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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended October 31, 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: 000-29665
EXCELSIOR VENTURE PARTNERS III, LLC
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-4102528
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
114 West 47th Street
New York, New York, 10036-1532
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (212) 852-1000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF MEMBERSHIP INTEREST WITHOUT PAR VALUE
(Title of Class)
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[_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant's common stock is not listed on any exchange nor does it trade on
any established securities market or other market.
TABLE OF CONTENTS
Form 10-K
Item No. Report Page
- -------- -----------
PART I
1. Business 1
2. Properties 4
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 5
6. Selected Financial Data 5
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 5
7A. Quantitative and Qualitative Disclosures About Market Risk 7
8. Financial Statements and Supplementary Data 7
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 19
PART III
10. Managers and Executive Officers of the Registrant 19
11. Executive Compensation 22
12. Security Ownership of Certain Beneficial Owners and Management 23
13. Certain Relationships and Related Transactions 23
14. Controls and Procedures 23
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain uncertainties and risks.
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the federal securities laws that also involve substantial
uncertainties and risks. The Company's future results may differ materially from
its historical results and actual results could differ materially from those
projected in the forward-looking statements as a result of certain risk factors.
Readers should pay particular attention to the considerations described in the
section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Readers should also carefully
review the risk factors described in the other documents the Company files, or
has filed, from time to time with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS.
Overview
Excelsior Venture Partners III, LLC (the "Company" or the "Fund") is a
Delaware limited liability company organized on February 18, 2000. The Company
is a non-diversified, closed-end management investment company operating as a
business development company under the Investment Company Act of 1940, as
amended, and, in connection with its initial offering of units, registered said
offering of units under the Securities Act of 1933, as amended (the "Securities
Act"). The Company's investment objective is to achieve long-term capital
appreciation by investing in domestic venture capital and other private
companies and, to a lesser extent, domestic and international private funds,
negotiated private investments in public companies and international direct
investments that the Investment Advisers (defined herein) believe offer
significant long-term capital appreciation.
United States Trust Company of New York, acting through its registered
investment advisory division, U.S. Trust-New York Fund Advisers Division (the
"Investment Sub-Advisor") and U.S. Trust Company, acting through its registered
investment advisory division, U.S. Trust-Connecticut Fund Advisers Division (the
"Investment Advisor") (together, the "Investment Advisers") provide investment
management services to the Company pursuant to an investment advisory agreement
dated September 8, 2000 and an investment sub-advisory agreement dated September
8, 2000 (together the "Investment Agreements"). The Investment Advisers are
subsidiaries of U.S. Trust Corporation. On May 31, 2000, U.S. Trust Corporation
became an indirect wholly owned subsidiary of The Charles Schwab Corporation.
All officers of the Company are employees and/or officers of the Investment
Advisers. The Investment Advisers are responsible for performing the management
and administrative services necessary for the operation of the Company.
Pursuant to a Registration Statement on Form N-2 (File 333-30986), which
was originally declared effective on September 7, 2000, the Company was
authorized to offer an unlimited number of units of membership interest with no
par value. The Company sold 295,210 units via a public offering, which closed on
May 11, 2001, for gross proceeds totaling $147,605,000 (including one share
purchased for $500 as of July 7, 2000 by David I. Fann, the Company's President
and Co-Chief Executive Officer). Units of the Company were made available
through Charles Schwab & Co., Inc., the Company's principal distributor (the
"Distributor").
The Company incurred offering costs associated with the public offering
totaling $1,468,218. Net proceeds to the Company from the public offering, after
offering costs, totaled $146,136,782.
The Company's Certificate of Formation provides that the duration of the
Company will be ten years from the final subscription closing date, subject to
the rights of the Board of Managers to extend the term for up to two additional
two-year periods.
1
Portfolio Investments
Investments Held -- Private
The Company's portfolio consists of the following direct private company
investments.
o Adeza Biomedical Corporation, Sunnyvale, CA, develops, manufactures, and
markets diagnostic products and services for women's reproductive healthcare.
Adeza's primary focus is on proprietary tests and services for the diagnosis of
pregnancy-related and female reproductive disorders including premature and late
birth, preeclampsia, endometriosis, and infertility. The Fund invested $3
million in Adeza. Enterprise Partners and Asset Management are also investors in
Adeza.
o Ancile Pharmaceuticals, Inc., San Diego, CA, is a specialized pharmaceutical
company focusing on the development and commercialization of prescription
botanical drugs for major chronic disease conditions with significant unmet
needs. Ancile is capitalizing on recent changes in the U.S. and European
regulatory environment to obtain botanical drug approvals several years more
quickly and at much less cost than conventional drugs based upon new chemical
entities. The Fund invested $3.6 million in Ancile. Morgenthaler Venture
Partners and Domain Associates are also investors in the company.
o Archemix Corporation, Cambridge, MA, seeks to discover aptamer-based
therapeutics and to develop sensor technologies that accelerate the process of
drug discovery and development. Both of these technologies derive from
Archemix's proprietary selected nucleic acid technology. The Fund invested $.6
million in the company. Schroder Ventures Life Sciences, Atlas Venture, Prospect
Venture Partners, Care Capital, MDS Capital, and POSCO Bio Venture also invested
in Archemix.
o Ethertronics, Inc., San Diego, CA, develops and manufactures embedded
antennas for personal mobile devices. Its internal antenna technologies
significantly enhance the signal quality, increase the range, and help extend
the battery life of mobile devices. Embedded antennas are used by mobile phone,
PDA, laptop, GPS, Bluetooth and Wireless LAN device manufacturers. The Fund
initially invested $3.5 million in Ethertronics and invested an additional $1.2
million in the company this year. Sevin Rosen is a co-investor in Ethertronics.
o Genoptix, Inc., San Diego, CA, is designing and developing the first
laser-based platform for analyzing, sorting and manipulating living cells
without the need for any dyes or labels. The Fund invested $2.5 million in
Genoptix. Other investors include Alliance Technology Ventures, Enterprise
Partners, Lotus Biosciences Investment Holdings, Mitsubishi Corporation and
Tullis-Dickerson & Co., Inc.
o LightConnect, Inc., Newark, CA, designs and manufactures MEMS (micro
electro-mechanical systems) components for optical networks. LightConnect's
product is meeting the need for configurability in optical networks by enabling
rapid dynamic bandwidth and circuit provisioning. The Fund invested $5 million
in LightConnect. The other investors in LightConnect are Sevin Rosen, Incubic,
Morgenthaler and US Venture Partners.
o LogicLibrary, Inc., Pittsburgh, PA, is a provider of software and services
that help enterprises develop better software applications and integrate them
faster. The company's patent-pending technology provides software development
organizations with comprehensive, intuitive tools for effectively and
efficiently capturing, understanding, leveraging and managing their software
development assets. The Fund invested $2 million in LogicLibrary. Birchmere
Ventures, NovakBiddle Venture Partners, and The Future Fund also invested in the
company.
o MIDAS Vision Systems, Inc., Wrentham, MA, is a developer of automated
optical inspection systems for advanced substrates and microelectronics
packaging industries. The Fund invested $4 million in the company. North
Atlantics Capital Corporation, PNC Technology Investors, and SpaceVest invested
in MIDAS Vision.
o Monterey Design Systems, Inc., Sunnyvale, CA, develops advanced physical
design software solutions for the semiconductor industry. Leading semiconductor
companies have adopted Monterey's products to
2
dramatically increase their design productivity. The Fund invested $4.75 million
in the company. Other investors include Sevin Rosen Funds, US Venture Partners,
Rho Capital Partners, Vertex Partners, Information Technology Ventures and LSI
Logic.
