Item 1.
Business.
PaineWebber R&D Partners III, L.P. (the “Partnership” or “Registrant”) is a Delaware limited partnership of which Paine Webber Development Corporation (“PWDC” or “General Partner”), an indirect, wholly-owned subsidiary of UBS Americas Inc. (“UBS Americas”) which is a wholly-owned subsidiary of UBS AG, is the general partner and manager of the Partnership.
As of December 31, 2005, the Partnership had an investment in Cephalon Clinical Partners, L.P. (“CCP”). (See Note 5 of the “Notes to Financial Statements” included in this filing on Form 10-K.) In addition, as of December 31, 2005, the Partnership owned marketable securities as described in Note 3 of the “Notes to Financial Statements” included in this filing on Form 10-K.
The General Partner intends to liquidate the Partnership’s remaining investments in a manner that preserves value for the limited partners while minimizing associated expenses. However, since the Partnership’s limited partnership interest in CCP is illiquid and has uncertain prospects, the General Partner has continued to consider ways in which it could terminate the Partnership while preserving any value that may accrue with respect to that interest. The General Partner is now in the final stages of formulating a plan that will result in the liquidation of all the Partnership’s remaining assets, including its interest in CCP and termination of the Partnership all in accordance with the terms of the Partnership Agreement. While the exact timing and method of liquidating the Partnership’s assets is not certain, the Partnership expects its assets to be liquidated and the Partnership terminated in mid-2006.
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 has waived its management fee for services rendered to the Partnership.
(Item 1 Continued)
Distributions
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 Limited Partners have been made pro rata in accordance with their individual capital contributions.
During the year ended December 31, 2000, the Partnership made a cash distribution which resulted in aggregate distributions per Unit to reach Contribution Payout. As a result, the General Partner will be allocated 20% of future cash distributions until Final Payout. No cash or security distributions were remitted by the Partnership during the year ended December 31, 2005. 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.
Profit and Loss Allocation
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 December 31, 2005, the cumulative profits of the Partnership were $794 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. As of December 31, 2005, the debit balance in the General Partner’s capital account was $1,532,114.
Other
At December 31, 2005, the Partnership had no employees, and PWDC 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 and biotechnology products and companies.
(Item 1 Continued)
Item 1A.
Item 1A.
Risk Factors
The operation of the Partnership is subject to certain risks, including those described below. References in this Item 1A to “we”, “us” or “our” mean the Partnership or the General Partner, as appropriate.
Our remaining assets include an illiquid investment with uncertain prospects that has prevented us from liquidating and terminating. This has forced us to sell our marketable securities to pay operating expenses.
For the past several years, our only assets have been marketable securities, cash and an investment in CCP. There is no established trading market for our investment in CCP and its prospects are uncertain. We have been attempting to find a way to liquidate our remaining assets, including our investment in CCP, so that we may terminate the Partnership, while preserving for our limited partners any value that may be realized from our investment in CCP. The various options that we have explored to liquidate our investment in CCP have presented regulatory and administrative issues, with the result being that we have been unable to liquidate and terminate the Partnership. Since we have no source of revenue or funding, we have been forced to sell our marketable securities to pay operating expenses. Had we not been forced to make these sales to pay operating expenses, we would be able to sell our marketable securities in a manner that may result in higher sales prices. The overall effect of the retention of our investment in CCP has been to diminish our assets and to reduce the amount that will be available to our limited partners when we liquidate and terminate.
As we notified our limited partners on December 1, 2005, we are in the final stages of formulating a plan that will result in the liquidation of our remaining assets, including our interest in CCP. While the exact timing and method of our liquidation is not certain, we continue to expect that our assets will be liquidated and that we will terminate in mid-2006.
There is no established market for units of our limited partnership interests and we have determined not to permit any sales, assignments or other transfers of units, except transfers that occur as a result of the laws of descent and distribution or by operation of law. In addition to being illiquid, our units are not expected to be income producing.
