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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended January 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 000-29665
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EXCELSIOR VENTURE PARTNERS III, LLC
------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-4102528
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
225 High Ridge Road, Stamford, CT 06905
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (203) 352-4400
114 West 47th Street, New York, NY 10036-1532
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since last
Report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [_] No [X]
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EXCELSIOR VENTURE PARTNERS III, LLC
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause Excelsior Venture Partners III, LLC's (the
"Company's") actual results to differ from future performance suggested herein.
The interim financial statements contained in this quarterly report 10Q
have been reviewed by Ernst & Young LLP, the Company's independent public
accountants.
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Portfolios of Investments as of January 31, 2004 and
October 31, 2003 2
Statements of Assets and Liabilities at January 31, 2004
and October 31, 2003 7
Statements of Operations for the three-month periods
ended January 31, 2004 and January 31, 2003 8
Statements of Changes in Net Assets for the three-month
periods ended January 31, 2004 and January 31, 2003 9
Statements of Cash Flows for the three-month periods
ended January 31, 2004 and January 31, 2003 10
Financial Highlights for the three-month periods ended
January 31, 2004 and January 31, 2003 11
Notes to Financial Statements 12
Independent Accountants' Review Report 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Excelsior Venture Partners III, LLC
Portfolio of Investments (Unaudited)
January 31, 2004
----------------------------
Percent of
PORTFOLIO STRUCTURE Value Net Assets
- ----------------------------------------------- ------------- ------------
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS $ 46,988,838 38.84%
INVESTMENT COMPANIES 519,599 0.43%
PRIVATE COMPANIES 66,732,859 55.17%
PRIVATE INVESTMENT FUNDS 3,596,772 2.97%
------------- ------------
TOTAL INVESTMENTS 117,838,068 97.41%
OTHER ASSETS & LIABILITIES (NET) 3,136,074 2.59%
------------- ------------
NET ASSETS $ 120,974,142 100.00%
============= ============
Excelsior Venture Partners III, LLC
Portfolio of Investments
October 31, 2003
----------------------------
Percent of
PORTFOLIO STRUCTURE Value Net Assets
- ----------------------------------------------- ------------- ------------
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS $ 52,994,406 43.27%
INVESTMENT COMPANIES 519,599 0.42%
PRIVATE COMPANIES 62,905,542 51.37%
PRIVATE INVESTMENT FUNDS 3,080,766 2.52%
------------- ------------
TOTAL INVESTMENTS 119,500,313 97.58%
OTHER ASSETS & LIABILITIES (NET) 2,957,540 2.42%
------------- ------------
NET ASSETS $ 122,457,853 100.00%
============= ============
Notes to Financial Statements are an integral part of these Financial
Statements.
Excelsior Venture Partners III, LLC
Portfolio of Investments January 31, 2004 (Unaudited)
Principal Acquisition Value
Amount/Shares Date ## (Note 1)
- -------------- ------------------- ------------
AGENCY OBLIGATIONS -- 38.84%
$ 47,000,000 Federal Home Loan Bank Discount Notes,
0.95%, 2/09/04 (Cost $46,988,838) $ 46,988,838
------------
PRIVATE COMPANIES **, #, @ -- 55.17
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 -- 49.54
Capital Equipment -- 0.00%
933,593 MIDAS Vision Systems, Inc.,
Series A-1 03/03 --
------------
Consumer Electronics -- 3.31