o NanoOpto Corporation, Somerset, NJ, is a designer and manufacturer of
integrated optical components using nano-manufacturing technology platforms. The
company is replacing today's discrete, costly, space-hungry bulk optics with a
coherent family of functional optical building blocks called Modular
Nano-Optics. The Fund initially invested $2 million in NanoOpto and has followed
on with an additional $231,000 investment. Bessemer Venture Partners,
Morgenthaler and New Enterprise Associates are co-investors in NanoOpto.
o NetLogic Microsystems, Inc., Mountain View, CA, defines, designs, and
markets highly differentiated data plane solutions that enable the global
infrastructure of networking and optical communications to achieve the highest
performance and functionality. NetLogic also provides multi-processor search
interfaces and software drivers that accelerate design and development of
leading-edge networking equipment. The Fund invested $5 million in NetLogic
Microsystems. Sevin Rosen is a co-investor in NetLogic Microsystems.
o OpVista, Inc., Irvine, CA, develops, markets and manufactures Dense
Wavelength Division Multiplexing (DWDM)-based optical networking equipment for
deployment in long haul and regional metro networks. OpVista's ultra-DWDM
products allow service providers to build flexible, scalable, and cost effective
networks while seamlessly integrating legacy networks. The Fund invested $4
million in OpVista. Sevin Rosen and Incubic are investors in OpVista.
o Pilot Software Acquisition Corporation, Fremont, CA, provides business
analytics solutions that enable companies to measure and meet business
performance objectives. The Fund invested $3 million in Pilot Software.
o Senomyx, Inc., La Jolla, CA, seeks to be the leader in discovering new and
improved proprietary flavor and fragrance molecules for use in a wide range of
consumer products. The Fund invested $1.5 million in Senomyx. Other investors
include Prospect Venture Partners, Rho Ventures, Merrill Lynch, Avalon Ventures,
Domain Associates and Bay City Capital.
o Silverback Systems, Inc., Campbell, CA, provides silicon and software
solutions that enable IP-based storage area networks and data center systems.
The Fund invested $1.4 million in Silverback. Other investors include J.P.
Morgan Partners, Newbury Ventures, Pitango Venture Capital and Gemini Israel
Funds.
o Tensys Medical, Inc., San Diego, CA, is developing and commercializing the
first practical, continuous, non-invasive arterial blood pressure monitoring
system. The Fund invested $5 million in Tensys. Other investors include
Crosspoint Venture Partners, Enterprise Partners, Versant Ventures and Sofinnova
Ventures.
o Virtual Silicon Technology, Inc., Sunnyvale, CA, is a supplier of
semiconductor intellectual property and process technology to manufacturers and
designers of sytems-on-chip. Virtual Silicon has licensed and delivered its
Silicon Ready(R) library products to hundreds of customers including
semiconductor manufacturers, foundries, ASSP designers, and systems developers.
The Fund invested $5 million in the company. Infinity Capital, Walden
International, Gemini Investors, Pacific Venture Group, and SCP Private Equity
Partners are also investors in Virtual Silicon.
Investments Held -- Third-Party Investment Funds
The Company considers the managers of its third-party investment funds to
be experienced, value-added investors. Although the private funds are still in
the early investment phase of their life cycle, the Company is optimistic the
investments will generate attractive returns in the coming years.
3
o Advanced Technology Ventures VII, L.P. ("ATV") is a $700 million fund
targeting varied-stage information technology, communications and life sciences
companies. As of September 30, 2002, ATV had eight investments in its portfolio.
ATV has drawn 10% of the Fund's $3 million capital commitment.
o CHL Medical Partners II, L.P. ("CHL") is a $125 million fund targeting start
up and early-stage medical technology and life sciences companies. As of
September 30, 2002, CHL has invested in five companies operating in the
healthcare field. CHL has drawn 14% of the Fund's $2 million capital commitment.
o Morgenthaler Venture Partners VII, L.P. ("Morgenthaler") is an $850 million
fund targeting varied-stage information technology, communications, and health
care companies. As of September 30, 2002, Morgenthaler's portfolio consists of
twenty companies. Morgenthaler has drawn 20% of the Fund's $3 million to capital
commitment.
o Prospect Venture Partners II, L.P. ("Prospect") is a $500 million fund
targeting varied-stage life sciences companies. As of September 30, 2002,
Prospect has eight direct investments in its portfolio. Prospect has drawn 21%
of the Fund's $3 million capital commitment.
The Company closed on a commitment in fiscal 2002 to the following fund
investment; capital has yet to be called.
o Tallwood II, L.P. is a $180 million fund targeting early-stage information
technology companies. The Fund committed $3 million to Tallwood II.
Investments Written Off
o Cenquest, Inc., Portland, OR, is an intermediary provider of accredited
business and management degree programs to large corporations. The Fund has
written off its $2 million investment in Cenquest because of the company's
diminishing prospects and its inability to secure additional financial support.
For additional information concerning the Company's investments, see
the financial statements beginning on page 9 of this report.
Competition
The Company encounters competition from other entities and individuals
having similar investment objectives. Primary competition for desirable
investments comes from investment partnerships, venture capital affiliates of
large industrial and financial companies, investment companies and wealthy
individuals. Some of the competing entities and individuals have investment
managers or advisers with greater experience, resources and managerial
capabilities than the Company and may therefore be in a stronger position than
the Company to obtain access to attractive investments. To the extent that the
Company can compete for such investments, it may not be able to do so on terms
as favorable as those obtained by larger, more established investors.
Employees
At October 31, 2002, the Company had no full-time employees. All
personnel of the Company are employed by and compensated by the Investment
Advisers pursuant to the Investment Agreements.
ITEM 2. PROPERTIES.
The Company does not own or lease any physical properties.
ITEM 3. LEGAL PROCEEDINGS.
None.
4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company has an unlimited number of no par value units authorized. As
of October 31, 2002, 295,210 units of membership interest were issued and
outstanding. There is no established public trading market for the Company's
units of membership interest.
Dividends
Fiscal Year Ended October 31, 2002. There were no dividends paid during
fiscal year 2002.
Fiscal Year Ended October 31, 2001. On May 17, 2001, the Company paid a
dividend of $1.99 per unit of net investment income to holders of record on May
11, 2001.
For additional information concerning the payment of dividends, see
"Significant Accounting Policies" in the notes to the financial statements of
the Company included in Item 8 hereof.
ITEM 6. SELECTED FINANCIAL DATA.
The information provided under Item 8 is incorporated herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Liquidity and Capital Resources
At October 31, 2002, the Company held $0 in cash and $138,512,604 in
investments as compared to $8,433,122 in cash and $139,676,495 in investments at
October 31, 2001. At October 31, 2002, investments included $83,770,608 in
short-term investments primarily consisting of U.S. Government agency
obligations, $1,518,036 in private investment funds and $53,223,960 in private
companies. At October 31, 2002, the Company had committed $14,000,000 to private
investment funds and $12,199,571 of this commitment remains outstanding.
