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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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.)
225 High Ridge Road
Stamford, CT 06905
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (203) 352-4400
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [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
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PART I
1. Business 1
2. Properties 5
3. Legal Proceedings 5
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 6
7A. Quantitative and Qualitative Disclosures About Market Risk 8
8. Financial Statements and Supplementary Data 8
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 23
9A Controls and Procedures 23
PART III
10. Managers and Executive Officers of the Registrant 23
11. Executive Compensation 26
12. Security Ownership of Certain Beneficial Owners and Management 27
13. Certain Relationships and Related Transactions 27
14. Principal Accountant Fees and Services 27
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28
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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
("Investment Company Act"), 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"). BDCs are a special type of investment
company, as defined and regulated by the Investment Company Act, which focus
primarily on investing in the privately issued securities of eligible portfolio
companies, as defined by the Investment Company Act. A BDC must also make
available significant managerial assistance to such companies. 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.
U.S. Trust Company, N.A., acting through its registered investment
advisory division, U.S. Trust Company, N.A. Asset Management Division, serves as
Investment Adviser to the Company. United States Trust Company of New York,
acting through its registered investment advisory division, U.S. Trust - New
York Asset Management Division, serves Investment Sub-Adviser to the Company
(together, the "Investment Advisers"). 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"). U.S. Trust Company,
N.A. and United States Trust Company of New York are each 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. 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.
The following is a summary of the Company's investment portfolio over
its life.
Investments Held -- Private
.. Adeza Biomedical Corporation, Sunnyvale, CA, develops, manufactures, and
markets diagnostic products for women's reproductive healthcare. Through
September 2003, Adeza has had six consecutive quarters of profitability and over
50% year-to-year revenue growth. The company's primary focus is on proprietary
diagnostic tests to help physicians and patients determine the likelihood of
pre-term delivery. The company's product, the ffN test, is considered the "Gold
Standard of care" by the American College of Obstetricians and Gynecologists,
and is now used in over 1000 U.S. hospitals. The company is developing several
other products, including those addressing infertility and cancer detection. The
Fund invested $3.0 million in September 2001. Enterprise Partners, and Sprout
Asset Management are also investors in Adeza.
1
.. Archemix Corporation, Cambridge, MA, seeks to discover aptamer-based
therapeutics in the inflammation and oncology areas using proprietary selected
nucleic acid technology. The company expects to have its first product in
clinical trials in 2004. In 2003, the company brought on a world class
biotechnology entrepreneur, Errol De Souza, to further advance the company's
development. The Fund's investment was staged into three tranches. The first
tranche of $0.6 million was invested in August 2002 and the second tranche of
$0.7 million was drawn in January 2003. Subsequent to the fiscal year-end, the
third tranche of $0.7 million was invested in November 2003. Schroder Ventures
Life Sciences, Atlas Venture, Prospect Venture Partners, Care Capital, MDS
Capital, and POSCO Bio Venture also invested in Archemix.
.. Datanautics, Inc., Fremont, CA, develops and markets web analytics and data
management software that provides detailed information about visitors on a
corporate or commerce website, including paths taken and usage behavior. This
technology allows for more effective online merchandising and marketing.
Currently, the company has over forty active customers including Citibank,
Knight Ridder, and Macy's. The Fund invested $0.5 million in August 2003 and
$3.5 million in September 2003.
.. 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. In 2003, Ethertronics had a
number of key design wins. The Fund initially invested $3.5 million in June
2001, and invested an additional $1.2 million in the company in September 2002
and $1.0 million in July 2003. Sevin Rosen is a co-investor in Ethertronics.
.. Genoptix, Inc., San Diego, CA, is developing a personalized medicine
diagnostics platform using a proprietary laser-based platform for analyzing,
sorting and manipulating living cells without the need for any dyes or labels.
The company is also creating diagnostics at the cellular level, addressing the
personalized medical trend. The Fund invested $2.5 million in December 2001 and
has invested an additional $0.4 million in July 2003 and $0.3 million in
September 2003. Other investors include Alliance Technology Ventures, Enterprise
Partners, Lotus Biosciences Investment Holdings, and Tullis-Dickerson & Co.,
Inc.
.. Gyration, Inc., Saratoga, CA is a manufacturer and marketer of high-end
wireless accessories for computers, multi-media, and home entertainment segments
using patented gyroscope technology. The company's products are carried by major
retailers such as Best Buy, Staples, Circuit City, Office Depot, Office Max and
others. The Fund made an initial investment of $4.0 million in March 2003.
Subsequent to the fiscal year-end, the Fund invested an additional $2.8 million
in Gyration as an extension of the original financing round. Other investors
include Huntington Ventures and NY Life Capital Partners.
.. 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 $5.0 million
in LightConnect in July 2001 and made a $1.0 million follow-on investment in
December 2002. The other investors in LightConnect are Sevin Rosen, Incubic,
Morgenthaler, and US Venture Partners.
.. 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. In 2003, the Company entered into a partnership with
Microsoft. The Fund invested $2.0 million in LogicLibrary in January 2002 and
invested an additional $0.7 million in August 2003. Birchmere Ventures, Novak
Biddle Venture Partners, and The Future Fund also invested in the company.
.. 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 dramatically increase their design
productivity. The Fund invested $3.0 million in the company in December 2001,
and made a follow-on investment in the amount of $4.8 million in the company in
June 2003. Other investors include Sevin Rosen Funds, US Venture Partners, Rho
Capital Partners, Vertex Partners, Information Technology Ventures, and LSI
Logic.
2
.. NanoOpto Corporation, Somerset, NJ, is a designer and manufacturer of
integrated optical components using nanotechnology 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 $2.0 million in NanoOpto in
October 2001, and has followed on with two additional $0.2 million investments
in March 2002 and September 2003. Bessemer Venture Partners, Morgenthaler, and
New Enterprise Associates are co-investors in NanoOpto.
.. 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. In 2003, the company had design wins and is shipping
product to several large data communications suppliers. The Fund invested $5.0
million in August 2001 in NetLogic Microsystems. Sevin Rosen is a co-investor in
NetLogic Microsystems.
.. OpVista, Inc., Irvine, CA, develops, markets and manufactures Dense Wavelength
Division Multiplexing (DWDM)-based optical networking equipment for deployment
in long haul, regional metro networks carriers, and cable companies. OpVista's
ultra-DWDM products allow service providers to build flexible, scalable, and
cost-effective networks while seamlessly integrating legacy networks. The
company's products are being successfully used by Time Warner cable. The Fund
invested $4.0 million in OpVista in July 2001 and subsequently, a follow-on
investment in the amount of $2.5 million was made in September 2003. Sevin Rosen
and Incubic are investors in OpVista.
.. Pilot Software, Inc., Mountain View, CA, develops and markets enterprise
business performance management and business intelligence analytics software.
Pilot currently has over 400 active customers including several Global 1000
companies such as United States Government GSA, Swiss Life, Nokia, and Noro
Nordisk. The Fund's initial investment of $3.0 in May 2002 was followed by a
$1.0 million investment in April 2003. Other investors include G51.
.. 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 Company has four strategic collaborations with Coca Cola,
Nestle, Kraft Foods, and Campbell Soup. The Fund invested $1.5 million in
Senomyx in November 2001. Other investors include Prospect Venture Partners, Rho
Ventures, Merrill Lynch, Avalon Ventures, Domain Associates, and Bay City
Capital.
