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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended January 31, 2003
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
114 West 47th Street, New York, NY 10036-1532
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (212) 852-1000
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since
last Report.
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 __
EXCELSIOR VENTURE PARTNERS III, LLC
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause Excelsior Venture Partners III, LLC's (the
"Company's") actual results to differ from future performance suggested herein.
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. 1
Portfolio of Investments as of January 31, 2003. 1
Statement of Assets and Liabilities at January 31, 2003 and October 31,
2002. 4
Statement of Operations for the three-month periods ended January 31, 2003
and January 31, 2002. 5
Statement of Changes in Net Assets for the three-month periods ended
January 31, 2003 and January 31, 2002. 6
Statement of Cash Flows for the three-month periods ended January 31, 2003
and January 31, 2002. 7
Financial Highlights for the three-month periods ended January 31, 2003 and
January 31, 2002. 8
Notes to Financial Statements. 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 14
Item 4. Controls and Procedures. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 15
Item 2. Changes in Securities and Use of Proceeds. 15
Item 3. Defaults Upon Senior Securities. 15
Item 4. Submission of Matters to a Vote of Security Holders. 15
Item 5. Other Information. 15
Item 6. Exhibits and Reports on Form 8-K. 15
SIGNATURES 16
CERTIFICATIONS 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EXCELSIOR VENTURE PARTNERS III, LLC
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JANUARY 31, 2003
-------------------------------
PORTFOLIO STRUCTURE
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS $ 80,992,035 61.08%
INVESTMENT COMPANIES 429,639 0.33%
PRIVATE COMPANIES 49,726,016 37.50%
PRIVATE INVESTMENT FUNDS 2,203,036 1.66%
-------------- --------------
TOTAL INVESTMENTS 133,350,726 100.57%
OTHER ASSETS & LIABILITIES (NET) (751,903) (0.57)%
-------------- --------------
NET ASSETS $ 132,598,823 100.00%
============== ==============
Notes to Financial Statements are an integral part of these
Financial Statements.
1
EXCELSIOR VENTURE PARTNERS III, LLC
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JANUARY 31, 2003
---------------------------------
PRINCIPAL ACQUISITION VALUE
AMOUNT/SHARES DATE ## (NOTE 1)
------------- ------------ ----------------
AGENCY OBLIGATIONS - 61.08%
$81,000,000 Federal Home Loan Bank Discount Note 1.18%, 2/04/03
(Cost 80,992,035) $ 80,992,035
----------------
PRIVATE COMPANIES **, #, @ - 37.50%
PREFERRED STOCK - 37.18%
647,948 Adeza Biomedical Corporation, Series 5 Preferred 09/01 3,000,000
2,419,355 Ancile Pharmaceuticals, Inc., Series D Preferred 11/01 1,500,000
1,314,285 Archemix Corporation, Series A Preferred 08/02 & 1/03 1,314,285
44,247,788 Cenquest, Inc., Series 1 Preferred 07/01 -
3,099,999 Ethertronics, Inc., Series B Preferred 06/01& 9/02 4,650,000
1,879,699 Genoptix, Inc., Series B Preferred 12/01 2,500,000
4,330,504 LightConnect, Inc., Series B Preferred 07/01 948,563
12,292,441 LightConnect, Inc., Series C Preferred 01/03 992,000
4,374,256 LogicLibrary, Inc., Series A Preferred 01/02 2,000,000
15,739,638 MIDAS Vision Systems, Inc., Series C Preferred 12/01 499,342
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&3/02 2,231,212
1,538,461 NetLogic Microsystems, Inc., Series D Preferred 8/01 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 5/02 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
----------------
49,301,016
NOTES - 0.32%
850,000 Ancile Pharmaceuticals, Inc., Bridge Note 6% 10/02 & 01/03 425,000
----------------
425,000
WARRANTS - 0.00%
2 Ancile Pharmaceuticals, Inc., Warrant 10/02 & 01/03 -
115,000 Ethertronics, Inc., Warrant 09/02 -
----------------
-
Total - Private Companies (Cost $61,203,112) 49,726,016
----------------
PRIVATE INVESTMENT FUNDS **, # - 1.66%
Advanced Technology Ventures VII, L.P. 08/01-12/02 298,690
Burrill Life Sciences Capital Fund 12/02 300,000
CHL Medical Partners II, L.P. 01/02-01/03 395,315
Morgenthaler Partners VII, L.P. 07/01-09/02 531,191
Prospect Venture Partners II, L.P. 06/01-10/02 527,840
Tallwood II, L.P 12/02 150,000
----------------
Total - Private Investment Funds (Cost $2,485,429) 2,203,036
----------------
INVESTMENT COMPANIES - 0.33%
429,639 Dreyfus Government Cash Management Account (Cost $429,639) 429,639
----------------
Notes to Financial Statements are an integral part of these
Financial Statements.