Results of Operations
Investment Income and Expenses
For the fiscal year ended October 31, 2002, the Company had investment
income of $1,742,304 from investments in short-term securities and net operating
expenses of $3,401,295, resulting in a net investment loss of ($1,658,991) as
compared to investment income of $2,729,924 and net operating expenses of
$1,899,081, resulting in net investment income of $830,843 for the period ended
October 31, 2001. The decline in investment income is due to a decline in
interest earned on short-term securities as well as a decrease in the level of
assets invested in short-term securities. Net operating expenses increased
during fiscal 2002 and were primarily comprised of management fees paid to the
Investment Advisers, legal fees and accounting and administration fees. For the
fiscal year ended October 31, 2002, the Investment Advisers earned $2,881,830 in
management fees, whereas for the period ended October 31, 2001, the Investment
Advisers earned $1,377,259 in management fees. This variance is a result of the
fact that the Company commenced operations on April 5, 2001 and therefore,
management fees were not incurred for the entire period ended October 31, 2001.
The Investment Advisers provide investment management and administrative
services required for the operation of the Company. In consideration of the
services
5
rendered by the Investment Advisers, the Company pays a management fee based
upon a percentage of the net assets of the Company. This fee is determined and
payable quarterly.
Net Assets
The Company's net asset value per unit was $469.14 at October 31, 2002,
down ($26.85) per unit from the net asset value per unit of $495.99 at October
31, 2001. This decline in net asset value per unit is comprised of a net
investment loss totaling ($1,658,991) or ($5.62) per unit and a net change in
realized and unrealized depreciation on investments of ($6,266,772) or ($21.23)
per unit.
The net change in unrealized depreciation of ($21.23) per unit is due
to the write-off of Cenquest, Inc. and the write-down of LightConnect, Inc.,
both private company investments, during the year. The Company's $2.0 million
investment in Cenquest, Inc. was written off because of the company's
diminishing prospects and its inability to secure additional financial support.
A $4.1 million write-down was taken on LightConnect, Inc. due to a third party
financing which was proposed in August 2002 and consummated in December 2002,
effectively reducing the valuation of the company. The net investment loss of
($1,658,991) resulted from a decrease in income earned on the Company's
short-term investments as well as an increase in operating expenses, mainly
management fees paid to the Investment Adviser in the amount of $2,881,830.
At October 31, 2001, the Company's net asset value per unit was
$495.99, down ($4.01) per unit from $500.00 per unit at April 5, 2001, the point
at which the Company commenced its operations. This decline was due, in large
part, to a deduction of offering costs of ($4.97) per unit.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the fiscal year ended October 31, 2002, the Company had a
($6,266,772) net realized and unrealized loss from investments, comprised of a
$764 net realized gain on investments and a ($6,267,536) net change in
unrealized depreciation of investments due to the Company's write-off of
Cenquest, Inc. and write-down of LightConnect, Inc. For the fiscal year ended
October 31, 2001, the Company had a ($59,696) net realized and unrealized loss
from investments, comprised of a $6,599 net realized gain on investments and a
($66,295) net change in unrealized depreciation of investments. The net realized
gain and net unrealized depreciation on investments for the fiscal year ended
October 31, 2001 is due to short-term securities purchases and sales.
Application of Critical Accounting Policies
Under the supervision of the Company's Valuation and Audit Committees,
consisting of the independent Managers of the Company, the Investment Advisers
make certain critical accounting estimates with respect to the valuation of
private portfolio investments. These estimates could have a material impact on
the presentation of the Company's financial condition because in total, they
currently represent 39.5% of the Company's net assets. During the fiscal year,
changes to these estimates, i.e. changes in the valuations of private
investments, resulted in a $6.3 million decrease in net asset value.
The value for securities for which no public market exists is difficult
to determine. Generally speaking, such investments will be valued on a "going
concern" basis without giving effect to any disposition costs. There is a range
of values that is reasonable for such investments at any particular time.
Because of the inherent uncertainty of valuation, the estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
Initially, direct private company investments are valued based upon
their original cost until developments provide a sufficient basis for use of a
valuation other than cost. Upon the occurrence of developments providing a
sufficient basis for a change in valuation, direct private company investments
will be valued by the "private market" or "appraisal" methods of valuation. The
private market method shall only be used with respect to reliable third party
transactions by sophisticated, independent investors.
6
The appraisal method shall be based upon such factors affecting the company such
as earnings, net worth, reliable private sale prices of the company's
securities, the market prices for similar securities of comparable companies, an
assessment of the company's future prospects or, if appropriate, liquidation
value. The values for the investments referred to in this paragraph will be
estimated regularly by the Investment Adviser or a committee of the Board and,
in any event, not less frequently than quarterly. However, there can be no
assurance that such value will represent the return that might ultimately be
realized by the Company from the investments.
The valuation of the Company's private funds is based upon its
pro-rata share of the value of the assets of a private fund as determined by
such private fund, in accordance with its partnership agreement, constitutional
or other documents governing such valuation, on the valuation date. If such
valuation with respect to the Company's investments in private funds is not
available by reason of timing or other event on the valuation date, or are
deemed to be unreliable by the Investment Advisers, the Investment Advisers,
under supervision of the Board, shall determine such value based on its judgment
of fair value on the appropriate date, less applicable charges, if any.
The Investment Advisers also make estimates regarding discounts on
market prices of publicly traded securities where appropriate. For securities
which have legal, contractual or practical restrictions on transfer, a discount
of 10% to 40% from the public market price will be applied.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Equity Price Risk
The Company anticipates that a majority of its investment portfolio
will consist of equity securities in private companies and private investment
funds, which are not publicly traded. These investments are recorded at fair
value as determined by the Investment Advisers in accordance with valuation
guidelines adopted by the Board of Managers. This method of valuation does not
result in increases or decreases in the fair value of these equity securities in
response to changes in public market prices. Thus, these equity securities are
not subject to equity price risk. At October 31, 2002, the Company held no
investments in the equity securities of public companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Independent Auditors' Report
Portfolio of Investments at October 31, 2002
Statement of Assets and Liabilities at October 31, 2002 and October 31,
2001
Statement of Operations for the year ended October 31, 2002 and period
April 5, 2001 (commencement of operations) through October 31, 2001
Statement of Changes in Net Assets for the year ended October 31, 2002
and period April 5, 2001 (commencement of operations) through October
31, 2001
Statement of Cash Flows for the year ended October 31, 2002 and period
April 5, 2001 (commencement of operations) through October 31, 2001
Financial Highlights for the year ended October 31, 2002 and period
April 5, 2001 (commencement of operations) through October 31, 2001
Notes to Financial Statements
Note - All other schedules are omitted because of the absence of
conditions under which they are required or because the required
information is included in the financial statements or the notes
thereto.