.. Silverback Systems, Inc., Campbell, CA, provides silicon and software
solutions that enable IP-based storage area networks and data center systems.
Initially, the Fund invested $1.4 million in Silverback in February 2002.
Subsequent rounds of financing include a $1.5 million follow-on investment in
March 2003, and a $1.5 million follow-on investment in September 2003. Other
investors include J.P. Morgan Partners, Newbury Ventures, Pitango Venture
Capital, and Gemini Israel Funds.
.. Tensys Medical, Inc., San Diego, CA, has developed and is commercializing the
first practical, continuous, non-invasive arterial blood pressure monitoring
system used in the surgical environment. Since the company's product launch in
May 2003, the company has over forty hospitals as customers including
Northwestern University, MD Anderson, and Stanford University. The Fund invested
$5.0 million in Tensys in March 2002. Other investors include Crosspoint Venture
Partners, Enterprise Partners, Versant Ventures, and Sofinnova Ventures.
.. Virtual Silicon Technology, Inc., Sunnyvale, CA, is a supplier of
semiconductor intellectual property and process technology to manufacturers and
designers of systems-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 $5.0 million in the company in December 2001. 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
.. Advanced Technology Ventures VII, L.P. ("ATV") is a $700 million venture
capital fund targeting varied-stage information technology, communications and
life sciences companies. As of October 31, 2003, ATV has drawn 20% of the Fund's
$3 million capital commitment, and is being carried at a value of $0.5 million.
3
.. Burrill Life Sciences Capital Fund ("Burrill") is a $200 million venture
capital fund established to invest primarily in innovative, early-stage life
science venture opportunities. As of October 31, 2003, Burrill has drawn 10% of
the Fund's $3 million capital commitment, and is being carried at a value of
$0.2 million.
.. CHL Medical Partners II, L.P. ("CHL") is a $125 million venture capital fund
targeting start-up and early-stage medical technology and life sciences
companies. As of October 31, 2003, CHL has drawn 25% of the Fund's $2 million
capital commitment, and is being carried at a value of $0.4 million.
.. CMEA Ventures VI, L.P. ("CMEA") is a $100 million venture capital fund
targeting both early life science and information technology companies. The Fund
committed $3 million in September 2003, but as of October 31, 2003, CMEA has not
called capital to make an investment.
.. Morgenthaler Venture Partners VII, L.P. ("Morgenthaler") is an $850 million
venture capital fund targeting varied-stage information technology,
communications, and health care companies. As of October 31, 2003, Morgenthaler
has drawn 30% of the Fund's $3 million capital commitment, and is being carried
at a value of $0.7 million.
.. Prospect Venture Partners II, L.P. ("Prospect") is a $500 million venture
capital fund targeting varied-stage life sciences companies. As of October 31,
2003, Prospect has drawn 33% of the Fund's $3 million capital commitment, and is
being carried at a value of $0.8 million.
.. Tallwood II, L.P. ("Tallwood") is a $150 million venture capital fund
established to invest in attractive early-stage growth companies possessing
leading-edge technology in the semiconductor industry. As of October 31, 2003,
Tallwood has drawn 15% of the Fund's $3 million capital commitment, and is being
carried at a value of $0.3 million.
.. Valhalla Partners, L.P. ("Vahalla") is a $200 million venture capital fund
established to invest in attractive early-stage venture capital investments in
information technology companies in the Mid-Atlantic region. As of October 31,
2003, Valhalla has drawn 4% of the Fund's $3 million capital commitment, and is
being carried at a value of $0.1 million.
Investments Written Off
.. Ancile Pharmaceuticals, Inc., San Diego, CA, was a specialized pharmaceutical
company focusing on the development and commercialization of prescription
botanical drugs for major chronic disease conditions. In 2003, the data for
Ancile Phase IIb trial did not show clear efficacy. As a result, the investors
chose not to continue funding the company. On August 1, 2003, Ancile voluntarily
executed a General Assignment for the Benefit of Creditors to the San Diego
Credit Association for the purpose of conducting an orderly corporate
liquidation. The Fund invested a total of $3.9 million in Ancile in November
2001, October 2002 and January 2003. Morgenthaler Venture Partners and Domain
Associates were also investors in the company.
.. Cenquest, Inc., Portland, OR, is an intermediary provider of accredited
business and management degree programs to large corporations. The Fund has
written off its $2.0 million investment, made in July 2001, in Cenquest because
of the company's changing business model and limited prospects.
.. MIDAS Vision Systems, Inc., Foxboro, MA, is a developer of automated optical
inspection systems for advanced substrates and microelectronics packaging
industries. The company has been unable to reverse sales declines and as a
result, the Fund has written off its $5.1 million investment, made in December
2001 and March 2003, in MIDAS Vision. North Atlantic Capital Corporation, PNC
Technology Investors, and SpaceVest are also investors in MIDAS Vision.
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
4
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, 2003, 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.
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.
Market Information
The Company has an unlimited number of no par value units authorized.
As of October 31, 2003, 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.
Holders
There were 451 holders of units of membership interest as of December
31, 2003.
Dividends and Distributions
Fiscal Year Ended October 31, 2003. There were no dividends or
distributions paid during fiscal year 2003.
Fiscal Year Ended October 31, 2002. There were no dividends or
distributions paid during fiscal year 2002.
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.
($ in 000's except for per unit data)
Fiscal Year Ended 10/31/03 10/31/02 10/31/01
Financial Position
Investments in securities 119,500 138,513 139,676
Other Assets 3,744 1,063 8,527
Total Assets 123,244 139,576 148,203
Liabilities 786 1,081 1,782
5
Net Assets 122,458 138,495 146,421
Changes in Net Assets
Net investment income (loss) (2,077) (1,659) 831
Net gain (loss) on investments (13,960) (6,267) (60)
Dividends -- -- 487
Per Unit Data
Net Assets 414.82 469.14 495.99
Dividends Paid -- -- 1.65
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Liquidity and Capital Resources
The Company focuses 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. The Company invests its available cash in short-term
investments of marketable securities pending distribution to investors.
At October 31, 2003, the Company held $3,738,154 in cash and cash
equivalents and $53,514,005 in short-term investments as compared to $0 in cash
and cash equivalents and $83,770,608 in short-term investments at October 31,
2002. The decrease in short-term investments from October 31, 2002 was due to
new and follow-on investments in private companies as wells as capital invested
in private investment funds. The Company, during this period funded additional
capital per its commitments to Advanced Technology Ventures VII, L.P., Burrill
Life Sciences Capital Fund, CHL Medical Partners II, L.P., Morgenthaler Partners
VII, L.P., Prospect Venture Partners II, L.P., Tallwood Venture Partners II,
L.P., and Valhalla Partners, L.P., each a private investment fund. The Company
has also committed capital to CMEA Ventures VI, L.P. during fiscal year ended
October 31, 2003. In connection with the Company's total commitments to private
funds in the amount of $23,000,000 since inception, the Company, through October
31, 2003, has contributed $3,835,429 or 16.7% of the total capital committed to
eight private investment funds.
