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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
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 333-23811
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EXCELSIOR PRIVATE EQUITY FUND II, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 22-3510108
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
114 West 47th Street
New York, NY 10036-1532
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (212) 852-1000
Title of Each Class Name of Exchange on Which Registered
None None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
FORM 10-K. [ ]
The number of shares outstanding of the registrant's common stock as of October
31, 1999 was 195,730 shares. No active market for the shares of the registrant
exists; therefore, the market value of such shares cannot be determined.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated June 2, 1997 (the
"Prospectus") are incorporated by reference in Part I, Part II and Part III
hereof.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
INDEX
Item No. Form 10-K
Report
Page
PART I
1. Business.......................................................................................................... 3
2. Properties........................................................................................................ 9
3. Legal Proceedings................................................................................................. 9
4. Submission of Matters to a Vote of Security Holders............................................................... 9
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............................................. 10
6. Selected Financial Data........................................................................................... 10
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................................................ 10
7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 11
8. Financial Statements and Supplementary Data....................................................................... 12
9. Changes in and Disagreements with Accountants and Financial Disclosure............................................ 12
PART III
10. Directors and Executive Officers of the Registrant................................................................ 24
11. Executive Compensation ........................................................................................... 24
12. Security Ownership of Certain Beneficial Owners and Management.................................................... 25
13. Certain Relationships and Related Transactions.................................................................... 25
PART IV
14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K................................................ 26
SIGNATURES
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "RISK FACTORS" AS
SET FORTH IN THE COMPANY'S REGISTRATION STATEMENT ON FORM N-2 (FILE NO.
333-23811) AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS." READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD- LOOKING
STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR
TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
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PART I
Item 1. Business.
Formation:
Excelsior Private Equity Fund II, Inc. (the "Company" or the
"Registrant") is a Maryland corporation organized on March 20, 1997. The Company
is a non-diversified, closed-end management investment company operating as a
business development company under the Investment Company Act of 1940, as
amended and has registered its shares under the Securities Act of 1933, as
amended. The Company's investment objective is to achieve long-term capital
appreciation by investing in private later-stage venture capital and private
middle-market companies and in certain venture capital, buyout and private
equity funds that the Managing Investment Adviser (defined herein) believes
offer significant long-term capital appreciation.
United States Trust Company of New York (the "Managing Investment
Adviser" or "U.S. Trust") provides investment management services to the Company
pursuant to a management agreement dated May 13, 1997 (the "Management
Agreement"), between the Managing Investment Adviser and the Company. The
Managing Investment Adviser is a subsidiary of U.S. Trust Corporation. All
officers of the Company are employees and/or officers of the Managing Investment
Adviser. The Managing Investment Adviser is responsible for performing the
management and administrative services necessary for the operation of the
Company.
Pursuant to a Registration Statement on Form N-2 (File No. 333-23811)
which was declared effective on June 2, 1997, the Company publicly offered up to
200,000 shares of common stock (the "Shares") at $1,000 per Share. The Company
held its initial and final closings on October 8, 1997 and November 19, 1997
representing over $155.5 million and $40.2 million, respectively. The Company
sold a total of 195,730 Shares in the public offering for gross proceeds
totaling $195,730,000 (after taking into account the 1 Share purchased for
$1,000 on March 20, 1997, by Douglas A Lindgren, the Company's Executive Vice
President and Chief Investment Officer). Shares of the Company were made
available through UST Financial Services Corp. (the "Selling Agent") to clients
of U.S. Trust and its affiliates who meet the Company's investor suitability
standards.
In connection with the public offering of its Shares, the Managing
Investment Adviser paid to the Selling Agent a commission totaling $60,000. The
Company incurred offering and organizational costs associated with the public
offering totaling $417,154. Net proceeds to the Company from the public
offering, after offering and organizational costs, totaled $195,362,846.
The Company's Articles of Incorporation provide that the duration of
the Company will be ten years from the final closing of the sale of the Shares,
subject to the rights of the Managing Investment Adviser and the investors to
extend the term of the Company. Additional characteristics of the Company's
business are discussed in the "Company", "Risk Factors" and "Investment
Objective and Policies" sections of the Prospectus, which sections are
incorporated herein by reference.
Portfolio Investments:
The Company commenced investment operations on October 8, 1997 and
during the year ended October 31, 1999 ("Fiscal 1999"), the Company's investment
portfolio consisted of securities with an aggregate cost of $222,252,794 and a
fair value of $254,708,299. The Company has invested $83.5 million in twelve
later stage venture capital and private middle market companies and committed to
invest another $58 million in private equity funds, of which $21.2 million has
been drawn. The
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Company has invested its cash balances in temporary investments in accordance
with the provisions in the Prospectus.
The following is a description of the Company's investments as of
October 31, 1999 and which are more fully set forth in Item 8.
Direct Investments Held
o Advantage Schools, Inc., Boston, MA, is a for-profit provider of public
school education management services. Advantage manages charter schools in
urban school districts in cooperation with local partners. Its schools are
publicly funded, receiving per-student capitation rates in line with those
currently received by other schools in the district. Founded in 1996,
Advantage has two schools in their third year of operation, and eight
schools that opened in September 1999. The company reports that an
additional eight schools are planned for the 2000 school year. Other
investors include Chase Capital Partners, Bessemer Venture Partners,
Fidelity Ventures and Kleiner, Perkins, Caufield & Byers.
o Captura Software, Inc., Bothell, WA, is a leading enterprise application
services provider developing and marketing expense management software and
service solutions for Global 2000 organizations. The company's solution is
focused on significantly increasing the efficiency and reducing the cost
of processing employee expense reports by providing a web-based software
application that automates much of the process. Captura's current
customers include General Motors, Ford, Compaq and Aetna. Other investors
include Oak Investment Partners and The Sprout Group ("Sprout").
o Classroom Holdings, Inc. (doing business as "Classroom Connect"), Los
Angeles, CA, is a leading provider of educational Internet products.
Specifically, the company offers a variety of products and services to
teachers and school districts wishing to incorporate the Internet into the
classroom. Along with a selection of over 108 proprietary product and
service offerings, Classroom Connect sells instruction guides, teaching
plans, seminars, and unique Internet content via electronic commerce and
direct mail. The company has seen the traffic on its website grow to over
4.6 million hits per month. Brentwood Associates, Media Technology
Ventures, Intel Corp., Media One and Waller Sutton are co-investors in
Classroom Connect.
o Constellar Corporation, Redwood Shares, CA, is a leading provider of
enterprise application integration software and services. Currently
serving large organizations in North America, Europe and Australia,
Constellar provides products and services that work to untangle
increasingly complex information technology environments -- managing data,
making it accessible, and moving it across myriad applications.