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Members and Board of Managers
Excelsior Venture Partners III, LLC
We have audited the accompanying statements of assets and liabilities
of Excelsior Venture Partners III, LLC (the "Fund") as of October 31, 2002 and
2001, including the portfolio of investments at October 31, 2002, and the
related statements of operations, changes in net assets, cash flows and the
financial highlights for the periods from April 5, 2001 (commencement of
operations) to October 31, 2002. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of October 31, 2002 and 2001 by
correspondence with the custodian and brokers, or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Excelsior Venture Partners III, LLC at October 31, 2002 and 2001,
the results of its operations, changes in its net assets, its cash flows and the
financial highlights for the periods from April 5, 2001 to October 31, 2002 in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
December 17, 2002
8
Excelsior Venture Partners III, LLC
Portfolio of Investments
October 31, 2002
Principal Acquisition Value
Amount/Shares Date## (Note 1)
- -------------- ------ --------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 59.88%
$83,000,000 Federal National Mortgage Association Discount Note 1.69%,
11/20/02 (Cost $82,925,969) ..................................... $ 82,925,969
--------------
PRIVATE COMPANIES **, #, @ -- 38.43%
647,948 Adeza Biomedical Corporation, Series 5 Preferred ................ 09/01 3,000,000
2,419,355 Ancile Pharmaceuticals, Inc., Series D Preferred ................ 11/01 3,000,000
600,000 Ancile Pharmaceuticals, Inc., Bridge Note 6% .................... 10/02 600,000
1 Ancile Pharmaceuticals, Inc., Warrants .......................... 10/02 --
628,571 Archemix Corporation, Inc. ...................................... 08/02 628,571
44,247,788 Cenquest, Inc., Series 1 Preferred .............................. 7/01 --
3,099,999 Ethertronics, Inc., Series B Preferred .......................... 06/01&09/02 4,650,000
115,000 Ethertronics, Inc., Warrants .................................... 09/02 --
1,879,699 Genoptix, Inc., Series B Preferred .............................. 12/01 2,500,000
4,330,504 LightConnect, Inc., Series B Preferred .......................... 7/01 948,563
4,374,256 LogicLibrary, Inc., Series A Preferred, ......................... 01/02 2,000,000
15,739,638 MIDAS Vision Systems, Inc., Series C Preferred, ................. 12/01 4,000,000
7,089,552 Monterey Design Systems, Inc., Series 1 Preferred, .............. 12/01 4,750,000
956,234 NanoOpto Corporation, Series A-1 Preferred ...................... 10/01&03/02 2,231,212
1,538,461 NetLogic Microsystems, Inc., Series D Preferred ................. 08/01 5,000,000
5,333,333 OpVista, Inc., Series B Preferred ............................... 07/01 4,000,000
15,000,000 Pilot Software Acquisition Corp., Series A Preferred ............ 05/02 3,000,000
517,260 Senomyx, Inc., Series E Preferred ............................... 11/01 1,500,000
2,211,898 Silverback Systems, Inc., Series B Preferred .................... 02/02 1,415,614
4,166,667 Tensys Medical, Inc., Series C Preferred ........................ 03/02 5,000,000
3,096,551 Virtual Silicon Technology, Inc., Series C Preferred ............ 12/01 5,000,000
--------------
TOTAL -- PRIVATE COMPANIES (Cost $59,275,398) .................... 53,223,960
--------------
PRIVATE INVESTMENT FUNDS **, # -- 1.09%
Advanced Technology Ventures VII, L.P ........................... 08/01-10/02 223,690
CHL Medical Partners II, L.P .................................... 01/02-10/02 235,315
Morgenthaler Venture Partners VII, L.P .......................... 07/01-09/02 531,191
Prospect Venture Partners II, L.P. .............................. 06/01-10/02 527,840
--------------
TOTAL -- PRIVATE INVESTMENT FUNDS (Cost $1,800,429) .............. 1,518,036
--------------
INVESTMENT COMPANIES -- 0.61%
844,639 Dreyfus Government Cash Management Fund Institutional Shares
(Cost $844,639) ................................................. 844,639
--------------
TOTAL INVESTMENTS (Cost $144,846,435*) ........................................ 100.01% 138,512,604
OTHER ASSETS & LIABILITIES (NET) .............................................. (0.01) (17,589)
------------ --------------
NET ASSETS .................................................................... 100.00% $ 138,495,015
============ ==============
* Aggregate cost for federal tax and book purposes.
** Restricted as to public resale. Acquired between June 1, 2001 and October
31, 2002. Total cost of restricted securities at October 31, 2002
aggregated $61,075,827. Total market value of restricted securities owned
at October 31, 2002 was $54,741,996 or 39.53% of net assets.
# Non-income producing securities.
## Required disclosure for restricted securities only.
@ At October 31, 2002 the Company owned 5% or more of the company's
outstanding shares thereby making the company an affiliate as defined by
the Investment Company Act of 1940. Total market value of affiliated
securities owned at October 31, 2002 was $53,223,960.
Notes to Financial Statements are an integral part of these Financial
Statements.
9
Excelsior Venture Partners III, LLC
Statement of Assets and Liabilities
October 31,
2002 2001
---- ----
ASSETS:
Investments, at market value (Cost $144,846,435 and
139,742,790 respectively) (Note 1) ........................... $ 138,512,604 $ 139,676,495
Cash and cash equivalents ..................................... -- 8,433,122
Interest receivable ........................................... 1,933 --
Receivable due from distributor ............................... -- 50,000
Other receivables ............................................. 996,290 --
Prepaid insurance ............................................. 64,783 43,070
------------- -------------
Total Assets ................................................ 139,575,610 148,202,687
------------- -------------
LIABILITIES:
Management fees payable (Note 2) .............................. 697,027 1,377,259
Professional fees payable ..................................... 202,991 221,430
Board of Managers' fees payable (Note 2) ...................... 60,000 45,000
Administration fees payable (Note 2) .......................... 38,960 27,811
Offering cost payable ......................................... -- 93,880
Other payables ................................................ 81,617 16,529
------------- -------------
Total Liabilities ........................................... 1,080,595 1,781,909
------------- -------------
NET ASSETS ...................................................... $ 138,495,015 $ 146,420,778
============= =============
NET ASSETS consist of:
Paid-in capital ............................................... $ 146,136,782 $ 146,136,782
Accumulated undistributed net investment income (loss) ........ (1,315,299) 343,692
Accumulated net realized gain ................................. 7,363 6,599
Unrealized (depreciation) on investments ...................... (6,333,831) (66,295)
------------- -------------
Total Net Assets ................................................ $ 138,495,015 $ 146,420,778
============= =============
Units of Membership Interest Outstanding (Unlimited
number of no par value units authorized) ....................... 295,210 295,210
============= =============
NET ASSET VALUE PER UNIT ........................................ $ 469.14 $ 495.99
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
10
Excelsior Venture Partners III, LLC
Statement of Operations
April 5, 2001
(Commencement
Year Ended Of Operations)
October 31, to October 31,
2002 2001
---- ----
INVESTMENT INCOME:
Interest income ............................................... $ 1,645,829 $ 2,729,924
Dividend income ............................................... 96,475 --
------------- -------------
Total Income ................................................ 1,742,304 2,729,924
------------- -------------
EXPENSES:
Management fees (Note 2) ...................................... 2,881,830 1,377,259
Professional fees ............................................. 287,000 241,385
Organizational fees ........................................... -- 154,976
Administration fees (Note 2) .................................. 160,473 96,925
Board of Managers' fees (Note 2) .............................. 83,000 45,000
Insurance ..................................................... 52,894 7,626
Custodian fees ................................................ 18,652 10,910
Miscellaneous fees ............................................ 11,326 15,000
------------- -------------
Total Expenses .............................................. 3,495,175 1,949,081
Organization expense reversal (Note 4) ........................ (93,880) --
Reimbursement of Organizational fees from Distributor ......... -- (50,000)
------------- -------------
Net Expenses ................................................ 3,401,295 1,899,081
------------- -------------
NET INVESTMENT INCOME (LOSS) .................................... (1,658,991) 830,843
------------- -------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON
INVESTMENTS: (Note 1)
Net realized gain on investments .............................. 764 6,599
Net change in unrealized (depreciation) on investments ........ (6,267,536) (66,295)
------------- -------------