2
EXCELSIOR VENTURE PARTNERS III, LLC
PORTFOLIO OF INVESTMENTS (UNAUDITED) CONTINUED
JANUARY 31, 2003
----------------
TOTAL INVESTMENTS (Cost $145,110,215*) - 100.57% $ 133,350,726
OTHER ASSETS & LIABILITIES (NET) - (0.57)% (751,903)
NET ASSETS - 100.00% ----------------
$ 132,598,823
================
* Aggregate cost for federal tax and book purposes.
** Restricted as to public resale. Acquired between June 1, 2001 and January
31, 2003. Total cost of restricted securities at January 31, 2003 aggregated
$63,688,541. Total market value of restricted securities owned at January
31, 2003 was $51,929,052 or 39.16% of net assets.
# Non-income producing securities.
## Required disclosure for restricted securities only.
@ At January 31, 2003 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 January 31, 2003 was $49,726,016.
Notes to Financial Statements are an integral part of these
Financial Statements.
3
EXCELSIOR VENTURE PARTNERS III, LLC
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 2003 OCTOBER 31, 2002
---------------- ----------------
(Unaudited)
ASSETS:
Investment Securities, at Cost $ 145,110,215 $ 144,846,435
================ ================
Investment Securities, at Value $ 133,350,726 $ 138,512,604
Cash and Cash Equivalents 32,103 --
Receivables:
Interest 11,239 1,933
Other Receivables 1,271 996,290
Prepaid Assets 47,530 64,783
---------------- ----------------
Total Assets 133,442,869 139,575,610
---------------- ----------------
LIABILITIES:
Management Fees Payable (Note 2) 668,443 697,027
Professional Fees Payable 98,537 202,991
Administration Fees Payable (Note 2) 42,502 38,960
Board of Managers' Fees Payable (Note 2) 14,796 60,000
Other Payables 19,768 81,617
---------------- ----------------
Total Liabilities 844,046 1,080,595
---------------- ----------------
NET ASSETS $ 132,598,823 $ 138,495,015
================ ================
NET ASSETS consist of:
Accumulated Undistributed Net Investment Loss $ (1,785,837) $ (1,315,299)
Accumulated Net Realized Gain on Investments 7,367 7,363
Net Unrealized Depreciation on Investments (11,759,489) (6,333,831)
Paid in Capital 146,136,782 146,136,782
---------------- ----------------
Total Net Assets $ 132,598,823 $ 138,495,015
================ ================
Units of Membership Interest Outstanding 295,210 295,210
---------------- ----------------
NET ASSET VALUE PER UNIT $ 449.17 $ 469.14
================ ================
Notes to Financial Statements are an integral part of these
Financial Statements.
4
EXCELSIOR VENTURE PARTNERS III, LLC
STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JANUARY,
2003 2002
------------- -----------
INVESTMENT INCOME:
Interest Income $ 291,251 $ 555,267
Dividend Income 2,163 -
------------- -----------
Total Income 293,414 555,267
------------- -----------
EXPENSES:
Management Fees (Note 2) 668,443 738,121
Administration Fees (Note 2) 38,979 46,996
Insurance Expense 17,254 6,496
Board of Managers' Fees (Note 2) 15,123 38,123
Professional Fees 12,603 50,411
Custodian Fees 5,247 4,537
Miscellaneous Fees 6,303 3,781
------------- -----------
Total Expenses 763,952 888,465
NET INVESTMENT LOSS (470,538) (333,198)
------------- -----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net Realized Gain on Security Transactions 4 599
Change in Unrealized Depreciation on Investments (5,425,658) (18,694)
------------- -----------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS (5,425,654) (18,095)
------------- -----------
NET DECREASE IN NET
ASSETS RESULTING FROM OPERATIONS $ (5,896,192) $ (351,293)
============= ===========
Notes to Financial Statements are an integral part of these
Financial Statements.