Constellar's customer list includes Sprint, British Telecom, Deutsche
Bank, NatWest, Princeton University, London Stock Exchange, and General
Electric. Co-investors include Brentwood Associates and Technology
Crossover Ventures.
o Conway-Stuart Medical, Inc., Sunnyvale, CA, develops and markets medical
devices for the treatment of gastrointestinal tract diseases. The
company's primary technology employs the delivery of radio frequency
through a catheter. Conway-Stuart is currently targeting two treatment
markets: gastroesophageal reflux disease ("GERD") and fecal incontinence.
The company's GERD products are currently undergoing the FDA 510(k)
approval process before product marketing may begin. The completion of the
510(k) process is expected by the end of 1999. Co- investors include US
Venture Partners and Onset Ventures.
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o LifeMinders.com, Herndon, VA, is a leading online direct marketing
company that provides personalized information, or content, and
advertisements via email to a community of members. Email messages contain
helpful reminders and tips that enable its members to better organize and
manage their lives. As of September 30, 1999, the company has
approximately 4 million members and 62 advertising partners.
LifeMinders.com has experienced significant membership growth since our
investment in January 1999, when the company had roughly 50,000 members.
Subsequent to the Company's year-end, LifeMinders.com held their initial
public offering in November (NASDAQ: LFMN). Co-investors include ABS
Ventures, FBR Technology Venture Partners, and Novak Biddle Ventures.
o MarketFirst Software, Inc., Mountain View, CA, is a leading developer
and marketer of hosted e-marketing software and services targeting
middle-market corporations. The company's solution is focused on enabling
and managing interactive marketing campaigns by utilizing the Internet.
The company's customers have realized increased customer revenue, improved
customer relationships and reduced cost by automating key marketing
functions with the MarketFirst solution. In less than a year of selling
their solution, MarketFirst has been able to acquire over 30 new
customers. Co-investors include Sprout, Enterprise Partners and SAP
Ventures.
o On the Go Software, Inc., Sunnyvale, CA, is an Internet application
software company. The company is a leading developer and marketer of
travel and entertainment expense management software and services to small
and middle-market firms. The Company's solution is focused on increasing
the efficiency and lowering the cost to processing employee travel and
entertainment expenses. Co-investors include Alpine Technology Ventures
and Edgewater Funds.
o PowerSmart, Inc., Shelton, CT, is a leading provider of "smart" battery
management products. The company's product offerings are designed to
maximize battery run-times and safety in applications such as laptop
computers, cellular telephones, and camcorders as well as a variety of
hand-held industrial devices. PowerSmart recently introduced two new lines
of Application Specific Integrated Circuits (ASICS) and electronic modules
that offer superior performance and flexibility at competitive prices.
PowerSmart was formed as a spin-off of technology and related assets from
Duracell and is led by a team of technical and management professionals
who had been employed by Duracell prior to their self-initiated spin-off.
MidMark Capital is a co-investor in PowerSmart.
o ReleaseNow.com, Menlo Park, CA, is the "e-commerce department" for
vendors and resellers of software and other digital goods. As an
outsourced service provider, the company will build and manage e-commerce
solutions that enable customers to market, sell and deliver software
online. Release provides software publishers, software resellers, and
content-driven web sites with technology and services to establish an
Internet-based sales and distribution channel. Release is a leading
provider of Electronic Software Distribution services and has successfully
established relationships with a number of high-volume software publishers
including Electronic Arts and Verity, and software retailers Chumbo.com
and Compaq. Other investors include The Sevin Rosen Funds and Draper
Fisher Jurvetson.
o SurVivaLink Corp., Minnetonka, MN, designs, develops and markets a line of
FDA-cleared automated external defibrillators ("AEDs"), which are
portable, emergency medical devices that deliver life-saving electrical
shocks to resuscitate victims of cardiac arrest. SurVivaLink's AEDs are
small light-weight and easy to use, making them highly suitable for law
enforcement personnel, firefighters and paramedics. Corporations, such as
Quantas Airlines, Ford Motor Company, General Electric and Harrah's
Entertainment, Inc. have started to purchase AEDs in volume as they seek
to protect the lives of their customers and employees. To date,
SurVivaLink estimates
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that its AEDs have been responsible for saving over 250 lives.
Co-investors include Fidelity Ventures, CIBC Wood Gundy Ventures, and The
Spray Venture Fund.
Direct Investments Sold
o Softcom Microsystems, Inc., Fremont, CA, designs, develops and markets
data acceleration products used in high-speed communications networks.
Softcom's single-chip network accelerator solutions and integrated
subsystems provide processing capabilities which help alleviate the "data
bottleneck" at the point where baseband local area network traffic moves
on to a high-speed broadband Internet backbone. The company believes its
products allow network equipment vendors (i.e., Cisco, Nortel, Lucent) to
achieve price/performance gains of more than ten times over current
equipment solutions. Softcom was sold in August 1999 to Intel, with the
Company realizing a 3.7 times return on its $4.2 million investment. The
consideration for the sale to Intel was in cash with 10% of the proceeds
held in escrow for one year. Other investors include Sevin Rosen and
Sequoia Capital.
o WNP Communications, Inc., Reston, VA, was the most successful bidder in
the Local Multipoint Distribution Services ("LMDS") auction conducted by
the Federal Communications Commission in 1998. WNP purchased broadband
spectrum covering 30 of the top 50 markets at very attractive prices. The
company was acquired in May 1999 by NextLink, a leading wireless
communication services provider, for cash and stock. The Company realized
a 3.3 times return on its $5.9 million investment. WNP was supported by a
strong investor base including Madison Dearborn, NEA, Columbia Capital,
Providence Equity Capital, Alta Communications, and the Company.
Fund Investments
The Fund's investment strategy includes an allocation of up to 30% of its
assets for investment in private equity funds managed by third parties. In
making fund investments, the Managing Investment Adviser has three objectives in
mind: (1) to generate high rates of return, (2) to provide additional
diversification to the Company, and (3) to generate co-investment opportunities
to enhance the Company's direct investment program.
During the year ended October 31, 1999, the Company made commitments to
six private equity funds ("Private Funds") totaling $29 million. In total, the
Company has committed $58 million or 30% of the Company's capital to 13 Private
Funds. Thus far, the Private Funds have drawn $21.2 million of the aggregate
commitment. Approximately, 67% of the capital committed to Private Funds is
targeting venture capital investment strategies seeking to invest in start-up,
high growth potential businesses. The remaining 33% of the Company's capital is
committed to Private Funds focused on buyouts of mature companies. It should be
noted that the Private Fund portfolio is very young with an average age of less
than two years. Consequently, the Managing Investment Adviser does not expect to
realize significant value creation from the Company portfolio for a few years.
