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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended April 30, 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
EXCELSIOR VENTURE PARTNERS III, LLC
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of 13-4102528
Incorporation or Organization) (I.R.S. Employer Identification No.)
225 High Ridge Road, Stamford, CT
(Address of Principal 06905
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 ]
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 registered
public accountants.
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Portfolios of Investments as of April 30, 2004
and October 31, 2003 2
Statements of Assets and Liabilities at April 30, 2004
and October 31, 2003 7
Statements of Operations for the six-month periods
ended April 30, 2004 and April 30, 2003 8
Statements of Operations for the three-month periods
ended April 30, 2004 and April 30, 2003 9
Statements of Changes in Net Assets for
the six-month periods ended April 30, 2004
and April 30, 2003 10
Statements of Cash Flows for the six-month periods
ended April 30, 2004 and April 30, 2003 11
Financial Highlights for the six-month periods
ended April 30, 2004 and April 30, 2003 12
Notes to Financial Statements 13
Report of Independent Registered Public Accounting Firm 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Excelsior Venture Partners III, LLC
Portfolio of Investments (Unaudited)
April 30, 2004
-----------------------------
Percent of Net
Value Assets
------------ --------------
PORTFOLIO STRUCTURE
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS $ 44,496,588 37.02%
INVESTMENT COMPANIES 519,599 0.43%
PRIVATE COMPANIES 70,799,526 58.91%
PRIVATE INVESTMENT FUNDS 4,523,415 3.76%
------------ ------
TOTAL INVESTMENTS 120,339,128 100.12%
OTHER ASSETS & LIABILITIES (NET) (145,365) (0.12)%
------------ ------
NET ASSETS $120,193,763 100.00%
============ ======
Excelsior Venture Partners III, LLC
Portfolio of Investments
October 31, 2003
-----------------------------
Percent of Net
Value Assets
------------ --------------
PORTFOLIO STRUCTURE
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.
1
Excelsior Venture Partners III, LLC
Portfolio of Investments April 30, 2004 (Unaudited)
Principal Acquisition Value
Amount/Shares Date ## (Note 1)
- ------------- ------------------- -----------
AGENCY OBLIGATIONS -- 37.02%
$44,500,000 Federal Home Loan Bank Discount Notes,
0.92%, 5/04/04 (Cost $44,496,588) $44,496,588
-----------
PRIVATE COMPANIES **, #, @ -- 58.91
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 -- 56.58
Capital Equipment -- 0.00%
933,593 MIDAS Vision Systems, Inc., Series A-1 03/03 --
-----------
Consumer Electronics -- 3.33
1,523,810 Gyration, Inc., Series C-2 03/03 4,000,000
-----------
Consumer Products -- 1.25
517,260 Senomyx, Inc., Series E 11/01 1,500,000
-----------
Enterprise Software -- 8.91
19,995,000 ***Datanautics, Inc. Series A Preferred 03/04 4,000,000
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
-----------
10,704,226
-----------
Information Services -- 0.00%
4,425 Cenquest, Inc., Series 2 7/01 --
-----------
Life Sciences -- 6.43%
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
233,333 Archemix Corporation, Inc., Series B 03/04 233,333
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 1,250,000
-----------
7,736,832
-----------
Medical Technology -- 4.16%
4,166,667 Tensys Medical, Inc., Series C 03/02 5,000,000
-----------
Optical -- 8.12%
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 1,318,959
5,333,333 OpVista, Inc., Series B 07/01 1,500,000
12,671,059 OpVista, Inc., Series C 09/03 5,000,000
-----------
9,759,521
Semiconductor -- 19.68%
7,000,000 Chips & Systems, Inc., Series A 03/04 3,500,000
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
34,364,257 Silverback Systems, Inc., Series C 03/03, 09/03, 04/04 4,298,896
3,096,551 Virtual Silicon Technology, Inc., Series C 12/01 5,000,000
-----------
23,648,947
2
Excelsior Venture Partners III, LLC
Portfolio of Investments April 30, 2004 (Unaudited) -- (continued)
Principal
Amount/Shares/ Acquisition Value
Percent Owned Date ## (Note 1)
- ---------------- ------------------- ------------
PRIVATE COMPANIES **,#,@ (continued)
Wireless--4.70%
3,766,666 Ethertronics, Inc., Series B 06/01, 09/02, 07/03 $ 5,650,000
------------
TOTAL PREFERRED STOCKS (Cost $78,824,803) 67,999,526
------------
Notes--2.33%
Consumer Electronics--2.33%
$ 2,797,200 Gyration, Inc., Bridge Note 12%, 6/2/2004 12/03 2,797,200
------------
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 $3,647,200) 2,797,200
