(Exact name of registrant as specified in charter)
225 High Ridge Road
Stamford, CT 06905
(Address of principal executive offices) (Zip code)
James D. Bowden
Bank of America Capital Advisors, LLC
100 Federal Street
Boston, MA 02110
(Name and address of agent for service)
Registrant’s telephone number, including area code: 1-866-637-2587
Date of fiscal year end: October 31
Date of reporting period: April 30, 2012
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507.
Item 1. Reports to Stockholders.
EXCELSIOR
VENTURE PARTNERS III, LLC
INVESTOR REPORT
For the Six Months Ended
April 30, 2012
(Unaudited)
EXCELSIOR VENTURE PARTNERS III, LLC
For the Six Months Ended April 30, 2012
Index
Page No.
FINANCIAL INFORMATION
Schedule of Investments
1-3
Statement of Assets, Liabilities and Net Assets
4
Statement of Operations
5
Statements of Changes in Net Assets
6
Statement of Cash Flows
7
Financial Highlights
8
Notes to Financial Statements
9-18
Excelsior Venture Partners III, LLC
Schedule of Investments
April 30, 2012 (Unaudited)
Principal Amount/Shares
Private Companies (A), (B), (I), (J)
Acquisition Dates (C)
Cost
Fair Value
% of Net Assets (D)
Common Stocks
Medical Technology
7,882
Recorders and Medicare Systems (P) Ltd. (E)
12/08
$
382,623
$
—
—%
Total Common Stocks - Private Companies
382,623
—
—%
Liquidating Trusts
Life Sciences
1,999,999
Archemix Liquidating Trust Preferred Series A (K)
08/02 - 11/03
1,999,999
—
—%
700,000
Archemix Liquidating Trust Preferred Series B (K)
03/04 - 12/05
465,178
—
—%
Total LIQUIDATING TRUSTS - Private Companies
2,465,177
—
—%
Preferred Stocks
Enterprise Software
4,542,763
SOA Software, Inc. Series F (F)
05/08
5,681,135
—
—%
Wireless
4,433,333
Ethertronics, Inc. Series B (G)
06/01 - 05/04
6,650,000
12,004,477
34.29%
1,969,205
Ethertronics, Inc. Series C (G)
05/05 - 03/10
2,953,808
5,332,169
15.23%
758,542
Ethertronics, Inc. Series D (G)
03/09
1,137,813
2,053,962
5.87%
10,741,621
19,390,608
55.39%
Total Preferred Stocks - Private Companies
16,422,756
19,390,608
55.39%
Total Private Companies
19,270,556
19,390,608
55.39%
The accompanying notes are an integral part of these financial statements
1
Excelsior Venture Partners III, LLC
Schedule of Investments
April 30, 2012 (Unaudited)
Percent Owned (H)
Private Investment Funds (A), (B), (I), (J)
Acquisition Dates (C)
Commitment
Cost
Fair Value
% of Net Assets (D)
Early-Stage Information Technology
0.98%
Sevin Rosen Fund IX, L.P.
10/04 - 08/11
$
3,000,000
$
2,376,609
$
1,583,304
4.52%
2.36%
Tallwood II, L.P.
12/02 - 09/08
3,000,000
2,890,443
1,302,544
3.72%
1.70%
Valhalla Partners, L.P.
10/03 - 09/11
3,000,000
1,694,940
1,447,441
4.13%
9,000,000
6,961,992
4,333,289
12.38%
Early-Stage Life Sciences and Technology
1.10%
Burrill Life Sciences Capital Fund, L.P.
12/02 - 02/12
3,000,000
34,308
520,254
1.49%
1.32%
CHL Medical Partners II, L.P.
01/02 - 05/09
2,000,000
1,641,817
1,705,376
4.87%
1.03%
CMEA Ventures VI, L.P.
12/03 - 10/09
3,000,000
2,537,661
1,797,047
5.13%
8,000,000
4,213,786
4,022,677
11.49%
Multi-Stage Life Sciences, Communications and Health Care
0.36%
Advance Technology Ventures VII, L.P.
08/01 - 12/08
2,700,000
1,348,076
1,492,431
4.26%
0.33%
Morgenthaler Partners VII, L.P.
07/01 - 01/10
3,000,000
877,917
812,986
2.32%
0.57%
Prospect Venture Partners II, L.P.
06/01 - 11/11
3,000,000
—
674,329
1.93%
8,700,000
2,225,993
2,979,746
8.51%
Total Private Investment Funds
13,401,771
11,335,712
32.38%
TOTAL INVESTMENTS
$
25,700,000
32,672,327
30,726,320
87.77%
OTHER ASSETS & LIABILITIES (NET)
4,280,982
12.23%
NET ASSETS
$
35,007,302
100.00%
(A)
Non-income producing securities. Restricted as to public resale and illiquid.
(B)
Total cost of illiquid and restricted securities at April 30, 2012, aggregated $32,672,327. Total fair value of illiquid and restricted securities at April 30, 2012 was $30,726,320 or 87.77% of net assets.
