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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, 1998 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
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UST PRIVATE EQUITY INVESTORS FUND, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 13-3786385
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(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, 1998 was 40,463 shares. No active market for the shares of the registrant
exists; therefore, the market value of such shares cannot be determined.
788996.3
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........................................... 10
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.
788996.3
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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, 1998 ("Fiscal 1998"), the Company's investment
portfolio consisted of securities with an aggregate cost of $47,979,593 and a
fair value of $45,459,390. The Company has invested $27.7 million in twelve
later stage venture capital and private middle market companies (two of which
are now public companies) and committed to invest another $12.0 million in six
venture capital, buyout and private equity funds of which $9.2 million has been
drawn.
The following is a description of the Company's investments as of
October 31, 1998 and which are more fully set forth in Item 8.
788996.3
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Investments held (private)
- --------------------------
o Best Friends Pet Care Inc., Norwalk, CT, is an innovative pet boarding
and grooming concept. The company's facilities offer a wide range of
pet services including boarding, grooming and training. With 22
locations, the company believes it is the largest provider of pet
boarding services in the country. Best Friends is currently rolling out
new facilities throughout New England.
o Cardiopulmonary Corp., Milford, CT, designs, develops and assembles
advanced software-driven ventilators, representing a new generation of
life support technology for the treatment of intensive care patients.
The technology, developed at Yale University Hospital, New Haven,
received FDA approval during the Company's 1998 fiscal year allowing
Cardiopulmonary to begin selling its products in the United States. The
company's first product, the Venturi ventilator, incorporates
proprietary "smart" software and pneumatic hardware. The company
believes that its products will improve clinical results, decrease the
length of hospital stays and reduce treatment costs.
o CommSite International, Inc., Vienna, VA, is a national wireless
antennae site location and site management company serving paging,
cellular, specialized mobile radio, and personal communications
services carriers. In April 1998, CommSite received $13.0 million in
additional equity financing in a transaction which valued the per share
price at a greater value than the Company's original cost. The capital
raised will be used to continue to acquire and build communications
towers. The company recently secured contracts to build one hundred new
communications towers.
o LogicVision, Inc., San Jose, CA, is a developer of built-in
semiconductor testing software. 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 company also recently
announced a partnership with Credence Systems Corp. that will involve
linking the LogicVision embedded ATE solution with Credence's
semiconductor test systems.
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 has been collected, but not effectively
interpreted. Corporate applications of NeoVista's products include
inventory management, customer profiling, behavior prediction and fraud
detection.
o Signius Corp., Somerset, NJ, (formerly known as ProCommunications,
Inc.) provides telemessaging services for small and medium sized
businesses. The company believes it is now the largest multi-site
telemessaging company in the United States, with 45 locations and over
1,000 employees. Among Signius' service offerings are voice mail,
custom call processing, alpha-numeric dispatch, inbound order taking,
claims processing and interactive voice response services. The Company
currently maintains a seat on the Board of Directors.
o QuickLogic Corp., San Jose, CA, designs, manufactures and markets
high-capacity programmable logic semiconductors, known as field
programmable gate arrays (FPGAs), along with comprehensive design
software. The company's products shorten the design cycle time for
electronic systems. accelerating time-to-market. QuickLogic recently
announced a new class of devices, embedded standard products (ESPs),
which facilitate extremely fast development of complex systems.
788996.3
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Investments held (public)
- -------------------------
o Corsair Communications, Inc., Palo Alto, CA, (ticker: "CAIR", Nasdaq)
is a provider of equipment and services to wireless communications
providers. The company has successfully deployed its products both
domestically and abroad. In July 1997, Corsair completed an initial
public offering priced at $15.00 per share and eventually traded to a
high of $27.625 per share on October 13, 1997. During the course of
1998, the company acquired Subscriber Computing. Subsequent to the
acquisition, the company missed its June 1998 quarterly earnings
estimates. This situation, combined with the sell-off of small
capitalization stocks beginning in August and the difficulties facing
telecommunications equipment companies with international exposure,
caused the stock price to decline sharply. It currently trades at
approximately $5.00 per share.