The Company participated in follow-on financing rounds for 12 of its
private companies: i) LightConnect, Series C Preferred for $992,000, ii) Ancile
Pharmaceuticals bridge note for $250,000, iii) Archemix Series A for $685,714,
iv) MIDAS Vision Systems Series A-1 preferred for $1,054,960, v) Pilot Software
Series A preferred for $1,000,000, vi) Silverback Systems Series C preferred for
$3,010,133, vii) Ethertronics Series B preferred for $1,000,000, viii) Genoptix
bridge note for $443,787, subsequently converted to Series B-2, and Series B-2
for $291,064, ix) Monterey Designs Series 2 preferred for $3,000,000, x) Logic
Library Series A for $704,225, xi) NanoOpto Series B for $237,499, and xii)
OpVista for $2,500,000. The Company also closed and funded 2 new private company
investments: i) in Gyration Series C-2 preferred for $4,000,000, and ii) in
promissory notes of Datanautics in the amount of $4,000,000.
The Company believes that its liquidity and capital resources are
adequate to satisfy its operational needs as well as the continuation of its
investment program.
Results of Operations
Investment Income and Expenses
For the fiscal year ended October 31, 2003, the Company had investment
income of $844,930 primarily from investments in short-term securities and net
operating expenses of $2,922,068, resulting in a net investment loss of
($2,077,138) as compared to investment income of $1,742,304 and net operating
expenses of $3,401,295, resulting in a net investment loss of ($1,658,991) for
the period ended October 31, 2002. For the fiscal year ended October 31, 2001,
the Company had investment income of $2,729,924 from investments in short-term
securities and net operating expenses of $1,899,081, resulting in net investment
income of $830,843. The decline in investment income is due to a
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decline in interest earned on short-term securities, as well as a decrease in
the level of assets invested in short-term securities due to the Company's
investment in private companies and private investment funds. Net operating
expenses decreased during fiscal 2003 compared to fiscal 2002 due to reduced
management fees paid to the Investment Advisers, as well as a reduction in legal
fees year over year.
For the fiscal year ended October 31, 2003, the Investment Advisers
earned $2,530,840 in management fees, whereas for the year ended October 31,
2002, the Investment Advisers earned $2,881,830 in management fees. This
decrease is a result of the fact that net assets for the periods of calculation
of management fees during fiscal 2003 were lower than those for similar periods
during the fiscal year ended October 31, 2002. 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 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 $414.82 at October 31,
2003, down ($54.32) per unit from the net asset value per unit of $469.14 at
October 31, 2002. This decline in net asset value per unit is comprised of a net
investment loss totaling ($2,077,138) or ($7.04) per unit and a net change in
realized and unrealized depreciation on investments of ($13,960,024) or ($47.28)
per unit, which is the result of the negative valuation impact of the Company's
investments on unrealized depreciation
The net change in unrealized depreciation of ($13,960,068) or ($47.28)
per unit is due to the write-off of Ancile Pharmaceuticals and MIDAS Vision
Systems, together totaling $8,904,960 or $30.16 per unit. The Company also
recorded write-downs of Genoptix, Monterey Design Systems and NanoOpto, all
private company investments, during the fiscal year ended October 31, 2003. The
Company's $3.9 million investment in Ancile Pharmaceuticals was written off as
the company is currently conducting an orderly liquidation of its assets through
a voluntary General Assignment for the Benefit of Creditors. The Company also
wrote off its $5.1 million investment in MIDAS Vision Systems due impaired
performance and prospects for the company. Genoptix, Monterey Design Systems and
NanoOpto were each written down by $1.2 million, $1.2 million and $1.0 million,
respectively. These write-downs were due to recent financing events which
effectively reduced the valuation of the Company's investment. The net
investment loss of ($2,077,138) or ($7.04) per unit resulted from operating
expenses of $2,922,068 exceeding investment income of $844,930.
For the fiscal year ended October 31, 2002, the Company's net asset
value per unit was $469.14, 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.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the fiscal year ended October 31, 2003, the Company had a
($13,960,024) net realized and unrealized loss from investments, comprised of a
$44 net realized gain on investments and a ($13,960,068) net change in
unrealized depreciation of investments due to the Company's write-off of Ancile
Pharmaceuticals and MIDAS Vision Systems, as well as the write-downs of
Genoptix, Monterey Design Systems and NanoOpto. 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
7
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 53.9% of the Company's net assets. For the private
investments held at October 31, 2003, changes to these estimates, i.e. changes
in the valuations of these private investments, resulted in a $14.0 million
decrease in net asset value from October 31, 2002.
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, both under the supervision 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 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, 2003, the Company held no
investments in the equity securities of public companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Independent Auditors' Report
Portfolios of Investments at October 31, 2003 and October 31, 2002
Statements of Assets and Liabilities at October 31, 2003, and October
31, 2002
Statements of Operations for the year ended October 31, 2003, October
31, 2002 and period April 5, 2001 (commencement of operations) through
October 31, 2001
8
Statements of Changes in Net Assets for the year ended October 31,
2003, October 31, 2002 and period April 5, 2001 (commencement of
operations) through October 31, 2001
Statements of Cash Flows for the year ended October 31, 2003, October
31, 2002 and period April 5, 2001 (commencement of operations) through
October 31, 2001
Financial Highlights for the year ended October 31, 2003, 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.
9
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 "Company"), including the portfolios of
investments, as of October 31, 2003 and 2002, the related statements of
operations, changes in net assets, cash flows and financial highlights for each
of the periods presented in the three years ended October 31, 2003. These
financial statements and financial highlights are the responsibility of the
Company'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 audit
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, 2003 and 2002, by
correspondence with the custodian, the general partners of the private
investment funds and the private investment companies. 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, 2003 and 2002, the results of
its operations, its changes in net assets, its cash flows and financial
highlights for each of the periods presented in the three years ended October
31, 2003, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 22, 2003
10
Excelsior Venture Partners III, LLC
Portfolio of Investments October 31, 2003
Principal Acquisition Value
Amount/Shares Date ## (Note 1)
- ------------- ------------- -----------
AGENCY OBLIGATIONS -- 43.27%
$ 53,000,000 Federal Home Loan Bank Discount Notes 0.95%, 11/05/03 (Cost $52,994,406) $52,994,406
-----------
PRIVATE COMPANIES **, #, @ -- 51.37%
Common Stocks -- 0.00%
Capital Equipment -- 0.00%
157,396 MIDAS Vision Systems, Inc. 03/03 --
-----------
Life Sciences -- 0.00%
46,860 Genoptix, Inc. 07/03 --
-----------
Semiconductor -- 0.00%
708,955 Monterey Design Systems, Inc. 06/03 --
-----------
TOTAL COMMON STOCKS (Cost $8,749,999) --