(C)
Acquisition dates cover a period from the original investment date to the last acquisition date and is a required disclosure for restricted securities only.
(D)
Calculated as fair value divided by the Company's net assets.
The accompanying notes are an integral part of these financial statements
2
Excelsior Venture Partners III, LLC
Schedule of Investments
April 30, 2012 (Unaudited) (continued)
(E)
Tensys Medical, Inc. merged with Recorders and Medicare Systems (P) Ltd. on December 19, 2008. As of January 2, 2010, Recorders and Medicare Systems (P) Ltd. became a subsidiary of HBM Bio Ventures (Cayman) Ltd.
(F)
LogicLibrary, Inc. merged with SOA Software, Inc. on May 1, 2008.
(G)
At April 30, 2012, the Company owned 5% or more of Ethertronics, Inc. voting securities, thereby making Ethertronics, Inc. an affiliate as defined by the Investment Company Act of 1940, as amended (the "Investment Company Act"). Total fair value of affiliated securities owned at April 30, 2012 (including investments in controlled affiliates) was $19,390,608 or 55.39% of net assets.
(H)
Represents the Company's capital balance as a percentage of the Private Investment Fund's total capital or the Fund's commitment as a percentage of the Private Investment Fund's total commitments.
(I)
The estimated cost of the Private Companies at April 30, 2012, for federal income tax purposes is $21,270,556. The resulting unrealized depreciation for federal income tax purposes is $1,879,948, which consists of unrealized appreciation and depreciation of $8,648,987 and $10,528,935 respectively. The estimated cost of the Private Investment Funds at April 30, 2012, for federal income tax purposes is $10,707,550. The resulting unrealized appreciation for federal income tax purposes is $628,162, which consists of unrealized appreciation and depreciation of $1,601,479 and $973,317, respectively.
(J)
All investments are based in the United States with the exception of Recorders and Medicare Systems (P) Ltd. which is located in India.
(K)
In addition to the fair value, Archemix unit holders may receive future amounts and possible milestone based earn outs. Contingent payments are subject to numerous risks and uncertainties, and therefore payments may never be earned or if earned may not be earned at the times currently estimated.
The accompanying notes are an integral part of these financial statements
3
Excelsior Venture Partners III, LLC
Statement of Assets, Liabilities and Net Assets
April 30, 2012 (Unaudited)
ASSETS:
Unaffiliated Issuers, at fair value (Cost $21,930,706)
$
11,335,712
Non-Controlled Affiliated Issuers, at fair value (Cost $10,741,621)
19,390,608
Investments, at fair value (Cost $32,672,327)
30,726,320
Cash and cash equivalents (Note 2)
4,565,450
Other Assets
13,200
Total Assets
35,304,970
LIABILITIES:
Professional fees payable
161,405
Management fees payable
87,173
Board of Managers' fees payable
22,000
Administration fees payable
11,637
Custody fees payable
1,574
Distribution payable to Members
197
Other payables
13,682
Total Liabilities
297,668
NET ASSETS
$
35,007,302
NET ASSETS consist of:
Members' Capital Paid-in*
$
146,136,782
Members' Capital Distributed
(47,304,504
)
Accumulated net investment income/(loss)
(12,432,282
)
Accumulated net realized gain/(loss) on investments
(49,455,687
)
Accumulated unrealized depreciation on investments
(1,946,007
)
Total Net Assets
$
35,007,302
Units of Membership Interest Outstanding (Unlimited number of no par value units authorized)
295,210
NET ASSET VALUE PER UNIT
$
118.58
*
Members’ Capital Paid-in consists of contributions from Members net of offering costs charged to the Members.