1,523,810 Gyration, Inc., Series C-2 03/03 4,000,000
------------
Consumer Products -- 1.24
517,260 Senomyx, Inc., Series E 11/01 1,500,000
------------
Enterprise Software -- 5.54
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 -- 6.20%
647,948 Adeza Biomedical Corporation, Series 5 09/01 3,000,000
2,419,355 Ancile Pharmaceuticals, Inc., Series D 11/01 --
1,999,999 Archemix Corporation, Inc., Series A 08/02, 01/03, 11/03 1,999,999
942,481 Genoptix, Inc., Series B-1 12/01 1,253,500
1,403,696 Genoptix, Inc., Series B-2 07/03, 09/03, 12/03 1,249,999
------------
7,503,498
------------
Medical Technology -- 4.13%
4,166,667 Tensys Medical, Inc., Series C 03/02 5,000,000
------------
Optical -- 8.07%
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 & 03/02 --
2,233,180 NanoOpto Corporation, Series B 09/03, 11/03, 1/04 1,318,958
5,333,333 OpVista, Inc., Series B 07/01 1,500,000
12,671,059 OpVista, Inc., Series C 09/03 5,000,000
------------
9,759,520
Semiconductor -- 16.38%
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
2,211,898 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
2
Excelsior Venture Partners III, LLC
Portfolio of Investments January 31, 2004 -- (continued)
Principal
Amount/Shares/ Acquisition Value
Percent Owned Date ## (Note 1)
- -------------- ------------------- -------------
Wireless -- 4.67%
3,766,666 Ethertronics, Inc., Series B 06/01, 09/02, 07/03 $ 5,650,000
-------------
TOTAL PREFERRED STOCKS (Cost $70,758,137) 59,932,859
-------------
Notes -- 5.63%
Consumer Electronics -- 2.31%
$ 2,797,200 Gyration, Inc., Bridge Note 12%, 6/2/2004 12/03 2,797,200
-------------
Enterprise Software -- 3.31%
$ 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 $7,647,200) 6,797,200
-------------
Warrants -- 0.00%
Consumer Electronics -- 0.01%
1 Gyration, Inc. 12/03 2,800
-------------
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 $2,800) 2,800
-------------
TOTAL -- PRIVATE COMPANIES
(Cost $87,158,136) 66,732,859
-------------
PRIVATE INVESTMENT FUNDS **, # -- 2.97%
0.40% Advanced Technology Ventures VII, LP 08/01-12/03 526,590
1.48% Burrill Life Sciences Capital Fund 12/02 213,442
1.35% CHL Medical Partners II, LP 01/02-11/03 510,529
4.94% CMEA Ventures Partners, LP 12/03 92,285
0.36% Morgenthaler Partners VII, LP 07/01-01/04 878,762
0.60% Prospect Venture Partners II, LP 06/01-01/04 911,700
2.36% Tallwood II, LP 12/02-10/03 343,464
1.75% Valhalla Partners II, LP 10/03 120,000
-------------
TOTAL -- PRIVATE INVESTMENT FUNDS
(Cost $4,353,784) 3,596,772
-------------
INVESTMENT COMPANIES -- 0.43%
519,599 Dreyfus Government Cash Management Fund
Institutional Shares (Cost $519,599) 519,599
-------------
TOTAL INVESTMENTS (Cost $139,020,357) - 97.41% 117,838,068
OTHER ASSETS & LIABILITIES (NET) - 2.59% 3,136,074
-------------
NET ASSETS - 100.00% $ 120,974,142
-------------
3
- ----------
** Restricted as to public resale. Acquired between June 1, 2001 and January
31, 2004. Total cost of restricted securities at January 31, 2004 aggregated
$91,511,920. Total value of restricted securities owned at January 31, 2004 was
$70,329,631 or 58.14% of net assets.
# Non-income producing securities.
## Required disclosure for restricted securities only.
@ At January 31, 2004 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 January 31, 2004 was $58,732,859.
*** At January 31, 2004, 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 January 31, 2004 was $8,000,000.
Notes to Financial Statements are an integral part of these Financial
Statements.
4
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 & 03/02 604,259
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
5
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 $54,905,542.