NET REALIZED AND UNREALIZED (LOSS) ON INVESTMENTS ............... (6,266,772) (59,696)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS ................................................ $ (7,925,763) $ 771,147
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
11
Excelsior Venture Partners III, LLC
Statement of Changes in Net Assets
April 5, 2001
(Commencement
Year Ended Of Operations)
October 31, to October 31,
2002 2001
---- ----
OPERATIONS:
Net investment income (loss) ..................................... $ (1,658,991) $ 830,843
Net realized gain on investments ................................. 764 6,599
Net change in unrealized (depreciation) on investments ........... (6,267,536) (66,295)
------------- -------------
Net increase (decrease) in net assets resulting from
operations...................................................... (7,925,763) 771,147
------------- -------------
TRANSACTIONS IN UNITS OF MEMBERSHIP INTERESTS:
Proceeds from units sold, net of offering costs ................. -- 146,136,282
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................................... -- (487,151)
------------- -------------
Total distributions ............................................ -- (487,151)
------------- -------------
Net Increase (Decrease) in Net Assets ............................. (7,925,763) 146,420,278
------------- -------------
NET ASSETS:
Beginning of period ............................................. 146,420,778 500
------------- -------------
End of period ................................................... $ 138,495,015 $ 146,420,778
============= =============
Membership Interest Transactions:
Units issued .................................................... -- 295,210
------------- -------------
Net Increase in Units Outstanding ................................. $ -- $ 295,210
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
12
Excelsior Venture Partners III, LLC
Statement of Cash Flows
April 5, 2001
(Commencement
Year Ended Of Operations)
October 31, to October 31,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Increase (Decrease) in Net Assets resulting from Operations ... $ (7,925,763) $ 771,147
Adjustments to reconcile net increase (decrease) in net assets from
operations to net cash used in operating activities:
Change in unrealized depreciation on investments ................ 6,267,536 66,295
Decrease (Increase) in receivable due from Distributor .......... 50,000 (50,000)
Purchase of investments ......................................... (36,110,398) (24,946,738)
Change in short-term investments ................................ 31,006,753 (114,796,052)
Increase in interest receivable ................................. (1,933) --
Increase in other receivable .................................... (996,290) --
Increase in prepaid insurance ................................... (21,713) (43,070)
Increase (Decrease) in expenses payable ......................... (701,314) 1,781,909
------------- -------------
Net cash used in operating activities ........................... (8,433,122) (137,216,509)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from units sold, net of offering costs ................... -- 146,136,282
Distribution to shareholders ...................................... -- (487,151)
------------- -------------
Net cash provided by financing activities ....................... -- 145,649,131
------------- -------------
Net change in cash .............................................. (8,433,122) 8,432,622
------------- -------------
Cash at beginning of period .................................... 8,433,122 500
------------- -------------
Cash at end of period .......................................... $ -- $ 8,433,122
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
13
Excelsior Venture Partners III, LLC
Financial Highlights
Per Unit Operating Performance:(1)
April 5, 2001
(Commencement
Year Ended Of Operations)
October 31, to October 31,
2002 2001
---- ----
NET ASSET VALUE, BEGINNING OF PERIOD...................... $ 495.99 $ 500.00
Deduction of offering costs from contributions ......... -- (4.97)
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ........................... (5.62) 2.81
Net realized and unrealized (loss) on investment
transactions .......................................... (21.23) (0.20)
----------- -----------
Total from investment operations ..................... (26.85) 2.61
----------- -----------
DISTRIBUTIONS:
Net investment income .................................. -- (1.65)
----------- -----------
Total Distributions .................................. -- (1.65)
----------- -----------
NET ASSET VALUE, END OF PERIOD ........................... $ 469.14 $ 495.99
TOTAL NET ASSET VALUE RETURN (5) ......................... (5.41)% 0.52%(3)
=========== ===========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ...................... $ 138,495 $ 146,421
Ratios to average net assets:
Gross expenses ....................................... 2.43% 1.35%(2)
Net expenses ......................................... 2.36% (4) 1.32%(2)
Net investment income (loss) ......................... (1.15)% 0.58%(2)
Portfolio Turnover Rate ................................ 0.00% 0.00%
(1) Selected data for a unit of membership interest outstanding through each
period.
(2) Annualized
(3) Not annualized
(4) Net of organization expense reversal
(5) Total investment return based on per share net asset value reflects the
effects of changes in net asset value based on the performance of the
Company during the period, and assumes dividends and distributions, if any,
were reinvested. The Company's shares were issued in a private placement and
are not traded. Therefore the market value total investment return is not
calculated.
Notes to Financial Statements are an integral part of these
Financial Statements.
14
EXCELSIOR VENTURE PARTNERS III, LLC
NOTES TO FINANCIAL STATEMENTS
October 31, 2002
Note 1 -- Significant Accounting Policies
Excelsior Venture Partners III, LLC (the "Company") is a non-diversified,
closed-end management investment company which has elected to be treated as a
business development company or "BDC" under the Investment Company Act of 1940,
as amended. The Company was established as a Delaware limited liability company
on February 18, 2000. The Company commenced operations on April 5, 2001. The
duration of the Company is ten years (subject to two 2-year extensions) from the
final subscription closing, at which time the affairs of the Company will be
wound up and its assets distributed pro rata to members as soon as is
practicable.
Costs incurred in connection with the initial offering of units totaled
$1,468,218. Each member's pro rata share of these costs was deducted from his,
her or its initial capital contribution.
The following is a summary of the Company's significant accounting
policies. Such policies are in conformity with generally accepted accounting
principles for investment companies and are consistently followed in the
preparation of the financial statements. Generally accepted accounting
principles in the United States require management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
A. Investment Valuation:
The Company values portfolio securities quarterly and at such other
times as, in the Board of Managers' view, circumstances warrant.
Securities for which market quotations are readily available generally
will be valued at the last sale price on the date of valuation or, if no
sale occurred, at the mean of the latest bid and ask prices; provided
that, as to such securities that may have legal, contractual or practical
restrictions on transfer, a discount of 10% to 40% from the public market
price will be applied. Securities for which no public market exists and
other assets will be valued at fair value as determined in good faith by
the Investment Adviser (as defined below) or a committee of the Board of
Managers under the supervision of the Board pursuant to certain valuation
procedures summarized below. Securities having remaining maturities of 60
days or less are valued at amortized cost, which approximates market
value.
The value for securities for which no public market exists is
difficult to determine. Generally, such investments will be valued on a
"going concern" basis without giving effect to any disposition costs.
There is a range of values that is reasonable for such investments at any
particular time. Initially, direct investments are valued based upon their
original cost until developments provide a sufficient basis for use of a
valuation other than cost. Upon the occurrence of developments providing a
sufficient basis for a change in valuation, direct investments will be
valued by the "private market" or "appraisal" methods of valuation. The
private market method shall only be used with respect to reliable third
party transactions by sophisticated, independent investors. The appraisal
method shall be based upon such factors affecting the company such as
earnings, net worth, reliable private sale prices of the company's
securities, the market prices for similar securities of comparable
companies, an assessment of the company's future prospects or, if
appropriate, liquidation value. The values for the investments referred to
in this paragraph will be estimated regularly by the Investment Adviser or
a committee of the Board and, in any event, not less frequently than
quarterly. However, there can be no assurance that such value will
represent the return that might ultimately be realized by the Company from
the investments.