------------
Warrants--0.00%
Consumer Electronics--0.00%
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 $91,224,802) 70,799,526
------------
PRIVATE INVESTMENT FUNDS **, #--3.76%
0.39% Advanced Technology Ventures VII, LP 08/01-04/04 709,531
1.21% Burrill Life Sciences Capital Fund 12/02-03/04 546,287
1.35% CHL Medical Partners II, LP 01/02-02/04 564,425
4.94% CMEA Ventures Partners, LP 12/03-04/04 115,965
0.36% Morgenthaler Partners VII, LP 07/01-04/04 1,020,587
0.59% Prospect Venture Partners II, LP 06/01-04/04 1,055,523
2.36% Tallwood II, LP 12/02-10/03 324,192
1.75% Valhalla Partners II, LP 10/03-03/04 186,905
------------
TOTAL--PRIVATE INVESTMENT FUNDS (Cost $5,470,420) 4,523,415
------------
INVESTMENT COMPANIES--0.43%
519,599 Dreyfus Government Cash Management Fund Institutional
Shares (Cost $519,599) 519,599
------------
TOTAL INVESTMENTS (Cost $141,711,409) -- 100.12% 120,339,128
OTHER ASSETS & LIABILITIES (NET) -- (0.12)% (145,365)
------------
NET ASSETS--100.00% $120,193,763
------------
- ----------
** Restricted as to public resale. Acquired between June 1, 2001 and April 30,
2004. Total cost of restricted securities at April 30, 2004 aggregated
$96,695,222.
Total value of restricted securities owned at April 30, 2004 was
$75,322,941 or 62.67% of net assets.
# Non-income producing securities.
3
## Required disclosure for restricted securities only.
@ At April 30, 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 April 30, 2004 was $62,799,526.
*** At April 30, 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 April 30, 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
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
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
April 30,
2004
(Unaudited) October 31, 2003
------------- ----------------
ASSETS:
Investments in unaffiliated issuers at value (Cost $50,486,607 and
$57,349,433, respectively) $ 49,539,602 $ 56,594,771
Investments in controlled affiliated issuers at value (Cost $8,000,000 and
$8,000,000, respectively) 8,000,000 8,000,000
Investments in non controlled affiliated issuers at value (Cost $83,224,802 and
$74,444,779, respectively) 62,799,526 54,905,542
------------ ------------
Investments, at value (Cost $141,711,409 and $139,794,212, respectively)
(Note 1) 120,339,128 119,500,313
------------ ------------
Cash 579,657 3,738,154
Interest receivable 380 407
Other receivables 1,945 1,945
Prepaid insurance 43,721 2,992
------------ ------------
Total Assets 120,964,831 123,243,811
------------ ------------
LIABILITIES:
Management fees payable (Note 2) 591,117 617,322
Administration fees payable (Note 2) 74,171 25,625
Professional fees payable 56,492 66,298
Board of Managers' fees payable (Note 2) 29,877 60,000
Other payables 19,411 16,713
------------ ------------
Total Liabilities 771,068 785,958
------------ ------------
NET ASSETS $120,193,763 $122,457,853
============ ============
NET ASSETS consist of:
Paid-in capital $141,566,044 $142,751,752
Unrealized depreciation on investments (21,372,281) (20,293,899)
------------ ------------
Total Net Assets $120,193,763 $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 $ 407.15 $ 414.82
============ ============
Notes to Financial Statements are an integral part of these Financial
Statements.
7
Excelsior Venture Partners III, LLC
Statements of Operations (Unaudited)
Six Months Ended April 30,
--------------------------
2004 2003
----------- -----------
INVESTMENT INCOME:
Interest income from unaffiliated investments $ 233,663 $ 499,480
Interest income from affiliated investments 6,729 --
Dividend income 2,347 4,881
----------- -----------
Total Income 242,739 504,361
----------- -----------
EXPENSES:
Management fees (Note 2) 1,200,959 1,296,800
Professional fees 69,634 24,795
Administration fees (Note 2) 69,463 75,394
Insurance Expense 39,677 33,523
Board of Managers' fees (Note 2) 29,877 29,753
Custodian fees 10,870 10,510
Miscellaneous fees 7,967 12,399
----------- -----------
Total Expenses 1,428,447 1,483,174
NET INVESTMENT LOSS (1,185,708) (978,813)
----------- -----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS: (Note 1)
Net realized loss on investments on unaffiliated investments -- (16)
Net change in unrealized depreciation on investments (1,078,382) (8,667,793)
----------- -----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (1,078,382) (8,667,809)
----------- -----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,264,090) $(9,646,622)
=========== ===========
Notes to Financial Statements are an integral part of these Financial
Statements.