*** 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.
6
Excelsior Venture Partners III, LLC
Statements of Assets and Liabilities
January 31,
2004 October 31,
ASSETS: (Unaudited) 2003
------------- -------------
Unaffiliated Issuers at value (Cost
$51,862,221 and $57,349,433, respectively) $ 51,105,209 $ 56,594,771
Controlled Affiliated Issuers at value (Cost
$8,000,000 and $8,000,000, respectively) 8,000,000 8,000,000
Non Controlled Affiliated Issuers at value
(Cost $79,158,136 and $74,444,779,
respectively) 58,732,859 54,905,542
------------- -------------
Investments, at value (Cost $139,020,357 and
$139,794,212, respectively) (Note 1) 117,838,068 119,500,313
------------- -------------
Cash and cash equivalents 3,807,363 3,738,154
Interest receivable 403 407
Other receivables 1,945 1,945
Prepaid insurance 55,642 2,992
------------- -------------
Total Assets 121,703,421 123,243,811
------------- -------------
LIABILITIES:
Management fees payable (Note 2) 609,842 617,322
Professional fees payable 44,328 66,298
Administration fees payable (Note 2) 40,049 25,625
Board of Managers' fees payable (Note 2) 15,124 60,000
Other payables 19,936 16,713
------------- -------------
Total Liabilities 729,279 785,958
------------- -------------
NET ASSETS $ 120,974,142 $ 122,457,853
============= =============
NET ASSETS consist of:
Paid-in capital $ 142,156,431 $ 142,751,752
Unrealized depreciation on investments (21,182,289) (20,293,899)
------------- -------------
Total Net Assets $ 120,974,142 $ 122,457,853
============= =============
Units of Membership Interest Outstanding
(Unlimited Number of no par value units
authorized) 295,210 295,210
============= =============
NET ASSET VALUE PER UNIT $ 409.79 $ 414.82
============= =============
Notes to Financial Statements are an integral part of these Financial
Statements.
7
Excelsior Venture Partners III, LLC
Statements of Operations (Unaudited)
Three Months Ended
January 31,
2004 2003
------------- -------------
INVESTMENT INCOME:
Interest income from unaffiliated investments $ 122,135 $ 291,251
Interest income from affiliated investments 6,729 --
Dividend income 1,195 2,163
------------- -------------
Total Income 130,059 293,414
------------- -------------
EXPENSES:
Management fees (Note 2) 609,842 668,443
Administration fees (Note 2) 35,341 38,979
Professional fees 35,288 12,603
Board of Managers' fees (Note 2) 15,124 15,123
Insurance Expense 20,116 17,254
Custodian fees 5,636 5,247
Miscellaneous fees 4,033 6,303
------------- -------------
Total Expenses 725,380 763,952
NET INVESTMENT LOSS (595,321) (470,538)
------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS: (Note 1)
Net realized gain on investments on
unaffiliated investments -- 4
Net change in unrealized depreciation on
investments (888,390) (5,425,658)
------------- -------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (888,390) (5,425,654)
------------- -------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ (1,483,711) $ (5,896,192)
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
8
Excelsior Venture Partners III, LLC
Statements of Changes in Net Assets (Unaudited)
Three Months Ended
January 31,
2004 2003
------------- -------------
OPERATIONS:
Net investment loss $ (595,321) $ (470,538)
Net realized gain on investments -- 4
Net change in unrealized depreciation on
investments (888,390) (5,425,658)
------------- -------------
Net decrease in net assets resulting from
operations (1,483,711) (5,896,192)
------------- -------------
NET DECREASE IN NET ASSETS (1,483,711) (5,896,192)
NET ASSETS:
Beginning of period 122,457,853 138,495,015
------------- -------------
End of period $ 120,974,142 $ 132,598,823
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
9
Excelsior Venture Partners III, LLC
Statements of Cash Flows (Unaudited)
Three Months Ended
January 31,
2004 2003
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from
operations. $ (1,483,711) $ (5,896,192)
Adjustments to reconcile net decrease in net
assets from operations to net cash provided
by operating activities:
Net change in unrealized depreciation on
investments 888,390 5,425,658
Purchase of investments (5,295,642) (2,612,714)
Proceeds received from private investment
funds 63,929 --
Net change in short-term investments 6,005,568 2,348,934
