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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 0-24856
UST PRIVATE EQUITY INVESTORS FUND, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 13-3786385
(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 40,463 shares. No active market for the shares of the registrant
exists; therefore, the market value of such shares cannot be determined.
906452.2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated December 16, 1994, as
supplemented by supplements thereto dated August 28, 1995 and October 31, 1995,
(the "Prospectus") are incorporated by reference in Part I, Part II and Part III
hereof.
UST PRIVATE EQUITY INVESTORS FUND, INC. INDEX
Form 10-K
Report
Item No. Page
- -------- ----------
PART I
1. Business.................................................... 3
2. Properties.................................................. 7
3. Legal Proceedings........................................... 7
4. Submission of Matters to a Vote of Security Holders......... 7
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
6. Selected Financial Data..................................... 8
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
7A. Quantitative and Qualitative Disclosures About
Market Risk................................................. 9
8. Financial Statements and Supplementary Data................. 10
9. Changes in and Disagreements with Accountants and
Financial Disclosure........................................ 10
PART III
10. Directors and Executive Officers of the Registrant.......... 23
11. Executive Compensation...................................... 23
12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 24
13. Certain Relationships and Related Transactions.............. 24
PART IV
14. Exhibits, Financial Statements, Schedules, and Reports
on Form 8-K................................................ 25
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.
33-84290) 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.
-2-
906452.2
PART I
Item 1. Business.
Formation:
UST Private Equity Investors Fund, Inc. (the "Company" or the "Registrant")
is a Maryland corporation organized on September 16, 1994. 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 originally dated December 9, 1994, as amended (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. 33-84290) which
was declared effective on December 16, 1994, the Company publicly offered up to
50,000 shares of common stock (the "Shares") at $1,000 per Share. The Company
held its initial and final closings on July 31, 1995, and October 31, 1995
representing over $28.0 million and $12.4 million, respectively. The Company
sold a total of 40,463 Shares in the public offering (after taking into account
the 1 Share purchased for $1,000 on September 16, 1994, by David I. Fann, the
Company's President). Gross proceeds received by the Company for the sale of its
Shares during 1995 totaled $40,463,000 and net proceeds after the payment of
offering and organizational expenses totaled $40,117,109. Shares of the Company
were made available through U.S. Trust Company of California, N.A. (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 $10,000. The
Company incurred offering and organizational costs associated with the public
offering totaling $374,891. Net proceeds to the Company from the public
offering, after offering and organizational costs, totaled $40,117,109.
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 August 1, 1995 and during
the year ended October 31, 1999, the Company's investment portfolio consisted of
securities with an aggregate cost of $44,055,089 and a fair value of
$47,204,696. The Company has invested $28.7 million in twelve later stage
venture capital and private middle market companies (two of which are now public
companies) and committed to invest another $12 million in six venture capital,
buyout and private equity funds of which $10.8 million has been drawn.
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.
906452.2
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The following is a summary of the 12 direct investments made by the Company
since inception and the status of each.
Investments Held -- Publicly Traded:
- -----------------------------------
o Corsair Communications Inc., Palo Alto, CA (NASDAQ: CAIR), is a
wireless communication infrastructure company providing pre-paid
cellular handset and fraud detection equipment and software. The
Company invested $3.0 million in October 1996. In July 1997, Corsair
had an initial public offering. On October 31, the price of Corsair
stock was $8.25, equaling the Company's per-share cost.
o QuickLogic Corp., San Jose, CA (NASDAQ: QUIK), designs, manufactures
and markets high-capacity programmable logic semiconductors, known as
field programmable gate arrays, along with comprehensive design
software. The company's products shorten the design cycle time for
electronic systems, accelerating time-to-market. QuickLogic's new class
of devices, embedded standard products, facilitates extremely fast
development of complex systems. On October 15, 1999, QuickLogic
completed its initial public offering at $10 per share. QuickLogic's
closing price on October 31, 1999, was $18.25 per share, which assigns
a market value to the Company's 431,035 shares of $7.9 million. Due to
the 6-month underwriter's lock-up, the Company's carrying value of $6.2
million reflects a 20% discount to market value.