The accompanying notes are an integral part of these financial statements
4
Excelsior Venture Partners III, LLC
Statement of Operations
For the six months ended April 30, 2012 (Unaudited)
INVESTMENT INCOME:
Interest income
$
5
Total Income
5
EXPENSES:
Management fees
178,232
Professional fees
152,212
Administration fees
59,553
Board of Managers' fees
29,500
Insurance expense
13,056
Custody fees
9,401
Other expenses
32,281
Total Expenses
474,235
NET INVESTMENT LOSS
(474,230
)
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS: (Note 2)
Net realized gain on unaffiliated investments
156,502
Net change in unrealized appreciation/(depreciation) on investments
468,999
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
625,501
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS
$
151,271
The accompanying notes are an integral part of these financial statements
5
Excelsior Venture Partners III, LLC
Statement of Changes in Net Assets (Unaudited)
For the Six Months Ended April 30, 2012
For the Fiscal Year Ended October 31, 2011
(Unaudited)
(Audited)
OPERATIONS:
Net investment loss
$
(474,230)
$
(1,001,043)
Net realized gain on unaffiliated investments
156,502
19,147
Net change in unrealized appreciation/(depreciation) on investments
468,999
2,132,885
Net change in net assets resulting from operations
151,271
1,150,989
TRANSACTIONS IN UNITS OF MEMBERSHIP INTEREST:
Net decrease in net assets resulting from distributions to Members
(1,697,460)
(1,918,863)
Net change in net assets
(1,546,189)
(767,874)
NET ASSETS:
Beginning of period
36,553,491
37,321,365
End of period
$
35,007,302
$
36,553,491
The accompanying notes are an integral part of these financial statements
6
Excelsior Venture Partners III, LLC
Statement of Cash Flows
For the six months ended April 30, 2012 (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net change in net assets resulting from operations
$
151,271
Purchases of investments
(64,308
)
Proceeds received from Private Companies and distributions received from Private Investment Funds
2,295,314
Adjustments to reconcile net change in net assets resulting from operations to net cash provided by (used in) operating activities:
Net realized gain on unaffiliated investments
(156,502
)
Net change in unrealized (appreciation)/depreciation on investments
(468,999
)
Changes in assets and liabilities related to operations
(Increase)/Decrease in other assets
(13,200
)
Increase/(Decrease) in professional fees payable
(36,548
)
Increase/(Decrease) in management fees payable
(7,288
)
Increase/(Decrease) in administration fees payable
(17,113
)
Increase/(Decrease) in Board of Managers' fees payable
11,500
Increase/(Decrease) in custody fees payable
(12,496
)
Increase/(Decrease) in other payables
(19,864
)
Net cash provided by/(used in) operating activities
1,661,767
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to Members
(1,697,510
)
Net cash provided by/(used in) financing activities
(1,697,510
)
Net change in cash and cash equivalents
(35,743
)
Cash and cash equivalents at beginning of period
4,601,193
Cash and cash equivalents at end of period
$
4,565,450
SUPPLEMENTAL INFORMATION
Non-cash distributions received from Private Investment Funds
$
1,101,137
The accompanying notes are an integral part of these financial statements
7
Excelsior Venture Partners III, LLC
Financial Highlights
Six Months Ended April 30, 2012
Fiscal Years Ended October 31,
(Unaudited)
2011
2010
2009
2008
2007
Per Unit Operating Performance: (1)
NET ASSET VALUE, BEGINNING OF PERIOD:
$
123.82
$
126.42
$
113.35
$
136.44
$
245.05
$
255.96
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss
(1.61)
(3.39)
(3.67)
(3.68)
(3.35)
(2.08)
Net realized and unrealized gain/(loss) on investments
2.12
7.29
19.74
(12.41)
(33.76)
19.17
Net increase/(decrease) in net assets resulting from operations
0.51
3.90
16.07
(16.09)
(37.11)
17.09
DISTRIBUTIONS TO MEMBERS:
Net change in net assets due to distributions to Members
(5.75)
(6.50)
(3.00)
(7.00)
(71.50)
(28.00)
NET ASSET VALUE, END OF PERIOD:
$
118.58
$
123.82
$
126.42
$
113.35
$
136.44
$
245.05
TOTAL NET ASSET VALUE RETURN: (1), (2)
0.42%
2.93%
14.00%
(11.99%)
(15.41%)
7.84%
RATIOS TO AVERAGE NET ASSETS:
Net Assets, End of Period (000's)
$
35,007
$
36,553
$
37,321
$
33,462
$
40,279
$
72,342
Ratios to Average Net Assets: (3), (4)
Gross expenses
2.65%
2.61%
3.00%
2.97%
2.11%
1.91%
Net expenses
2.65%
2.61%
3.00%
2.97%
2.11%
1.91%
Net investment (loss)
(2.65%)
(2.60%)
(2.99%)
(2.94%)
(1.49%)
(0.88%)
Portfolio Turnover Rate(5)
0.19%
1.51%
2.28%
3.97%
7.91%
12.37%
(1)
Selected data for a unit of membership interest outstanding throughout each period
(2)
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 that distributions, if any, were reinvested at the Company’s net asset value as of the quarter-end immediately following the distribution date. The Company’s units are not traded in any market and, therefore, the market value total investment return is not calculated. For the fiscal year ended October 31, 2008, the impact on the Company’s total net asset value return of a voluntary reimbursement by BACA (as defined in the Notes to Financial Statements) for the matter discussed in Note 3 is 0.39%. Excluding this item, total net asset value return would have been (15.80)% for the fiscal year ended October 31, 2008
(3)
Ratios do not reflect the Company’s proportional share of net investment income (loss) and expenses, including any performance-based fees, of the Private Investment Funds
(4)
Ratios for the period November 1, 2011 through April 30, 2012 are annualized.
The Private Investment Funds' expense ratios have been obtained from audited financial statements for the fiscal year ended December 31, 2011 but are unaudited information in these financial statements. The range for these ratios is given below:
The Private Investment Funds' management fees range from 2.00% to 2.50% on committed capital during the initial investment period and typically decrease over time as the Private Investment Funds seek to exit investments. The Private Investment Funds' incentive fees range from 20% to 25% of profits generated by the Private Investment Funds
(5)
Contributions received from Private Investment Funds are included in the portfolio turnover rate
The accompanying notes are an integral part of these financial statements
8
Excelsior Venture Partners III, LLC
NOTES TO FINANCIAL STATEMENTS
April 30, 2012
Note 1 — Organization
Excelsior Venture Partners III, LLC (the "Company") is a non-diversified, closed-end management investment company which commenced operations on April 5, 2001. The Company was organized as a Delaware limited liability Company on February 18, 2000. The Company registered its initial offering of units under the Securities Act of 1933, as amended (the "Securities Act"). 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 ("Members") as soon as is practicable. On March 17, 2011 the Company’s Board of Managers (the “Board” or “Board of Managers”) authorized an extension of the duration of the Company until May 11, 2013.