At October 31, 2002 and October 31, 2001, market quotations were not
readily available for securities valued at $54,741,996 or 39.5% of net
assets and $24,880,443 or 16.9% of net assets, respectively. Such
securities were valued by the Investment Advisers, under the supervision of
the Board of Managers. Because of the inherent uncertainty of valuation,
the
15
estimated values may differ significantly from the values that would have
been used had a ready market for the securities existed, and the
differences could be material.
B. Security transactions and investment income:
Security transactions are recorded on a trade date basis. Realized
gains and losses on investments sold are recorded on the basis of
identified cost. Interest income, adjusted for amortization of premiums and
discounts on investments, is earned from settlement date and is recorded on
the accrual basis. Dividend income is recorded on the ex-dividend date.
C. Income taxes:
Under current law and based on certain assumptions and representations,
the Company intends to be treated as a partnership for federal, state and
local income tax purposes. By reason of this treatment, the Company will
itself not be subject to income tax. Rather, each member, in computing
income tax, will include his, her or its allocable share of Company items
of income, gain, loss, deduction and expense.
At October 31, 2002 the cost of investments for Federal income tax
purposes was substantially the same as the cost for financial reporting
purposes. At October 31, 2002, the net unrealized depreciation amounted to
$6,333,831, which is composed of gross unrealized depreciation of
$6,333,831.
D. Dividends to members:
The Company will distribute all cash that the Investment Adviser does
not expect to use in the operation of the Company. Due to the nature of the
Company's investments, investors should not expect distributions of cash or
property during the first several years of the Company's operations.
E. Other:
The Company treats all highly-liquid financial instruments that mature
within three months as cash equivalents.
Note 2 -- Investment Advisory Fee, Administration Fee and Related Party
Transactions
U.S. Trust Company serves as the Investment Adviser to the Company pursuant
to an Investment Advisory Agreement with the Company. United States Trust
Company of New York ("U.S. Trust NY") and U.S. Trust Company, N.A. serve as
Investment Sub-Advisers to the Company pursuant to Investment Sub-Advisory
Agreements with U.S. Trust Company and the Company. In return for its services
and expenses which U.S. Trust Company assumes under the Investment Advisory
Agreement, the Company will pay U.S. Trust Company, on a quarterly basis, a
management fee at an annual rate equal to 2.00% of the Company's average
quarterly net assets through the fifth anniversary of the first closing date and
1.00% of net assets thereafter. Pursuant to the Investment Sub-Advisory
Agreements, U.S. Trust Company pays investment management fees to U.S. Trust NY
and U.S. Trust Company, N.A.
In addition to the management fee, U.S. Trust Company is entitled to
allocations and distributions equal to the Incentive Carried Interest. The
Incentive Carried Interest is an amount equal to 20% of the Company's cumulative
realized capital gains on Direct Investments, net of cumulative realized capital
losses and current net unrealized capital depreciation on all of the Company's
investments and cumulative net expenses of the Company. Direct Investments means
Company investments in domestic and foreign companies in which the equity is
closely held by company founders, management, and/or a limited number of
institutional investors and negotiated private investments in public companies.
The Incentive Carried Interest will be determined annually as of the end of each
calendar year.
On December 20, 2001, the Board of Managers approved an Investment
Sub-Advisory Agreement, substantially similar to those currently in effect,
among the Company, U.S. Trust Company and U.S. Trust
16
Company, N.A. Prior to December 21, 2001, the effective date of the Agreement,
U.S. Trust NY served as the sole Investment Sub-Adviser to the Company.
U.S. Trust Company is a Connecticut state bank and trust company. U.S.
Trust NY is a New York state-chartered bank and trust company and a member of
the Federal Reserve System. U.S. Trust Company, N.A. is a nationally chartered
bank. Each is a wholly-owned subsidiary of U.S. Trust Corporation, a registered
bank holding company. U.S. Trust Corporation is an indirect wholly-owned
subsidiary of The Charles Schwab Corporation ("Schwab").
Pursuant to an Administration, Accounting and Investor Services Agreement,
the Company retains PFPC Inc. ("PFPC"), an indirect majority-owned subsidiary of
the PNC Financial Services Group, Inc., as administrator, accounting and
investor services agent. In addition, PFPC Trust Company serves as the Company's
custodian. In consideration for its services, the Company (i) pays PFPC a
variable fee between 0.105% and 0.07%, based on average quarterly net assets,
payable monthly, subject to a minimum quarterly fee of approximately $30,000,
(ii) pays PFPC annual fees of approximately $15,000 for taxation services and
(iii) reimburses PFPC for out-of-pocket expenses.
Charles Schwab & Co., Inc. (the "Distributor"), the principal subsidiary of
Schwab, serves as the Company's distributor for the offering of units. U.S.
Trust Company paid the Distributor from its own assets an amount equal to 0.02%
of the total of all subscriptions received in the offering. U.S. Trust Company
or an affiliate will pay the Distributor an on-going fee for the sale of units
and the provision of ongoing investor services in an amount equal to the annual
rate of 0.45% of the average quarterly net asset value of all outstanding units
held by investors introduced to the Company by the Distributor through the fifth
anniversary of the final subscription closing date and at the annual rate of
0.22% thereafter, subject to elimination upon all such fees totaling 6.5% of the
gross proceeds received by the Company from this offering.
Each member of the Board of Managers receives $7,000 annually, $2,000 per
meeting attended and is reimbursed for expenses incurred for attending meetings.
No person who is an officer, manager or employee of U.S. Trust Corporation, or
its subsidiaries, who serves as an officer, manager or employee of the Company
receives any compensation from the Company.
As of October 31, 2002, Excelsior Venture Investors III, LLC had an
investment in the Company of $87,921,182. This represents an ownership interest
of 63.48% in the Company.
Note 3 -- Purchases and Sales of Securities
Excluding short-term investments, the Company had $36,110,398 and
$24,965,427 in purchases and $0 and $0 in sales of securities for the periods
ended October 31, 2002 and October 31, 2001, respectively.
Note 4 -- Organization Fees
The Company originally estimated organization fees totaling $154,976, which
were expensed in the fiscal period ended October 31, 2001. As a result of the
Company's final closing held on May 11, 2001, the Company was reimbursed for
$50,000 in organizational expenses from the Distributor during 2002. Certain
anticipated organizational expenses totaling $93,880 were ultimately not
incurred. As a result, the Company reversed $93,880 of organizational expense in
the current year, as reflected in the Statement of Operations.
Note 5 -- Commitments
As of October 31, 2002, the Company had outstanding investment commitments
totaling $12,199,571.
17
Note 6 -- Transactions with Affiliated Companies
An affiliated company is a company in which the Company has ownership
of at least 5% of the voting securities. The Company did not receive
dividend or interest income from affiliated companies during the year ended
October 31, 2002. Transactions with companies which are or were affiliates
were as follows:
For the Year Ended October 31, 2002
----------------------------------------------
Cumulative
October 31, Sale/Merger Realized Value
Affiliate 2001 Value Purchases Proceeds Gain (Loss) (Note 1)
- ---------------------------------------- ------------- -------------- ------------- ------------- -------------
NanoOpto Corporation, Series A-1
Preferred $ 2,000,000 $ 231,212 -- -- $ 2,231,212
Ethertronics, Inc., Series B Preferred 3,500,000 1,150,000 -- -- 4,650,000
Ethertronics, Inc., Warrants -- -- -- -- --
Ancile Pharmaceuticals, Inc., Bridge
Notes 6% -- 600,000 -- -- 600,000
Ancile Pharmaceuticals, Inc., Warrant -- -- -- -- --
----------- ------------ ---------- ---------- ------------
Total $ 5,500,000 $ 1,981,212 -- -- $ 7,481,212
----------- ------------ ---------- ---------- ------------
18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are names, ages, positions and certain other information
concerning the current managers and executive officers of the Company as of
October 31, 2002.
