, 2001 and March 31, 2001, the market value of GMO
was $13.55 per share and $8.25 per share, respectively. The carrying value at
December 31, 2000 was $9.1875 per share resulting in the recognition of
unrealized appreciation of $2,443,782 and $2,011,509 for the three months and
six months ended June 30, 2001, respectively.
The market value of Repligen Corporation ("Repligen") as of June 30, 2002
was $2.26 per share decreasing from $3.75 per share as of March 31, 2002 and
$2.43 per share as of December 31, 2001. The Partnership recognized unrealized
depreciation on its investment of 285,700 shares of $425,693 for the quarter
ended June 30, 2002 and $48,569 for the six months then ended. As of June 30,
2001 and March 31, 2001, the market value of Repligen was $2.40 and $2.875 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 six months ended June 30, 2001 of $135,708 and $278,558,
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 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
June 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
$2.0 million at June 30, 2002 resulting from the recognition of a net loss of
$2.7 million for the six months ended June 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 $2.1
million at June 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 JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2001:
Net income (loss) for the quarters ended June 30, 2002 and 2001 was
$(2.0) million and $2.3 million, respectively, resulting primarily from the
recognition of unrealized appreciation (depreciation) of marketable securities.
For the quarter ended June 30, 2002, the Partnership recognized
unrealized depreciation of $1.9 million on its investments of 0.461 shares of
GMO and 0.285 shares of Repligen. The market value of GMO decreased from $5.80
per share as of March 31, 2002 to $2.52 per share as of June 30, 2002 resulting
in the recognition of unrealized depreciation for this period of $1.5 million.
Repligen's market value at June 30, 2002 was $2.26 per share as compared to
$3.75 per share as of March 31, 2002. The Partnership recognized unrealized
depreciation of $0.4 million for the three months ended June 30, 2002. For the
quarter ended June 30, 2001, the Partnership recognized unrealized appreciation
of $2.3 million on these same investments. GMO had a market value as of this
date of $13.55 per share as compared to $8.25 per share as of March 31, 2001.
Accordingly, the Partnership recognized unrealized appreciation of $2.4 million
for this period. The Partnership recognized unrealized depreciation of $0.1
million upon the decrease of Repligen's market value from $2.875 per share as of
March 31, 2001 to $2.40 per share at June 30, 2001.
There were no material variances in expenses for the three months
ended June 30, 2002 as compared to the same period in 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001:
For the six months ended June 30, 2002, the Partnership recognized a
net loss of $2.7 million as compared to net income of $1.7 million for this same
period in 2001. The variance results primarily from an unfavorable change in
unrealized appreciation (depreciation) of marketable securities.
The Partnership recognized unrealized depreciation of $2.6 million
for the six months ended June 30, 2002 resulting primarily from its investment
of 0.461 shares of GMO. GMO's market value decreased from $8.00 per share at
December 31, 2001 to $2.52 per share as of June 30, 2002. For this same period
ended June 30, 2001, the Partnership recognized unrealized appreciation of $1.7
million. The market value of GMO as of this date was $13.55 per share as
compared to a carrying value of $9.1875
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001:
[CONTINUED]
per share as of December 31, 2001. The Partnership recognized unrealized
appreciation of $2.0 million for the six months ended June 30, 2001. The market
value of Repligen decreased from $3.375 per share at December 31, 2000 to $2.40
per share at June 30, 2001 resulting in unrealized depreciation of $0.3 million
on an investment of 0.285 million shares.
There were no material variances in expenses for the six months ended
June 30, 2002 as compared to the same period in 2001.
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 August
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
13