Pursuant to a Registration Statement on Form N-2 (File 333-30986), which was originally declared effective on September 7, 2000, the Company was authorized to offer an unlimited number of units of membership interest with no par value. The Company sold 295,210 units via a public offering, which closed on May 11, 2001, for gross proceeds totaling $147,605,000. At the time, units of the Company were made available through Charles Schwab & Co., Inc., the Company’s principal distributor.
The Company incurred offering costs associated with the public offering totaling $1,468,218. Net proceeds to the Company from the public offering, after offering costs, totaled $146,136,782.
Until January 29, 2010, the Company was treated as a business development company or "BDC" under the Investment Company Act of 1940, as amended (the "Investment Company Act"). BDCs are a special type of investment companies, as defined and regulated by the Investment Company Act, which focus primarily on investing in the privately issued securities of eligible portfolio companies, as defined by the Investment Company Act. A BDC must also make available significant managerial assistance to such companies.
At a special meeting held on December 10, 2009, Members of the Company approved a proposal to withdraw the Company's election to be treated as a BDC and continue its operations as a registered closed-end management investment company. The registration of the Company under the Investment Company Act became effective on January 29, 2010.
The Company’s investment objective is to achieve long-term capital appreciation primarily by investing in domestic venture capital and other private companies ("Private Companies") and, to a lesser extent, domestic and international private funds ("Private Investment Funds"), negotiated private investments in public companies and international direct investments that Bank of America Capital Advisors LLC ("BACA" or the "Investment Adviser") believes offer significant long-term capital appreciation. Private 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.
BACA, a Delaware limited liability company and a registered investment adviser under the Investment Advisers Act of 1940, as amended, serves as investment adviser for the Company. Its principal offices are located at 100 Federal Street, Boston, MA 02110. The Investment Adviser is an indirect wholly-owned subsidiary of, and is controlled by, Bank of America Corporation ("Bank of America"), a financial holding company which has its principal executive offices at 101 North Tryon Street, Charlotte, NC 28255. BACA is responsible for identifying, evaluating, structuring, monitoring and disposing of the Company’s investments and for performing the management and administrative services necessary for the operation of the Company. All officers of the Company are employees and/or officers of the Investment Adviser. The Investment Adviser is compensated as described in Note 3.
9
Prior to May 29, 2008, the Company’s investment adviser was UST Advisers, Inc. (the "former investment adviser"). On May 29, 2008, BACA assumed the responsibilities of the investment adviser to the Company as a result of a transfer (the "Transfer") of the former investment adviser’s rights and obligations under the Advisory Agreement (as defined below) between the Company and the former investment adviser dated July 1, 2007. The Transfer was approved by the Company’s Board of Managers on March 11, 2008. This change was a product of corporate mergers resulting from the acquisition by Bank of America of U.S. Trust Corporation (“U.S. Trust Corp.”) in July 2007. The Transfer of the Advisory Agreement from the former investment adviser to BACA did not change (i) the way the Company was managed, including the level of services provided, (ii) the team of investment professionals providing services to the Company, or (iii) the management and incentive fees paid by the Company. Until July 1, 2007, United States Trust Company, National Association ("U.S. Trust"), acting through its registered investment advisory division, U.S. Trust-New York Asset Management Division, had served as the investment sub-adviser to the Company (the "Investment Sub-Adviser").
The former investment adviser, a Delaware corporation and registered investment adviser, had been an indirect wholly-owned subsidiary of, and controlled by, Bank of America, since July 1, 2007. Prior to that, the former investment adviser was an indirect subsidiary of U.S. Trust Corp., a registered financial holding company, which, in turn, was a wholly-owned subsidiary of The Charles Schwab Corporation ("Schwab"). The former investment adviser assumed the duties of the investment adviser from the previous investment adviser to the Company, U.S. Trust Company, N.A. ("UST-NA"), which was acting through its registered investment advisory division, U.S. Trust Asset Management Division, on December 16, 2005. UST-NA has served as the investment adviser to the Company pursuant to an investment advisory agreement.
On July 1, 2007, U.S. Trust Corp. and its subsidiaries, including the former investment adviser and the Investment Sub-Adviser, were acquired by Bank of America (the "Sale"). The former investment adviser continued to serve as the Investment Adviser to the Company after the Sale (until May 29, 2008, as indicated above) pursuant to a new investment advisory agreement with the Company (the "Advisory Agreement") that was approved at a special meeting of Members of the Company held on March 15, 2007 and was identical in all material respects except for the term and the date of effectiveness to the previous investment advisory agreement. The Investment Sub-Adviser ceased to serve as the investment sub-adviser to the Company after the Sale.