Should any of our limited partners desire or need to liquidate their investment in our units, they will be unable to do so because we have determined not to permit any sales, assignments or other transfers of units, except transfers that occur as a result of the laws of descent and distribution or by operation of law. As a result, our limited partners can expect to hold their units until we terminate. We do not expect to make any distributions of cash or property to our limited partners prior to our making our final liquidating distribution.
Item 2.
Item 2.
Properties.
The Partnership does not own or lease any office, manufacturing or laboratory facilities.
Item 3.
Item 3.
Legal Proceedings.
None.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
There is no existing public market for the Units, and no such market is expected to develop. Effective December 1, 2005, the General Partner no longer permits any sale, assignment or other transfers of units, except transfers that occur as a result of the laws of descent and distribution or by operation of law. As of December 31, 2005, there were 4,469 Limited Partners. The Partnership purchased none of its limited partnership Units during the year ended December 31, 2005.
The Partnership distributes to the Partners, when available, the net proceeds from royalty distributions, 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. During the years ended December 31, 2005, 2004, and 2003, the Partnership made no distributions to the Partners.
Item 6.
Item 6.
Selected Financial Data.
See the “Selected Financial Data” on Page included in this filing on Form 10-K.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
Partners’ capital of $2.0 million at December 31, 2004, increased to $2.3 million at December 31, 2005, resulting from the Partnership’s recognition of net income of $0.3 million (as discussed in Results of Operations below).
The Partnership’s funds are invested in marketable securities until cash is needed to pay for the ongoing management and administrative expenses of the Partnership or for distribution to the Partners. Liquid assets increased from $2.1 million at December 31, 2004 to $2.3 million at December 31, 2005. The increase of $0.2 million resulted from the increase in market values as of these dates of $0.5 million offset (i) by the sale of marketable securities having a value as December 31, 2004 of $0.2 million and (ii) the payment of expenses. On December 1, 2005, the Board of Directors of the General Partner authorized the Partnership to sell at the then prevailing market price at the end of each month, as many shares of marketable securities required to pay the Partnership’s operating expenses for which no other funds are available to the Partnership.
Results of Operations
Year ended December 31, 2005 compared to the year ended December 31, 2004:
Net income (loss) for the years ended December 31, 2005 and 2004 was $0.3 million and $(0.5) million, respectively. The favorable variance of $0.8 million resulted from an increase in revenues of $0.7 million and a decrease in expenses of $0.1 million.
Net revenues were $0.4 million for the year ended December 31, 2005 as compared to $(0.3) million for the year ended December 31, 2004. Unrealized appreciation (depreciation) for the years ended December 31, 2005 and 2004 was $0.5 million and $(0.2) million, respectively. At December 31, 2005, the Partnership’s investments in 0.025 million shares of Genzyme General Division (“GENZ”) had a market value of $70.78 per share as compared to $58.07 per share as of December 31, 2004. The Partnership recognized unrealized appreciation of $0.3 million for the year ended December 31, 2005. The market value of Repligen Corporation (“Repligen”) increased from $2.88 per share as of December 31, to $4.00 per share as of December 31, 2005 resulting in the recognition of unrealized appreciation of $0.2 million on its investment of 0.131 million shares. At December 31, 2004, the Partnership’s investment in 0.026 million shares of GENZ had a market value of $1.5 million ($58.07 per share) as compared to a market value of $1.3 million ($49.29 per share) as of December 31, 2003. The Partnership recognized unrealized appreciation of $0.2 million for the year ended December 31, 2004. The market value of the Partnership’s investment in Repligen of 0.192 million shares as of December 31, 2004 was $0.54 million ($2.88 per share) as compared to $0.84 million ($4.37 per share) as of December 31, 2003. The Partnership recognized unrealized depreciation of $0.4 million for the year ended December 31, 2004, which included the change in unrealized appreciation previously recorded of $0.1 million related to the sale of Repligen shares during the year ended December 31, 2004.
(Item 7 Continued)
Expenses decreased by $0.1 million from December 31, 2004 to December 31, 2005 resulting primarily from decreases in legal and printing expenses.