-----------
Preferred Stocks -- 48.10%
Capital Equipment -- 0.00%
933,593 MIDAS Vision Systems, Inc., Series A-1 03/03 --
-----------
Consumer Electronics -- 3.27%
1,523,810 Gyration, Inc., Series C-2 03/03 4,000,000
-----------
Consumer Products -- 1.22%
517,260 Senomyx, Inc., Series E 11/01 1,500,000
-----------
Enterprise Software -- 5.48%
5,914,488 LogicLibrary, Inc., Series A 01/02 & 08/03 2,704,226
20,000,000 ***Pilot Software Inc., Series A 05/02 & 04/03 4,000,000
-----------
6,704,226
-----------
Information Services -- 0.00%
4,425 Cenquest, Inc., Series 2 7/01 --
-----------
Life Sciences -- 5.15%
647,948 Adeza Biomedical Corporation, Series 5 09/01 3,000,000
2,419,355 Ancile Pharmaceuticals, Inc., Series D 11/01 --
1,314,285 Archemix Corporation, Inc., Series A 08/02 & 01/03 1,314,285
942,481 Genoptix, Inc., Series B-1 12/01 1,253,500
826,823 Genoptix, Inc., Series B-2 07/03 & 09/03 734,851
-----------
6,302,636
-----------
Medical Technology -- 4.08%
4,166,667 Tensys Medical, Inc., Series C 03/02 5,000,000
-----------
Optical -- 8.11%
4,330,504 LightConnect, Inc., Series B 07/01 948,562
12,292,441 LightConnect, Inc., Series C 12/02 992,000
956,234 NanoOpto Corporation, Series A-1 10/01& 3/02 604,259
558,295 NanoOpto Corporation, Series B 09/03 888,244
5,333,333 OpVista, Inc., Series B 07/01 1,500,000
12,671,059 OpVista, Inc., Series C 09/03 5,000,000
-----------
9,933,065
-----------
Semiconductor -- 16.18%
3,333,333 Monterey Design Systems, Inc., Series 2 06/03 5,400,000
1,538,461 NetLogic Microsystems, Inc., Series D 08/01 5,000,000
1,105,949 Silverback Systems, Inc., Series B-1 02/02 450,051
30,927,835 Silverback Systems, Inc., Series C 03/03 & 09/03 3,965,564
3,096,551 Virtual Silicon Technology, Inc., Series C 12/01 5,000,000
-----------
19,815,615
11
Excelsior Venture Partners III, LLC
Portfolio of Investments October 31, 2003 --(continued)
Principal
Amount/Shares/ Acquisition Value
Percent Owned Date ## (Note 1)
- -------------- ------------------- ------------
Wireless -- 4.61%
3,766,666 Ethertronics, Inc., Series B 06/01, 09/02, 07/03 5,650,000
------------
TOTAL PREFERRED STOCKS (Cost $68,844,780) 58,905,542
------------
Notes -- 3.27%
Enterprise Software -- 3.27%
$4,000,000 ***Datanautics, Inc., Convertible Promissory Note 3%, 1/31/2004@ 08/03 & 09/03 $ 4,000,000
------------
Life Sciences--0.00 %
$ 600,000 Ancile Pharmaceuticals, Inc., Bridge Note 6%, 2/22/2003 10/02 --
$ 250,000 Ancile Pharmaceuticals, Inc., Bridge Note 6%, 5/10/2003 01/03 --
------------
--
TOTAL NOTES (Cost $4,850,000) 4,000,000
------------
Warrants -- 0.00%
Life Sciences--0.00 %
2 Ancile Pharmaceuticals, Inc. 10/02 & 01/03 --
------------
Wireless -- 0.00%
100,000 Ethertronics, Inc. 09/02 --
115,000 Ethertronics, Inc. 07/03 --
66,667 Ethertronics, Inc. 08/03 --
------------
--
TOTAL WARRANTS (Cost $0) --
------------
TOTAL--PRIVATE COMPANIES (Cost $82,444,779) 62,905,542
------------
PRIVATE INVESTMENT FUNDS **, # -- 2.52%
0.40% Advanced Technology Ventures VII, L.P. 08/01-05/03 490,904
1.48% Burrill Life Sciences Capital Fund 12/02 213,442
1.35% CHL Medical Partners II, L.P. 01/02-07/03 410,529
0.36% Morgenthaler Partners VII, L.P. 07/01-09/03 740,727
0.60% Prospect Venture Partners II, L.P. 06/01-09/03 761,700
2.36% Tallwood II, L.P. 12/02-10/03 343,464
2.79% Valhalla Partners II, L.P. 10/03 120,000
------------
TOTAL--PRIVATE INVESTMENT FUNDS (Cost $3,835,428) 3,080,766
------------
INVESTMENT COMPANIES -- 0.42%
519,599 Dreyfus Government Cash Management Fund Institutional Shares (Cost $519,599) 519,599
------------
TOTAL INVESTMENTS (Cost $139,794,212) -- 97.58% 119,500,313
OTHER ASSETS & LIABILITIES (NET) -- 2.42% 2,957,540
------------
NET ASSETS -- 100.00% $122,457,853
------------
- ----------
** Restricted as to public resale. Acquired between June 1, 2001 and October
31, 2003. Total cost of restricted securities at October 31, 2003
aggregated $86,280,207. Total value of restricted securities owned at
October 31, 2003 was $65,986,308 or 53.88% of net assets.
# Non-income producing securities.
## Required disclosure for restricted securities only.
@ At October 31, 2003, the Company owned 5% or more of the company's
outstanding voting shares thereby making the company an affiliate as
defined by the Investment Company Act of 1940. Total value of affiliated
securities owned at October 31, 2003 was $62,905,542.
*** At October 31, 2003, the Company owned 25% or more of the company's
outstanding voting shares thereby making the company a controlled affiliate
as defined by the Investment Company Act of 1940. Total value of controlled
affiliated securities owned at October 31, 2003 was $8,000,000.
Notes to Financial Statements are an integral part of these Financial
Statements.
12
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%
0.40% Advanced Technology Ventures VII, L.P....................... 08/01-10/02 223,690
1.35% CHL Medical Partners II, L.P................................ 01/02-10/02 235,315
0.36% Morgenthaler Venture Partners VII, L.P...................... 07/01-09/02 531,191
0.60% 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
=========== ============
** 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.
*** At October 31, 2002, the Company owned 25% or more of the company's
outstanding voting shares thereby making the company a controlled affiliate
as defined by the Investment Company Act of 1940. Total value of controlled
affiliated securities owned at October 31, 2002 was $3,000,000.
# 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
Statessments.
13
Excelsior Venture Partners III, LLC
Statements of Assets and Liabilities
October 31,
---------------------------
2003 2002
------------ ------------
ASSETS:
Unaffiliated Issuers at value (Cost $57,349,433 and $85,571,037, $ 56,594,771 $85,288,644
respectively)
Controlled Affiliated Issuers at value (Cost $8,000,000 and
$3,000,000, respectively) 8,000,000 3,000,000
Non Controlled Affiliated Issuers at value (Cost $74,444,779 and
$56,275,398, respectively) 54,905,542 50,223,960
------------ ------------
Investments, at value (Cost $139,794,212 and $144,846,435
respectively) (Note 1)....................................... 119,500,313 138,512,604
------------ ------------
Cash and cash equivalents....................................... 3,738,154 --
Interest receivable ............................................ 407 1,933
Other receivables............................................... 1,945 996,290
Prepaid insurance............................................... 2,992 64,783
------------ ------------
Total Assets................................................. 123,243,811 139,575,610
------------ ------------
LIABILITIES:
Management fees payable (Note 2)................................ 617,322 697,027
Professional fees payable....................................... 66,298 202,991
Board of Managers' fees payable (Note 2)........................ 60,000 60,000
Administration fees payable (Note 2)............................ 25,625 38,960
Other payables.................................................. 16,713 81,617
------------ ------------
Total Liabilities............................................ 785,958 1,080,595
------------ ------------
NET ASSETS......................................................... $122,457,853 $138,495,015
============ ============
NET ASSETS consist of:
Paid-in capital................................................. $142,751,752 $144,828,846
Unrealized (depreciation) on investments........................ (20,293,899) (6,333,831)
------------ ------------
Total Net Assets................................................... $122,457,853 $138,495,015
============ ============
Units of Membership Interest Outstanding (Unlimited
Number of no par value units authorized)........................ 295,210 295,210
============ ============
NET ASSET VALUE PER UNIT........................................... $ 414.82 $ 469.14
============ ============
Notes to Financial Statements are an integral part of these
Financial Statements.