5
EXCELSIOR VENTURE PARTNERS III, LLC
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31,
------------------------------
2003 2002
------------- -------------
OPERATIONS:
Net Investment Loss $ (470,538) $ (333,198)
Net Realized Gain on Investments 4 599
Change in Unrealized
Depreciation on Investments (5,425,658) (18,694)
------------- -------------
Net Decrease in Net Assets
Resulting from Operations (5,896,192) (351,293)
------------- -------------
NET DECREASE IN NET ASSETS (5,896,192) (351,293)
NET ASSETS:
Beginning of Period 138,495,015 146,420,778
------------- -------------
End of Period $ 132,598,823 $ 146,069,485
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
6
EXCELSIOR VENTURE PARTNERS III, LLC
STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31,
------------------------------
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Decrease in Net Assets Resulting from Operations........................ $ (5,896,192) $ (351,293)
Adjustments to reconcile net decrease in net assets from operations to net
cash provided by/ used in operating activities:
Change in unrealized depreciation on investments......................... 5,425,658 18,694
Purchase of investments.................................................. (2,612,714) (22,905,000)
Change in short-term investments......................................... 2,348,934 19,868,218
Increase in interest receivable.......................................... (9,306) (9,932)
Decrease in other receivable............................................. 995,019 -
Decrease in prepaid insurance............................................ 17,253 6,496
Decrease in expenses payable............................................. (236,549) (770,389)
------------- -------------
Net cash provided by/ used in operating activities..................... 32,103 (4,143,206)
------------- -------------
Net change in cash..................................................... 32,103 (4,143,206)
------------- -------------
Cash at beginning of period.......................................... -- 8,433,122
Cash at end of period................................................ $ 32,103 $ 4,289,916
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
7
EXCELSIOR VENTURE PARTNERS III, LLC
FINANCIAL HIGHLIGHTS (UNAUDITED)
PER UNIT OPERATING PERFORMANCE: (1)
THREE MONTHS ENDED
JANUARY 31,
-----------------------
2003 2002
--------- ----------
NET ASSET VALUE, BEGINNING OF PERIOD................ $ 469.14 $ 495.99
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss............................... (1.59) (1.13)
Net realized and unrealized loss on investment
transactions..................................... (18.38) (0.06)
--------- ----------
Total from investment operations................ (19.97) (1.19)
NET ASSET VALUE, END OF PERIOD...................... $ 449.17 $ 494.80
TOTAL NET ASSET VALUE RETURN (3), (4)............... (4.26)% (0.24)%
========= ==========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................ $ 132,599 $ 146,069
Ratios to average net assets: (2)
Net expenses.................................... 2.25% 2.43%
Net investment income........................... (1.39)% (0.91)%
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) 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.
8
EXCELSIOR VENTURE PARTNERS III, LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2003
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, two-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.
Certain costs incurred in connection with the initial offering of units
totaled $1,468,218. Each member's 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
Advisers (as defined below) or a committee of the Board 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.
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" method 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 Advisers 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 January 31, 2003, market quotations were not readily available for
securities valued at $51,929,052. Such securities were valued by the
Investment Advisers, under the supervision of the Board of Managers.
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.
9
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 January 31, 2003, the cost of investment for Federal income tax
purposes was $145,110,215. At January 31, 2003, the net unrealized
depreciation amounted to ($11,759,489), which is composed of gross
unrealized depreciation of ($11,759,489).
