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”) which it sold during the year ended December 31, 2006. (See Note 5 of the “Notes to Financial Statements” included in this filing on Form 10-K.) In addition, as of December 31, 2006, 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 Partnership’s Agreement of Limited Partnership (the “Agreement”) provides that the Partnership will terminate upon the occurrence of certain events, which include the sale, authorized by an affirmative vote of a majority-in-interest, of all of the Partnership’s assets.
On February 15, 2007, the Partnership filed with the Securities and Exchange Commission a definitive Schedule 14A which included a Consent Solicitation Statement, dated February 16, 2007, in which the General Partner sought the consent of the Partnership’s Limited Partners (hereinafter defined) to a proposal to sell all of the assets of the Partnership which, if approved, would result in a final liquidating distribution and termination of the Partnership. The solicitation expired on March 28, 2007. The proposal was approved by the required majority-in-interest of limited partnership interests. As a result, the Partnership is required to sell its remaining assets, including its marketable securities, in open-market transactions at prevailing prices prior to April 15, 2007.
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 (except for distributions which are made in connection with the dissolution of the Partnership). No cash or security distributions have been remitted by the Partnership since this time. 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. The Agreement provides that upon termination of the Partnership, the Partnership’s assets will be distributed to all Partners (after satisfying claims of creditors) pro rata in accordance with their respective capital account balances on the date of termination.
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, 2006, the cumulative profits of the Partnership were $784 per Unit.
Pursuant to the terms of the Agreement, 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 that will be available for distribution to the Partners, after satisfying claims of creditors. As of December 31, 2006, the debit balance in the General Partner’s capital account was $1,536,932. In 1995, the General Partner was named as a defendant in a class action lawsuit relating, among other things, to the sale of the Partnership’s limited partnership interests. In connection with the settlement of that lawsuit, in July 2003, the General Partner deposited in escrow with counsel for the plaintiffs in the lawsuit the amount of $1,497,992. Under the terms of that settlement, the escrowed funds may only be used to fund the negative balance in the General Partner’s capital account upon the Partnership’s termination.
(Item 1 Continued)
Other
At December 31, 2006, 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 was engaged in one primary business segment, the management of investments in technology and biotechnology products and companies.
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.
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, 2006, there were 4,449 Limited Partners. The Partnership purchased none of its limited partnership Units during the year ended December 31, 2006.
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, 2006, 2005, and 2004, 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 $2.3 million at December 31, 2005, decreased to $1.8 million at December 31, 2006, resulting from the Partnership’s recognition of a net loss of $0.5 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 decreased from $2.3 million at December 31, 2005 to $1.7 million at December 31, 2006. The decrease of $0.6 million resulted from the decrease in market values as of these dates of $0.3 million and the sale of marketable securities to pay expenses having a value at December 31, 2005 of $0.3 million. 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, 2006 compared to the year ended December 31, 2005:
Net income (loss) for the years ended December 31, 2006 and 2005 was $(0.5) million and $0.3 million, respectively. The unfavorable variance of $0.8 million resulted from a decrease in revenues of $0.7 million and an increase in expenses of $0.1 million.
Net revenues were $(0.3) million for the year ended December 31, 2006 as compared to $0.4 million for the year ended December 31, 2005. Unrealized appreciation (depreciation) for the years ended December 31, 2006 and 2005 was $(0.4) million and $0.5 million, respectively. Realized gain on sale of investment for the year ended December 31, 2006 was $0.1 million. At December 31, 2006, the Partnership’s investment in 0.024 million shares of Genzyme General Division (“GENZ”) had a market value of $61.58 per share as compared to $70.78 per share as of December 31, 2005. The Partnership recognized unrealized depreciation of $0.2 million for the year ended December 31, 2006. The market value of Repligen Corporation (“Repligen”) decreased from $4.00 per share as of December
(Item 7 Continued)
31, to $2.81 per share as of December 31, 2006 resulting in the recognition of unrealized depreciation of $0.1 million on its investment of 0.085 million shares. Also included in unrealized depreciation in the accompanying Statements of Operations for the year ended December 31, 2006, is the amount of $0.1 million representing the change in net unrealized appreciation relating to the sale of Repligen and GENZ shares. At December 31, 2005, the Partnership’s investment in 0.025 million shares of 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 the Partnership’s investment in Repligen of 0.131 million shares as of December 31, 2005 was $4.00 per share as compared to $2.88 per share as of December 31, 2004. The Partnership recognized unrealized appreciation of $0.2 million for the year ended December 31, 2005. During the year ended December 31, 2006, pursuant to an Offer to Purchase by Cephalon, Inc., the Partnership sold its partnership interest in CCP for proceeds of $0.1 million and recognized a gain upon the sale of this amount.