14
Excelsior Venture Partners III, LLC
Statements of Operations
April 5, 2001
(Commencement
Year Ended Year Ended Of Operations)
October 31, October 31, to October 31,
2003 2002 2001
------------ ----------- --------------
INVESTMENT INCOME:
Interest income................................................... $ 833,408 $ 1,645,829 $2,729,924
Dividend income................................................... 11,522 96,475 --
------------ ----------- ----------
Total Income 844,930 1,742,304 2,729,924
------------ ----------- ----------
EXPENSES:
Management fees (Note 2).......................................... 2,530,840 2,881,830 1,377,259
Professional fees................................................. 77,463 287,000 241,385
Organizational fees............................................... -- -- 154,976
Administration fees (Note 2)...................................... 147,498 160,473 96,925
Board of Managers' fees (Note 2).................................. 60,000 83,000 45,000
Insurance......................................................... 68,833 52,894 7,626
Custodian fees.................................................... 21,366 18,652 10,910
Miscellaneous fees................................................ 16,068 11,326 15,000
------------ ----------- ----------
Total Expenses................................................. 2,922,068 3,495,175 1,949,081
Organization expense reversal (Note 4)............................ -- (93,880) --
Reimbursement of Organizational fees from Distributor............. -- -- (50,000)
------------ ----------- ----------
Net Expenses................................................... 2,922,068 3,401,295 1,899,081
------------ ----------- ----------
NET INVESTMENT INCOME (LOSS)......................................... (2,077,138) (1,658,991) 830,843
------------ ----------- ----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS: (Note 1)
Net realized gain on investments.................................. 44 764 6,599
Net change in unrealized (depreciation) on investments............ (13,960,068) (6,267,536) (66,295)
------------ ----------- ----------
NET REALIZED AND UNREALIZED (LOSS) ON INVESTMENTS.................... (13,960,024) (6,266,772) (59,696)
------------ ----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS...... $(16,037,162) $(7,925,763) $ 771,147
============ =========== ==========
Notes to Financial Statements are an integral part of these Financial
Statements.
15
Excelsior Venture Partners III, LLC
Statements of Changes in Net Assets
April 5, 2001
(Commencement
Year Ended Year Ended Of Operations)
October 31, October 31, to October 31,
2003 2002 2001
------------ ------------ --------------
OPERATIONS:
Net investment income (loss)......................................... $ (2,077,138) $ (1,658,991) $ 830,843
Net realized gain on investments..................................... 44 764 6,599
Net change in unrealized (depreciation) on investments............... (13,960,068) (6,267,536) (66,295)
------------ ------------ ------------
Net increase (decrease) in net assets resulting from operations... (16,037,162) (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................................... (16,037,162) (7,925,763) 146,420,278
------------ ------------ ------------
NET ASSETS:
Beginning of period.................................................. 138,495,015 146,420,778 500
------------ ------------ ------------
End of period........................................................ $122,457,853 $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.
16
Excelsior Venture Partners III, LLC
Statements of Cash Flows
April 5, 2001
(Commencement
Year Ended Year Ended Of Operations)
October 31, October 31, to October 31,
2003 2002 2001
------------ ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ... $(16,037,162) $ (7,925,763) $ 771,147
Adjustments to reconcile net increase (decrease) in net assets from
operations to net cash (used in) / provided by operating
activities:
Net change in unrealized depreciation on investments ........... 13,960,068 6,267,536 66,295
Purchase of investments ........................................ (25,204,380) (36,110,398) (24,946,738)
Change in short-term investments ............................... 30,256,603 31,006,753 (114,796,052)
Decrease (increase) in receivable due from distributor ......... -- 50,000 (50,000)
Decrease (increase) in interest receivable ..................... 1,526 (1,933) --
Decrease (increase) in other receivable ........................ 994,345 (996,290) --
Decrease (increase) in prepaid insurance ....................... 61,791 (21,713) (43,070)
Increase (decrease) in management fee payable .................. (79,705) (680,232) 1,377,259
Increase (decrease) in Board of Managers' fees payable ......... -- 15,000 45,000
Increase (decrease) in expenses payable ........................ (214,932) (36,082) 359,650
------------ ------------ -------------
Net cash (used in) provided by operating activities ......... 3,738,154 (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 .......................................... 3,738,154 (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.
17
Excelsior Venture Partners III, LLC
Financial Highlights
Per Unit Operating Performance:(1)
April 5, 2001
(Commencement
Year Ended Year Ended Of Operations)
October 31, October 31, to October 31,
2003 2002 2001
----------- ----------- --------------
NET ASSET VALUE, BEGINNING OF PERIOD................ $ 469.14 $ 495.99 $ 500.00
Deduction of offering costs from contributions... -- -- (4.97)
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)..................... (7.04) (5.62) 2.81
Net realized and unrealized (loss) on investment
transactions.................................. (47.28) (21.23) (0.20)
-------- -------- --------
Total from investment operations.............. (54.32) (26.85) 2.61
-------- -------- --------
DISTRIBUTIONS:
Net investment income............................ -- -- (1.65)
-------- -------- --------
Total Distributions........................... -- -- (1.65)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD...................... $ 414.82 $ 469.14 $ 495.99
TOTAL NET ASSET VALUE RETURN (5).................... (11.58)% (5.41)% 0.52%(3)
======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's)................ $122,458 $138,495 $146,421
Ratios to average net assets:
Gross expenses................................ 2.27% 2.43% 1.35%(2)
Net expenses.................................. 2.27% 2.36%(4) 1.32%(2)
Net investment income (loss).................. (1.61)% (1.15)% 0.58%(2)
Portfolio Turnover Rate.......................... 0.00% 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 presented.
Notes to Financial Statements are an integral part of these
Financial Statements.
18
EXCELSIOR VENTURE PARTNERS III, LLC
NOTES TO FINANCIAL STATEMENTS
October 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 2-year extensions) from the
final subscription closing which occurred on May 11, 2001, 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.
As a BDC, the Company must be primarily engaged in the business of
furnishing capital and making available managerial assistance to companies that
generally do not have ready access to capital through conventional financial
channels. The Company's investment objective is to achieve long-term capital
appreciation primarily 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 Adviser believes offer significant
long-term capital appreciation potential. Venture capital and private investment
companies are companies in which the equity is closely held by company founders,
management and/or a limited number of institutional investors. The Company does
not have the right to demand that such equity securities be registered.
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. Certain amounts in the prior years' financial
statements have been reclassified to conform with the current year's financial
statements.
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 or both
under the supervision of the Board of Managers pursuant to certain
valuation procedures summarized below. Securities having remaining
maturities of 60 days or less from the date of purchase 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" 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 investee company such
as earnings, net worth, reliable private sale prices of the investee
company's securities, the market prices for similar securities of
comparable companies, an assessment of the investee 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 under the supervision of
the Board of Managers and, in any
19
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 Investment Funds is based upon
its pro-rata share of the value of the net assets of the Private Investment
Fund as determined by such Private Investment 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 Investment Funds is not available by
reason of timing or other event on the valuation date, or are deemed to be
unreliable by the Investment Adviser, the Investment Adviser, under
supervision of the Board of Managers, shall determine such value based on
its judgment of fair value on the appropriate date, less applicable
charges, if any.