The primary focus of the individual funds today is on investing the committed
capital. Each Private Fund is managed by experienced investors who are capable
of serving the Company's objectives. Below is a summary of each of the Private
Funds in the portfolio.
Investments in third-party funds
o Advanced Technology Ventures V, LP ("ATV") is a $175 million private
equity fund committed to investing in seed to later-stage information
technology and health care companies. The fund has invested $43 million in
22 companies. Among these companies is Optobionics Corp., an early stage
company developing an artificial silicon retina for the treatment of
patients blinded by age-
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related macular degeneration, retinitis pigmentosa, and other outer
retinal degenerative diseases. ATV has been an active investor in
e-commerce, including Noosh, an early stage company engaged in the
development of a web-based marketplace for commercial printing.
o Brand Equity Ventures I, LP ("BEV") is a $95 million fund focused on seed
to later-stage venture financings in consumer and retail companies in the
U.S. The fund is now in the third year of its term and has invested $51
million in 13 companies. Two portfolio companies have gone public,
Cyberian Outpost (Nasdaq "COOL"), an internet retailer of computer
hardware and software and Alloy Online (Nasdaq "ALOY"), an internet
community site for Generation Y.
o Brentwood Associates III, LP ("BA") is a $500 million fund focused on
middle market buyouts. BA has drawn $0.7 million of the Company's $5
million commitment since it held its first closing in May 1999. BA has
made one investment, Racquetball & Fitness Clubs, Inc., a growth build-up
strategy in the fitness club industry.
o Broadview Capital I LP ("BC") is a $200 million fund focused on
recapitalizations in the technology sector. BC is sponsored by Broadview
International LLC, a leading technology M&A investment bank. Since BC's
closing in April 1999, BC has drawn $0.1 million of the Company's $5
million commitment. BC has not made any investments to-date.
o Commonwealth Capital Ventures II, LP (CVII) is a $80 million fund
targeting early to later- stage companies in the New England region. CVII
has drawn $2 million of the Company's $5 million commitment and invested
$33 million in 17 companies. Among the portfolio companies are
SmarterKids.com (Nasdaq: SKDS), an online retailer of testing and
educational products for children and Altiga, a provider of broadband
virtual private network products for the enterprise market. Subsequent to
the Company's year-end, SmarterKids.com held a public offering.
o Communications Ventures III, LP ("CV") is a $125 million fund that invests
solely in the communications sector, targeting early stage companies. So
far, CV has drawn $2.9 million of the Company's $5 million commitment
since concluding fundraising in October 1998. CV consists of 12 companies
with $43 million in invested capital. Among these investments are
Universal Access, a multi-vendor, wholesale provider of local and long
haul, leased line, high capacity bandwidth and Arbinet, a real-time
virtual trading floor and clearinghouse for telecom minutes and bandwidth.
o Friedman, Fleischer & Lowe, LLC ("FF&L") is a $319 million fund focused on
middle market buyouts. Since FF&L's first closing in January 1999, they
have drawn $0.6 million of the Company's $5 million commitment and made
one investment. FF&L acquired a majority interest in Advanced Career
Technologies, a provider of information technology training services in
the Northeast.
o Mayfield X, LP ("Mayfield") is a $400 million fund focused on early stage
information technology and healthcare investments, primarily located in
Silicon Valley, CA. The Company has committed $5 million of which $1.5
million has been drawn since Mayfield closed in June 1999. Founded in
1969, Mayfield is a well-established and highly regarded venture firm.
Over the past thirty years, they have raised over $1 billion in nine
venture funds and invested in 340 high-growth companies. Among their
investments are SCOM, Compaq, Immunex, Silicon Graphics, Citrix Systems,
and Legato.
o Mid-Atlantic Venture Fund III, LP ("Mid-Atlantic") invests in early and
expansion stage technology companies in the Mid-Atlantic region. To date,
the $57 million fund has invested $23 million in 18 companies. Among the
portfolio companies are NexTone Communications, a
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developer of an Internet-based system that allows communication service
providers to offer voice- data integration services to small- and
medium-size businesses and remote offices of larger organizations and
Net2000, a competitive local exchange carrier serving major East Coast
metropolitan markets.
o Morgenthaler Venture Partners V, LP ("Morgenthaler") invests in companies
of all stages in the health care and technology sectors. Morgenthaler
closed its $250 million fund in July 1998 and has drawn $2.8 million of
the Company's $8 million commitment. The portfolio consists of 19
companies, among them are BlueGill Technologies, a provider of online bill
presentment and payment solutions and Coalescent Surgical, an early stage
company developing technology to automate the surgical closure process.
o Quad-C Partners V, LP ("Quad-C") is a $303 million fund focused on taking
control positions in leveraged acquisitions and recapitalizations of
middle-market companies. The fund has drawn $2.1 million of the Company's
$5 million commitment since its closing in April 1998. Quad-C has invested
$112 million in 6 portfolio investments. Included in the portfolio are
Universal Fiber Systems, a carpet and textile manufacturer and Service
Investors, a company in the insulation distribution market.
o Sevin Rosen VI, LP ("Sevin Rosen") is a $165 million private equity fund
that invests in early- stage technology companies. The fund has drawn down
$1.3 million of the Company's $2.5 million commitment. Included in the
current portfolio of 31 companies is Airspan, a provider of wireless
communication local loop systems. Monterey Design Networks is developing
the next generation of cross connect systems. These systems support the
exponential growth of bandwidth demand generated by the Internet, data
networks and emerging broadband services. Monterey was sold to Cisco
Systems for $500 million. Sevin Rosen's $2.3 million investment is now
worth $63.0 million in Cisco stock.
o Trinity Ventures VI, LP ("Trinity") closed on $140 million in September,
1998 and will invest in early to late-stage companies in the software,
communications, and electronic commerce sectors. Trinity has drawn $1.7
million of the Company's $3 million commitment. To-date $38 million has
been invested in 13 companies, including 800.com, an online retailer of
consumer electronics and SciQuest, a "virtual" or stockless distributor
consolidating the fragmented scientific products industry through public
and private web-based procurement systems.
Competition:
The Company encounters competition from other entities and
individuals having similar investment objectives. Primary competition for
desirable investments comes from investment partnerships, venture capital
affiliates of large industrial and financial companies, investment companies and
wealthy individuals. Some of the competing entities and individuals have
investment managers or advisers with greater experience, resources and
managerial capabilities than the Company and may therefore be in a stronger
position than the Company to obtain access to attractive investments. To the
extent that the Company can compete for such investments, it may not be able to
do so on terms as favorable as those obtained by larger, more established
investors.