8
Excelsior Venture Partners III, LLC
Statements of Operations (Unaudited)
Three Months Ended April 30,
----------------------------
2004 2003
--------- -----------
INVESTMENT INCOME:
Interest income from unaffiliated investments $ 111,528 $ 208,229
Interest income from affiliated investments -- --
Dividend income 1,152 2,718
--------- -----------
Total Income 112,680 210,947
--------- -----------
EXPENSES:
Management fees (Note 2) 591,117 628,357
Professional fees 34,346 12,192
Administration fees (Note 2) 34,122 36,415
Insurance Expense 19,561 16,269
Board of Managers' fees (Note 2) 14,753 14,630
Custodian fees 5,234 5,263
Miscellaneous fees 3,934 6,096
--------- -----------
Total Expenses 703,067 719,222
NET INVESTMENT LOSS (590,387) (508,275)
--------- -----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
(Note 1)
Net realized loss on investments on unaffiliated
investments -- (20)
Net change in unrealized depreciation on
investments (189,992) (3,242,135)
--------- -----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (189,992) (3,242,155)
--------- -----------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $(780,379) $(3,750,430)
========= ===========
Notes to Financial Statements are an integral part of these Financial
Statements.
9
Excelsior Venture Partners III, LLC
Statements of Changes in Net Assets (Unaudited)
Six Months Ended April 30,
---------------------------
2004 2003
------------ ------------
OPERATIONS:
Net investment loss $ (1,185,708) $ (978,813)
Net realized loss on investments -- (16)
Net change in unrealized depreciation on
investments (1,078,382) (8,667,793)
------------ ------------
Net decrease in net assets resulting from
operations (2,264,090) (9,646,622)
------------ ------------
NET DECREASE IN NET ASSETS (2,264,090) (9,646,622)
NET ASSETS:
Beginning of period 122,457,853 138,495,015
------------ ------------
End of period $120,193,763 $128,848,393
============ ============
Notes to Financial Statements are an integral part of these Financial
Statements.
10
Excelsior Venture Partners III, LLC
Statements of Cash Flows (Unaudited)
Six Months Ended April 30,
---------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (decrease) in net assets resulting from operations. $ (2,264,090) $ (9,646,622)
Adjustments to reconcile net (decrease) in net assets
from operations to net cash provided by/(used in)
operating activities:
Net change in unrealized depreciation on investments 1,078,382 8,667,793
Purchase of investments (10,494,037) (10,572,673)
Proceeds received from private investment funds 79,022 --
Net change in short-term investments 8,497,818 10,938,235
Decrease in interest receivable 27 617
Decrease in other receivable -- 994,345
Decrease (increase) in prepaid insurance (40,729) 33,523
Decrease in management fee payable (26,205) (68,670)
Decrease in Board of Managers' fees payable (30,123) (30,247)
Increase (decrease) in other expenses payable 41,438 (172,347)
------------ ------------
Net cash provided by/(used in) operating activities (3,158,497) 143,954
------------ ------------
Net increase/(decrease) in cash (3,158,497) 143,954
------------ ------------
Cash at beginning of period 3,738,154 --
------------ ------------
Cash at end of period $ 579,657 $ 143,954
============ ============
Notes to Financial Statements are an integral part of these Financial
Statements.
11
Excelsior Venture Partners III, LLC
Financial Highlights (Unaudited)
Per Unit Operating Performance: (1)
Six Months Ended April 30,
--------------------------
2004 2003
-------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 414.82 $ 469.14
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (4.02) (3.32)
Net realized and unrealized loss on
investment transactions (3.65) (29.36)
-------- --------
Total from investment operations (7.67) (32.68)
-------- --------
NET ASSET VALUE, END OF PERIOD $ 407.15 $ 436.46
======== ========
TOTAL NET ASSET VALUE RETURN (3), (4) (1.85)% (6.97)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) $120,194 $128,848
Ratios to average net assets: (2)
Net expenses 2.36% 2.23%
Net investment loss (1.96)% (1.47)%
Portfolio Turnover Rate (3) 0.11% 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.