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 Company, N.A. Prior
10
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 wholly-owned subsidiary of
PNC Bank N.A., 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 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 this 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 January 31, 2003, Excelsior Venture Investors III, LLC had an
investment in the Company of $84,178,086. 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 $2,612,714 in purchases
and $0 in sales of securities for the three-month period ended January 31, 2003.
Excluding short-term investments, the Company had $22,905,000 in purchases and
$0 in sales of securities for the three-month period ended January 31, 2002.
NOTE 4 -- COMMITMENTS
As of January 31, 2003, the Company had outstanding investment commitments
totaling $14,514,571.
11
NOTE 5 -- 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 January 31,
2003. Transactions with companies, which are or were affiliates were as follows:
SALE/ CUMULATIVE
OCTOBER 31, MERGER REALISED VALUE
AFFILIATE 2002 VALUE PURCHASES INTEREST PROCEEDS GAIN (LOSS) (NOTE 1)
- --------------------------------------------- ---------- ----------- --------- --------- ----------- -----------
Archemix Corporation, Series A Preferred $ 628,571 $ 685,714 $ -- $ -- $ -- $ 1,314,285
LightConnect, Inc., Series C Preferred -- 992,000 -- -- -- 992,000
Ancile Pharmaceuticals, Inc., Bridge Notes 6% 600,000 250,000 10,767 -- -- 425,000
Ancile Pharmaceuticals, Inc., Warrant -- -- -- -- -- --
---------- ----------- --------- --------- ----------- -----------
Total $1,228,571 $ 1,927,714 $ 10,767 $ -- $ -- $ 2,731,285
========== =========== ========= ========= =========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JANUARY 31, 2003 AS COMPARED TO THE SIMILAR PERIOD IN
2002
The Company's net asset value per unit of membership interest was $449.17
at January 31, 2003, a decrease of ($19.97) per unit from the net asset value
per unit of membership interest of $469.14 at October 31, 2002. This decrease is
principally the result of (i) a $1,925,000 write-down of Ancile Pharmaceuticals,
Inc., a private company investment, (ii) a $3,550,658 write-down of MIDAS Vision
Systems, Inc., a private company investment, and (iii) operating expenses
exceeding investment income during the period primarily due to a decline in net
investment income and the management fee accrual. The Company's net asset value
per unit of membership interest was $494.80 at January 31, 2002, a decrease of
($1.19) per unit from the net asset value per unit of membership interest of
$495.99 at October 31, 2001. This decrease is principally the result of
operating expenses exceeding investment income during the period.
REALIZED AND UNREALIZED GAINS AND LOSSES FROM PORTFOLIO INVESTMENTS
For the three-month periods ended January 31, 2003 and 2002, the Company
had a net realized gain on security transactions of $4 and $599, respectively.
For the three-month periods ended January 31, 2003 and 2002, the Company had a
net change in unrealized depreciation on investments of ($5,425,658) and
($18,694), respectively. The realized gains were principally the result of the
Company's sale of short-term investments during these periods. The change in
unrealized depreciation was principally the result of write-downs taken during
the period ended January 31, 2003. For the period ended January 31, 2002, the
change in unrealized depreciation was principally the result of a decline in the
value of short-term investments.
12
INVESTMENT INCOME AND EXPENSES
For the three-month period ended January 31, 2003, the Company had
investment income of $293,414 and net operating expenses of $763,952, resulting
in a net investment loss of ($470,538). In comparison, for the similar period
ended January 31, 2002, the Company had investment income of $555,267 and net
operating expenses of $888,465, resulting in a net investment loss of
($333,198). This decrease in net investment income resulted from the negative
impact of the decline in short-term interest rates, along with a decrease in
assets invested in short-term instruments.
U.S. Trust Company (the "Investment Adviser") and United States Trust
Company of New York and U.S. Trust Company, N.A. (each an "Investment
Sub-Adviser" and together with U.S. Trust Company, the "Investment Advisers")
provide investment management and administrative services required for the
operation of the Company. In consideration of the services rendered by the
Investment Advisers, the Company pays a management fee based upon a percentage
of the net assets of the Company invested or committed to be invested in certain
types of investments and an incentive fee based in part on a percentage of
realized capital gains of the Company. Such fee is determined and payable
quarterly. For the three-month periods ended January 31, 2003 and 2002, the
Investment Advisers earned $668,443 and $738,121 in management fees,
respectively. Management fees declined over the period ended January 31, 2003
due to the decline in net assets.