Decrease (increase) in interest
receivable 4 (9,306)
Decrease in other receivable -- 995,019
Decrease (increase) in prepaid insurance (52,650) 17,253
Decrease in management fee payable (7,480) (28,584)
Decrease in Board of Managers' fees
payable (44,876) (45,204)
Decrease in other expenses payable (4,323) (162,761)
------------- -------------
Net cash provided by operating
activities 69,209 32,103
------------- -------------
Net increase in cash 69,209 32,103
------------- -------------
Cash at beginning of period 3,738,154 --
------------- -------------
Cash at end of period $ 3,807,363 $ 32,103
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
10
Excelsior Venture Partners III, LLC
Financial Highlights (Unaudited)
Per Unit Operating Performance: (1)
Three Months Ended
January 31,
2004 2003
------------- -------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 414.82 $ 469.14
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (2.02) (1.59)
Net realized and unrealized loss on
investment transactions (3.01) (18.38)
------------- -------------
Total from investment operations (5.03) (19.97)
------------- -------------
NET ASSET VALUE, END OF PERIOD $ 409.79 $ 449.17
============= =============
TOTAL NET ASSET VALUE RETURN (3), (4) (1.21)% (4.26)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 120,974 $ 132,599
Ratios to average net assets: (2)
Net expenses 2.38% 2.25%
Net investment loss (1.96)% (1.39)%
Portfolio Turnover Rate (3) 0.09% 0.00%
(1) Selected data for a unit of membership interest outstanding through each
period
(2) Annualized
(3) Not annualized
(4) Total investment return based on per unit 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 units 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.
11
EXCELSIOR VENTURE PARTNERS III, LLC
NOTES TO FINANCIAL STATEMENTS
January 31, 2004 (Unaudited)
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 period financial statements have been reclassified to conform to the
current period'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.
12
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 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 January 31, 2004 and October 31, 2003, market quotations were not
readily available for securities valued at $70,329,631 or 58.14% of net
assets and $65,986,308 or 53.88% 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 $(595,321) and $(2,077,138) of undistributed net
investment loss for the periods ended January 31, 2004 and October 31,
2003, respectively. The Company reclassified $0 and $44 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 January 31, 2004 and October 31, 2003, 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 January 31, 2004 was $134,666,573,
and those investments had net depreciation on a tax basis at January 31,
2004 of $20,425,277, consisting of gross appreciation of $6,224,396 and
gross depreciation of $26,649,673. 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 $19,539,237, consisting of gross appreciation of $6,506,176 and
gross depreciation of $26,045,413.
D. Dividends to members:
13
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
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 January 31, 2004
and October 31, 2003, $609,842 and $617,322 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 January 31, 2004 and January 31, 2003, 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
14
Corporation, or its subsidiaries, who serves as an officer, manager or employee
of the Company receives any compensation from the Company.
As of January 31, 2004 and October 31, 2003, Excelsior Venture Investors
III, LLC had an investment in the Company of $76,798,357 and $77,740,266,
respectively. This represents an ownership interest of 63.48% in the Company as
of both dates.
Note 3 -- Purchases and Sales of Securities
Excluding short-term investments, the Company's purchases and sales of
securities for the three month periods ended January 31, 2004, and January 31,
2003 were as follows:
Three Month Periods Ended
January 31, Purchases ($) Proceeds ($)
- ------------------------- ------------- ------------
2004 5,295,642 63,929
2003 2,612,714 --
Note 4 -- Commitments
As of January 31, 2004, the Company had outstanding investment commitments
totaling $18,582,286.