Investments Held -- Private:
- ---------------------------
o Best Friends Pet Care, Inc., Norwalk, CT, is the largest operator of
pet kennels in the United States. The company's facilities offer a wide
range of pet services including boarding, grooming and training. The
Company has invested a total of $3.5 million, from December 1996 to
October 1999, which is currently held at cost. The other institutional
investors include Eos Partners, Merrill Lynch, Tudor Investments,
Consumer Venture Partners, Chancellor Capital and Victory Ventures.
o Cardiopulmonary Corp., Milford, CT, is a manufacturer of a smart
ventilator used in the acute and sub-acute hospital market. The Company
has invested a total of $2.2 million over a period from November 1996
to July 1998. This position is currently carried at $2.3 million,
reflecting a small mark-up attributable to a subsequent financing. The
other institutional investors include Oxford Bioscience Partners,
Elliot Associates, Axiom Ventures and Aetna.
o LogicVision, Inc., San Jose, CA, is a developer of built-in
semiconductor testing technologies used in semiconductor design testing
and manufacture. As semiconductors become more complex (i.e., large
systems reduced to a customized chip), the need for adopting new
testing technology is becoming critical. LogicVision operates globally
and counts among its customers Sun Microsystems, Cisco Systems, NCR
Corp., Hitachi and Hughes. The Fund invested $1.3 million in May 1997
and this position is currently held at cost. The other institutional
investors include CitiGrowth, Citicorp, Zesicker Capital and Intel.
o Signius Corp., Somerset, NJ (formerly known as ProCommunications
Corp.), provides telemessaging services for small and medium sized
businesses. Signius' service offerings are voice mail, custom call
processing, alpha-numeric dispatch, inbound order taking, claims
processing and interactive voice response services. The Fund has
invested a total of $3.4 million. This position has been written down
to $1.3 million, reflecting the valuation of the last financing. The
other institutional investors include Bachow, Fidelity Ventures, Nassau
Capital, Edison Ventures and Allegra Capital.
o NeoVista Software, Inc., Cupertino, CA, is a company engaged in
developing data mining software applications. Data mining allows
companies to discover non-obvious relationships by applying various
artificial intelligence algorithms to data that have been deposited
into data warehouses. The software allows companies to make use of
information that in the past had been collected, but not effectively
interpreted. Corporate applications of NeoVista's products include
inventory management, customer profiling, behavior
906452.2
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prediction and fraud detection. The Company has made a total investment
of $1.0 million. As discussed below in "Subsequent Events", shortly
after the end of the Company's fiscal year, NeoVista was acquired by
Accrue Software (NASDAQ: ACRU) for $140 million of Accrue stock. The
Company's carrying value is $1.0 million. The Company's position, under
the terms of the acquisition, is significantly higher than the carrying
value.
Investment Exits:
- ----------------
o Rental Service Corp., Scottsdale, AZ, is a consolidator of heavy
equipment rental businesses. The Company made a total investment of $1
million in January 1996 and divested its investment in 1998 for total
proceeds of $3.0 million.
o CommSite International, Inc., Vienna, VA, is a provider of wireless
towers and construction services. The Company made a total investment
of $2.4 million during the period from May 1996 to March 1998. On May
13, 1999, American Tower Corporation (NYSE: AMT), a publicly traded
company, acquired CommSite. The proceeds to the Company include an
initial cash consideration of approximately $2.4 million with milestone
payments of $0.2 to $0.5 million to be made if the business continues
to perform to pre-established criteria.
Investments Written-off:
- -----------------------
o AbTox, Inc., Mundelein, IL, is a manufacturer of gas plasma
sterilizers. The Company invested $2.8 million and this position has
been written-down to zero. AbTox filed for bankruptcy in July 1998
after the FDA forced the company to stop the manufacture, sale,
distribution, and service of its product. The FDA indicated that the
company had never received FDA clearance to market its present Plazlyte
sterilizer although the company had received clearance to market a
prior version of the Plazlyte sterilizer. At the time of our
investment, AbTox had a sterling customer base which included some of
the leading research and medical centers in the world. In our due
diligence, which included many discussions with the company's
management, its advisers and its customers, the company represented
that it had received all necessary FDA approvals and in fact,
represented as such in the various agreements that were signed with the
investors.
In August 1999, the Company, together with co-investors Hambrecht
& Quist Healthcare Investors, Hambrecht & Quist Life Sciences
Investors, Westmed Ventures II, LP, Anvers, LP, CG Asian-American Fund,
LP, Citi Growth Fund II Offshore, LP, Princeton Global Fund, LP, and
others, filed a lawsuit against Salomon Smith Barney and Dominick &
Dominick in the Supreme Court of the State of New York alleging fraud
and deceit, and negligent misrepresentation, in their actions related
to the private placement of AbTox Series F Convertible Preferred Stock
to the Company and the other investors. In October 1999, the
defendants, Salomon Smith Barney and Dominick & Dominick, responded to
the motion by filing a motion to dismiss the lawsuit based on several
legal arguments, including that the plaintiffs did not justifiably rely
on alleged misrepresentations or omissions, and that the claim of
negligent misrepresentation is barred by the Martin Act. We are
currently waiting for a hearing date in this action. The Company's
investment manager and its advisers believe that the facts surrounding
the AbTox transaction merit the prosecution of this case, and our
fiduciary duties to the Company require us to pursue this matter.
o P2 Holdings Corp. (formerly known as Plynetic Express), San Leandro,
CA, was a provider of rapid prototyping and rapid tooling services. The
company filed for bankruptcy in 1998. P2 has completed its liquidation,
and we will not receive any proceeds. The Company invested $2.8 million
in P2 and this position has been written off entirely.