At October 31, 2003 and October 31, 2002, market quotations were not
readily available for securities valued at $65,986,308 or 53.9% of net
assets and $54,741,996 or 39.5% 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 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 fixed income 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.
In accordance with the accounting guidance provided in the AICPA Audit
and Accounting Guide, "Audits of Investment Companies", the Company
reclassified certain amounts from undistributed net investment income or
loss and accumulated net realized gains to net capital contributions. The
Company reclassified $(2,077,138) and $(1,658,991) of undistributed net
investment income (loss) for the periods ended October 31, 2003 and 2002,
respectively. The Company reclassified $44 and $764, of accumulated
realized gains for the same periods, respectively. These reclassifications
were to reflect, as adjustments to paid-in capital, the amounts of taxable
income or loss that have been allocated to the members and had no effect on
net assets.
The cost of the Private Investment Funds for federal tax purposes is
based on amounts reported to the Company on Schedule K-1 from the Private
Investment Funds. As of October 31, 2003 and 2002, the Company had not
received information to determine the tax cost of the Private Investment
Funds as of those dates. The cost basis for federal tax purposes of the
Company's other investments at October 31, 2003 was $135,958,784, and those
investments had net depreciation on a tax basis at October 31, 2003 of
$19,531,237, consisting of gross appreciation of $6,506,176 and gross
depreciation of $26,045,413. The cost basis for federal tax purposes of the
Company's other investments at October 31, 2002 was $143,406,006, and those
investments had net depreciation on a tax basis at October 31, 2002 of
$6,051,438, consisting of gross appreciation of $0 and gross depreciation
of $6,051,438.
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.
Note 2 -- Investment Advisory Fee, Administration Fee and Related Party
Transactions
20
Prior to June 1, 2003, and pursuant to an Investment Advisory Agreement
(the "Agreement"), U.S. Trust Company served during the reporting period as the
Investment Adviser to the Company pursuant to an Investment Advisory Agreement
with the Company. Under the Agreement for the services provided, the Investment
Adviser is entitled to receive 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 of April 5, 2001, and 1.00% of net assets thereafter.
Prior to June 1, 2003, and pursuant to sub-advisory agreements among the
Company, U.S. Trust Company, United States Trust Company of New York ("U.S.
Trust NY") and U.S. Trust Company, N.A., U.S. Trust NY and U.S. Trust Company,
N.A. served as the investment sub-advisers to the Company and received an
investment management fee from the Investment Adviser. As of October 31, 2003,
and 2002, $617,322 and $697,027 were payable to the Investment Adviser.
In addition to the management fee, the Investment Adviser 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. As of, and for the years ended, October 31, 2003 and 2002 and for
the period ended October 31, 2001, there was no Incentive Carried interest
earned by the Investment Adviser.
U.S. Trust NY is a New York state-chartered bank and trust company and a
member of the Federal Reserve System. Effective June 1, 2003, U.S. Trust Company
merged into U.S. Trust Company, N.A., a nationally chartered bank. Pursuant to
an assumption agreement dated June 1, 2003, U.S. Trust Company, N.A. assumed the
duties and obligations of U.S. Trust Company under the Agreement. As a result,
U.S. Trust Company, N.A., acting through its registered investment advisory
division, U.S. Trust Company, N.A. Asset Management Division, now serves as
Investment Adviser to the Company with U.S. Trust NY, acting through its
registered investment advisory division, U.S. Trust--New York Asset Management
Division, serving as a sub-investment adviser. The merger had no impact on the
management or operations of the investment advisory functions performed for the
Company, and did not constitute a change in control. U.S. Trust NY and U.S.
Trust Company, N.A. are each 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"), a majority-owned subsidiary of The PNC
Financial Services Group, 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. The
Investment Adviser paid the Distributor from its own assets an amount equal to
0.02% of the total of all subscriptions received in the offering. The Investment
Adviser 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 the 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, 2003 and 2002, Excelsior Venture Investors III, LLC had
an investment in the Company of $77,740,266 and $87,921,182, respectively. This
represents an ownership interest of 63.48% in the Company as of both dates.
Note 3 -- Purchases and Sales of Securities
21
Excluding short-term investments, the Company had $25,204,380, $36,110,398
and $24,965,427 in purchases and $0, $0 and $0 in sales of securities for the
periods ended October 31, 2003, 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
2002, as reflected in the Statement of Operations.
Note 5 -- Commitments
As of October 31, 2003, the Company had outstanding investment commitments
totaling $19,164,574.
Note 6 -- Transactions with Affiliated Companies
An affiliated company is a company in which the Company has ownership of
more than 5% of the voting securities. The Company did not receive dividend or
interest income from affiliated companies during the year ended October 31, 2003
and 2002. Transactions with companies, which are or were affiliates were as
follows:
Shares/Par
Held at
October 31, October 31,
Name of Investment 2002 2002 Value
- ------------------ ------------ -----------
Controlled Affiliates
Pilot Software Inc., Series A Preferred 15,000,000 $3,000,000
Datanautics, Inc., Promissory Note 3.00%
-- --
-----------
Total Controlled Affiliates $3,000,000
Non Controlled Affiliates
Adeza Biomedical Corp., Series 5 Preferred 647,948 $3,000,000
Ancile Pharmaceuticals, Inc., Series Dpreferred 2,419,355 3,000,000
Ancile Pharmaceuticals, Inc., Bridge Notes 6% $ 600,000 600,000
Ancile Pharmaceuticals, Inc.,Warrant 1 --
Archemix Corporation, Series, Preferred 628,571 628,571
Cenqest, Inc., Series 1 44,247,788 --
Cenqest, Inc., Series 2 -- --
Ethertronics Inc., Series B Preferred 3,099,999 4,650,000
Ethertronics Inc., Warrant 115,000 --
Genoptix, Inc., Bridge Note 6% -- --
Genoptix, Inc., Series B Preferred 1,879,699 2,500,000
Genoptix, Inc., Series B-1 Preferred -- --
Genoptix, Inc., Series B-2 Preferred -- --
Genoptix, Inc., Common Stock -- --
Gyration, Inc., Series C2 Preferred -- --
LightConnect, Inc., Series B Preferred 4,330,504 948,563
LightConnect, Inc., Series C Preferred -- --