Employees:
At October 31, 1999, the Company had no full-time employees. All
personnel of the Company are employed by and compensated by the Managing
Investment Adviser pursuant to the Management Agreement.
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Item 2. Properties.
The Company does not own or lease physical properties.
Item 3. Legal Proceedings.
The Company is not party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company has 200,000 Shares authorized, of which 195,730 Shares
were issued and outstanding on October 31, 1999. On November 30, 1999, the
Company declared two dividends. A dividend comprised of a long-term capital gain
and a return of capital totaling $137.71 per share was payable to shareholders
of record on December 14. A dividend comprised of a short-term capital gain was
payable to shareholders of record on December 20 in the amount of $25.56 per
share.
There is no established public trading market for the Company's
Shares.
Item 6. Selected Financial Data.
All selected financial data for the years ended October 31, 1999,
1998 and the period commencing on October 8, 1997 (inception) and ending on
October 31, 1997 may be found in the financial statements. See Item 8.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources:
At October 31, 1999, the Company held $136 in cash and $254,708,299
in investments as compared to $20,601 in cash and $201,945,731 in investments at
October 31, 1998. At October 31, 1999, investments included $70,770,253 in
commercial paper, $1,000,526 in corporate bonds, $43,900,267 in U.S. Government
and agency obligations, $24,103,891 in private investment funds, $102,068,711 in
private companies and $12,864,651 in investment companies.
Results of Operations:
Investment Income and Expenses
For the year ended October 31, 1999, the Company had interest income
of $6,991,973, and net operating expenses of $2,823,677, resulting in net
investment income of $4,168,296 as compared to interest income of $9,813,746,
and net operating expense of $1,735,761, resulting in investment income of
$8,077,985 for the fiscal year ended October 31, 1998.
United States Trust Company of New York (the "Managing Investment
Adviser") provides investment management and administrative services required
for the operation of the Company. In consideration of the services rendered by
the Managing Investment Adviser, 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 fiscal years ended October 31, 1999, 1998 and for the
period commencing on October 8, 1997 (inception) and ending October 31, 1997,
the Managing Investment Adviser earned $2,364,920, $1,409,748 and $49,167 in
management fees, respectively. For the same periods, the Managing Investment
Adviser reimbursed other operating expenses of the Company in the amount of $0,
$0 and $33,346 as a result of expenses incurred in excess of those permitted
pursuant to the Company's Prospectus.
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Net Assets
The Company's net asset value per common share was $1,252.27 at
October 31, 1999 up $218.90 per share from the net asset value per common share
of $1,033.37 at October 31, 1998. This increase was primarily the result of the
successful exit of two investments, WNP Communications and Softcom Microsystems,
as well as valuation write-ups in Advantage Schools, Classroom Connect,
Lifeminders.com, PowerSmart and ReleaseNow.com.
For the year ended October 31, 1999, the Company had a net increase
in net assets resulting from operations of $50,515,111 ($258.08 per share),
comprised of net investment income totaling $4,168,296 ($21.29 per share), a net
change in realized and unrealized gain on investments of $57,098,372 ($291.72
per share) and a net change in allowance for the management incentive fee of
$10,751,557 (($54.93) per share).
At October 31, 1999, the Company's net assets were $245,106,914, an
increase of $42,845,651 from net assets of $202,261,263 at October 31, 1998.
This increase was the result of a $50,515,111 net increase in net assets
resulting from operations and offset by a $7,669,460 distribution to
shareholders.
Realized and Unrealized Gains and Losses from Portfolio Investments:
For the fiscal year ended October 31, 1999, the Company had a
$57,098,372 net realized and unrealized gain from investments, comprised of a
$24,838,281 net realized gain on investments and a $32,260,091 net change in
unrealized appreciation of investments as compared to a $92,481 net realized and
unrealized gain from investments, comprised of a $592 net realized loss on
investments and a $93,073 net change in unrealized appreciation of investments
for the fiscal year ended October 31, 1998.
Year 2000:
Like other investment companies, financial and business organizations
and individuals around the world, the Company could be affected adversely if the
computer systems used by the Investment Adviser and the Company's other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." Based on the Company's current assessment, the costs of addressing
potential problems have not and are not expected to have a material adverse
impact on the Company's financial position, results of operations, or cash flows
in future periods. The Investment Adviser, the Company's other service providers
and each portfolio company have informed the Company that they have taken steps
to address the Year 2000 Problem with respect to the computer systems that they
use. At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Company as a result of the Year
2000 Problem. In particular, the Company could incur losses if portfolio
companies incur business losses as a result of the Year 2000 Problem.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Equity Price Risk:
A majority of the Company's investment portfolio consists of equity
securities in private companies and private investment funds which are not
publicly traded. These investments are recorded at fair value as determined by
the Investment Adviser in accordance with valuation guidelines adopted by the
Board of Directors. This method of valuation does not result in increases or
decreases in the
906457.2
-11-
fair value of these equity securities in response to changes in market prices.
Thus, these equity securities are not subject to equity price risk.
Item 8. Financial Statements and Supplementary Data.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
INDEX
Portfolio of Investments at October 31, 1999
Statement of Assets and Liabilities as of October 31, 1999
Statement of Operations for the year ended October 31, 1999
Statement of Changes in Net Assets for the years ended October 31, 1999, 1998
and the period October 8, 1997 (commencement of operations) to October 31, 1997.
Statement of Cash Flows for the year ended October 31, 1999.
Financial Highlights -- Selected Per Share Data and Ratios for the years ended
October 31, 1999, 1998 and the period October 8, 1997 (commencement of
operations) to October 31, 1997.
Notes to Financial Statements
Independent Auditors' Report
Note - All other schedules are omitted because of the absence of
conditions under which they are required or because the required
information is included in the financial statements or the notes
thereto.
Please refer to attached pages for above-referenced
Financial Statements and Supplementary Data.