906452.2
-5-
o Party Stores Holdings, Inc., Melville, NY, operated the Party
Experience, the Paperama, and Paper Cutter retail stores. The company
filed for bankruptcy in 1998. The company has completed its liquidation
and we will not receive any proceeds. The Company invested $2.1 million
and this position has been written off entirely.
Fund Investments:
- ----------------
During the year, the portfolios of the funds that the Company has
invested in saw significant appreciation in value:
o Allegra Capital Partners III, LP (formerly Lawrence Smith Hovey III,
LP) is a later stage focused venture fund based in New York City. In
1999, Allegra reported that one of its portfolio companies had
completed an initial public offering. The Company has committed $2.0
million to Allegra of which $1.6 million has been drawn down. The
current carrying value of this position is $2.0 million.
o Brentwood Associates Buyout Fund II, LP is a buyout and consolidation
fund based in Westwood, CA. The Company has committed $2.0 million to
Brentwood of which $1.6 million has been drawn, and over $300,000 has
been distributed. The current carrying value for our position in
Brentwood is $1.8 million.
o Bruckmann, Rosser, Sherill & Co., LP ("BRS") is a leveraged buyout fund
based in New York City. BRS is nearing the end of its investment cycle.
In 1999, BRS's portfolio declined in value due to the write-off of its
investment in Jitney Jungle, a grocery chain in the Southeast. The
Company has a $2.0 million commitment of which $1.8 million has been
drawn and the current carrying value is $2.2 million.
o Morgenthaler Venture Partners IV, LP, an early stage and buyout fund
focusing on healthcare and information technology, appreciated nearly
20% for the year and made several distributions of stock, including
Microsoft and Nortel. To date Morgenthaler has drawn down $1.8 million
of the Company's $2.0 million commitment and distributed in excess of
$800,000, and has a remaining carrying value of $2.0 million.
o Sevin Rosen Fund V, LP, an early stage venture fund, appreciated 10% in
addition to distributing over $400,000 to the Company in the form of
cash and shares of Cisco Systems. The Cisco distribution is the result
of the sale of Lightspeed International and Sentient Networks. The
Company has committed $2.0 million to Sevin Rosen V, of which $1.8
million has been drawn, a total of $1.7 million has been distributed,
and the carrying value is $2.2 million.
o Vanguard V, LP, an early stage fund investing in information technology
and healthcare, appreciated 70% for the year. The Company has committed
$2.0 million, all of which has been drawn, $1.0 million has been
distributed to date in the form of Cisco stock. The remaining carrying
value is $3.7 million. In addition, Vanguard V has appreciated
significantly in value since October 31, 1999 as explained in the
"Subsequent Events" section below.
Subsequent Events:
- -----------------
In November 1999, Accrue Software, Inc. (NASDAQ: ACRU), announced its
intention to acquire NeoVista Software, Inc. for $140.0 million in the form of
2.4 million shares of Accrue stock. Based on our ownership in NeoVista, the
Company's position, as of the date of acquisition, is valued at approximately
$4.2 million. The Company's cost basis is $1 million.
On November 5, Cobalt Networks (NASDAQ: COBT), an investment of
Vanguard V (see "Fund Investments" above), completed its initial public
offering. Cobalt increased dramatically on the first day of trading (the stock
was offered at $25 per share and closed on its first day at $128 1/8 per share).
906452.2
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Another investment of Vanguard V, Digital Island (NASDAQ: ISLD), has
appreciated significantly in recent months, increasing from $26.00 per share on
September 30, 1999 to $148.00 per share on December 14, 1999.
These events should increase the value of our position in Vanguard
substantially.
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.
Item 2. Properties.
The Company does not own or lease physical properties.
Item 3. Legal Proceedings.
In August 1999, the Company, together with several co-investors, filed
a lawsuit against Salomon Smith Barney and Dominick & Dominick in the Supreme
Court of the State of New York alleging fraud and deceit, and negligent
misrepresentation, in their actions related to the private placement of Abtox
Series F Convertible Preferred Stock to the Company and the other investors. In
October 1999, the defendants filed a motion to dismiss and the matter is still
pending.
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.