LogicLibrary, Inc., Series A Preferred 4,374,256 2,000,000
MIDAS Vision Systems, Inc., Series A-1 Preferred -- --
MIDAS Vision Systems, Inc., Series C Preferred 15,739,638 4,000,000
MIDAS Vision Systems, Inc., Common Stock -- --
Monterey Design Systems, Inc., Series 1 Preferred 7,089,552 4,750,000
Monterey Design Systems, Inc., Common Stock -- --
Monterey Design Systems, Inc., Series 2 Preferred -- --
Nanooptp Corp., Series A-1 Preferred 956,234 2,231,212
Nanooptp Corp., Series B Preferred -- --
NetLogic Microsystems, Inc., Series D Preferred 1,538,461 5,000,000
OpVista, Inc., Series B Preferred 5,333,333 4,000,000
OpVista, Inc., Series C Preferred -- --
Senomyx, Inc., Series E Preferred 517,260 1,500,000
Silverback Systems, Inc., Series B Preferred 2,211,898 1,415,614
Silverback Systems, Inc., Series B-1 Preferred -- --
Silverback Systems, Inc., Series C Preferred -- --
Tensys Medical, Inc., Series C Preferred 4,166,667 5,000,000
Virtual Silicon Technology, Inc., Series C Preferred 3,096,551 5,000,000
===========
Total Non Controlled Affiliates $50,223,960
===========
For the Year Ended October 31, 2003
-----------------------------------
Name of Investment Shares/Par
Purchases/ Sale/ Held at
Conversion Conversion Realized October 31, Cumulative Value
Acquisitions Proceeds Gain (Loss) 2003 (Note 1)
------------ ----------- ----------- ----------- ----------------
Controlled Affiliates
Pilot Software Inc., Series A Preferred $1,000,000 $ -- $ -- 20,000,000 $ 4,000,000
Datanautics, Inc., Promissory Note 3.00%
4,000,000 -- -- $ 4,000,000 4,000,000
---------- ---------- -----------
Total Controlled Affiliates $5,000,000 $ -- $ -- $ 8,000,000
Non Controlled Affiliates
Adeza Biomedical Corp., Series 5 Preferred $ -- $ -- $ -- 647,948 $ 3,000,000
Ancile Pharmaceuticals, Inc., Series Dpreferred -- -- -- 2,419,355 --
Ancile Pharmaceuticals, Inc., Bridge Notes 6% 250,000 -- -- $ 850,000 --
Ancile Pharmaceuticals, Inc.,Warrant -- -- -- 2 --
Archemix Corporation, Series, Preferred 685,714 -- -- 1,314,285 1,314,285
Cenqest, Inc., Series 1 -- 2,000,000 -- -- --
Cenqest, Inc., Series 2 2,000,000 -- -- 4,425 --
Ethertronics Inc., Series B Preferred 1,000,000 -- -- 3,766,666 5,650,000
Ethertronics Inc., Warrant -- -- -- 281,667 --
Genoptix, Inc., Bridge Note 6% 443,787 443,787 -- -- --
Genoptix, Inc., Series B Preferred -- 2,500,000 -- -- --
Genoptix, Inc., Series B-1 Preferred 2,500,000 -- -- 942,481 1,253,500
Genoptix, Inc., Series B-2 Preferred 734,851 -- -- 826,823 734,851
Genoptix, Inc., Common Stock -- -- -- 46,860 --
Gyration, Inc., Series C2 Preferred 4,000,000 -- -- 1,523,810 4,000,000
LightConnect, Inc., Series B Preferred -- -- -- 4,330,504 948,562
LightConnect, Inc., Series C Preferred 992,000 -- -- 12,292,441 992,000
LogicLibrary, Inc., Series A Preferred 704,225 -- -- 5,914,488 2,704,226
MIDAS Vision Systems, Inc., Series A-1 Preferred 1,054,960 -- -- 933,593 --
MIDAS Vision Systems, Inc., Series C Preferred -- 4,000,000 -- -- --
MIDAS Vision Systems, Inc., Common Stock 4,000,000 -- -- 157,396 --
Monterey Design Systems, Inc., Series 1 Preferred -- 4,750,000 -- -- --
Monterey Design Systems, Inc., Common Stock 4,750,000 -- -- 708,955 --
Monterey Design Systems, Inc., Series 2 Preferred 3,000,000 -- -- 3,333,333 5.400,000
Nanooptp Corp., Series A-1 Preferred -- -- -- 956,234 604,259
Nanooptp Corp., Series B Preferred 237,499 -- -- 558,295 888,244
NetLogic Microsystems, Inc., Series D Preferred -- -- -- 1,538,461 5,000,000
OpVista, Inc., Series B Preferred -- -- -- 5,333,333 1,500,000
OpVista, Inc., Series C Preferred 2,500,000 -- -- 12,671,059 5,000,000
Senomyx, Inc., Series E Preferred -- -- -- 517,260 1,500,000
Silverback Systems, Inc., Series B Preferred -- 1,415,614 -- -- --
Silverback Systems, Inc., Series B-1 Preferred 1,415,614 -- -- 1,105,949 450,051
Silverback Systems, Inc., Series C Preferred 3,010,133 -- -- 30,927,835 3,965,564
Tensys Medical, Inc., Series C Preferred -- -- -- 4,166,667 5,000,000
Virtual Silicon Technology, Inc., Series C Preferred -- -- -- 3,096,551 5,000,000
=========== =========== ========== ===========
Total Non Controlled Affiliates $33,278,783 $15,109,401 $ -- $54,905,542
=========== =========== ========== ===========
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. As of October 31,
2003 (the end of the period covered by this report), the Company's principal
executive officers and principal financial officer evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e))and 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.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls over financial reporting 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 over financial reporting. Accordingly, no
corrective actions were required or undertaken.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Managers and Officers
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, 2003.
Served in Present Principal Occupation During Past 5
Name and Age Position Capacity Since Years and Other Affiliations
------------ -------- ----------------- ----------------------------
David I. Fann, 39 President and July 20, 2000 Mr. Fann is a Managing Director of U.S.
Co-Chief Trust Company, N.A. Mr. Fann is a
Executive Officer director of Curon Medical, Inc. (Nasdaq:
23
CURN). Mr. Fann also serves as President and Co-Chief Executive Officer
of UST Private Equity Investors Fund, Inc., Excelsior Private Equity Fund
II, Inc., and Excelsior Venture Investors III, LLC.
Douglas A. Co-Chief July 20, 2000 Mr. Lindgren is a Managing Director of U.S. Trust Company. Mr. Lindgren
Lindgren, 42 Executive Officer also serves as Co-Chief Executive Officer of UST Private Equity Investors
and Chief Fund, Inc., Excelsior Private Equity Fund II, Inc., and Excelsior Venture
Investment Officer Investors III, LLC, Manager of Excelsior Directional Hedge Fund of Funds,
LLC, and Chairman of the Board of Excelsior Buyout Investors, LLC and
Excelsior Absolute Return Fund of Funds, LLC.
Robert Treasurer June 3, 2003 Mr. Aufenanger is a Senior Vice President of U.S. Trust Company, N.A.
Aufenanger, 50 Prior to joining U.S. Trust in April 2003, Mr. Aufenanger worked as a
consultant to various clients in the fund industry and prior to this was
Chief Financial Officer for Icon Holdings Corp. Mr. Aufenanger also
serves as Treasurer of UST Private Equity Investors Fund, Inc., Excelsior
Private Equity Fund II, Inc., and Excelsior Venture Investors III, LLC,
and Chief Financial Officer of Excelsior Directional Hedge Fund of Funds,
LLC, Excelsior Buyout Investors, LLC, and Excelsior Absolute Return Fund
of Funds, LLC.
Lee A. Vice President July 20, 2000 Mr. Gardella is a Senior Vice President of U.S. Trust Company, N.A. Mr.
Gardella, 36 Gardella also serves as Vice President of UST Private Equity Investors
Fund, Inc., Excelsior Private Equity Fund II, Inc., Excelsior Venture
Investors III, LLC, and Excelsior Absolute Return Fund of Funds, LLC.