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
906457.2
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Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 1999
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
COMMERCIAL PAPER -- 28.87%
$8,000,000 American Express Co., 11/01/99......................................... 5.28% $ 8,000,000
8,000,000 Associates Corp., 11/18/99............................................. 5.30 8,000,000
8,000,000 Bear Stearns Corp., 1/19/00............................................ 6.00 7,894,666
7,000,000 Chevron Transport Corp., 11/08/99...................................... 5.27 7,000,000
8,000,000 Ford Motor Credit Corp., 2/16/00....................................... 5.92 8,000,000
8,000,000 General Electric Capital Corp., 2/23/00................................ 5.98 8,000,000
8,000,000 General Motors Acceptance Corp., 1/28/00............................... 5.99 8,000,000
8,000,000 HFC, 1/14/00........................................................... 5.98 8,000,000
8,000,000 Morgan Stanley Dean Witter, 2/02/00.................................... 6.02 7,875,587
--------------------
TOTAL COMMERCIAL PAPER (Cost $70,770,253).............................. 70,770,253
--------------------
CORPORATE BONDS -- 0.41%
1,000,000 CIT Group Holdings, Inc., 12/09/99 (Cost $1,000,526)................... 5.88 1,000,526
--------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS-- 17.91%
44,000,000 Federal Home Loan Bank, 11/17/99 (Cost $43,900,267) 5.10** 43,900,267
--------------------
PRIVATE INVESTMENT FUNDS #, @-- 9.83%
4 Advanced Technology Ventures V, LP..................................... 855,421
9 Brand Equity Ventures I, LP............................................ 1,932,637
2 Brentwood Associates Buyout Fund II, LP................................ 695,576
2 Broadview Capital Partners, LP......................................... 18,630
5 Commonwealth Capital Ventures II, LP................................... 2,387,067
7 Communications Ventures III, LP........................................ 3,325,561
4 Friedman, Fleischer & Lowe LLC, LP..................................... 606,269
6 +Mayfield, LP.......................................................... 1,535,934
4 MidAtlantic Venture Fund III, LP....................................... 3,919,046
6 Morgenthaler Venture Partners V, LP.................................... 2,579,459
8 Quad-C Partners V, LP.................................................. 2,012,794
8 Sevin Rosen Fund VI, LP................................................ 1,962,786
9 Trinity Ventures VI, LP................................................ 2,272,711
--------------------
TOTAL PRIVATE INVESTMENT FUNDS
(Cost $20,833,772).................................................. 24,103,891
--------------------
PRIVATE COMPANIES #, @ -- 41.64%
Preferred and Common Stocks -- 41.46%
Computer Software --2.86%
1,151,315 +Constellar Corp., Series C............................................ 6,999,995
--------------------
Educational Services -- 7.58%
7,548 +Advantage Schools Inc., Series C...................................... 7,929,551
79,531 +Advantage Schools Inc., Series D...................................... 835,513
38,502 + Classroom Holdings, Inc., Cumulative................................. 3,850,200
361,822 + Classroom Holdings, Inc., Series A................................... 4,121,153
162,297 + Classroom Holdings, Inc., Series B................................... 1,848,562
--------------------
See Notes to Financial Statements 18,584,979
--------------------
906457.2
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Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- ------------- ---------- --------
Internet Services -- Business 8.63%
695,652 + Captura Software, Inc., Series D..................................... 4,000,000
4,694,407 + MarketFirst Software, Inc., Series D................................. 5,000,000
7,113,967 + On the Go Software, Inc. Series B.................................... 5,000,002
1,676,229 + ReleaseNow.com, Series D............................................. 6,704,916
115,000 + ReleaseNow.com, Series E............................................. 460,000
--------------
21,164,918
--------------
Internet Services -- Consumer -- 11.25%
1,965,280 + LifeMinders.com Corp., Series C...................................... 15,892,826
637,606 + LifeMinders.com Corp., Series D...................................... 5,156,192
556,462 + LifeMinders.com Corp., Series E...................................... 4,499,997
250,000 + LifeMinders.com Corp., (Common)...................................... 2,021,700
--------------
27,570,715
--------------
Medical Devices --5.39%
4,000,000 + Conway-Stuart Medical, Inc., Series B................................ 6,000,000
538,059 +SurVivaLink Corp., Series B........................................... 7,209,991
--------------
13,209,991
--------------
Semiconductors --5.75%
7,960,371 +PowerSmart Inc., Series A............................................. $ 7,960,371
530,786 +PowerSmart Inc., Series B............................................. 1,000,000
4,850,000 +PowerSmart Inc. Common................................................ 5,128,390
--------------
14,088,761
--------------
Warrants -- 0.18%
Educational Services -- 0.18%
42,773 + Advantage Schools, Inc., Series D.................................... 449,952
--------------
Software Distribution Services -- 0.00%
173,913 + Captura Software, Inc., Series D..................................... --
--------------
TOTAL PRIVATE COMPANIES (Cost $72,883,325)............................. 102,068,711
--------------
INVESTMENT COMPANIES-- 5.25%
8,107,075 Dreyfus Treasury Cash Management Fund.................................. 8,107,075
4,757,576 Fidelity Cash Portfolio, U.S. Treasury II.............................. 4,757,576
--------------
TOTAL INVESTMENT COMPANIES (Cost
$12,864,651)........................................................... 12,864,651
--------------
TOTAL INVESTMENTS (Cost $222,252,794*)............................................................. 103.91% 254,708,299
OTHER ASSETS & LIABILITIES (NET)................................................................... (3.91) (9,601,385)
-------- --------------
NET ASSETS......................................................................................... 100.00% $245,106,914
======== ==============
* Aggregate cost for Federal tax and book purposes.
** Discount Rate.
+ At October 31, 1999, the Company owned 5% or more of the company's
outstanding shares thereby making the company an affiliate as defined by
the Investment Company Act of 1940. At October 31, 1999, these securities
were valued at the cost at which they were acquired during the year. Total
market value of affiliated securities owned at October 31, 1999 was
$102,068,711.
# Restricted as to public resale. Acquired between November 1, 1997 and
October 31, 1999. Total cost of restricted securities at October 31, 1999
aggregated $93,717,097. Total market value of restricted securities owned
at October 31, 1999 was $126,172,602 or 51.48% of net assets.
@ Non-Income Producing Security.
See Notes to Financial Statements
906457.2
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Excelsior Private Equity Fund II, Inc.