906452.2
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company has 100,000 Shares authorized, of which 40,463 Shares were
issued and outstanding on October 31, 1999. There was no dividend declared for
1999.
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,
1997, 1996 and the period commencing on August 1, 1995 (inception) and ending on
October 31, 1995 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 $47,204,696 in investments and
$4,993 in cash as compared to $45,459,390 in investments and $603,540 in cash at
October 31, 1998. At October 31, 1999, investments included $4,971,281 in
commercial paper, $7,997,462 in U.S. Government and agency obligations,
$13,865,235 in private investment funds, $9,500,826 in private companies,
$9,233,716 in public companies and $1,636,176 in investment companies.
At October 31, 1999 the Company had a $7,000,000 note payable to The
Chase Manhattan Bank. The proceeds were used for temporary investment purposes.
The note held an interest rate equal to the Federal Funds rate plus 0.50%. The
note was collateralized by a United States Treasury Bill. The note was paid in
its entirety on November 1, 1999.
In connection with the Company's commitments to private funds in the
amount of $12,000,000, since inception, a total of $10,747,302, representing
capital calls, was paid by the Company, comprised of 1,554,644 in fiscal 1999
and $9,192,658 in prior years.
Results of Operations:
Investment Income and Expenses
For the year ended October 31, 1999, the Company had interest income of
$364,937, total expenses of $748,654, expenses reimbursed by the Managing
Investment Adviser of ($146,907), and net operating expenses of $601,747,
resulting in net investment loss of $236,810 as compared to interest income of
$569,706, and net operating expenses of $730,161, resulting in net investment
loss of $160,455 for the fiscal year ended October 31, 1998. The decrease in net
investment income in the year ended October 31, 1999 is primarily the result of
the Company using available cash, which had been in short-term, interest bearing
vehicles, to make investments in private companies and private funds which do
not pay interest.
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
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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, and October 31, 1998 the Managing Investment Adviser earned $468,230 and
$549,137 in management fees, respectively. In addition, for the same periods,
the Managing Investment Advisor received/(reimbursed) $227,752 and ($122,095) in
management incentive fees, respectively. For the same periods, the Managing
Investment Adviser reimbursed other operating expenses of the Company in the
amount of $146,907 and $76,165 as a result of expenses incurred in excess of
those permitted pursuant to the Company's Prospectus.
Net Assets
The Company's net asset value per common share was $995.85 at October
31, 1999, up $59.01 per share from the net asset value per common share of
$936.84 at October 31, 1998. This increase is primarily the result of
appreciation in the value of QuickLogic, Corsair and several of the private fund
investments, most notably Vanguard V and Sevin Rosen V. The increase was
partially offset by declines in value of Signius and Commsite.
For the year ended October 31, 1999, the Company had a net increase in
net assets resulting from operations of $2,755,650 ($68.09 per share), comprised
of net investment loss totaling $236,810 ($5.85 per share), net realized and
unrealized gain of $3,220,212 ($79.57 per share) and net change in allowance for
management incentive fee of ($227,752) ($5.63 per share).
At October 31, 1999, the Company's net assets were $40,295,269, an
increase of $2,388,077 from net assets of $37,907,192 at October 31, 1998. This
increase was the result of a $2,755,650 net increase in net assets resulting
from operations and offset by a $367,573 distribution to shareholders.
Realized and Unrealized Gains and Losses from Portfolio Investments:
- -------------------------------------------------------------------
For the year ended October 31, 1999, the Company had a $3,220,212 net
realized and unrealized gain from investments, comprised of $2,449,598 net
realized loss on investments and a $5,669,810 net change in unrealized
appreciation of investments as compared to a $7,350,233 net realized and
unrealized loss from investments, comprised of $356,562 net realized gain on
investments and a ($7,706,795) net change in unrealized depreciation 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 currently 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:
- -----------------
The 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
906452.2
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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 fair value of these equity securities in response to changes in
market prices. Thus, these equity securities are not subject to equity price
risk. Nevertheless, the Company is exposed to equity price risk through its
investments in the equity securities of two public companies. At October 31,
1999, these publicly traded equity securities were valued at $9,233,716. Thus,
there is exposure to equity price risk, which is estimated as the potential loss
in fair value due to a hypothetical 10% decrease in quoted market prices, and
would result in a decrease of approximately $923,372 in the value of these
securities. Actual results may differ.
Item 8. Financial Statements and Supplementary Data.
UST PRIVATE EQUITY INVESTORS FUND, 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 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, 1997, 1996 and for the period from August 1, 1995
(commencement of operations) to October 31, 1995
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.
906452.2
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UST Private Equity Investors Fund, Inc.