James F. Vice President July 20, 2000 Mr. Rorer is a Vice President of U.S. Trust Company, N.A. Prior to
Rorer, 33 joining U.S. Trust in May 1999, he worked at Bain & Company. Mr. Rorer
also serves as Vice President of UST Private Equity Investors Fund, Inc.,
Excelsior Private Equity Fund II, Inc., Excelsior Venture Investors III,
LLC, and Excelsior Buyout Investors, LLC.
Cynthia Chief September 19, 2001 Ms. Englert is a Vice President of U.S. Trust Company, N.A. Prior to
Englert, 39 Administrative joining U.S. Trust in August 2001, Ms. Englert held positions in finance
Officer and at Whitney & Co. and Greenwich Capital Markets, Inc. Ms. Englert also
Secretary serves as Chief Administrative Officer and Secretary of
24
UST Private Equity Investors Fund, Inc., Excelsior Private Equity Fund
II, Inc., and Excelsior Venture Investors III, LLC, and Secretary of
Excels Investors, LLC and Excelsior Absolute Return Fund of Funds, L
Raghav V. Vice President September 19, 2001 Mr. Nandagopal is a Senior Vice President of U.S. Trust Company, N.A. in
Nandagopal, 41 the Alternative Investments Division. Prior to joining U.S. Trust in
February 2001, Mr. Nandagopal held positions at McKinsey & Company and
AT&T Capital. Mr. Nandagopal also serves as Vice President of Excelsior
Venture Investors III, LLC.
John C. Chairman of the May 26, 2000 Mr. Hover was an Executive Vice President of U.S. Trust Company (retired
Hover II, 60 Board and Manager since 1998). Mr. Hover also serves as chairman of the board of directors
or managers of UST Private Equity Investors Fund, Inc., Excelsior Private
Equity Fund II, Inc., and Excelsior Venture Investors III, LLC.
Gene M. Manager, May 26, 2000 Mr. Bernstein is Director of NIC Holding Corp; Dean of the Skodneck
Bernstein, 56 Member of the Business Development Center at Hofstra University from 2000-2001; prior
Audit and to this Mr. Bernstein was President and Vice Chairman at Northville
Valuation Industries, a petroleum marketing, distribution, trading and storage
Committees company and wholly-owned subsidiary of NIC Holding Corp. Mr. Bernstein
also serves as a director or manager of UST Private Equity Investors
Fund, Inc., Excelsior Private Equity Fund II, Inc., Excelsior Venture
Investors III, LLC and Excelsior Directional Hedge Fund of Funds, LLC.
Stephen V. Manager, May 26, 2000 Mr. Murphy is President of S.V. Murphy & Co., an investment banking firm.
Murphy, 58 Member of the Mr. Murphy also serves as a director or manager of UST Private Equity
Audit and Investors Fund, Inc., Excelsior Private Equity Fund II, Inc., Excelsior
Valuation Venture Investors III, LLC and Excelsior Directional Hedge Fund of Funds,
Committees LLC.
Victor F. Manager, May 26, 2000 Since October 2002, Mr. Imbimbo has been head of healthcare marketing in
Imbimbo, Member of the the United States for TBWA, a global marketing agency. Prior to this, he
Jr., 51 Audit and was with Bedrock Communications, Inc., a consulting company addressing
Valuation the merger of traditional and digital communications solutions. Mr.
Committees Imbimbo also serves as a director or manager of UST Private Equity
25
Investors Fund, Inc., Excelsior Private Equity Fund II, Inc., Excelsior
Venture Investors III, LLC and Excelsior Directional Hedge Fund of Funds,
LLC.
Audit Committee Financial Expert
Mr. Murphy is the audit committee financial expert as defined by SEC rules
and is "independent," as the term is used in Item 7(d)(3)(iv) of Schedule 14A
under the Securities Exchange Act of 1934.
Code of Ethics
As of the end of the period, October 31, 2003, the Company has adopted a
code of ethics, which complies with the criteria provided in SEC rules, and
applies to its principal executive officer, the principal financial officer and
any other officers who serve a similar function. A copy of the code of ethics is
filed as Exhibit 14 to this Form 10-K.
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, 2003.
Aggregate Total Compensation
Compensation From the Company
From And Fund Complex *
Name of Person/Position The Company Paid to Managers
- ----------------------- ------------ ------------------
John C. Hover II
Manager $15,000 $53,750 (4 Funds)
Gene M. Bernstein
Manager $15,000 $74,250 (5 Funds)
Stephen V. Murphy
Manager $15,000 $74,250 (5 Funds)
Victor F. Imbimbo, Jr.
Manager $15,000 $74,250 (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 Directional Hedge
Fund
26
of Funds, 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, 2003, certain beneficial owners, the directors, the chief
executive officer and the directors and executive officers as a group held of
record the following shares. Except as set forth below, to the Company's
knowledge and based solely on a review of Forms 13D and 13G filed with the
Securities and Exchange Commission (or the lack of such filings, as the case may
be), no other person beneficially owned more than 5% of the Company's shares.
Amount and Nature
of Beneficial
Title of Class Name and Address of Beneficial Owner Ownership Percent of Class
- -------------- ------------------------------------ ----------------- ----------------
Units of Excelsior Venture Investors III, LLC 187,409 units 63.5%
membership 225 High Ridge Road
Interest Stamford, CT 06905
Units of David I. Fann 1 unit *
membership c/o U.S. Trust Company, N.A.
Interest 5 Palo Alto Square, 9th Floor
3000 Camino Real
Palo Alto, CA 94303
Units of John C. Hover II 200 units *
membership c/o United States Trust Company of New York,
Interest 114 West 47th Street, New York, NY 10036
1532.
Units of Gene M. Bernstein 300 units *
membership c/o United States Trust Company of New York,
Interest 114 West 47th Street, New York, NY 10036
1532.
Units of Stephen V. Murphy 200 units *
membership c/o United States Trust Company of New York,
Interest 114 West 47th Street, New York, NY 10036
1532.
Units of Managers and executive officers 701 units *
membership as a group (4 persons)
Interest
* 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
PART IV
27
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)
(14) Code of Ethics
(31.1) Certification of Co-Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Co-Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
28
(31.3) Certification of Treasurer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32.1) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(99)(a) Audit Committee Charter (4)
(b) 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.
29
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, 2004 By: /s/ DOUGLAS A. LINDGREN
-------------------------------------------
Douglas A. Lindgren, Co-Chief Executive Officer
and Chief Investment Officer
(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, 2004
(principal executive officer)
/s/ DOUGLAS A. LINDGREN
- -------------------------
Douglas A. Lindgren Co-Chief Executive Officer and January 29, 2004
Chief Investment Officer
(principal executive officer)
/s/ ROBERT F. AUFENANGER
- -------------------------
Robert F. Aufenanger Treasurer January 29, 2004
(principal financial and accounting officer)
/s/ JOHN C. HOVER II January 29, 2004
- -------------------------
John C. Hover II Chairman of the Board and Manager
/s/ GENE M. BERNSTEIN January 29, 2004
- -----------------------
Gene M. Bernstein Manager
/s/ STEPHEN V. MURPHY January 29, 2004
- ---------------------
Stephen V. Murphy Manager
/s/ VICTOR F. IMBIMBO, JR January 29, 2004
- -------------------------
Victor F. Imbimbo, Jr. Manager