Served in Present Principal Occupation During Past 5
Name and Age Position Capacity Since Years and Other Affiliations
------------ -------- -------------- ----------------------------
David I. Fann, 38 President and July 20, 2000 Mr. Fann is a Managing Director of U.S.
Co-Chief Executive Trust Company, N.A in the Private Equity
Officer Division. He serves as President and
Co- Chief Executive Officer of UST
Private Equity Investors Fund, Inc.,
Excelsior Private Equity Fund II, Inc.,
Excelsior Venture Partners III, LLC and
Excelsior Venture Investors III, LLC.
Douglas A. Co-Chief Executive July 20, 2000 Mr. Lindgren is a Managing Director of
Lindgren, 41 Officer and Chief U.S. Trust Company in the Private Equity
Investment Officer Division. He serves as Chief Investment
Officer and Co-Chief Executive Officer
of UST Private Equity Investors Fund,
Inc., Excelsior Private Equity Fund II,
Inc., Excelsior Venture Partners III,
LLC and Excelsior Venture Investors III,
LLC.
Brian F. Chief Financial July 20, 2000 Mr. Schmidt is Senior Vice President of
Schmidt, 44 Officer U.S. Trust Company and Division Manager
of Mutual Funds Administration
Division. He serves as Chief Financial
Officer of UST Private Equity Investors
Fund, Inc., Excelsior Private Equity
Fund II, Inc., Excelsior Venture
Partners III, LLC and Excelsior Venture
Investors III, LLC.
Frank D. Treasurer July 20, 2000 Mr. Bruno is a Vice President of U.S.
Bruno, 42 Trust Company in the Mutual Funds
Administration Division. He serves as
Treasurer of UST Private Equity
Investors Fund, Inc., Excelsior Private
Equity Fund II, Inc., Excelsior Venture
Partners III, LLC and Excelsior Venture
Investors III, LLC and Vice President of
U.S. Trust.
Lee A. Vice July 20, 2000 Mr. Gardella is a Senior Vice President
19
Gardella, 35 President of U.S. Trust Company in the Private
Equity Division. He serves as an
officer of UST Private Equity Investors
Fund, Inc., Excelsior Private Equity
Fund II, Inc., Excelsior Venture
Partners III, LLC, Excelsior Venture
Investors III, LLC.
James F. Vice President July 20, 2000 Mr. Rorer is a Vice President of U.S.
Rorer, 32 Trust Company in the Private Equity
Division. He serves as an officer of UST
Private Equity Investors Fund, Inc.,
Excelsior Private Equity Fund II, Inc.,
Excelsior Venture Partners III, LLC and
Excelsior Venture Investors III, LLC.
Prior to joining U.S. Trust in May 1999,
he worked at Bain & Company, a leading
global strategic consulting firm, from
September 1996 until April 1999, working
with companies on a variety of strategic
issues in a number of different industries
including automotive, electric power,
telecommunications, consumer products and
financial services.
Cynthia Chief September 19, 2001 Ms. Englert is a Vice President of U.S.
Englert, 38 Administrative Trust Company in the Private Equity
Officer and Division. She serves as Chief
Secretary Administrative Officer and Secretary of
UST Private Equity Investors Fund, Inc.,
Excelsior Private Equity Fund II, Inc.,
Excelsior Venture Partners III, LLC and
Excelsior Venture Investors III, LLC.
Prior to joining U.S. Trust in August
2001, Ms. Englert worked at Whitney &
Co. in fund administration from May 1999
until August 2001 and at Greenwich
Capital Markets, Inc. in management
reporting and financial analysis from
July 1993 until March 1999.
Raghav V. Vice September 19, 2001 Mr. Nandagopal is a Senior Vice
Nandagopal, 40 President President of U.S. Trust Company in the
Private Equity Division. He serves as an
officer of Excelsior Venture Partners III,
LLC and Excelsior Venture Investors III,
LLC. Prior to joining U.S. Trust in
February 2001, Mr. Nandagopal was Chief
Business Development Officer of Globeshaker.
From September 1998 to September 2000, Mr.
Nandagopal was an Engagement Manager with
McKinsey & Company, where he advised clients
in defining strategies, improving operations,
identifying acquisitions and
20
defining technology capabilities for
telecom, wireless, financial services
and healthcare companies. From October
1994 to July 1998, he held several
positions, including Chief Information
Officer, AT&T Capital.
Jean-Noel Vice President September 19, 2001 Mr. Odier is a Vice President of U.S.
Odier, 31 Trust Company, N.A. in the Private
Equity Division. He serves as an
officer of Excelsior Venture Partners
III, LLC and Excelsior Venture Investors
III, LLC. Prior to joining U.S. Trust
in November 2000, Mr. Odier worked at
Lombard Odier & Cie in Geneva since
March 1999. Mr. Odier also worked for
the International Committee of the Red
Cross from June 1997 to February 1999.
John C. Chairman of the May 26, 2000 Mr. Hover retired as an Executive Vice
Hover II, 59 Board and President of United States Trust Company
Manager of New York in 1998 after 22 years of
service. Mr. Hover serves as chairman
of the board of directors or managers of
UST Private Equity Investors Fund, Inc.,
Excelsior Private Equity Fund II, Inc.,
Excelsior Venture Partners III, LLC and
Excelsior Venture Investors III, LLC.
Gene M. Manager, May 26, 2000 Mr. Bernstein has been associated with
Bernstein, 55 Member of the Northville Industries Holding Corp.,
Audit and a third generation privately-held
Valuation petroleum marketing, trading, storage
Committees and distribution company, since 1982.
He has held positions there ranging from
Vice President to President to Vice
Chairman, and currently serves as a
Director. From 2000-2001 he was Dean of
the Skodneck Business Development Center
at Hofstra University in Hempstead, New
York. Mr. Bernstein serves as a director
or manager of UST Private Equity
Investors Fund, Inc., Excelsior Private
Equity Fund II, Inc., Excelsior Venture
Partners III, LLC, Excelsior Venture
Investors III, LLC and the Excelsior
Hedge Fund of Funds I, LLC.
Stephen V. Manager, May 26, 2000 Since 1991, Mr. Murphy has been
Murphy, 57 Member of the President of S. V. Murphy & Co., Inc.,
Audit and an investment banking firm that
Valuation specializes in mergers and acquisitions,
Committees divestitures and strategic and
capital-related advisory services for
financial
21
and other institutions. Mr. Murphy
serves as a director or manager of UST
Private Equity Investors Fund, Inc.,
Excelsior Private Equity Fund II, Inc.,
Excelsior Venture Partners III, LLC,
Excelsior Venture Investors III, LLC and
the Excelsior Hedge Fund of Funds I,
LLC.
Victor F. Manager, May 26, 2000 Since October 2002, Mr. Imbimbo has been
Imbimbo, Jr., 49 Member of the head of healthcare marketing in the
Audit and United States for TBWA, a global
Valuation marketing agency. Prior to this, he was
Committees with Bedrock Communications, Inc., a
consulting company addressing the
merger of traditional and digital
communications solutions, since 1996.