Note 5 -- 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 from
affiliated companies during the period ended January 31, 2004 and the year ended
October 31, 2003. Transactions with companies, which are or were affiliates,
were as follows:
For the Three Months Ended January 31, 2004
---------------------------------------------------------
Shares/Par Shares/Par
Held at Purchases/ Sale/ Realized Held at Cumulative
October October 31, Conversion Conversion Interest Gain January 31, Value
Name of Investment 31, 2003 2003 Value Acquisitions Proceeds Received (Loss) 2004 (Note 1)
- --------------------------------------------------------- ------------ ---------------------------------------------------------
Controlled Affiliates
Pilot Software Inc., Series
A Preferred 20,000,000 $ 4,000,000 $ -- $ -- $ -- $ -- 20,000,000 $ 4,000,000
Datanautics, Inc., Promissory
Note 3.00% $ 4,000,000 4,000,000 -- -- -- -- $ 4,000,000 4,000,000
---------------------------------------------------------- ------------
Total Controlled
Affiliates $ 8,000,000 $ -- $ -- -- $ -- $ 8,000,000
Non Controlled Affiliates
Adeza Biomedical Corp.,
Series 5 Preferred 647,948 $ 3,000,000 $ -- $ -- $ -- $ -- 647,948 $ 3,000,000
Ancile Pharmaceuticals, Inc.,
Series D Preferred 2,419,355 -- -- -- -- -- 2,419,355 --
Ancile Pharmaceuticals, Inc.,
Bridge Notes 6% $ 850,000 -- -- -- -- -- $ 850,000 --
Ancile Pharmaceuticals,
Inc., Warrant 2 -- -- -- -- -- 2 --
Archemix Corporation,
Series A Preferred 1,314,285 1,314,285 685,714 -- -- -- 1,999,999 1,999,999
Cenqest, Inc., Series 2
Preferred 4,425 -- -- -- -- -- 4,425 --
Ethertronics Inc., Series B
Preferred 3,766,666 5,650,000 -- -- -- -- 3,766,666 5,650,000
Ethertronics Inc., Warrant 281,667 -- -- -- -- -- 281,667 --
Genoptix, Inc., Series B-1
Preferred 942,481 1,253,500 -- -- -- -- 942,481 1,253,500
Genoptix, Inc., Series B-2
Preferred 826,823 734,851 515,148 -- -- -- 1,403,696 1,249,999
Genoptix, Inc., Common Stock 46,860 -- -- -- -- -- 46,860 --
Gyration, Inc., Series C2
Preferred 1,523,810 4,000,000 -- -- -- -- 1,523,810 4,000,000
Gyration, Inc., Bridge Note
12%, 6/2/2004 -- -- 2,797,200 -- 6,658 -- $ 2,800,000 $ 2,797,200
Gyration, Inc., Warrant -- -- 2,800 -- -- -- 1 2,800
LightConnect, Inc., Series B
Preferred 4,330,504 948,562 -- -- -- -- 4,330,504 948,562
LightConnect, Inc., Series C
Preferred 12,292,441 992,000 -- -- -- -- 12,292,441 992,000
LogicLibrary, Inc., Series A
Preferred 5,914,488 2,704,226 -- -- -- -- 5,914,488 2,704,226
MIDAS Vision Systems, Inc.,
Series A-1 Preferred 933,593 -- -- -- -- -- 933,593 --
MIDAS Vision Systems, Inc.,
Common Stock 157,396 -- -- -- -- -- 157,396 --
Monterey Design Systems,
Inc., Common Stock 708,955 -- -- -- -- -- 708,955 --
Monterey Design Systems,
Inc., Series 2 Preferred 3,333,333 5,400,000 -- -- -- -- 3,333,333 5,400,000
NanoOpto Corp., Series A-1
Preferred 956,234 604,259 -- -- -- -- 956,234 --
NanoOpto Corp., Series B
Preferred 558,295 888,244 712,496 -- -- -- 2,233,180 1,318,958
NetLogic Microsystems, Inc.,
Series D Preferred 1,538,461 5,000,000 -- -- -- -- 1,538,461 5,000,000
OpVista, Inc., Series B
Preferred 5,333,333 1,500,000 -- -- -- -- 5,333,333 1,500,000
OpVista, Inc., Series C
Preferred 12,671,059 5,000,000 -- -- 71 -- 12,671,059 5,000,000
Senomyx, Inc., Series E
Preferred 517,260 1,500,000 -- -- -- -- 517,260 1,500,000
Silverback Systems, Inc.,
Series B-1 Preferred 2,211,898 450,051 -- -- -- -- 2,211,898 450,051
Silverback Systems, Inc.,
Series C Preferred 30,927,835 3,965,564 -- -- -- -- 30,927,835 3,965,564
Tensys Medical, Inc.,
Series C Preferred 4,166,667 5,000,000 -- -- -- -- 4,166,667 5,000,000
Virtual Silicon Technology,
Inc., Series C Preferred 3,096,551 5,000,000 -- -- -- -- 3,096,551 5,000,000