Portfolio of Investments October 31, 1999
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- -------------------------- ---------- ----------
COMMERCIAL PAPER -- 12.34%
$1,000,000 Bear Stearns Corp., 1/19/00........................ 6.00% $ 986,833
1,000,000 CIT, 11/01/99...................................... 5.33 1,000,000
1,000,000 General Electric Capital Corp., 2/23/00............ 5.98 1,000,000
1,000,000 HFC, 1/14/00....................................... 5.98 1,000,000
1,000,000 Morgan Stanley Dean Witter, 2/02/00................ 6.02 984,448
-------------
TOTAL COMMERCIAL PAPER (Cost $4,971,281)........... 4,971,281
-------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 19.85%
1,000,000 Federal Home Loan Bank, 11/01/99................... 5.16** 1,000,000
***7,000,000 U.S. Treasury Bill, 11/4/99........................ 4.62** 6,997,462
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $7,997,462).................................. 7,997,462
-------------
PRIVATE INVESTMENT FUNDS #, @ -- 34.41%
6,006 Allegra Capital Partners III, LP.................. 2,019,500
952 Brentwood Associates Buyout Fund II, LP........... 1,766,274
1,394 Bruckmann, Rosser, Sherrill & Co., LP............. 2,174,000
2,012 Morgenthaler Venture Partners IV, LP.............. 1,996,381
3,588 Sevin Rosen Fund V, LP............................ 2,181,989
4,008 Vanguard V, LP.................................... 3,727,091
-------------
TOTAL PRIVATE INVESTMENT FUNDS 13,865,235
(Cost $9,328,431).................................. -------------
See Notes to Financial Statements
-11-
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- -------------------------- ---------- ----------
PRIVATE COMPANIES #, @ -- 23.58%
Common and Preferred Stocks -- 23.58%
Business Services -- 3.34%
750,000 Signius Corporation, Series C........................... $932,809
323,046 Signius Corporation, Series E........................... $414,307
113,066 Signius Corporation (Common)............................ --
----------
1,347,116
----------
Computer Software -- 2.58%
537,521 NeoVista Software, Inc., Series V...................... 537,521
475,481 NeoVista Software, Inc., Series VI..................... 356,611
103,301 NeoVista Software, Inc., Series VII.................... 103,301
41,055 NeoVista Software, Inc., Series VIII................... 41,055
----------
1,038,488
----------
Medical Devices -- 5.61%
1,136,364 AbTox Inc., Series F................................... --
515,464 Cardiopulmonary Corp., Series D........................ 2,190,722
35,294 Cardiopulmonary Corp., Series F........................ 150,000
----------
2,340,722
-----------
Semiconductors -- 3.10%
294,000 LogicVision Inc., Series F............................. 1,249,500
-----------
Specialty Retail -- 8.75%
2,608,696 Best Friends Pet Care, Inc., Series F.................. 3,000,000
583,333 Best Friends Pet Care, Inc., Series G.................. 350,000
583,333 Best Friends Pet Care, Inc., Series H.................. 175,000
-----------
3,525,000
-----------
TOTAL PRIVATE COMPANIES (Cost $14,181,135)............ 9,500,826
-----------
PUBLIC COMPANIES -- 22.91%
Common Stocks -- 22.91%
Telecommunications -- 7.30%
356,437 Corsair Communications, Inc............................ 2,940,605
-----------
See Notes to Financial Statements
906452.2
-12-
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- -------------------------- ---------- ----------
Semiconductors # -- 15.61%
431,035 QuickLogic Corp................................. 6,293,111
----------
TOTAL PUBLIC COMPANIES (Cost $5,940,604)........ 9,233,716
----------
INVESTMENT COMPANIES -- 4.06%
971,770 Dreyfus Treasury Cash Management Fund........... 971,770
664,406 Fidelity Cash Portfolio, U.S. Treasury II....... 664,406
-------------
TOTAL INVESTMENT COMPANIES
(Cost $1,636,176)............................... 1,636,176
-------------
TOTAL INVESTMENTS (Cost $44,055,089*)............................... 117.15% 47,204,696
-------------
OTHER ASSETS & LIABILITIES (NET).................................... 117.15% (6,909,427)
--------- -------------
NET ASSETS.......................................................... 100.00% 47,204,696
========= =============
* Aggregate cost for Federal tax and book purposes.
** Discount Rate.
*** Held as collateral for the note payable. 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. Total market value of affiliated securities owned at October
31, 1999 was $7,212,838.
# Restricted as to public resale. Acquired between January 3, 1996 and
October 31, 1999. Total cost of restricted securities at October 31,
1999 aggregated $26,509,566. Total market value of restricted securities
owned at October 31, 1999 was $29,659,172 or 73.6% of net assets.
@ Non-Income Producing Security.