Investments in third-party funds
- --------------------------------
o Brentwood Associates Buyout Fund II, LP ("Brentwood") specializes in
consolidating businesses in fragmented industries. Brentwood has
acquired a total of eight companies to date including Classroom
Connect, Inc., a provider of educational Internet products, in which
Excelsior Private Equity Fund II, Inc. (an affiliate of the Company) is
also invested. Other companies in Brentwood's portfolio include Aspen
Marketing Group, Inc., a company in the promotional marketing industry
and WorldPoint Logistics, Inc., a player in the third-party logistics
industry. In August 1998, Clinical Communications Group, Inc., a
provider of educational and promotional materials for the
pharmaceutical industry, was sold to Snyder Communications, for
approximately two times Brentwood's original cost of $20 million.
o Bruckmann, Rosser, Sherrill & Co., LP ("BRS") is a leveraged buyout
fund targeting acquisitions in stable industries. Among BRS's recent
transactions are acquisitions of Mediq (healthcare services),
California Pizza Kitchen (specialty restaurants) and Penhall
International, Inc. (operator-assisted equipment rental provider). In
July 1998, BRS sold one of its portfolio companies, Restaurant
Associates Corp., to Compass Group plc, resulting in a 4.75 times
return on BRS's cost and a distribution of approximately $200,000 to
the Company.
o Lawrence, Smith & Horey III, LP ("LSH") targets later-stage and new
media investment opportunities on the East Coast. Approximately
three-quarters of LSH have been invested to date in a portfolio of nine
companies. Among LSH's investments are Signius Corp. and CommSite
International, Inc., both direct investments of the Company. LSH's
other investments include National Network Technologies, Inc., a
provider of installation and maintenance services for all major
communications carriers in the New York marketplace besides Bell
Atlantic, and Shuttle America, a start-up commuter airline.
o Morgenthaler Venture Partners IV, LP ("Morgenthaler") invests in
healthcare and information technology companies across all investment
stages on a national basis. In June, Nortel acquired Aptis, one of
Morgenthaler's portfolio companies, returning 5.9 times the fund's
cost. The Company received 6,668 shares of Nortel valued at
approximately $232,000. To date, Morgenthaler's portfolio consists of
23 companies including Molecular Applications Group, Inc., a company in
the drug design automation software market, and Nuance Communications,
Inc. which develops speech recognition and natural language
understanding software.
o Sevin Rosen V, LP ("Sevin Rosen") invests in early-stage technology
companies. In 1998, Sevin Rosen invested in several companies including
Airspan Communications, a designer, manufacturer and seller of wireless
local loop (WLL) systems to replace copper cable running between a
telephone central office and a telephone subscriber location. The fund
also invested in Decision.ism, Inc., a company that develops and
markets software for data mart management. As a result of Sevin Rosen's
investment in LightSpeed International, a company that was acquired by
Cisco Systems in December 1997, the Company received 7,000 shares of
Cisco Systems in April 1998.
788996.3
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o Vanguard V, LP ("Vanguard") invests in seed and early stage companies
in the communications, life science and computer sectors primarily on
the West Coast and in the Southwest. In April 1998, the Company
received a distribution of approximately 13,600 shares of Cisco Systems
from Vanguard. The distribution resulted from Cisco's purchase of
LightSpeed International, another company in the Vanguard portfolio.
Vanguard's portfolio also includes ImageX.com, a low cost
Internet/Intranet solution to enable businesses to order their printed
materials, and Fujant Technologies which is building a family of multi-
carrier power amplifiers and active antennae for use in cellular and
PCS base stations.
Investments sold
- ----------------
o Rental Service Corp., Scottsdale, AZ, (ticker: "RSV", New York Stock
Exchange) is a consolidator of heavy equipment rental companies. In
January 1996, the Company invested in RSV at $7.03 per share. RSV
subsequently completed an initial public offering in September 1996.
The Company has since sold its position in RSV at an average of $21.60
per share representing the Company's first completely realized
investment.
Investments written-off
- -----------------------
o AbTox, Inc., Mundelein, IL, manufactured gas plasma sterilizers used in
hospitals and by medical equipment companies. In April 1998, the Food
and Drug Administration (the "FDA") notified the company that it had
not received FDA clearance to sell the company's Plazlyte sterilizer.
Further, the FDA indicated that it had believed the sterilizer posed a
safety issue when used on medical instruments used in eye surgeries and
medical instruments containing copper, zinc, or brass. The FDA
acknowledged that the company did receive FDA clearance for a prior
product also called the Plazlyte Sterilization System, which the
company never commercially marketed. Subsequently, in July 1998, the
company sought Chapter 11 Bankruptcy protection and ceased marketing
its product.
Our investment was predicated on the potential growth of a new
sterilizer that had over 150 units installed at some of the most
prestigious medical institutions and hospitals in the world.