------------ ------------ ------------------------------ ------------
Total Non Controlled
Affiliates $ 54,905,542 $ 4,713,358 $ -- $ 6,729 $ -- $ 58,732,859
------------ ------------ ------------------------------ ------------
15
For the Ended October 31, 2003
-------------------------------------------------
Shares/Par Shares/Par
Held at Purchases/ Sale/ Realized Held at Cumulative
October 31, October 31, Conversion Conversion Gain October 31, Value
Name of Investment 2002 2002 Value Acquisitions Proceeds (Loss) 2003 (Note 1)
- --------------------------------------------------------- ------------ -------------------------------------------------
Controlled Affiliates
Pilot Software Inc., Series A
Preferred 15,000,00 $ 3,000,000 $ 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 $ 3,000,000 $ 5,000,000 $ -- $ -- $ 8,000,000
Non Controlled Affiliates
Adeza Biomedical Corp.,
Series 5 Preferred 647,948 $ 3,000,000 $ -- $ -- $ -- 647,948 $ 3,000,000
Ancile Pharmaceuticals, Inc.,
Series D Preferred 2,419,355 3,000,000 -- -- -- 2,419,355 --
Ancile Pharmaceuticals, Inc.,
Bridge Notes 6% $ 600,000 600,000 250,000 -- -- $ 850,000 --
Ancile Pharmaceuticals, Inc.,
Warrant 1 -- -- -- -- 2 --
Archemix Corporation,
Series A Preferred 628,571 628,571 685,714 -- -- 1,314,285 1,314,285
Cenqest, Inc., Series 1
Preferred 44,247,788 -- -- 2,000,000 -- -- --
Cenqest, Inc., Series 2
Preferred -- -- 2,000,000 -- -- 4,425 --
Ethertronics Inc., Series B
Preferred 3,099,999 4,650,000 1,000,000 -- -- 3,766,666 5,650,000
Ethertronics Inc., Warrant 115,000 -- -- -- -- 281,667 --
Genoptix, Inc., Bridge
Note 6% -- -- 443,787 443,787 -- -- --
Genoptix, Inc., Series B
Preferred 1,879,699 2,500,000 -- 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 4,330,504 948,563 -- -- -- 4,330,504 948,562
LightConnect, Inc., Series C
Preferred -- -- 992,000 -- -- 12,292,441 992,000
LogicLibrary, Inc., Series A
Preferred 4,374,256 2,000,000 704,225 -- -- 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 15,739,638 4,000,000 -- 4,000,000 -- -- --
MIDAS Vision Systems, Inc.,
Common Stock -- -- 4,000,000 -- -- 157,396 --
Monterey Design Systems, Inc.,
Series 1 Preferred 7,089,552 4,750,000 -- 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
NanoOpto Corp., Series A-1
Preferred 956,234 2,231,212 -- -- -- 956,234 604,259
NanoOpto Corp., Series B
Preferred -- -- 237,499 -- -- 558,295 888,244
NetLogic Microsystems, Inc.,
Series D Preferred 1,538,461 5,000,000 -- -- -- 1,538,461 5,000,000
OpVista, Inc., Series B
Preferred 5,333,333 4,000,000 -- -- -- 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 -- -- -- 517,260 1,500,000
Silverback Systems, Inc.,
Series B Preferred 2,211,898 1,415,614 -- 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 -- -- -- 4,166,667 5,000,000
Virtual Silicon Technology,
Inc., Series C Preferred 3,096,551 5,000,000 -- -- -- 3,096,551 5,000,000
------------ ------------ ------------ -------- ------------
Total Non Controlled
Affiliates $ 50,223,960 $ 33,278,783 $ 15,109,401 $ -- $ 54,905,542
------------ ------------ ------------ -------- ------------
16
Independent Accountants' Review Report
To the Members and Board of Managers of
Excelsior Venture Partners III, LLC
We have reviewed the accompanying statement of assets and liabilities of
Excelsior Venture Partners III, LLC ("the Company"), including the portfolio of
investments, as of January 31, 2004, and the related statements of operations,
changes in net assets, cash flows, and the financial highlights for the
three-month periods ended January 31, 2004 and 2003. These financial statements
and financial highlights are the responsibility of the Fund's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures,