Year ended December 31, 2004 compared to the year ended December 31, 2003:
Net loss for the year ended December 31, 2004 was $0.5 million as compared to net income for the year ended December 31, 2003 of $0.6 million. The unfavorable variance of $1.1 million resulted primarily from an unfavorable change in unrealized depreciation of marketable securities.
Net revenues, comprised primarily of unrealized appreciation (depreciation) for the years ended December 31, 2004 and 2003 were $(0.2) million (refer to the year ended December 31, 2005 compared to the year ended December 31, 2004) and $0.9 million, respectively. The market value of the Partnership’s investment of 0.286 million shares of Repligen as of December 31, 2003 and 2002 was $1.3 million ($4.37 per share) and $0.9 million ($3.04 per share), respectively. The Partnership recognized unrealized appreciation of $0.4 million for the year ended December 31, 2003. During the year ended December 31, 2003, in accordance with Genzyme Corporation’s decision to eliminate its tracking stock structure and pursuant to its Restated Articles of Organization, each share of Genzyme Molecular Oncology (“GMO”) common stock was converted to 0.05653 shares of GENZ common stock. The Partnership’s investment of 0.461 million shares of GMO was converted to 0.026 million shares of GENZ. As of December 31, 2003, the market value of the Partnership’s investment in Genzyme Corporation was $1.3 million as compared to $0.8 million as of December 31, 2002. The Partnership recognized unrealized appreciation of $0.5 million for the year ended December 31, 2003.
There were no material variances in expenses for the year ended December 31, 2004 as compared to this same period in 2003.
Critical Accounting Policies
The General Partner makes judgments in valuing its investments in product development projects. (See Note 5 of the “Notes to Financial Statements” included in this filing on Form 10-K.) The General Partner’s judgment involves estimating the prospect of the projects producing a commercially viable product. These estimates are based on the General Partner’s experience in evaluating similar investments,
publicly available information from the sponsor companies of the projects and other sources the General Partner considers reliable. Based on these estimates, as of December 31, 2005, the Partnership is carrying its investment, a limited partnership interest in CCP, at zero.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risks
The Partnership’s non-cash assets subject to market risk consist of 25,375 shares of GENZ and 131,000 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 marketable securities subject to equity price risks are based on quoted market prices as of the dates of the Statements of Financial Condition. Market prices are subject to fluctuation and, consequently, the amount realized in the subsequent sale 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 December 31, 2005 and 2004 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 8.
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 Registered Public Accounting Firm (Page )
Statements of Financial Condition (Page)
Statements of Operations (Page)
Statements of Changes in Partners’ Capital (Deficit) (Page )
Statements of Cash Flows (Page)
Notes to Financial Statements (Pages to)
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The President (Principal Executive Officer) and Vice President (Principal Financial and Accounting 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 13(a)-15(e) and 15(d)-15(e) as of a date within 90 days of the filing date of this Annual Report on Form 10-K (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 Annual Report on Form 10-K 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.
PART III
Item 10.
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. 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, 2005:
*
Geraldine L. Banyai resigned as Secretary effective March 6, 2006.
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.
(Item 10 Continued)
Directors
Robert J. Chersi is the Chief Financial Officer of UBS Financial Services Inc. (“UBS FS”) and a member of the Group Managing Board of UBS AG. He served most recently (prior to the UBS AG merger) as Senior Vice President and Controller of UBS FS. Mr. Chersi joined UBS FS in 1995 following the Kidder, Peabody & Co. Incorporated (“Kidder”) acquisition. Previous to his employment with Kidder, Mr. Chersi worked for the accounting firm KPMG Peat Marwick from 1983-1988 serving banking and brokerage industry clients. Mr. Chersi is a Certified Public Accountant and earned a Bachelor of Business Administration in Accounting from Pace University where he graduated summa cum laude in 1983.