Mr. Imbimbo serves as a director or
manager of UST Private Equity Investors
Fund, Inc., Excelsior Private Equity
Fund II, Inc., Excelsior Venture
Partners III, LLC, Excelsior Venture
Investors III, LLC and the Excelsior
Hedge Fund of Funds I, LLC.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the federal securities laws, the Company's managers and executive
officers and any persons holding more than 10% of the Company's outstanding
units are required to report their ownership of units and any changes in the
ownership of the Company's units to the Company and the Securities and Exchange
Commission. To the best of the Company's knowledge, the Company's managers and
executive officers have satisfied these filings.
ITEM 11. EXECUTIVE COMPENSATION.
The Company has no full-time employees. Pursuant to the Investment
Agreements, the Investment Advisers employ and compensate all of the personnel
of the Company, and also furnish all office facilities, equipment, management
and other administrative services required for the operation of the Company. In
consideration of the services rendered by the Investment Advisers, the Company
will pay a management fee based upon average quarterly net assets and an
incentive fee based in part on a percentage of realized capital gains of the
Company.
Managers receive compensation of $7,000 annually and $2,000 per meeting
attended plus reasonable expenses. The Company does not have a stock option
plan, other long-term incentive plan, retirement plan or other retirement
benefits.
The following chart provides certain information about the fees received
by the managers in the fiscal year ended October 31, 2002.
Aggregate Total Compensation
Compensation From the Company
From And Fund Complex *
Name of Person/Position The Company Paid to Directors
----------------------- ----------- -----------------
John C. Hover II
Manager $15,000 $47,750 (4 Funds)
22
Gene M. Bernstein
Manager $15,000 $64,250 (5 Funds)
Stephen V. Murphy
Manager $15,000 $64,250 (5 Funds)
Victor F. Imbimbo, Jr.
Manager $15,000 $64,250 (5 Funds)
* The "Fund Complex" consists of UST Private Equity Investors Fund, Inc.,
Excelsior Private Equity Fund II, Inc., Excelsior Venture Partners III,
LLC, Excelsior Venture Investors III, LLC and Excelsior Hedge Fund of
Funds I, LLC. The parenthetical number represents the number of
investment companies (including the Company) from which such person
receives compensation that is considered a part of the same Fund Complex
as the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of October 31, 2002, Mr. Fann, the Co-Chief Executive Officer and
President, was the owner of one unit of membership interest of the Company.
Amount and Nature
Title of Class Name and Address of Beneficial Owner of Beneficial Percent of Class
- -------------- ------------------------------------ Ownership ----------------
---------
Units of David I. Fann 1 unit *
membership c/o U.S. Trust Company, N.A.
Interest 5 Palo Alto Square, 9/th/ Floor
3000 Camino Real
Palo Alto, CA 94303
Managers and executive officers 1 unit *
as a group (1 person)
* Less than one percent.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has engaged in no transactions with the managers or executive
officers other than as described above or in the notes to the financial
statements.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
principal executive officers and principal financial officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on January 28, 2003, have
concluded that, based on such evaluation, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company was made known to them by others within those entities,
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 Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, nor were there
any significant deficiencies or material weaknesses in the Company's internal
controls. Accordingly, no corrective actions were required or undertaken.
23
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The financial statements listed in Item 8, "Financial Statements and
Supplementary Data," beginning on page 8 are filed as part of this
report.
2. Financial Statement Schedules
The financial statement schedules listed in Item 8, "Financial
Statements and Supplementary Data," beginning on page 8 are filed as
part of this report.
3. Exhibits
(3)(a) Certificate of Formation of Limited Liability Company (1)
(3)(b) Certificate of Amendment (1)
(3)(c) Form of Limited Liability Company Operating Agreement (1)
(4) For instruments defining the rights of security holders see
Exhibits (3)(a), (b) and (c), (10)(h),(i),(j) and (k) hereto
and the Specimen Certificate of the Company's units (1)
(10)(a) Form of Investment Advisory Agreement (l)
(10)(b) Form of Investment Sub-Advisory Agreement (1)
(10)(c) Form of Distribution Agreement (1)
(10)(d) Form of Selling Agent Agreement (l)
(10)(e) Form of Custodian Agreement (1)
(10)(f) Form of Administration, Accounting and Investor Services
Agreement (1)
(10)(g) Form of Escrow Agreement (1)
(10)(h) Form of Subscription Agreement for investment in units of the
Company (1)
(10)(i) Form of Subscription Agreement with Charles Schwab & Co., Inc.
for investment in units of the Company (1)
(10)(j) Amended and Restated Agreement with respect to Seed Capital
(2)
(10)(k) Form of Subscription Agreement between the Company and
Excelsior Venture Investors III, LLC (1)
(10)(l) Investment Sub-Advisory Agreement dated December 21, 2001
among the Company, U.S. Trust Company and U.S. Trust Company,
N.A. (3)
(23) Consent of Independent Auditors
24
(99)(a) Audit Committee Charter (4)
(99)(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) 1. Reports on Form 8-K
None
/1/ Incorporated by reference to the Company's Registration Statement on
Form N-2/A as filed with the Securities and Exchange Commission on
August 10, 2000 (File No. 333-30986).
/2/ Incorporated by reference to the Company's Registration Statement on
Form N-2/A as filed with the Securities and Exchange Commission on
November 14, 2000 (File No. 333-30986).
/3/ Incorporated by reference to the Company's Quarterly Report on Form
10-Q as filed with the Securities and Exchange Commission on March 18,
2002.
/4/ Incorporated by reference to the Company's Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on January 29,
2000.
25
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.
EXCELSIOR VENTURE PARTNERS III, LLC
Date: January 29, 2003 By: /s/ DAVID I. FANN
--------------------------------
David I. Fann, Co-Chief Executive
Officer and President
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ DAVID I. FANN
- -------------------------
David I. Fann Co-Chief Executive Officer and President January 29, 2003
(principal executive officer)
/s/ DOUGLAS A. LINDGREN
- -------------------------
Douglas A. Lindgren Co-Chief Executive Officer and January 29, 2003
Chief Investment Officer
(principal executive officer)
/s/ BRIAN F. SCHMIDT
- -------------------------
Brian F. Schmidt Chief Financial Officer January 29, 2003
(principal financial and accounting officer)
/s/ JOHN C. HOVER II January 29, 2003
- -------------------------
John C. Hover II Chairman of the Board and Manager
/s/ GENE M. BERNSTEIN January 29, 2003
- -------------------------
Gene M. Bernstein Manager
/s/ STEPHEN V. MURPHY January 29, 2003
- -------------------------
Stephen V. Murphy Manager
/s/ VICTOR F. IMBIMBO, JR January 29, 2003
- -------------------------
Victor F. Imbimbo, Jr. Manager
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
I, David I. Fann, certify that:
1. I have reviewed this annual report on Form 10-K of Excelsior Venture Partners
III, LLC;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 29, 2003
/s/ David I. Fann
- --------------------------
David I. Fann, Co-Chief Executive Officer
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
I, Douglas A. Lindgren, certify that:
1. I have reviewed this annual report on Form 10-K of Excelsior Venture Partners
III, LLC;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 29, 2003
/s/ Douglas A. Lindgren
- --------------------------------
Douglas A. Lindgren, Co-Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Brian F. Schmidt, certify that:
1. I have reviewed this annual report on Form 10-K of Excelsior Venture Partners
III, LLC;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 29, 2003
/s/ Brian F. Schmidt
- ----------------------------
Brian F. Schmidt, Chief Financial Officer