Note 2 — Significant Accounting Policies
A. Basis of Accounting:
The Company’s policy is to prepare its financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Consequently, income and the related assets are recognized when earned, and expenses and the related liabilities are recognized when incurred. The following is a summary of significant accounting policies followed by the Company in the preparation of its financial statements.
B. Recent Accounting Pronouncements:
In May 2011, FASB issued Codification Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS ("ASU 2011-04"). ASU 2011-04 requires disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for those transfers. In addition, ASU 2011-04 expands the qualitative and quantitative fair value disclosure requirements for fair value measurements categorized in Level 3 of the fair value hierarchy and requires a description of the valuation process in place and a description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs if a change in those inputs would result in a significantly different fair value measurement. ASU 2011-04 is effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. The adoption of ASU 2011-04 is currently being assessed but is not expected to have a material impact of the Company's financial statements.
C. Valuation of Investments:
The Company computes its net asset value as of the last business day of each fiscal quarter and at such other times as deemed appropriate by the Investment Adviser in accordance with valuation principles set forth below, or may be determined from time to time, pursuant to the valuation procedures (the “Procedures”) established by the Board.
10
The Board has approved the Procedures pursuant to which the Company values its interests in the Private Investment Funds and other investments. The Board has delegated to the Investment Adviser general responsibility for determining the value of the assets held by the Company. The value of the Company’s interests is based on information reasonably available at the time the valuation is made and the Investment Adviser believes to be reliable. Generally, the value of each Private Investment Fund is determined to be that value reported to the Company by the Private Investment Fund as of each quarter-end, determined by the Private Investment Fund in accordance with its own valuation policies. The Company follows the authoritative guidance under U.S. GAAP for estimating the fair value of investments in investment companies that have calculated net asset value in accordance with the specialized accounting guidance for investment companies. The adoption of this guidance does not have a material effect on the financial statements.
While the Investment Adviser may rely on a Private Investment Fund’s valuation mechanics, the Investment Adviser must maintain an effective monitoring process and internal controls to comply with the Procedures and the Company’s stated accounting policies. In reviewing valuations from the Private Investment Funds, the Investment Adviser takes into consideration all reasonably available information from the Private Investment Funds related to valuation. If the Investment Adviser determines that a Private Investment Fund’s value as reported by that Private Investment Fund does not represent current value, or in the event a Private Investment Fund does not report a quarter-end value to the Company on a timely basis, then the Private Investment Fund is valued at its fair value in accordance with the Procedures. In determining fair value of a Private Investment Fund, the Investment Adviser shall recommend a value for such Private Investment Fund for approval by the valuation committee of the Board (the “Valuation Committee”) that it reasonably believes represents the amount the Company could reasonably expect to receive from the Private Investment Fund if the Company were able to sell its interests in the Private Investment Fund at that time. In making such a recommendation and approving a valuation, the Investment Adviser and the Valuation Committee, respectively, take into consideration all reasonably available information and other factors deemed pertinent.
The value for securities for which no public market exists is difficult to determine. Generally, such investments will be valued on a "fair value" basis and in conformity with U.S. GAAP. Accordingly, the fair value measurement is determined based on the estimated price a seller would receive in an orderly transaction at the measurement date. For venture capital companies there are a range of values that are reasonable for such investments at any particular time. Initially, Private Companies are valued based upon their original cost except that original cost valuation will be adjusted, upon approval by the Valuation Committee on the advice of the Investment Adviser, based on either a market or appraisal method of valuation. The private market method shall only be used with respect to reliable third party transactions by sophisticated, independent investors. The appraisal method shall be based upon such inputs 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 the Valuation Committee 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.
At April 30, 2012, market quotations were not readily available for the investments on the Company’s Schedule Investments which are valued at $30,726,320 or 87.77% of net assets. Such securities were valued by the Investment Adviser, 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.
FASB ASC 820-10 "Fair Value Measurements and Disclosure" establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). FASB ASC 820-10-35-39 to 55 provides three levels of the fair value hierarchy as follows:
11
Level 1
Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
Level 2
Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active;
Level 3
Inputs that are unobservable.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. The Company generally uses the capital balance reported by the Private Investment Funds as the primary input in its valuation; however, adjustments to the reported capital balance may be made based on various factors, including, but not limited to, the attributes of the interest held, including the rights and obligations, any restrictions or illiquidity on such interests, any potential clawbacks by the Private Investment Funds and the fair value of the Private Investment Funds' investment portfolio or other assets and liabilities.
An individual Private Investment Fund’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes ‘‘observable’’ requires significant judgment by the Company, Board and Valuation Committee. The Company, Board and Valuation Committee considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of the Private Investment Fund within the hierarchy is based upon the pricing transparency of that Private Investment Fund and does not necessarily correspond to the Company’s perceived risk of that Private Investment Fund.