Stephen R. Dyer is an Executive Director of UBS FS. Prior to joining UBS FS in 1988, Mr. Dyer had been employed at L.F. Rothschild & Co., Incorporated and Thomson McKinnon Securities, Inc. He received his Bachelor of Science degree from Boston College and a Masters of Business Administration from Indiana University. Mr. Dyer is a Certified Public Accountant.
Rosemarie Albergo is a Director of UBS FS. Prior to joining UBS FS in 1983, Ms. Albergo was employed at KPMG. She received her Bachelor of Business Administration degree from Pace University and is a Certified Public Accountant.
Executive Officers
Stephen R Dyer, President, see “Directors” above.
Robert J. Chersi, Vice-President, see “Directors” above.
Rosemarie Albergo, Treasurer, see “Directors” above.
Geraldine L. Banyai, Secretary, joined UBS FS in June 1993 as Assistant Secretary of UBS FS and was elected Secretary in March, 1999. Ms. Banyai was elected Divisional Vice President in April 1996 and Corporate Vice President in April 1997. In November 1996, Ms. Banyai was elected Assistant Secretary of UBS Americas. Prior to joining UBS FS, Ms. Banyai was employed by the Philadelphia Savings Fund Society (“PSFS”) in Philadelphia for 35 years and served as Vice President and Corporate Secretary of PSFS and 28 of its subsidiaries.
Code of Ethics
Neither the General Partner nor the Partnership has adopted a code of ethics with respect to the General Partner’s officers and directors. A code of ethics has not been adopted because the General Partner believes that such a policy is not required for the protection of the Limited Partners because the Partnership does not engage in any substantial business activities, the Partnership intends to terminate, and all the General Partner’s officers and directors are officers and employees of UBS Americas or its affiliates. As such, they are obligated to conduct all their business activities, including those on behalf of the Partnership, in a fair, honest and ethical fashion.
Item 11.
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 through included in this filing on Form 10-K.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
There are no investors known to the Partnership to be beneficial owners at March 1, 2006 of more than five percent of the Registrant’s Units. No member of management of PWDC had any beneficial interest in the Registrant’s Units.
Item 13.
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 through included in this filing on Form 10-K.
Item 14.
Item 14.
Principal Accountant Fees and Services.
Audit Fees
Fees for audit services totaled $65,000 and $62,500 for the years ended December 31, and 2004, respectively, including fees associated with the annual audit and the review of the Partnership’s quarterly reports on Form 10-Q.
Tax Fees
Fees for tax services, including tax compliance and tax advice, totaled $9,500 and $12,500 for the years ended December 31, 2005 and 2004, respectively.
Audit-Related and All Other Fees
No fees were paid to the principal accountant for audit-related or other services for the years ended December 31, 2005 and 2004.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
The following documents are filed as part of the filing on Form 10-K.
Exhibits
31.1
President (Principal Executive Officer) Executive Officer - Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Vice President (Principal Financial and Accounting Officer) - Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
President (Principal Executive Officer) Executive Officer - Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Vice President (Principal Financial and Accounting Officer) - Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section of the Sarbanes-Oxley Act of 2002.
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.
Report of Independent Registered Public Accounting Firm (Page )
Statements of Financial Condition (Page)
Statements of Operations (Page)
Statements of Changes in Partners’ Capital (Deficit) (Page )
Statements of Cash Flows (Page)
Notes to Financial Statements (Pages to)
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 2006.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PaineWebber Development Corporation
(General Partner)
By: /s/ Stephen R. Dyer
Stephen R. Dyer
President
(Principal Executive Officer)
By: /s/ Robert J. Chersi
Robert J. Chersi
Vice President
(Principal Financial and Accounting Officer)
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Description
Page
Selected Financial Data
Quarterly Financial Information (Unaudited)
Report of Independent Registered Public Accounting Firm
Statements of Financial Condition, at December 31, 2005 and
Statements of Operations, for the years ended December 31, 2005, 2004 and 2003
Statements of Changes in Partners’ Capital (Deficit), for the years ended December 31, 2005, 2004 and 2003
Statements of Cash Flows, for the years ended December 31, 2005, 2004 and 2003
Notes to Financial Statements
to
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.