Statement of Assets and Liabilities
October 31, 1999
ASSETS:
Investments, at value (Cost $222,252,794) (Note 1)................................................ $ 254,708,299
Receivable for investments sold (Note 3).......................................................... 1,705,909
Interest receivable............................................................................... 241,822
-------
Prepaid insurance................................................................................. 28,269
Cash.............................................................................................. 136
---------------------
Total Assets................................................................................ 256,684,435
---------------------
LIABILITIES:
Deferred incentive fee payable (Note 2).......................................................... 5,837,077
Management fees payable (Note 2)................................................................. 5,599,309
Directors' fees payable (Note 2)................................................................. 43,500
Administration fees payable (Note 2).............................................................. 14,499
Accrued expenses and other payables............................................................... 83,136
---------------------
Total Liabilities........................................................................... 11,577,521
---------------------
NET ASSETS............................................................................................ $ 245,106,914
=====================
NET ASSETS consist of:
Undistributed net investment income............................................................... $ 5,259,727
Accumulated net realized gain on investments...................................................... 22,825,393
Net unrealized appreciation of investments........................................................ 32,455,505
Allowance for management incentive fee........................................................... (10,751,557)
Par value......................................................................................... 1,957
Paid-in capital in excess of par value............................................................ 195,315,889
---------------------
Total Net Assets...................................................................................... $ 245,106,914
=====================
Shares of Common Stock Outstanding ($0.01 par value, 200,000 authorized).............................. 195,730
NET ASSET VALUE PER SHARE............................................................................. $ 1,252.27
=====================
See Notes to Financial Statements
906457.2
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Excelsior Private Equity Fund II, Inc.
Statement of Operations
For the Year Ended October 31, 1999
INVESTMENT INCOME:
Interest income..................................................................................... $ 6,991,973
------------------
EXPENSES:
Managing investment advisory fees (Note 2).......................................................... 2,364,920
Legal fees.......................................................................................... 175,000
Administration fees (Note 2)........................................................................ 58,000
Directors' fees and expenses (Note 2)............................................................... 43,500
Audit fees.......................................................................................... 26,000
Printing fees....................................................................................... 6,500
Miscellaneous expenses.............................................................................. 149,757
------------------
Total Expenses................................................................................ 2,823,677
------------------
NET INVESTMENT INCOME 4,168,296
------------------
NET REALIZED AND UNREALIZED GAIN (LOSS): (Note 1)
Net realized gain on investments.................................................................... 24,838,281
Net change in unrealized appreciation of investments................................................ 32,260,091
------------------
NET REALIZED AND UNREALIZED GAIN....................................................................... 57,098,372
------------------
Net change in allowance for management incentive fee.................................................... (10,751,557)
------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................... $ 50,515,111
==================
See Notes to Financial Statements
906457.2
-16-
Excelsior Private Equity Fund II, Inc.
Statement of Changes in Net Assets
Year Ended
October 31,
-----------------------------------------------------
1999 1998
------------------------ ------------------------
OPERATIONS:
Net investment income......................................................$ 4,168,296 $ 8,077,985
Net realized gain (loss) on investments....................................$ 24,838,281 $ (592)
Net change in unrealized appreciation of investments.......................$ 32,260,091 $ 93,073
Net change in allowance for management incentive fee....................... $ (10,751,557) ----
------------------------ ------------------------
Net increase in net assets resulting from operations.......................$ 50,515,111 $ 8,170,466
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...................................................... $ (7,669,460) $ (1,763,590)
CAPITAL SHARE TRANSACTIONS:
Subscriptions (0 and 40,218 shares, respectively).......................... $ -- $ 39,804,846
------------------------ ------------------------
Net increase in net assets.................................................$ 42,845,651 $ 46,211,722
NET ASSETS:
Beginning of period........................................................$ 202,261,263 $ 156,049,541
------------------------ ------------------------
End of period (including undistributed net investment income of
$5,259,727 and $6,748,595, respectively) ..................................$ 245,106,914 $ 202,261,263
======================== ========================
See Notes to Financial Statements
906457.2
-17-
Excelsior Private Equity Fund II, Inc.
Statement of Cash Flows
For the Year Ended October 31, 1999
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments................................................................. $ 33,609,816
Purchases of Investments........................................................................... (54,190,497)
Net Decrease in Short-Term Investments............................................................. 23,210,576
Investment Income.................................................................................. 7,610,895
Operating Expenses Paid............................................................................ (2,591,795)
-------------
Net Cash Provided for Investing and Operating Activities........................................... 7,648,995
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid................................................................................. (7,669,460)
-------------
Net Cash Used by Financing Activities.............................................................. (7,669,460)
-------------
Net Decrease in Cash............................................................................... (20,465)
Cash at Beginning of Year.............................................................................. 20,601
-------------
Cash at End of Year.................................................................................... $ 136
=============
Reconciliation of Net Investment Income to Net Cash Used for Investing
and Operating Activities:..............................................................................
Net Investment Income ............................................................................. $ 4,168,295
Proceeds from Sales of Investments 33,609,816
Purchases of Investments........................................................................... (54,190,497)
Net Decrease in Short-Term Investments............................................................. 23,210,576
Net Decrease in Receivables Related to Operations.................................................. 602,045
Net Decrease in Payables Related to Operations..................................................... (1,602,328)
Accretion/Amortization of Discounts and Premiums................................................... 1,851,088
-------------
Net Cash Provided for Investing and Operating Activities........................................... $ 7,648,995
=============
See Notes to Financial Statements
906457.2
-18-
Excelsior Private Equity Fund II, Inc.
Financial Highlights - Selected Per Share Data and Ratios
For a fund share outstanding throughout the period
October 8,
Year Ended Year Ended 1997* to
October 31, October 31, October 31,
1999 1998 1997
---------------------------------------- -----------------
NET ASSET VALUE, BEGINNING OF PERIOD.................................$ 1,033.37 $ 1,003.46 $ 1,000.00
------------------- ----------------- -----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income................................................$ 21.29 $ 41.84 $ 2.79
Net Realized and Unrealized Gain (Loss) on Investments...............$ 291.72 (1.78) 0.67
Net Change in Allowance for Management Incentive Fee.................$ (54.93) $ -- $ --
------------------- ----------------- -----------------
Total from Investment Operations.....................................$ 258.08 $ 40.06 $ 3.46
------------------- ----------------- -----------------
DISTRIBUTIONS
Net Investment Income................................................$ (39.18) $ (10.15) --
------------------- ----------------- -----------------
NET ASSET VALUE, END OF PERIOD.......................................$ 1,252.27 $ 1,033.37 $ $ 1,003.46
=================== ================= =================
TOTAL NET ASSET VALUE RETURN+........................................ 25.94% 4.04% 0.35%
=================== ================= =================
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands)................................$ 245,107 $ 202,261 $ 156,050
Ratio of Net Operating Expenses to Average Net Assets................ 1.26% 0.87% 0.72%**
Ratio of Gross Operating Expenses to Average Net Assets++............ 1.26% 0.87% 1.04%**
Ratio of Net Investment Income to Average Net Assets................. 1.86% 4.05% 4.23%**
Portfolio Turnover Rate.............................................. 40.00% 0.00% 0.00%
* Commencement of operations.