See Notes to Financial Statements
-13-
UST Private Equity Investors Fund, Inc.
Statement of Assets and Liabilities
October 31, 1999
ASSETS:
Investments, at value (Cost $44,055,089) (Note 1)............................................. $ 47,204,696
Receivable for investments sold............................................................... 436,770
Interest receivable........................................................................... 110,457
Prepaid expenses.............................................................................. 8,522
Cash.......................................................................................... 4,993
-----------------------
Total Assets.................................................................................... 47,765,438
-----------------------
LIABILITIES:
Deferred incentive fee payable (Note 2)....................................................... 227,752
Management fees payable (Note 2).............................................................. 128,136
Directors' fees payable (Note 2).............................................................. 43,501
Administration fees payable (Note 2).......................................................... 14,567
Note payable (Note 4)......................................................................... 7,000,000
Accrued expenses and other payables........................................................... 56,213
------------------------
Total Liabilities............................................................................... 7,470,169
------------------------
NET ASSETS...................................................................................... $ 40,295,269
========================
NET ASSETS consist of:
Undistributed net investment income........................................................... $ 565,764
Accumulated net realized loss on investments.................................................. (2,577,254)
Net unrealized appreciation of investments.................................................... 3,149,607
Allowance for management incentive fee........................................................ (227,752)
Par value..................................................................................... 405
Paid-in capital in excess of par value........................................................ 39,384,499
------------------------
Total Net Assets................................................................................ $ 40,295,269
========================
Shares of Common Stock Outstanding ($0.01 par value, 100,000 authorized) 40,463
NET ASSET VALUE PER SHARE $ 995.85
========================
See Notes to Financial Statements
906452.2
-14-
UST Private Equity Investors Fund, Inc.
Statement of Operations
For the Year Ended October 31, 1999
INVESTMENT INCOME:
Interest income...................................................... $ 364,937
--------------------
EXPENSES:
Managing investment advisory fees (Note 2)........................... 468,230
Legal fees........................................................... 125,999
Administration fees (Note 2)......................................... 58,000
Directors' fees and expenses (Note 2)................................ 43,501
Interest Expense on Loans (Note 4)................................... 14,306
Miscellaneous expenses............................................... 38,618
--------------------
Total Expenses.................................................... 748,654
Expenses reimbursed by Managing Investment Adviser (Note 2).......... (146,907)
--------------------
Net Expenses...................................................... 601,747
--------------------
NET INVESTMENT LOSS.................................................... (236,810)
--------------------
NET REALIZED AND UNREALIZED GAIN (LOSS): (Note 1)
Net realized loss on investments..................................... (2,449,598)
Net change in unrealized appreciation of investments................. 5,669,810
--------------------
NET REALIZED AND UNREALIZED GAIN....................................... 3,220,212
--------------------
Net change in allowance for management incentive fee................... (227,752)
--------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $2,755,650
====================
See Notes to Financial Statements
-15-
UST Private Equity Investors Fund, Inc.
Statement of Changes in Net Assets
Years Ended October 31,
1999 1998
------------------- --------------
OPERATIONS:
Net investment loss........................................................... $ (236,810) $ (160,455)
Net realized gain (loss) on investments....................................... (2,449,598) 356,562
Net change in unrealized appreciation (depreciation) of investments........... 5,669,810 (7,706,795)
Net change in allowance for management incentive fee.......................... (227,752) 122,095
------------------- ---------------
Net increase (decrease) in net assets resulting from operations............ 2,755,650 (7,388,593)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain............................................................. (367,573) (1,883,686)
------------------- ---------------
Net increase (decrease) in net assets........................................... 2,388,077 (9,272,279)
NET ASSETS:
Beginning of year............................................................. 37,907,192 47,179,471
------------------- ---------------
End of year (including undistributed net investment income
of $565,764 and $417,716, respectively)....................................... $ 40,295,269 $ 37,907,192
==================== ================
See Notes to Financial Statements
-16-
UST Private Equity Investors Fund, Inc.