All of the Company’s investments in the Private Companies and Private Investment Funds have been classified within Level 3, and the Company generally does not hold any investments that could be classified as Level 1 or Level 2, as observable prices are typically not available. The Private Investment Funds generally do not provide redemption options for investors and, subsequent to final closing, do not permit subscriptions by new or existing investors. Accordingly, the Company generally holds interests in such Private Investment Funds for which there is no active market. The Company's interests in Private Companies and Private Investment Funds, in the absence of a recent and relevant secondary market transaction, are generally classified as Level 3. Assumptions used by the Company, Board or Valuation Committee due to the lack of observable inputs may significantly impact the resulting fair value and, therefore, the Company’s results of operations.
The following table presents the investments carried on the Statement of Assets, Liabilities and Net Assets by level within the valuation hierarchy as of April 30, 2012.
Level 1
Level 2
Level 3
Total
Investments in Private Companies
Common Stocks
$
–
$
–
$
–
$
–
Liquidating Trusts
–
–
–
–
Preferred Stocks
–
–
19,390,608
19,390,608
Investments in Private Investment Funds
Early-Stage Information Technology
–
–
4,333,289
4,333,289
Early-Stage Life Sciences and Technology
–
–
4,022,677
4,022,677
Multi-Stage Life Sciences, Communications and Health Care
–
–
2,979,746
2,979,746
Totals:
$
–
$
–
$
30,726,320
$
30,726,320
The following table includes a rollforward of the amounts for the six months ended April 30, 2012 for investments classified within Level 3. The classification of an investment within Level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.
12
Fair Value Measurements using Level 3 inputs
Private
Companies
Private
Investment Funds
Balance as of November 1, 2011
$
18,711,585
$
13,620,240
Net change in unrealized appreciation/(depreciation) on investments
913,845
(444,846)
Contributions
-
64,308
Distributions
(234,822)
(2,060,492)
Net realized gain/(loss) on investments
-
156,502
Balance as of April 30, 2012
$
19,390,608
$
11,335,712
The net change in unrealized depreciation relating to Level 3 investments still held at the reporting date for Private Companies and Private Investment Funds is $913,845 and $(444,846), respectively.
The Company recognizes transfers into and out of the levels indicated above at the end of the reporting period. There were no transfers into or out Level 3 at the end of the reporting period.
All net realized and unrealized gain (losses) in the table above are reflected in the accompanying Statement of Operations.
Additional information on the investments can be found in the Schedule of Investments.
The estimated remaining life of the Company’s Private Investment Funds as of April 30, 2012 is one to three years with the possibility of extensions in each of the Private Investment Funds.
Investments in Private Companies and Private Investment Funds are closed investment vehicles, which provide for no liquidity or redemption option, and are not readily marketable.
D. Cash and Cash Equivalents:
Cash and cash equivalents consist primarily of cash and short term investments which are readily convertible into cash and have an original maturity of three months or less. At April 30, 2012, the Company did not hold any cash equivalents.
E. Use of Estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material.
F. Security Transactions and Investment Gains and Losses:
Private and Public Companies
Security transactions are recorded on a trade date basis or in the case of private investments or securities transactions are recorded when the Company has a legal and enforceable right to demand payment. Realized gains and losses on investments sold are recorded on the basis of specific cost. Interest income, adjusted for amortization of premiums and discounts, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date.
Private Investment Funds
Distributions of cash or in-kind securities from a Private Investment Fund are recorded as a return of capital to reduce the cost basis of the Private Investment Fund. In-kind securities received from a Private Investment Fund are recorded at fair value. Distributions are recorded when they are received from the Private Investment Funds as there are no redemption rights with respect to the Private Investment Funds. The Company may also recognize realized losses based upon information received from the Private Investment Fund managers for write-offs taken in the underlying portfolio. Unrealized appreciation/(depreciation) on investments, within the Statement of Operations, includes the Company's share of interest and dividends, realized (but undistributed) and unrealized gains and losses on security transactions and expenses of each Private Investment Fund.
13
G. Income Taxes:
The Company is a limited liability company that is treated as a partnership for tax reporting. Tax basis income and losses are passed through to the individual Members and, accordingly, there is no provision for income taxes reflected in these statements.
Differences arise in the computation of Members' capital for financial reporting in accordance with U.S. GAAP and Members' capital for federal and state income tax reporting. These differences are primarily due to the fact that unrealized gains and losses are allocated for financial reporting purposes and are not allocated for federal and state income tax reporting purposes.
The cost of the Private Investment Funds for federal income tax purposes is based on amounts reported to the Company on Schedule K-1 from the Private Investment Funds. As of April 30, 2012, the Company has not received information to determine the tax cost of the Private Investment Funds. The estimated cost of the Private Companies at April 30, 2012 for federal income tax purposes is $21,270,556. The resulting estimated net unrealized depreciation for federal income tax purposes on the Private Companies at April 30, 2012 is $1,879,948, which consists of unrealized appreciation and depreciation of $8,648,987 and $10,528,935 respectively. Based on the amounts reported to the Company on Schedule K-1 as of December 31, 2011, and after adjustment for purchases and sales between January 1, 2012 and April 30, 2012, the estimated cost of the Private Investment Funds at April 30, 2012 for federal income tax purposes is $10,707,550. The resulting estimated net unrealized appreciation for federal income tax purposes on the Private Investment Funds at April 30, 2012 is $628,162, which consists of unrealized appreciation and depreciation of $1,601,479 and $973,317, respectively.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, local and foreign jurisdictions, where applicable. As of December 31, 2011, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2009 forward (with limited exceptions). FASB ASC 740-10 requires the Investment Adviser to determine whether a tax position of the Company is more likely than not to be sustained upon examination by taxing authorities, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Investment Adviser reviewed the Company’s tax positions for the open tax years and has concluded that no provision for taxes is required in the Company’s financial statements. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the six months ended April 30, 2012, the Company did not incur any interest or penalties.