Expenses increased by $0.1 million from December 31, 2005 to December 31, 2006 resulting primarily from increases in legal and other expenses relating to the General Partner’s efforts to formulate a plan for the liquidation of the Partnership’s assets and termination of the Partnership.
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 (refer to year ended December 31, 2006 compared to the year ended December 31, 2005) and $(0.2) million, respectively. 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.
Expenses decreased by $0.1 million from December 31, 2004 to December 31, 2005 resulting primarily from decreases in legal and printing expenses.
(Item 7 Continued)
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. As of December, 31, 2006, the interest in CCP had been sold.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risks
The Partnership’s non-cash assets subject to market risk consist of 24,270 shares of GENZ and 85,300 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, 2006 and 2005 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 Assistant Treasurer (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, 2006:
Name
Age
Position and Date Appointed
Directors
Michael Schweitzer
Director since November 2006
Rosemarie Albergo
Director since December 2003
Executive Officers
Clifford Watttley
President since October 3, 2006
Rosemarie Albergo
Assistant Treasurer since December 2003
Tambra King
Secretary since November 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
Michael Schweitzer joined UBS Financial Services Inc. (“UBS FS”). in August 2003 as Managing Director and Co-Head of Private Wealth Management. In September 2005, he was promoted to Chief Operating Officer, Products and Services - North America. In September 2006, he was named Deputy Head of Products and Services and Head of P&S Consulting in addition to his current role as COO. Prior to joing UBS, he spent 15 years at Merrill Lynch and Co. where he held a variety of positions including Financial Advisor, Producing Manager, District Sales manager and Branch Manager. Additionally, he has held positions as National Sales Manager of Private Client, Head of Trust and Insurance Sales, and National Director, Private Weath Management.
Rosemarie Albergo is an Executive 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
Clifford Wattley, President, is a Director in Alternative Investments US of UBS FS having joined Paine Webber Group Inc., a predecessor firm, in 1986. He also was employed previously by Paine Webber, Jackson & Curtis from 1979 to 1980. From 1986 to 1992, Mr. Wattley participated in PaineWebber’s Principal Transactions Group. Since 1992, Mr. Wattley has been a member of the Alternative Investments US where his responsibilities have included the management of a number of partnerships in various asset classes and private equity feeder funds. He holds a Bachelor of Science degree in engineering from Columbia University and a Masters in Business Administration from Harvard University.
Rosemarie Albergo, Assistant Treasurer, see directors above.
Tambra King, Secretary, has served as Secretary of PWDC since November 2006 and as Director and Secretary of UBS FS an affiliate of the Company, since July 2006. Prior to her association with UBS FS, Ms. King served as Director of Legal Administration and Assistant Secretary of Triarc Companies, Inc. from April 2004 until July 2006. Prior thereto, Ms. King was Secretary of Centre Insurance Company from November 2000 until April 2004 and served in various positions with Trace International Holdings, Inc., most recently as Vice President and Secretary.
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.
Item11.
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, 2007 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 $68,000 for the years ended December 31, 2006 and 2005, 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 $13,000 and $9,500 for the years ended December 31, 2006 and 2005, 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, 2006 and 2005.
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) - 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
Assistant Treasurer (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) - 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
Assistant Treasurer (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 2nd day of April 2007.
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 2nd day of April 2007.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
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.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Selected Financial Data
(A) Based on 50,000 limited partnership units and a 1% general partnership interest.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Quarterly Financial Information (Unaudited)
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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
March 28,
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Financial Condition
See notes to financial statements.
PAINEWEBBER R&D PARTNERS III, L.P. (a Delaware Limited Partnership)
Statements of Operations
Statements of Changes in Partners' Capital (Deficit)
See notes to financial statements.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
Statements of Cash Flows
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the years ended December 31, 2006, 2005 and 2004.
See notes to financial statements.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2006
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. In addition, the Partnership’s Agreement of Limited Partnership (the “Agreement”) provides that the Partnership will terminate upon the occurrence of certain events, which include the sale, authorized by an affirmative vote of a majority-in-interest, of all of the Partnership’s assets (Note 7).
The principal objective of the Partnership was 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 were expected to address significant market opportunities. The Partnership was engaged in diverse product development projects (the “Projects”) including product development contracts, participation in other partnerships and investments in securities of Sponsor Companies.
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2006
(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 (except for distributions made in connection with the dissolution of the Partnership). No cash or security distributions have been remitted by the Partnership since this time. As of December 31, 2006, 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. The Agreement provides that upon termination of the Partnership, the Partnership’s assets will be distributed to all Partners (after satisfying claims of creditors) pro rata in accordance with their respective capital account balances on the date of termination.
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, 2006, the cumulative profits of the Partnership were $784 per Unit.