and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements and financial highlights
referred to above for them to be in conformity with accounting principles
generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the statement of assets and liabilities,
including the portfolio of investments, as of October 31, 2003, and the related
statements of operations, changes in net assets and cash flows, and the
financial highlights for the year then ended (not presented herein) and in our
report dated December 22, 2003, we expressed an unqualified opinion on those
financial statements and financial highlights.
ERNST & YOUNG LLP
Boston, Massachusetts
March 12, 2004
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three-month Period Ended January 31, 2004 as Compared to the Similar Period in
2003
Realized and Unrealized Gains and Losses from Portfolio Investments
For the three-month periods ended January 31, 2004 and 2003, the Company
had a net realized gain/(loss) on security transactions of $0 and $4,
respectively. For the three-month periods ended January 31, 2004 and 2003, the
Company had a net change in unrealized depreciation on investments of ($888,390)
and ($5,425,658), respectively. The realized gains/(losses) were principally the
result of the Company's sale of short-term investments during these periods. The
net change in unrealized depreciation for the period ended January 31, 2004 was
principally the result of a $886,041 write-down taken on NanoOpto Corporation, a
private company investment, during the period ended January 31, 2004. For the
period ended January 31, 2003, the net change in unrealized depreciation was
principally the result of a decline in the value of the private company
investments.
Investment Income and Expenses
For the three-month period ended January 31, 2004, the Company had
investment income of $130,059 and net operating expenses of $725,380 resulting
in a net investment loss of ($595,321). In comparison, for the similar period
ended January 31, 2003, the Company had investment income of $293,414 and net
operating expenses of $763,952, resulting in a net investment loss of
($470,538). The decrease in net investment income resulted from the decrease in
short-term investments as the Company continues its investment program in
venture capital companies and private equity funds. The decrease in operating
expenses was due to a decline in management fees as a result of reduced net
assets during the period.
U.S. Trust Company, N.A., acting through its registered investment advisory
division, U.S. Trust Company, N.A. Asset Management Division (the "Investment
Adviser"), and United States Trust Company of New York, acting through its
registered investment advisory division, U.S. Trust - New York Asset Management
Division (the "Investment Sub-Adviser" and together with U.S. Trust Company,
N.A., the "Investment Advisers"), provide investment management and
administrative services required for the operation of the Company. The term
Investment Adviser includes, where applicable, U.S. Trust Company, the entity
that merged into U.S. Trust Company, N.A. on June 1, 2003 as described in Note 2
to Item 1 above. In consideration of the services rendered by the Investment
Advisers, the Company pays a management fee based upon a percentage of the net
assets of the Company invested or committed to be invested in certain types of
investments and an incentive fee based in part on a percentage of realized
capital gains of the Company. Such fee is determined and payable quarterly. For
the three-month periods ended January 31, 2004 and 2003, the Investment Advisers
earned $609,842 and $668,443 in management fees, respectively. Management fees
declined over the period ended January 31, 2004 due to the decline in net
assets.