Statement of Cash Flows
For the Year Ended October 31, 1999
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments.............................. $ 3,653,921
Purchases of Investments........................................ (2,931,879)
Net Decrease in Short-Term Investments.......................... 316,094
Investment Income............................................... 283,968
Interest Paid................................................... (14,912)
Operating Expenses Paid......................................... (538,166)
----------------------
Net Cash Provided for Investing and Operating Activities........ 769,026
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid.............................................. (367,573)
Cash Receipts from Borrowings................................... (1,000,000)
----------------------
Net Cash Used by Financing Activities............................. (1,367,573)
----------------------
Net Decrease in Cash.............................................. (598,547)
Cash at Beginning of Year....................................... 603,540
----------------------
Cash at End of Year............................................... $ 4,993
======================
Reconciliation of Net Investment Income to Net Cash
Used for Investing and Operating Activities:
Net Investment Loss............................................. $ (236,810)
Proceeds from Sales of Investments.............................. 3,653,921
Purchases of Investments........................................ (2,931,879)
Net Increase In Short-Term Investments.......................... 316,094
Net Decrease in Receivables Related to Operations............... (70,063)
Net Decrease in Payables Related to Operations.................. (45,800)
Accretion/Amortization of Discounts and Premiums................ 83,563
------------------------
Net Cash Provided for Investing and Operating Activities........ $ 769,026
========================
See Notes to Financial Statements
906452.2
-17-
UST Private Equity Investors Fund, Inc.
Financial Highlights - Selected Per Share Data and Ratios
For a fund share outstanding throughout each period
August 1,
1995* to
Years Ended October 31, October 31,
1999 1998 1997 1996 1995
------------- --------------- --------------- ------------- -------------
NET ASSET VALUE, BEGINNING $ 936.84 $1,165.99 $ 1,055.77 $ 992.32 $ 1,000.00
OF PERIOD
Offering Costs -- -- -- -- (8.53)
------------- --------------- --------------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (5.85) (3.97) 5.35 40.33 12.86
Net Realized and Unrealized Gain (Loss)
on Investments 79.57 (181.64) 144.20 32.84 (0.17)
Net Change in Allowance for Management (5.63) 3.01 (2.91) (0.10) --
Incentive fee ------------- --------------- ---------------- -------------- ---------------
Total from Investment Operations 68.09 (182.60) 146.64 73.07 12.69
------------- --------------- ---------------- -------------- ---------------
DISTRIBUTIONS -- -- (35.34) (9.62) (11.84)
Net Investment Income
Net Realized Gain (9.08) (46.55) (1.08) -- --
------------- --------------- ---------------- --------------- -------------
NET ASSET VALUE, END OF PERIOD $ 995.85 $ 936.84 $ 1,165.99 $ 1,055.77 $ 992.32
============= =============== ================ =============== =============
TOTAL NET ASSET VALUE RETURN+ 7.33% (16.22)% 14.37% 7.41% 0.39%
============= =============== =================== ============= =============
RATIOS AND SUPPLEMENTAL DATA $ 40,295 $ 37,907 $ 47,179 $ 42,720 $ 40,152
Net Assets, End of Period (Thousands)
Ratio of Net Operating Expenses to Average 1.62% 1.77% 1.65% 1.00% 0.50%**
Net Assets
Ratio of Gross Operating Expenses to 2.01% 1.95% 2.02% 1.56% 2.44%**
Average Net Assets++
Ratio of Net Investment Income to Average (0.64)% (0.39)% 0.48% 3.96% 5.18%**
Net Assets
Interest Expense Ratio 0.04% 0.09% N/A N/A N/A
Portfolio Turnover Rate 0% 11% 44% 10% 0%
* 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.
See Notes to Financial Statements
906452.2
-18-
UST PRIVATE EQUITY INVESTORS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
UST Private Equity Investors Fund, Inc. ("the Company") was incorporated
under the laws of the State of Maryland on September 16, 1994 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
orless 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
Adviser. 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 $29,659,172. 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.
(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.
906452.2
-19-
(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 resulted in an increase in
undistributed net investment income and a corresponding decrease in additional
paid in capital. The reclassification had no effect on net assets.
The Company has an unused capital loss carryforward of $1,978,718 available
for income tax purposes, to be applied against future net security profits, if
any, realized after October 31, 1999. If not applied, the carryover expires in
fiscal year 2007.
At October 31, 1999 the tax basis of the Company's investments for Federal
income tax purposes amounted to $44,055,089. The net unrealized appreciation
amounted to $3,149,607, which is comprised of gross unrealized appreciation of
$8,020,638 and aggregate gross unrealized depreciation of $4,871,031.
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 10% of the cumulative realized capital
gains (net of realized capital losses and unrealized net capital depreciation),
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.
U.S. Trust has voluntarily agreed to waive or reimburse other operating
expenses of the Company, exclusive of management fees, to the extent they exceed
0.42% of the Company's net assets, and U.S. Trust will waive or reimburse,
exclusive of management fees, all such expenses with respect to that portion of
the Company's net assets, determined as of the end of each fiscal quarter, that
is invested in short-term investments.
Each Director of the Company receives an annual fee of $9,000, plus a
meeting fee of $1,500 for each meeting attended, 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.
906452.2
-20-
3. Purchases and Sales of Securities
Purchases and sales of securities, excluding short-term investments, for
the Company aggregated $2,931,879 and $4,090,691, respectively.