Furthermore, at the time of our investment we received copies of FDA
clearance letters that we believed at the time accurately reflected the
product's regulatory position. We sought and received the requisite
legal representations and warranties regarding the company, its
products, and its regulatory status in the Purchase Agreements which we
now believe the company breached. As a result, we are currently
exploring all recovery avenues including possible legal remedies. We
are uncertain of the amount of recovery, if any, that we may receive
and, accordingly have written off this investment.
o Party Stores Holdings, Inc., Melville, NY, was a dominant party store
concept chain in New York with a stronghold on Long Island. In 1997,
the Company invested in the company on the premise that it would help
to fund the acquisition of two geographically contiguous chains,
Paperama and Paper Cutters. Both of these acquisitions were turnaround
situations. However, the problems were more severe than originally
anticipated and the combined entity required significantly more
capital. In early 1998, the Company and the other investors chose not
to invest more equity, as it was unclear how the business could be made
economically viable. As a result, the company filed for Chapter 11
Bankruptcy protection in January 1998. The Company does not anticipate
any recovery from this investment.
o P2 Holdings Corp. (also known as Plynetics Express), San Leandro, CA,
was a provider of rapid prototyping and rapid tooling services. At the
time of our investment, we believed the outsourcing of prototyping and
tooling services to be a rapidly growing industry with significant
fragmentation. P2 sought to consolidate this industry and provide
customers with a national, multi-site solution. During the course of
this year, P2 struggled as the industry entered a downturn. Quickly,
the company became a high fixed cost manufacturer and service provider
in an industry that was undergoing significant pricing pressure. As a
result, the company imposed several cost cutting initiatives but was
unable to protect its margins from
788996.3
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deteriorating. In October, the Company perceived the company's
viability to be in serious doubt and wrote-off its investment. No
recovery is expected for the company's shareholders.
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, 1998, 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.
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.
788996.3
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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, 1998. On December 21, 1998, the Company
declared a dividend payable to shareholders of record on December 18, 1998 in
the amount of $9.08 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, 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, 1998, the Company held $45,459,390 in investments and
$603,540 in cash as compared to $47,016,190 in investments at October 31, 1997.
At October 31, 1998, investments included $1,000,000 in commercial paper,
$386,917 in corporate bonds, $11,954,587 in U.S. Government and agency
obligations, $10,290,156 in private investment funds, $18,142,158 in private
companies, $2,103,659 in public companies and $1,581,913 in investment
companies.
At October 31, 1998 the Company had an $8,000,000 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 2, 1998.
In connection with the Company's commitments to private funds in the
amount of $12,000,000, since inception, a total of $9,192,658, representing
capital calls, was paid by the Company, comprised of $3,606,968 in fiscal 1998
and $5,585,690 in prior years.
Results of Operations:
- ---------------------
Investment Income and Expenses
For fiscal 1998, the Company had interest income of $569,706, and net
operating expenses of $730,161, resulting in net investment loss of $160,455 as
compared to interest income of $959,878, and net operating expenses of $743,207,
resulting in net investment income of $216,671 for the fiscal year ended October
31, 1997. The decrease in net investment income in Fiscal 1998 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 fee based in part on a
percentage of realized capital gains of the Company. Such fee is determined and
payable
788996.3
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quarterly. For the fiscal years ended October 31, 1998, and October 31, 1997 the
Managing Investment Adviser earned $549,137 and $588,909 in management fees,
respectively. In addition, for the same periods, the Managing Investment Advisor
received/reimbursed ($122,095) and $117,732 in management incentive fees,
respectively. For the same periods, the Managing Investment Adviser reimbursed
other operating expenses of the Company in the amount of ($76,165) and
($165,453) 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 $936.84 at October
31, 1998, down $229.15 per share from the net asset value per common share of
$1,165.99 at October 31, 1997. This decrease is primarily the result of the
write-off of AbTox, Inc., Party Stores Holdings, Inc. and P2 Holdings Corp. as
detailed above as well as the depreciation in the price of Corsair
Communications, Inc. This decrease was partially offset by an increase in value
of CommSite International, Bruckmann, Rosser, Sherrill & Co., LP, Sevin Rosen V,
LP and Vanguard V, LP as well as by the distributions of Cisco Systems and
Northern Telecom shares.
For fiscal 1998, the Company had a net decrease in net assets resulting
from operations of $7,388,593 ($182.60 per share), comprised of net investment
loss totaling $160,455 ($3.97 per share), and realized and unrealized loss of
$7,350,233 ($181.64 per share) and allowance for management incentive fee of
$122,095 ($3.01 per share) compared to a net increase in net assets resulting
from operations of $5,933,285 ($146.64 per share), comprised of net investment
income totaling $216,671 ($5.35 per share) and net realized and unrealized gains
of $5,834,344 ($144.20 per share) and allowance for management incentive fee
($117,732) ($2.91 per share) in fiscal 1997.