H. Distribution Policy:
Distributions of available cash will be made by the Company at such times and in such amounts as determined by the Board in its sole discretion. Distributions are recorded on the ex-dividend date to members of record on the record date.
I. Contribution Policy:
Units are issued when contributions are paid. For the six months ended April 30, 2012, no additional units were issued.
J. Restrictions on Transfers:
Limited liability company interests of the Company (“Interests”) are generally not transferable. No Member may assign, sell, transfer, pledge, hypothecate or otherwise dispose of any Interests without the prior written consent of the Company, which may be granted or withheld in its sole discretion, and in compliance with applicable securities and tax laws.
14
K. Fees of the Private Investment Funds:
Each Private Investment Fund will charge its investors (including the Company) expenses, including asset-based management fees and performance-based referred to as an allocation of profits. In addition to Company level expenses shown on the Company’s Statement of Operations, Members of the Company will indirectly bear the fees and expenses charged by the Private Investment Funds. These fees are reflected in the valuations of the Private Investment Funds and are not reflected in the ratios to average net assets in the Financial Highlights. However, the Company has disclosed in the Financial Highlights a range of the expense ratios and fees charged by the Private Investment Funds.
L. Expenses:
The Company records expenses on an accrual basis. Such accruals require management to make estimates and assumptions that affect the reported amounts, which is consistent with U.S. GAAP.
Note 3 — Investment Advisory Fee, Administration Fee and Related Party Transactions
Under the Company's registration statement for the services provided, the Investment Adviser was entitled to receive a management fee at an annual rate equal to 2.00% of the Company’s end of the quarter net assets through the fifth anniversary of the first closing date of April 5, 2001, and 1.00% of net assets thereafter. Effective November 1, 2010, the Company’s management fees will be calculated based on average quarterly net assets. This change is being made in accordance with the Company’s Advisory Agreement. In prior years, management fees were calculated based on end of quarter net asset value.
As of April 30, 2012, $87,173 was payable to BACA for management fees.
On July 31, 2008, the Company received $268,999 from BACA as a reimbursement for fees associated with the sale of Genoptix, Inc. The Company, through its own internal controls, identified a potential violation of the Investment Company Act involving the sale of Genoptix, Inc. through an affiliate of the former investment adviser. BACA and its affiliate believe that the sale of Genoptix, Inc. in the initial public offering and secondary offering was at arms-length. However, to ensure the Company and its investors are made whole and in its fiduciary capacity as the Investment Adviser, BACA decided to reimburse the Company for the fees paid to its affiliate.
Until December 31, 2009 in addition to the management fee, the Investment Adviser was entitled to allocations and distributions equal to the incentive carried interest. The incentive carried interest was an amount equal to 20% of the excess, if any, of the Company’s cumulative realized capital gains on Private Companies, over the sum of (i) cumulative realized capital losses on investments of any type (ii) cumulative gross unrealized capital depreciation on investments of any type and (iii) cumulative net expenses. As of December 31, 2009, the incentive carried interest was eliminated and could no longer be allocated to the Investment Adviser.
Pursuant to an Administration, Accounting and Investor Services Agreement, the Company retained BNY Mellon Investment Servicing (U.S.) Inc. as administrator, accounting and investor services agent. In consideration for its services, the Company (i) paid BNY Mellon Investment Servicing (U.S.) Inc. a variable fee between 0.07% and 0.105%, based on average quarterly net assets, payable monthly, subject to a minimum quarterly fee of approximately $28,750, (ii) paid annual fees of approximately $38,750 for taxation services and (iii) reimbursed BNY Mellon Investment Servicing (U.S.) Inc. for out-of-pocket expenses through January 31, 2012.
Effective February 1, 2012, the Fund retained J D Clark & Company ("J D Clark"), a wholly-owned division of UMB Fund Services, Inc., a subsidiary of UMB Financial Corporation, to provide administrator, accounting, tax preparation, and investor services to the Company. Pursuant to an Administration and Accounting Services Agreement, in consideration for its services, the Company will pay J D Clark a quarterly fee of 0.0325% (0.13% on an annualized basis) of the net assets as of the start of business on the first business day of each calendar quarter. In addition, BNY Mellon Investment Servicing Trust Company serves as the Company's custodian.