On May 13, 1999, the Company sold its investments in CommSite
International, Inc. resulting in total proceeds of $2,718,750, of which $300,000
is held in escrow.
At fiscal year end October 31, 1999, the Company had outstanding investment
commitments totaling $1,252,698.
4. Note Payable
At October 31, 1999 the Company had a $7,000,000 note payable to The Chase
Manhattan Bank. The proceeds were used for temporary investment purposes. The
note had an interest rate equal to the Federal Funds rate plus 0.50%. The note
was collateralized by a United States Treasury Bill which is identified in the
Schedule of Investments. The note was paid in its entirety on November 1, 1999.
The average daily amount of borrowings during the period ended October 31, 1999
was $254,795 with a weighted average annualized interest rate of 5.61%.
5. Transactions with Affiliated Companies
An affiliated company is a company in which the Company 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:
Sales Value
Purchases Proceeds Realized Gains (Note 1)
---------------- ---------------- ----------------- -----------------
Signius Corporation $ -- $ -- $ -- $ 1,347,116
CommSite International, Inc.... -- 2,718,750 -- --
Cardiopulmonary Corp........... -- -- -- 2,340,722
Best Friends Pet Care, Inc..... 525,000 -- -- 3,525,000
---------------- ---------------- ----------------- -----------------
$ 525,000 $ 2,718,750 $ -- $ 7,212,838
================ ================ ================= =================
906452.2
-21-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
UST Private Equity Investors Fund, Inc.
We have audited the accompanying statement of assets and liabilities of UST
Private Equity Investors Fund, 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, the statements of changes in net assets for each
of the two years then ended 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.
Weconducted 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 UST
Private Equity Investors Fund, Inc. at October 31, 1999, the results of its
operations and its cash flows for the year then ended, the changes in net assets
for each of the two years then ended and the financial highlights for each of
the indicated periods in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
December 14, 1999
906452.2
-22-
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 September 16, 1994
Executive Officer
Douglas A. Lindgren [38] Executive July 6, 1995
Vice President
Brian Schmidt [41] Chief Financial Officer May 31, 1996
Chief Accounting Officer
Treasurer
Frank Bruno [40] Assistant Treasurer March 4, 1997
Ronald A. Schwartz [51] Secretary September 16, 1994
Frank J. Hearn, Jr. [35] Assistant Secretary March 4, 1997
John C. Hover* [56] Director December 9, 1998
Gene M. Bernstein [52] Director December 1, 1994
Stephen V. Murphy [54] Director December 1, 1994
*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 as modified by the Supplement dated August 28, 1995.
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
906452.2
-23-
certain types of investments and an incentive fee based in part on a percentage
of realized capital gains of the Company. For the year ended October 31, 1999,
the Managing Investment Adviser reimbursed $146,907 to the Company pursuant to a
voluntary agreement, representing operating expenses (excluding its management
fee of $468,230). Additional information with respect to the management fee
payable to the Managing Investment Adviser is set forth in the "Management"
section of the Prospectus, as modified by the supplement thereto dated October
31, 1995, which section is incorporated herein by reference.
The disinterested directors receive compensation of $9,000 on an annual basis
and $1,500 for each Board of Directors' meeting attended plus reasonable
expenses. For the year ended October 31, 1999, the disinterested directors of
the Company each received compensation totaling $15,000.
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 251
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.
These filings have all been satisfied by the Company's executive officers and
directors although the Company notes that each of Messrs. Fann, Lindgren,
Bernstein, Murphy and Schmidt filed untimely initial statements of beneficial
ownership on Form 3 reporting their status as directors or executive officers.
The Company notes that the reports of Messrs. Lindgren and Murphy of one
transaction each on separate Form 5s and the reports of Messrs. Fann and
Bernstein of two transactions each on separate Form 5s should have been reported
on separate Form 4s. In all cases the securities purchased have not subsequently
been sold or otherwise disposed of.
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.
906452.2
-24-
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 years 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, 1997, 1996 and for the
period from August 1, 1995 (commencement of operations) to
October 31, 1995
Notes to Financial Statements
Independent Auditors' Report
2. Exhibits
(3)(a) Articles of Incorporation of the Company (1)
(3)(b) Amended and Restated 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 December 16, 1994,
filed with the Securities and Exchange Commission, as
supplemented by supplements thereto dated August 28,
1995 and October 31, 1995 (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 September 22, 1994.
906452.2
-25-
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
906452.2
-26-
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
fiscal year ended October 31, 1999, of UST Private Equity Investors Fund, Inc.
ERNST & YOUNG LLP
New York, New York
January 25, 2000