Report of Independent Registered Public Accounting Firm
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. (the “Partnership”) as of December 31, 2005 and 2004, and the related statements of operations, changes in partners’ capital (deficit), and cash flows for each of the three years in the period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 the Partnership at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
March 27,
See notes to financial statements.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1.
Organization and Business
PaineWebber R&D Partners III, L.P. (the “Partnership”) is a Delaware limited partnership of which Paine Webber Development Corporation (“PWDC” or the “General Partner”), an indirect, wholly-owned subsidiary of UBS Americas Inc. (“UBS Americas”) which is a wholly-owned subsidiary of UBS AG 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.
The General Partner intends to liquidate the Partnership’s remaining investments in a manner that preserves value for the limited partners while minimizing associated expenses. However, since the Partnership’s limited partnership interest in Cephalon Clinical Partners, L.P. (“CCP”) (note 5) is illiquid and has uncertain prospects, the General Partner has continued to consider ways in which it could terminate the Partnership while preserving any value that may accrue with respect to that interest. The General Partner is now in the final stages of formulating a plan that will result in the liquidation of all the Partnership’s remaining assets, including its interest in CCP and termination of the Partnership all in accordance with the terms of the Partnership Agreement.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
(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.
During the year ended December 31, 2000, the Partnership made a cash distribution which resulted in aggregate distributions per Unit to reach Contribution Payout. As a result, the General Partner will be allocated 20% of future cash distributions until Final Payout. No cash or security distributions were remitted by the Partnership during the year ended December 31, 2005, 2004 and 2003. As of December 31, 2005, 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.
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 December 31, 2005, the cumulative profits of the Partnership were $794 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. As of December 31, 2005, the debit balance in the General Partner’s capital account was $1,532,114.
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.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
(Note 2 Continued)
Marketable securities consist of a money market fund and common stock which are recorded at market value. Marketable securities are not considered cash equivalents for the Statements of Cash Flows.
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.
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:
During the year ended December 31, 2005, the Partnership sold 690 shares of its investment in Genzyme General Division (“GENZ”) for average proceeds of $73.19 per share. The cost basis of the shares was $24.81 per share resulting in the recognition of a gain from the sale of $33,382. The market value of the shares as of this date was $70.78 per share as compared to a carrying value of $58.07 per share as of December 31, 2004. The Partnership recognized unrealized appreciation on its remaining investment of 25,375 shares in the amount of $299,565 which is net of the amount of $22,951 for the change in unrealized appreciation previously recorded on the shares sold during 2005. At December 31, 2004 and 2003, the Partnership recorded its investment of 26,065 shares of at a market value of $58.04 per share and $49.29 per share resulting in unrealized appreciation for the year ended December 31, 2004 of $228,851. In accordance with Genzyme Corporation’s decision to eliminate its tracking stock structure and pursuant to its Restated Articles of Organization, on June 30, 2003, each share of Genzyme Molecular Oncology (“GMO”) common stock was converted to 0.05653 shares of GENZ. The Partnership’s investment of 461,091 shares of GMO was exchanged for 26,065 shares of GENZ. The exchange of GMO shares was based on 130% of the average daily closing prices for GMO for the twenty consecutive business days commencing May 8, 2003. Gains associated with the exchange, as well as changes in the market value of the shares have been included in unrealized appreciation of marketable securities in the Statement of Operations. The market value of the Partnership’s investment in GMO as of December 31, 2002 was $806,910. The Partnership recognized unrealized appreciation on in its investment in Genzyme Corporation of $477,847 for the year ended December 31, 2003.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
(Note 3 Continued)
During the year ended December 31, 2005, the Partnership sold 61,300 shares of Repligen Corporation (“Repligen”) for an average price of $1.62 per share as compared to a cost basis of $3.155 per share. The Partnership recorded a loss on the sale of $94,117 for this period. During 2004, the Partnership sold 93,400 shares of Repligen Corporation (“Repligen”) for total proceeds of $216,654 resulting in the recognition of loss upon the sale of $78,022 for the year ended December 31, 2004. The market value per share of Repligen was $4.00 per share, $2.88 per share, and $4.37 per share at December 31, 2005, 2004 and 2003, respectively. The market value as of December 31, 2002 was $3.04 per share. The Partnership recognized unrealized appreciation (depreciation) of $163,589, $(400,010), $379,981 for the years ended December 31, 2005, 2004 and 2003, respectively. Unrealized appreciation (depreciation) for the years ended December 31, 2005 and 2004, includes the change in unrealized depreciation previously recorded of $16,890 and $113,483, respectively, related to the sale of Repligen shares.