12
EXCELSIOR VENTURE PARTNERS III, LLC
NOTES TO FINANCIAL STATEMENTS
April 30, 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.
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. 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.
13
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 April 30, 2004 and October 31, 2003, market quotations were not
readily available for securities valued at $75,322,941 or 62.67% of net
assets and $65,986,308 or 53.88% of net assets, respectively. Such
securities were valued by the Investment Adviser, under the supervision of
the Board of Managers. Two of the Company's private company investments,
Senomyx, Inc and NetLogic Microsystems, Inc. have each filed S-1
registration statements, on March 29, 2004 and April 16, 2004,
respectively, with the Securities and Exchange Commission for an initial
public offering of their common stock. These investments represent
$6,500,000 of the $75,322,941 at April 30, 2004. 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 $(1,185,708) and $(2,077,138) of undistributed net
investment loss for the six months ended April 30, 2004 and the year ended
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 April 30, 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 April 30, 2004 was $136,240,989, and
those investments had net depreciation on a tax basis at April 30, 2004 of
$20,425,276, consisting of gross appreciation of $6,224,396 and gross
depreciation of $26,649,672. 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:
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
14
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 April 30, 2004 and October 31, 2003, $591,117 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. For the six month periods ended April 30, 2004 and April 30,
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 a
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, served 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 April 30, 2004 and October 31, 2003, Excelsior Venture Investors III,
LLC had an investment in the Company of $76,302,947 and $77,740,266,
respectively. This represents an ownership interest of 63.48% in the Company as
of both dates.
Note 3 -- Purchases and Sales of Securities
Excluding short-term investments, the Company's purchases and sales of
securities for the six-month periods ended April 30, 2004, and April 30, 2003
were as follows:
Six-Month Periods Ended
April 30, Purchases ($) Proceeds ($)
- ----------------------- ------------- ------------
2004 10,494,037 79,022
2003 10,572,673 --
15
Note 4 -- Commitments
As of April 30, 2004, the Company had outstanding investment commitments
totaling $17,508,273.
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
income from affiliated companies during the period ended April 30, 2004 and the
year ended October 31, 2003. Transactions with companies, which are or were
affiliates, were as follows:
Shares/Par
Held at
October 31, October 31,
Name of Investment 2003 2003 Value
- ------------------------------------------ ------------ -----------
Controlled Affiliates
Pilot Software Inc., Series A Preferred 20,000,000 $ 4,000,000
Datanautics, Inc., Series A Preferred -- --
Datanautics, Inc., Promissory Note 3.00% $ 4,000,000 4,000,000
-----------
Total Controlled Affiliates $ 8,000,000
Non Controlled Affiliates
Adeza Biomedical Corp., Series 5 Preferred 647,948 $ 3,000,000
Ancile Pharmaceuticals, Inc., Series D
Preferred 2,419,355 --
Ancile Pharmaceuticals, Inc., Bridge
Notes 6% $ 850,000 --
Ancile Pharmaceuticals, Inc.,Warrant 2 --
Archemix Corporation, Series A Preferred 1,314,285 1,314,285
Archemix Corporation, Series B Preferred -- --
Cenqest, Inc., Series 2 Preferred 4,425 --
Chips & Systems, Inc., Series A Preferred -- --
Ethertronics Inc., Series B Preferred 3,766,666 5,650,000
Ethertronics Inc., Warrant 281,667 --
Genoptix, Inc., Series B-1 Preferred 942,481 1,253,500
Genoptix, Inc., Series B-2 Preferred 826,823 734,851
Genoptix, Inc., Common Stock 46,860 --
Gyration, Inc., Series C2 Preferred 1,523,810 4,000,000
Gyration, Inc., Bridge Note 12%, 6/2/2004 -- --
Gyration, Inc., Warrant -- --
LightConnect, Inc., Series B Preferred 4,330,504 948,562
LightConnect, Inc., Series C Preferred 12,292,441 992,000
LogicLibrary, Inc., Series A Preferred 5,914,488 2,704,226
MIDAS Vision Systems, Inc., Series A-1