15
Each member of the Board of Managers receives $10,000 as an annual retainer and the Chairman of the Board receives an additional $1,000 annual retainer. Also, each member of the Board receives $2,000 per quarterly meeting attended. In addition, each Board member receives $500 per quarterly telephonic meeting and $500 for any other telephonic special meeting. For each audit committee meeting attended, Board members receive $1,500, while the Chairman of the Audit Committee receives an additional $1,000 retainer. Each member of the Board is reimbursed for expenses incurred for attending meetings. No person who is an officer, manager or employee of Bank of America, or its subsidiaries, who serves as an officer, manager or employee of the Company, receives any compensation from the Company.
Affiliates of the Investment Adviser may have banking, underwriting, lending, brokerage, or other business relationships with the Private Investment Funds or the Private Companies in which the Company invests and with companies in which the Private Investment Funds invest.
Note 4 — Purchases and Sales of Securities
Excluding short-term investments, the Company's purchases and proceeds received from the sale of investments and distributions received from Private Investment Funds and Private Companies for the six months ended April 30, 2012 were as follows:
Purchases
Proceeds
$64,308
$2,295,314
Note 5 — Capital Commitments of Company Members to the Company
As of April 30, 2012, each Member has contributed 100% of its share of the total $147,605,000 in capital commitments to the Company.
Note 6 — Capital Commitments
As of April 30, 2012, the Company had unfunded investment commitments to the Private Investment Funds totaling $829,983 as listed.
Private Investment Funds:
Unfunded Commitments
Advance Technology Ventures VII, L.P.
$
121,500
Burrill Life Sciences Capital Fund, L.P.
21,859
CHL Medical Partners II, L.P.
-
CMEA Ventures VI, L.P.
330,000
Morgenthaler Partners VII, L.P.
-
Prospect Venture Partners II, L.P.
255,000
Sevin Rosen Fund IX, L.P.
-
Tallwood II, L.P.
-
Valhalla Partners, L.P.
101,624
Total
$
829,983
16
Note 7 — 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 dividends from affiliated companies during the six months ended April 30, 2012. Transactions with companies, which are or were affiliates, were as follows:
For the six months ended April 30, 2012
Non-Controlled Affiliates
Shares/ Principal
Amount Held at
October 31, 2011
October 31, 2011
Fair Value
Purchases/
Conversion
Acquisition
Sales
Proceeds/
Conversion
Realized
Gain/ (Loss)
Shares/ Principal
Amount Held at
April 30, 2012
April 30, 2012
Fair Value
Ethertronics, Inc., Series B
4,433,333
$
11,439,247
$
-
$
-
$
-
4,433,333
$
12,004,477
Ethertronics, Inc., Series C
1,969,205
5,081,104
-
-
-
1,969,205
5,332,169
Ethertronics, Inc., Series D
758,542
1,957,251
-
-
-
758,542
2,053,962
Total
$
$18,477,602
$
-
$
-
$
-
$
$19,390,608
Note 8 — Description of the Private Investment Funds
CMEA Ventures VI, L.P. represents 5.13% of the Company’s net assets at April 30, 2012. The investment objective of CMEA Ventures VI, L.P. is to invest in and assist new and emerging growth-oriented business that are involved in the areas of life science technology, human healthcare and high technology companies in order to achieve net rates of return on invested capital in the top quartile of venture capital funds of the same vintage year. CMEA Ventures VI, L.P. does not provide liquidity to its partners in the form of redemptions and explicitly states that no partner can withdraw its capital or profits. Liquidity is provided at the general partner’s discretion in the form of distributions in cash or securities. Additionally, the general partner of CMEA Ventures VI, L.P. may approve transfers at its sole discretion.
Note 9 — Indemnifications
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 the Investment Adviser's experience, the risk of loss from such claims is considered remote.
Many of the Private Investment Funds' partnership agreements contain provisions that allow them to recycle or recall distributions made to the Company. Accordingly, the unfunded commitments disclosed under Note 6 reflect both amounts undrawn to satisfy commitments and distributions that are recallable, as applicable.
Note 10 — Concentrations of Market, Credit and Industry Risk
The Company invests in Private Investment Funds and Private Companies. This portfolio strategy presents a high degree of business and financial risk due to the nature of the Private Companies and the underlying companies in which Private Investment Funds invest, which may include entities with little operating history, minimal capitalization, or operations in new or developing industries.
The Company may invest in certain financial instruments which may contain varying degrees of off balance sheet credit, interest and market risks. However, due to the nature of the Company’s investments in the Private Investment Funds and Private Companies, such risks are limited to the Company’s investment in each Private Investment Fund and Private Company, which is the current value as included in the Schedule of Investments.
Note 11 — Liquidity Risk
The Company focuses its investments in the securities of privately-held venture capital companies, and to a lesser extent in venture capital, buyout and other private equity funds managed by third parties.
17
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.
Note 12 — Subsequent Events
The Company has evaluated all events subsequent to the balance sheet date of April 30, 2012, through the date these financial statements were available to be issued and has determined that there were no subsequent events that require disclosure.
18
We use cookies on this site to provide a more responsive and personalized service. Continuing to browse, clicking I Agree, or closing this banner indicates agreement. See our Cookie Policy for more information.