Net Assets
At January 31, 2004, the Company's net assets were $120,974,142, or a net
asset value per unit of membership interest of $409.79. This represents a
decrease of ($1,483,711) from net assets of $122,457,853, or a net asset value
per unit of membership interest of $414.82, at October 31, 2003. The decrease
resulted principally from (i) a $886,041 write-down of NanoOpto Corporation, a
private company investment, and (ii) operating expenses of $725,380 exceeding
investment income of $130,059.
Liquidity and Capital Resources
The Company will focus its investments in the securities of privately-held
venture capital companies, and to a lesser extent in venture capital, buyout and
other private equity funds managed by third parties. The Company may offer
managerial assistance to certain of such privately-held venture capital
companies companies. The Company invests its available cash in short-term
investments of marketable securities pending distribution to investors.
At January 31, 2004, the Company held $3,807,363 in cash and $47,508,437 in
short-term investments as compared to $3,738,154 held in cash and $53,514,005 in
short-term investments at October 31, 2003. The decrease in short-term
investments from October 31, 2003 was due to new and follow-on investments in
private companies as
18
wells as capital calls for private investment funds. The Company, during this
period funded additional capital per its commitments to Advanced Technology
Ventures VII, L.P., CHL Medical Partners II, L.P., CMEA Ventures VI, L.P.,
Morgenthaler Partners VII, L.P., and Prospect Venture Partners II, L.P., each a
private investment fund. In connection with the Company's total commitments to
private funds in the amount of $23,000,000 since inception, the Company, through
January 31, 2004, has contributed $4,417,714 or 19.2 % of the total capital
committed thus far.
The Company participated in follow-on financing rounds for 4 of its private
companies, including: i) Archemix Corporation Series A preferred for $685,714,
ii) Genoptix, Inc. Series B-2 preferred for $515,148, iii) Gyration, Inc. bridge
note for $2,800,000, and iv) NanoOpto Corporation Series B preferred for
$712,497.
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.
Application of Critical Accounting Policies
Under the supervision of the Company's Valuation and Audit Committees,
consisting of the independent Managers of the Company, the Investment Advisers
make certain critical accounting estimates with respect to the valuation of
private portfolio investments. These estimates could have a material impact on
the presentation of the Company's financial condition because in total, they
currently represent 58.1% of the Company's net assets. For the private
investments held at January 31, 2004, changes to these estimates, i.e. changes
in the valuations of these private investments, resulted in a $.9 million
decrease in net asset value from October 31, 2003.
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.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Equity Price Risk
The Company anticipates that a majority of its investment portfolio will
consist of securities in private companies and private investment funds,
currently representing 58.1% of net assets, 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 securities in response to changes in market prices. Thus, these
securities are not subject to equity price risk normally associated with public
equity markets, except that to the extent that the private investment funds hold
underlying public securities, the Company is indirectly exposed to equity price
risk associated with the public markets. As of January 31, 2004, the Company
directly held no investments in the securities of public companies.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. As of January 31,
2004 (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 changes in the Company's
internal control over financial reporting identified in connection with the
evaluation of such internal control that occurred during the Company's last
fiscal quarter, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
20
15 Independent Accountants' Acknowledgement Letter.
31.1 Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Treasurer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EXCELSIOR VENTURE PARTNERS III, LLC
Date: March 16, 2004 By: /s/ David I. Fann
-----------------------------------
David I. Fann
Co-Chief Executive Officer
Date: March 16, 2004 By: /s/ Douglas A. Lindgren
-----------------------------------
Douglas A. Lindgren
Co-Chief Executive Officer
Date: March 16, 2004 By: /s/ Robert F. Aufenanger
-----------------------------------
Robert F. Aufenanger
Treasurer
(Principal Financial Officer)
22