Preferred 933,593 --
MIDAS Vision Systems, Inc., Common Stock 157,396 --
Monterey Design Systems, Inc., Common
Stock 708,955 --
Monterey Design Systems, Inc., Series 2
Preferred 3,333,333 5,400,000
NanoOpto Corp., Series A-1 Preferred 956,234 604,259
NanoOpto Corp., Series B Preferred 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 12,671,059 5,000,000
Senomyx, Inc., Series E Preferred 517,260 1,500,000
Silverback Systems, Inc., Series B-1
Preferred 2,211,898 450,051
Silverback Systems, Inc., Series C
Preferred 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 $54,905,542
===========
For the Six Months Ended April 30, 2004
-------------------------------------------------------------------
Purchases/ Sale/ Realized Shares/Par
Conversion Conversion Interest Gain Held at April Cumulative Value
Name of Investment Acquisitions Proceeds Received (Loss) 30, 2004 (Note 1)
- ------------------------------------------ ------------ ------------ -------- -------- ------------- ----------------
Controlled Affiliates
Pilot Software Inc., Series A Preferred $ -- $ -- $ -- $ -- 20,000,000 $ 4,000,000
Datanautics, Inc., Series A Preferred 4,000,000 19,995,000 4,000,000
Datanautics, Inc., Promissory Note 3.00% -- (4,000,000) -- -- -- --
------------ ------------ ------ ---- -----------
Total Controlled Affiliates $ 4,000,000 ($4,000,000) -- $ -- $ 8,000,000
Non Controlled Affiliates
Adeza Biomedical Corp., Series 5 Preferred $ -- $ -- $ -- $ -- 647,948 $ 3,000,000
Ancile Pharmaceuticals, Inc., Series D
Preferred -- -- -- -- 2,419,355 --
Ancile Pharmaceuticals, Inc., Bridge
Notes 6% -- -- -- -- $ 850,000 --
Ancile Pharmaceuticals, Inc.,Warrant -- -- -- -- 2 --
Archemix Corporation, Series A Preferred 685,714 -- -- -- 1,999,999 1,999,999
Archemix Corporation, Series B Preferred 233,333 -- -- -- 233,333 233,333
Cenqest, Inc., Series 2 Preferred -- -- -- -- 4,425 --
Chips & Systems, Inc., Series A Preferred 3,500,000 -- -- -- 7,000,000 3,500,000
Ethertronics Inc., Series B Preferred -- -- -- -- 3,766,666 5,650,000
Ethertronics Inc., Warrant -- -- -- -- 281,667 --
Genoptix, Inc., Series B-1 Preferred -- -- -- -- 942,481 1,253,500
Genoptix, Inc., Series B-2 Preferred 515,148 -- -- -- 1,403,696 1,250,000
wGenoptix, Inc., Common Stock -- -- -- -- 46,860 --
Gyration, Inc., Series C2 Preferred -- -- -- -- 1,523,810 4,000,000
Gyration, Inc., Bridge Note 12%, 6/2/2004 2,797,200 -- 6,658 -- $ 2,797,200 2,797,200
Gyration, Inc., Warrant 2,800 -- -- -- 1 2,800
LightConnect, Inc., Series B Preferred -- -- -- -- 4,330,504 948,562
LightConnect, Inc., Series C Preferred -- -- -- -- 12,292,441 992,000
LogicLibrary, Inc., Series A Preferred -- -- -- -- 5,914,488 2,704,226
MIDAS Vision Systems, Inc., Series A-1
Preferred -- -- -- -- 933,593 --
MIDAS Vision Systems, Inc., Common Stock -- -- -- -- 157,396 --
Monterey Design Systems, Inc., Common
Stock -- -- -- -- 708,955 --
Monterey Design Systems, Inc., Series 2
Preferred -- -- -- -- 3,333,333 5,400,000
NanoOpto Corp., Series A-1 Preferred -- -- -- -- 956,234 --
NanoOpto Corp., Series B Preferred 712,496 -- -- -- 2,233,180 1,318,959
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 -- -- 71 -- 12,671,059 5,000,000
Senomyx, Inc., Series E Preferred -- -- -- -- 517,260 1,500,000
Silverback Systems, Inc., Series B-1
Preferred -- -- -- -- 2,211,898 450,051
Silverback Systems, Inc., Series C
Preferred 333,333 -- -- -- 34,364,257 4,298,896
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 $ 8,780,024 $ -- $6,729 $ -- $62,799,526
============ ============ ====== ==== ===========
Shares/Par
Held at
October 31, October 31,
Name of Investment 2003 2003 Value
- ------------------------------------------ ------------ -----------
For the Six Months Ended April 30, 2004
--------------------------------------------------------
Shares/Par
Purchases/ Sale/ Realized Held at April
Conversion Conversion Gain Ocotber 31, Cumulative Value
Name of Investment Acquisitions Proceeds (Loss) 2003 (Note 1)
- ------------------------------------------ ------------ ----------- ----------- ------------- ----------------
16
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 D
Preferred 2,419,355 3,000,000
Ancile Pharmaceuticals, Inc., Bridge Notes
6% $ 600,000 600,000
Ancile Pharmaceuticals, Inc., Warrant 1 --
Archemix Corporation, Series A Preferred 628,571 628,571
Cenqest, Inc., Series 1 Preferred 44,247,788 --