** Annualized.
+ Total investment return based on per share net asset value reflects the
effects of changes in net asset value based on the performance of the
Company during the period, and assumes dividends and distributions, if
any, were reinvested. The Company's shares were issued in a private
placement and are not traded, therefore market value total investment
return is not calculated. Total return for periods of less than one year
are unannualized.
++ Expense ratio before waiver of fees and reimbursement of expenses by adviser.
# The amount shown for the year ended October 31, 1998 for a share
outstanding throughout that period does not accord with the aggregate net
gains on investments for that period because of the timing of sales and
purchases of the portfolio shares in relation to fluctuating market of
the investments in the Company.
See Notes to Financial Statements
906457.2
-19-
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Excelsior Private Equity Fund II, Inc. ("the Company") was
incorporated under the laws of the State of Maryland on March 20, 1997 and is
registered under the Securities Act of 1933, as amended, as a non-diversified,
closed-end management investment company which has elected to be treated as a
business development company under the Investment Company Act of 1940, as
amended.
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 financial statements. Generally accepted accounting principles
require management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from these estimates.
(a) Portfolio valuation:
The Company values portfolio securities quarterly and at other such
times as, in the Board of Directors' view, circumstances warrant. Investments in
securities that are traded on a recognized stock exchange or on the national
securities market are valued at the last sale price for such securities on the
valuation date. Short-term debt instruments with remaining maturities of 60 days
or less are valued at amortized cost, which approximates market value. Direct
equity investments that are the same class as a class of stock that is
registered and publicly traded, but are subject to regulatory holding periods or
other restrictions, are valued based upon the last sales price of the
unrestricted stock on the securities exchange on which such securities are
primarily traded, less a liquidity discount determined by the Investment
Advisor. Direct equity investments for which market quotations are not readily
available are carried at fair value as determined in good faith by the
Investment Adviser after considering certain pertinent factors, including the
cost of the investment, developments since the acquisition of the investment,
comparisons to similar publicly traded investments, subsequent purchases of the
same investment by other investors, the current financial position and operating
results of the issuer and such other factors as may be deemed relevant.
Investments in limited partnerships are carried at fair value as determined by
the Investment Adviser. In establishing the fair value of investments in other
partnerships, the Investment Adviser takes into consideration information
received from those partnerships, including their financial statements and the
fair value established by the general partner of the investee partnership.
At October 31, 1999, market quotations were not readily available for
securities valued at $126,172,602. Such securities were valued by the Investment
Adviser, under the supervision of the Board of Directors. 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, when
appropriate, discounts on investments, is earned from settlement date and is
recorded on the accrual basis. Dividend income is recorded on the ex-dividend
date.
906457.2
-20-
(c) Repurchase agreements:
The Company enters into agreements to purchase securities and to
resell them at a future date. It is the Company's policy to take custody of
securities purchased and to ensure that the market value of the collateral
including accrued interest is sufficient to protect the Company from losses
incurred in the event the counterparty does not repurchase the securities. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Company may be delayed or limited.
(d) Federal income taxes:
It is the policy of the Company to continue to qualify as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
and distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
Dividends from net investment income are declared and paid at least
annually. Any net realized capital gains, unless offset by any available capital
loss carryforward, are distributed to shareholders at least annually. Dividends
and distributions are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent. To
the extent these differences are permanent, such amounts are reclassified within
the capital accounts based on their federal tax basis treatment; temporary
differences do not require reclassification. During the current year, permanent
differences, primarily due to net operating losses and tax classification of
distributions, resulted in an increase in undistributed net investment income, a
decrease in accumulated net realized gain on investments and a corresponding
decrease in additional paid in capital. The reclassification had no effect on
net assets.
At October 31, 1999 the tax basis of the Company's investments for
Federal income tax purposes amounted to $222,252,794. The net unrealized
appreciation amounted to $32,455,505, which is comprised of gross unrealized
appreciation of $32,896,229 and aggregate gross unrealized depreciation of
$440,724.
2. Investment Advisory Fee, Administration Fee, and Related Party
Transactions
Pursuant to an Investment Management Agreement ("Agreement"), United
States Trust Company of New York ("U.S. Trust") serves as the Managing
Investment Adviser to the Company. Under the Agreement, for the services
provided, U.S. Trust is entitled to receive a fee, at the annual rate of 1.50%
of the net assets of the Company, determined as of the end of each fiscal
quarter, that are invested or committed to be invested in Portfolio Companies or
Private Funds and a fee equal to an annual rate of 0.50% of the net assets of
the Company, determined as of the end of each fiscal quarter, that are invested
in short-term investments and are not committed to Portfolio Companies or
Private Funds.
In addition to the management fee, the Company has agreed to pay U.S.
Trust an incentive fee in an amount equal to 20% of the cumulative realized
capital gains (net of realized capital losses and unrealized net capital
depreciation) on investments other than Private Funds, less the aggregate amount
of incentive fee payments in prior years. If the amount of the incentive fee in
any year is a negative number, or cumulative net realized gains less net
unrealized capital depreciation at the end of any year is less than such amount
calculated at the end of the previous year, U.S. Trust will be required to repay
the Company all or a portion of the incentive fee previously paid.
Chase Global Funds Services Company ("CGFSC"), a corporate affiliate
of The Chase Manhattan Bank, (the "Administrator") provides administrative
services to the Company. For the services provided to the Portfolio, the
Administrator is entitled to an annual fee of $58,000, which is paid quarterly.
906457.2
-21-
U.S. Trust has voluntarily agreed to waive or reimburse operating
expenses of the Company, exclusive of management fees, to the extent they exceed
0.25% of the Company's net assets.
Each Director of the Company receives an annual fee of $15,000, and
is reimbursed for expenses incurred for attending meetings. No person who is an
officer, director or employee of U.S. Trust, or of any parent or subsidiary
thereof, who serves as an officer, director or employee of the Company receives
any compensation from the Company.
3. Purchases and Sales of Securities
Purchases and sales of securities, excluding short-term investments,
for the Company aggregated $54,183,529 and $35,315,725, respectively.
At fiscal year end October 31, 1999 the Company had outstanding
investment commitments totaling $36,754,503.