On March 3, 2003, the Board of Directors of Repligen adopted a shareholder rights plan to help protect investors against potential hostile takeover attempts. Under the plan a dividend was declared of one purchase right for each outstanding share of common stock held as of March 17, 2003. (The Partnership continued to own 285,700 Repligen shares as of this date). The rights are not immediately exercisable and will be “triggered” upon such time that a purchaser acquires 15% or more of Repligen’s outstanding common stock. The rights entitle the holder to purchase $100 worth of Repligen common stock at a purchase price of $50.00. As of December 31, 2005, the Partnership has recorded these rights at a zero value.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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 Financial Services Inc. (“UBS FS”).
PWDC and UBS FS, and its affiliates, have acted in an investment banking capacity for several of the Sponsor Companies. In addition, PWDC and its affiliates have had direct limited partnership interests in some of the same product development limited partnerships as the Partnership.
Pursuant to the terms of the Partnership Agreement, the General Partner is required to restore its deficit capital account, if any, by remitting cash equal to such amount to the Partnership.
5.
Product Development Projects
As of December 31, 2005, the Partnership has an interest in one remaining Project: a $6.0 million investment in CCP, a $45.0 million limited partnership formed to fund the development, clinical testing, manufacturing and marketing of Myotrophin™ for use in the treatment of amyotrophic lateral sclerosis and certain other peripheral neuropathies. If CCP produces a product for commercial sale, Cephalon, Inc. (as Sponsor Company) has the option to license the Partnership’s technology to manufacture and market the product developed. In addition, Cephalon, Inc. has the option to purchase the Partnership’s interest in the technology. As of December 31, 2005, the Partnership is carrying this investment at zero. Since the Partnership’s limited partnership interest in CCP is illiquid and has uncertain prospects, the General Partner has continued to consider ways in which it could terminate the Partnership while preserving for the Partners any value that may accrue with respect to this interest.
At December 31, 2002, the Partnership had a $6.0 million investment in Alkermes Clinical Partners, L.P. (“ACP”), a $46.0 million limited partnership formed to fund the development, clinical testing, manufacturing and marketing of Cereport (formerly known as RMP-7) 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. In October 2003 the general partner of ACP solicited proxies from the limited partners of ACP for their consideration and vote upon the proposed termination, liquidation and dissolution of ACP. In November 2003, the General Partner of the Partnership voted the Partnership’s interest in ACP in favor of the termination. On December 17, 2003, ACP was terminated. There was no liquidating distribution to ACP’s limited partners (including the Partnership).
6.
Income Taxes
The Partnership is not subject to federal, state or local income taxes. Each Partner separately takes into account, on their individual tax return, their share of the income, gains, losses deductions or credits for the Partnership’s taxable year whether or not any distribution is made to any Partner. Accordingly, no provision has been made in the accompanying financial statements for federal, state or local taxes.
7.
Subsequent Event
On March 21, 2006, the Partnership engaged Robert A. Stanger & Co, Inc. (“Stanger”) to solicit purchasers for the Partnership’s investment in CCP. The Partnership is required to pay Stanger a fee of $45,000, $30,000 of which is currently due and payable and the balance of $15,000 is payable on the earlier of June 15, 2006 and the date on which t he Partnership enters into a definitive agreement to sell its investment in CCP. The Partnership also agreed to indemnify Stanger and its affiliates against certain liabilities arising from its engagement by the Partnership