Cenqest, Inc., Series 2 Preferred -- --
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 -- --
NanoOpto Corp., Series A-1 Preferred 956,234 2,231,212
NanoOpto 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
===========
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 D
Preferred -- -- -- 2,419,355 --
Ancile Pharmaceuticals, Inc., Bridge Notes
6% 250,000 -- -- $ 850,000 --
Ancile Pharmaceuticals, Inc., Warrant -- -- -- 2 --
Archemix Corporation, Series A Preferred 685,714 -- -- 1,314,285 1,314,285
Cenqest, Inc., Series 1 Preferred -- 2,000,000 -- -- --
Cenqest, Inc., Series 2 Preferred 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
NanoOpto Corp., Series A-1 Preferred -- -- -- 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
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 -- -- 2,211,898 450,051
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
=========== =========== ==== ===========
Note 6 -- Pending Litigation
The Investment Adviser has been contacted by the Office of the New York
State Attorney General and the Securities and Exchange Commission in connection
with the investigation of practices in the mutual fund industry. The Investment
Adviser has also been named in certain class actions which allege that the
Investment Adviser allowed certain parties to engage in illegal and improper
trading practices which have caused injury to certain investors in mutual funds
and a derivative action alleging common law breach of fiduciary duty toward
certain mutual funds by various parties including the Investment Adviser.
Based upon currently available information, the Investment Adviser believes
that the pending class actions and investigation are not likely to materially
affect its ability to provide investment management services to the Company.
Note 7 -- Guarantees
In the normal course of business, the Company enters into contracts that
provide general indemnifications. The Company's maximum exposure under these
agreements is dependent on future claims that may be made against the Company,
and therefore cannot be established; however, based on experience, the risk of
loss from such claims is considered remote.
17
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Excelsior Venture Partners III, LLC
We have reviewed the statement of assets and liabilities of Excelsior Venture
Partners III, LLC (the "Company"), including the portfolio of investments, as of
April 30, 2004, and the related statements of operations for the three-month and
six-month periods ended April 30, 2004 and 2003, and the statements of changes
in net assets, cash flows, and the financial highlights for the six-month
periods ended April 30, 2004 and 2003. These financial statements and financial
highlights are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board (United States),
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the interim financial statements and financial highlights referred to
above for them to be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the statement of assets and
liabilities, including the portfolio of investments, as of October 31, 2003
(presented herein), 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
June 11, 2004
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Six-month and Three-month Periods Ended April 30, 2004 as Compared to the
Similar Periods in 2003
Realized and Unrealized Gains and Losses from Portfolio Investments
For the six-month periods ended April 30, 2004 and 2003, the Company had a
net realized loss on security transactions of $0 and ($16), respectively. For
the six-month periods ended April 30, 2004 and 2003, the Company had a net
change in unrealized depreciation on investments of ($1,078,382) and
($8,667,793), respectively. The realized loss for the period ended April 30,
2003 was principally the result of the Company's sale of short-term investments
during the period. The net change in unrealized depreciation for the period
ended April 30, 2004 was principally the result of a $886,041 write-down taken
on NanoOpto Corporation, a private company investment, as well as a decline in
the overall value of the Company's private investment funds. For the period
ended April 30, 2003, the net change in unrealized depreciation was principally
the result of a decline in the value of the private company investments.