Pursuant to the terms of the Agreement, 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 that will be available for distribution to the Partners, after satisfying claims of creditors. As of December 31, 2006, the debit balance in the General Partner’s capital account was $1,536,932. In 1995, the General Partner was named as a defendant in a class action lawsuit relating, among other things, to the sale of the Partnership’s limited partnership interests. In connection with the settlement of that lawsuit, in July 2003, the General Partner deposited in escrow with counsel for the plaintiffs in the lawsuit the amount of $1,497,992. Under the terms of that settlement, the escrowed funds may only be used to fund the negative balance in the General Partner’s capital account upon the Partnership’s termination (Note 7).
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2006
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.
3. Marketable Securities
The Partnership held the following marketable securities at:
During the year ended December 31, 2006, the Partnership sold 1,105 shares of its investment in Genzyme Corporation (“GENZ”) for average proceeds of $64.27 per share. The cost basis of the shares was $24.81 per share resulting in the recognition of a gain from the sale of $43,601. The market value of the shares as of December 31, 2006, was $61.58 per share as compared to a carrying value of $70.78 per share as of December 31, 2005. The Partnership recognized unrealized depreciation on its remaining investment of 24,270 shares in the amount of $274,083 which includes the amount of $50,800 for the change in unrealized appreciation previously recorded on the shares sold during 2006. During the year ended December 31, 2005, the Partnership sold 690 shares of its investment in 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. At December 31, 2005 and 2004, the Partnership recorded its investment of
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2006
(Note 3 Continued)
25,375 and 26,065 shares, respectively, at a market value of $70.78 per share and $58.04 per share, respectively. The Partnership recognized unrealized appreciation for the years ended December 31, 2005 and 2004 of $299,565 and $228,851, respectively. Unrealized appreciation of $299,565 for the year ended December 31, 2005 is net of $22,951 for the change in unrealized appreciation previously recorded on the shares sold during 2005.
During the years ended December 31, 2006, 2005 and 2004, the Partnership sold 45,700 shares (average price of $3.10 per share), 61,300 shares (average price of $1.62 per share) and 93,400 shares (average price of $2.32 per share), respectively, of Repligen Corporation (“Repligen”) as compared to a cost basis of $3.155 per share. The Partnership recognized realized gain (loss) from the sales for the years ended December 31, 2006, 2005 and 2004 of $(2,341), $(94,117) and ($78,022), respectively. The market value per share of Repligen was $2.81 per share, $4.00 per share, and $2.88 per share, at December 31, 2006, 2005, and 2004, respectively The Partnership recognized unrealized appreciation (depreciation) of $(140,119), $163,589, and $(400,010), for the years ended December 31, 2006, 2005 and 2004, respectively. Unrealized appreciation (depreciation) for these years, includes the change in unrealized appreciation (depreciation) previously recorded of $(38,611), $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 that 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, 2006 and 2005, the Partnership has recorded these rights at a zero value.
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, at the time of the Partnership’s dissolution, the General Partner is required to restore its deficit capital account, if any, by remitting cash equal to such amount to the Partnership (Note 7).
PAINEWEBBER R&D PARTNERS III, L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2006
5. Product Development Projects
As of December 31, 2005, the Partnership had 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. As of December 31, 2005, the Partnership carried this illiquid investment at zero. On March 21, 2006, the Partnership engaged Robert A. Stanger & Co., Inc. (“Stanger”) to solicit purchasers for the Partnership’s investment in CCP at a fee of $45,000. Stanger had identified and contacted what it believed to be the most likely purchasers of the Partnership’s interest in CCP. There was no interest expressed by those contacted by Stanger. Pursuant to an Offer to Purchase by Cephalon, Inc., on December 15, 2006, the Partnership sold its interest in CCP for a purchase price of $1,000 per CCP limited partnership interest. As a result, the Partnership will receive total proceeds of $133,000 and recognized a gain of this amount for the year ended December 31, 2006.
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 February 15, 2007, the Partnership filed with the Securities and Exchange Commission a definitive Schedule 14A which included a Consent Solicitation Statement, dated February 16, 2007, in which the General Partner sought the consent of the Partnership’s Limited Partners to a proposal to sell all of the assets of the Partnership which, if approved, would result in a final liquidating distribution and termination of the Partnership. The solicitation expired on March 28, 2007 and the proposal was approved by the required majority-in-interest of the limited partnership interests. As a result, the Partnership is required to sell its remaining assets, including its marketable securities, in open market transactions at prevailing prices, prior to April 15, 2007 The Partnership expects to make its final liquidating distribution to its Limited Partners on or about April 30, 2007.
By order dated February 14, 2007, the court administering the funds that were escrowed for funding the negative balance in the General Partner’s capital account approved their release. On March 21, 2007, these funds, in the amount of $1,497,002, were applied to partially fund the negative balance in the General Partner’s capital account.