4. Transactions with Affiliated Companies
An affiliated company is a company in which the fund has ownership of
at least 5% of the voting securities. The Company did not receive dividend or
interest income from affiliated companies during the period. Transactions with
companies which are or were affiliates are as follows:
Summary of Transactions with Affiliated Companies
Sales Realized Value
Affiliate Purchases Proceeds Gains (Note 1)
- -------------------------- --------------------- -------------------- --------------------- ---------------------
Constellar Corp. $ -- $ -- $ -- $ 6,999,995
Advantage Schools, Inc. 835,513 -- -- 9,214,416
Classroom Holdings, Inc. 2,999,963 -- -- 9,819,915
Captura Software, Inc. 4,000,000 -- -- 4,000,000
Marketfirst Software, Inc. 5,000,000 -- -- 5,000,000
On the Go Software, Inc. 5,000,002 -- -- 5,000,002
ReleaseNow.com 460,000 -- -- 7,164,916
Life Minders.com Corp. 11,499,997 -- -- 27,570,715
Conway-Stuart Medical Inc. 6,000,000 -- -- 6,000,000
Softcom Microsystems Inc. -- 15,420,465 11,241,816 --
SurVivaLink Corp. 209,991 -- -- 7,209,991
PowerSmart, Inc. 1,000,000 -- -- 14,088,761
--------------------- -------------------- --------------------- ---------------------
$ 37,005,466 $15,420,465 $11,241,816 $102,068,711
===================== ==================== ===================== =====================
906457.2
-22-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Excelsior Private Equity Fund II, Inc.
We have audited the accompanying statement of assets and liabilities of
Excelsior Private Equity Fund II, Inc., including the portfolio of investments,
as of October 31, 1999, the related statement of operations and statement of
cash flows for the year then ended, and the statement of changes in net assets
and financial highlights for each of the indicated periods. These financial
statements and financial highlights are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1999 by correspondence with the custodian and others. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Excelsior Private Equity Fund II, Inc. at October 31, 1999, the results of its
operations and its cash flows for the year then ended, and the changes in its
net assets and the financial highlights for each of the indicated periods.
/s/ Ernst & Young LLP
New York, New York
December 14, 1999
906457.2
-23-
PART III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below are names, ages, positions and certain other information
concerning the current directors and executive officers of the Company as of
October 31, 1999.
Served in Present
Name and Age Position Capacity Since
- --------------------------------------------------------------------------------
David I. Fann [35] President; Chief March 20, 1997
Executive Officer
Douglas A. Lindgren [38] Executive March 20, 1997
Vice President;
Chief Investment Officer
Brian Schmidt [41] Chief Financial Officer March 20, 1997
Frank Bruno [40] Treasurer March 20, 1997
Ronald A. Schwartz [51] Secretary March 20, 1997
John C. Hover* [56] Director December 9, 1998
Gene M. Bernstein [52] Director March 20, 1997
Stephen V. Murphy [54] Director March 20, 1997
*Indicates director who is an "interested person" of the Company within the
meaning of the Investment Company Act of 1940.
Additional information concerning the directors and executive officers of the
Company is incorporated herein by reference from the section entitled
"Management -- Directors, Officers and Investment Professionals" in the
Prospectus dated June 2, 1997.
Item 11. Executive Compensation.
At October 31, 1999, the Company had no full-time employees. Pursuant to the
Management Agreement, the Managing Investment Adviser employs and compensates
all of the personnel of the Company, and also furnishes all office facilities,
equipment, management and other administrative services required for the
operation of the Company. In consideration of the services rendered by the
Managing Investment Adviser, 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. Additional information with
respect to the management fee payable to the Managing Investment Adviser is set
forth in the "Management" section of the Prospectus, dated June 2, 1997, which
section is incorporated herein by reference.
The disinterested directors receive compensation of $15,000 on an annual basis
plus reasonable expenses. For the year ended October 31, 1999, the disinterested
directors of the Company each received compensation totaling $15,000.
906457.2
-24-
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
As of October 31, 1999, no person or group is known by the Company to be the
beneficial owner of more than 5% of the aggregate number of Shares held by all
shareholders. The directors and officers of the Company as a group own 261
Shares.
On January 13, 2000, U.S. Trust Corporation ("USTC"), the parent company of the
Managing Investment Adviser, announced that they had signed a definitive
agreement to merge with The Charles Schwab Corporation("Schwab") (the "merger").
The transaction is subject to Federal Reserve Board and other regulatory
approvals as well as USTC shareholder approval. The transaction is expected to
close by July 2000. Under the terms of the merger, USTC shareholders will
receive 3.427 shares of Schwab stock for each share of USTC stock. Schwab,
through its principal operating subsidiary, Charles Schwab & Co., Inc., is the
nation's fourth largest financial services firm and the nation's largest
electronic brokerage serving 6.4 million active accounts with $725 billion in
customer assets.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the federal securities laws, the Company's directors and executive
officers and any persons holding more than 10% of the Company's units are
required to report their ownership of units and any changes in the ownership of
the Company's units to the Company and the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions.
The Company has engaged in no transactions with the executive officers or
directors other than as described above, in the notes to the financial
statements, or in the Prospectus.
906457.2
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements
Portfolio of Investments at October 31, 1999
Statement of Assets and Liabilities as of October 31, 1999
Statement of Operations for the year ended October 31, 1999
Statement of Changes in Net Assets for the year
ended October 31, 1999 and October 31, 1998
Statement of Cash Flows for the year ended October 31, 1999
Financial Highlights -- Selected Per Share Data
and Ratios for the years ended October 31, 1999,
1998 and the period from October 8, 1997
(commencement of operations) to October 31, 1997
Notes to Financial Statements
Independent Auditors' Report
2. Exhibits
(3)(a) Articles of Incorporation of the Company (1)
(3)(b) By-Laws of the Company (1)
(10)(a) Management Agreement (l)
(10)(b) Transfer Agency and Custody Agreement (l)
(23) Consent of Independent Auditors
(27) Financial Data Schedule (included in EDGAR electronic filing only)
(29) Prospectus of the Company dated June 2, 1997, filed with the Securities and
Exchange Commission (l)
(b) No reports on Form 8-K have been filed during the last quarter of the period
for which this report is filed.
(1) Incorporated by reference to the Company's Form N-2, as amended, filed
November 7, 1997.
906457.2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ DAVID I. FANN
--------------------------------------
David I. Fann, President and
Chief Executive Officer
By: /s/ BRIAN SCHMIDT
--------------------------------------
Brian Schmidt, Chief Financial Officer
By: /s/ JOHN C. HOVER II
--------------------------------------
John C. Hover, II, Director
By: /s/ GENE M. BERNSTEIN
--------------------------------------
Gene M. Bernstein, Director
By: /s/ STEPHEN V. MURPHY
--------------------------------------
Stephen V. Murphy, Director
Date: January 28, 2000
906457.2
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CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Prospectus, which is incorporated by reference, and to the use of our report
dated December 14, 1999, included in this Annual Report (Form 10-K), for the
year ended October 31, 1999, of Excelsior Private Equity Fund II, Inc.
ERNST & YOUNG LLP
New York, New York
January 25, 2000
906457.2