For the three-month periods ended April 30, 2004 and 2003, the Company had
a net realized loss on security transactions of $0 and ($20), respectively. For
the three-month periods ended April 30, 2004 and 2003, the Company had a net
change in unrealized depreciation on investments of ($189,992) and ($3,242,135),
respectively. The realized loss for the period ended April 30, 2003 was
principally the result of the Company's sale of short-term investments during
the period. The net change in unrealized depreciation for the period ended April
30, 2004 was principally the result of a decline in the overall value of the
Company's private investment funds. For the period ended April 30, 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 six-month period ended April 30, 2004, the Company had investment
income of $242,739 and operating expenses of $1,428,447, resulting in a net
investment loss of ($1,185,708). In comparison, for the similar period ended
April 30, 2003, the Company had investment income of $504,361 and operating
expenses of $1,483,174, resulting in a net investment loss of ($978,813). 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
primarily to a decline in management fees as a result of reduced net assets
during the period.
For the three-month period ended April 30, 2004, the Company had investment
income of $112,680 and operating expenses of $703,067, resulting in a net
investment loss of ($590,387). In comparison, for the similar period ended April
30, 2003, the Company had investment income of $210,947 and operating expenses
of $719,222, resulting in a net investment loss of ($508,275). The decrease in
net investment income resulted from the decrease in short-term investments. The
decrease in operating expenses was due primarily 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 six-month periods ended April 30, 2004 and 2003, the Investment
Advisers earned $1,200,959 and $1,296,800 in management fees, respectively.
Management fees declined over the period ended April 30, 2004 due to the decline
in net assets. For the three-month periods ended April 30, 2004 and 2003, the
Investment Advisers earned $591,117 and $628,357 in management fees,
respectively. Management fees declined over the period ended April 30, 2004 due
to the decline in net assets.
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Net Assets
At April 30, 2004, the Company's net assets were $120,193,763, or a net
asset value per unit of membership interest of $407.15. This represents a
decrease of ($2,264,090) 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 write-down of NanoOpto Corporation, a private
company investment, (ii) operating expenses exceeding investment income by
($1,185,708), and (iii) an increase in net unrealized depreciation related to
the private investment funds.
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 April 30, 2004, the Company held $579,657 in cash and $45,016,187 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 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., Burrill Life Sciences Capital Fund, CHL
Medical Partners II, L.P., CMEA Ventures VI, L.P., Morgenthaler Partners VII,
L.P., Prospect Venture Partners II, L.P., and Valhalla Partners, 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
April 30, 2004, has contributed $5,491,727 or 23.9% of the total capital
committed thus far.
During the six-month period ended April 30, 2004, the Company participated
in follow-on financing rounds for several of its private companies, including:
i) Archemix Corporation Series A preferred for $685,714 and Series B preferred
for $233,333, ii) Genoptix, Inc. Series B-2 preferred for $515,148, iii)
Gyration, Inc. bridge note and warrants for $2,800,000, iv) NanoOpto Corporation
Series B preferred for $712,496, v) Silverback Systems Series C preferred for
$333,333. The Company also funded one new private company investment in Chips &
Systems for $3,500,000. After April 30, 2004, the Company participated in
follow-on financing rounds for several of its private companies, including: i)
Ethertronics Series B preferred for $1,000,000, ii) LogicLibrary Series A
preferred for $704,225, and iii) Tensys Medical Series D preferred for
$1,425,000.
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.
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 Adviser
makes 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 62.7% of the Company's net assets. For the private
investments held at April 30, 2004, changes to these estimates, i.e. changes in
the valuations of these private investments, resulted in a $1.1 million decrease
in net asset value as compared to 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
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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 Adviser, the Investment Adviser, 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 Adviser also makes estimates regarding discounts on market
prices of publicly traded securities where appropriate. For securities which
have legal, contractual or practical restrictions on transfer, a discount of 10%
to 40% from the public market price will be applied.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Equity Price Risk
The Company anticipates that a majority of its investment portfolio will
consist of securities in private companies and private investment funds,
currently representing 62.7% 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 April 30, 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 April 30, 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.
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None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
15 Independent Registered Public Accounting Firm's
Acknowledgement Letter.
31.1 Certification of 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 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.
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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: June 14, 2004 By: /s/ Douglas A. Lindgren
-----------------------------------
Douglas A. Lindgren
Chief Executive Officer
Date: June 14, 2004 By: /s/ Robert F. Aufenanger
-----------------------------------
Robert F. Aufenanger
Treasurer
(Principal Financial Officer)
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