NET ASSETS
At January 31, 2003, the Company's net assets were $132,598,823, a decrease
of ($5,896,192) from net assets of $138,495,015 at October 31, 2002. The
decrease resulted from (i) a $1,925,000 write-down of Ancile Pharmaceuticals,
Inc., a private company investment, (ii) a $3,550,658 write-down of MIDAS Vision
Systems, Inc., a private company investment, and (iii) operating expenses
exceeding investment income during the period primarily due to a decline in net
investment income and the management fee accrual. The Company's net assets at
January 31, 2002 were $146,069,485, down ($351,293) from net assets of
$146,420,778 at October 31, 2001. The decline in net assets during this period
was due to the net investment loss posted for the three-month period ended
January 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company will focus its investments in the securities of privately-held
venture capital companies, and to a lesser extent in venture capital, buyout and
other private equity funds managed by third parties. The Company may offer
managerial assistance to certain of such privately-held venture capital
companies companies. The Company invests its available cash in short-term
investments of marketable securities pending distribution to investors.
At January 31, 2003, the Company held $32,103 in cash and $81,421,674 in
short-term investments as compared to $0 in cash and $83,770,608 in investments
at October 31, 2002. The decrease in short-term investments from October 31,
2002 was due to follow-on investments in private companies as wells as capital
calls for private investment funds. The Company, during this period, committed
and funded capital to a sixth private investment fund, Burrill Life Sciences
Capital Fund. The Company contributed capital to Advanced Technology Ventures
VII, L.P., CHL Medical Partners II, L.P. and Tallwood Venture Partners II, L.P.,
each a private investment fund. In connection with the Company's total
commitments to private funds in the amount of $17,000,000 since inception, the
Company, through January 31, 2003, has contributed $2,485,429 or 14.6% of the
total capital committed thus far. The Company also participated in follow-on
financing rounds for two of its private companies, Ancile Pharmaceuticals for
$250,000 and Archemix Corporation for $685,714. At January 31, 2002, the Company
held $4,289,916 in cash and $94,909,143 in short-term investments as compared to
$8,433,122 in cash and $114,796,052 in short-term investments at October 31,
2001. The decrease in short-term investments from October 31, 2001 was due to
follow-on investments in private companies as wells as capital calls for private
investment funds.
13
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 39.2% of the Company's net assets. During the period ended
January 31, 2003, changes to these estimates, i.e. changes in the valuations of
private investments, resulted in a $5.4 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. 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 the 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 3. 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 market prices. Thus, these equity securities are not subject to
equity price risk normally associated with public equity markets. As of January
31, 2003, the Company held no investments in the equity securities of public
companies.
ITEM 4. 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 March 13, 2003, have
concluded that, based on such evaluation, the Company's disclosure controls and
procedures were adequate and effective to ensure that material
14
information relating to the Company was made known to them by others within
those entities, particularly during the period in which this Quarterly Report on
Form 10-Q was being prepared.
(b) Changes in Internal Controls. There were no significant changes in the
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K.
None.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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: March 17, 2003 By: /s/ David I. Fann
-----------------------------------
David I. Fann
Co-Chief Executive Officer
Date: March 17, 2003 By: /s/ Douglas A. Lindgren
-----------------------------------
Douglas A. Lindgren
Co-Chief Executive Officer
Date: March 17, 2003 By: /s/ Brian F. Schmidt
-----------------------------------
Brian F. Schmidt
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
I, David I. Fann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Excelsior Venture
Partners III, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The 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):
16
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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 17, 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 quarterly report on Form 10-Q of Excelsior Venture
Partners III, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The 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
17
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 17, 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 quarterly report on Form 10-Q of Excelsior Venture
Partners III, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
/s/ Brian F. Schmidt
- ------------------------
Brian F. Schmidt, Chief Financial Officer
18