At October 31, 1998, the Company's net assets were $37,907,192, a
decrease of $9,272,279 from net assets of $47,179,471 at October 31, 1997. This
decrease was the result of a $7,388,593 net decrease in net assets resulting
from operations and a $1,883,686 distribution to shareholders.
Realized and Unrealized Gains and Losses from Portfolio Investments:
- -------------------------------------------------------------------
For the fiscal year ended October 31, 1998, the Company had a
($7,350,233) net realized and unrealized loss from investments, comprised of
$356,562 net realized gain on security transactions and a ($7,706,795) net
change in unrealized depreciation of investments as compared to a $5,834,344 net
realized and unrealized gain from investments, comprised of $1,926,352 net
realized gain on security transactions and a $3,907,992 net change in unrealized
appreciation of investments for the fiscal year ended October 31, 1997.
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 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 and the Company's other service providers
have informed the Company that they are taking 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.
788996.3
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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 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,
1998, these publicly traded equity securities were valued at $2,103,659. 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 $210,366 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, 1998
Statement of Assets and Liabilities as of October 31, 1998
Statement of Operations for the year ended October 31, 1998
Statement of Changes in Net Assets for the years ended October 31, 1998 and
October 31, 1997
Statement of Cash Flows for the year ended October 31, 1998
Financial Highlights -- Selected Per Share Data and Ratios for the years ended
October 31, 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.
788996.3
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UST Private Equity Investors Fund, Inc.
Portfolio of Investments October 31, 1998
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- --------------------- ----------- -----------
COMMERCIAL PAPER -- 2.64%
$1,000,000 General Electric Capital Corp., 12/11/98
(Cost $1,000,000)..................................... 5.11% $1,000,000
-------------
CORPORATE BONDS - 1.02%
142,000 AT&T Corp., 5/01/99............................................ 4.38 141,631
150,000 Bank of New York (Delaware), 2/12/99........................... 5.42 150,039
95,000 Merrill Lynch & Co., 2/16/99................................... 5.50 95,247
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TOTAL CORPORATE BONDS (Cost $385,641).......................... 386,917
-------------
U.S. GOVERNMENT AGENCY OBLIGATIONS-- 31.54%
1,000,000 Federal Farm Credit Bank, 11/19/98............................. 4.77** 997,615
1,000,000 Federal Home Loan Bank, 11/02/98............................... 5.40** 999,850
1,000,000 Federal Home Loan Mortgage Corp., 11/30/98 5.09** 995,900
1,000,000 Federal National Mortgage Association, 11/04/98................ 5.34** 999,555
***8,000,000 U.S. Treasury Bill, 12/17/98................................... 3.75** 7,961,667
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $11,954,587)............................................. 11,954,587
-------------
PRIVATE INVESTMENT FUNDS #, @-- 27.14%
943 Brentwood Associates Buyout Fund II, LP........................ 1,470,378
1,388 Bruckmann, Rosser, Sherrill & Co., LP.......................... 2,066,227
6,005 Lawrence, Smith & Horey III, LP................................ 1,434,769
2,008 Morgenthaler Venture Partners IV, LP........................... 1,320,455
3,586 Sevin Rosen Fund V, LP......................................... 1,925,527
4,007 Vanguard V, LP................................................. 2,072,800
-------------
TOTAL PRIVATE INVESTMENT FUNDS
(Cost $8,309,479).............................................. 10,290,156
-------------
See Notes to Financial Statements
788996.3
-11-
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- --------------------- ----------- -----------
PRIVATE COMPANIES #, @ -- 47.86%
Preferred and Common Stocks -- 47.22%
Business Services-- 8.28%
750,000 +!Signius Corporation, Series C................................ $ 3,000,000
+!Signius Corporation, Bridge Note............................. 139,056
-------------
3,139,056
-------------
Communications Services --11.28%
1,125,000 !CommSite International Inc., Series A......................... 1,125,000
1,875,000 !CommSite International Inc., Series B......................... 1,931,250
1,183,252 !CommSite International Inc., Series C......................... 1,218,750
-------------
4,275,000
-------------
Computer Software -- 2.36%
537,521 !NeoVista Software Inc., Series V.............................. 537,521
475,481 !NeoVista Software Inc., Series VI............................. 356,611
-------------
894,132
-------------
Medical Devices -- 6.18%
1,136,364 AbTox Inc., Series F........................................... --
515,464 !Cardiopulmonary Corp., Series D............................... 2,190,722
35,294 !Cardiopulmonary Corp., Series F............................... 149,999
-------------
2,340,721
-------------
Semiconductors -- 11.21%
294,000 LogicVision Inc., Series F..................................... 1,249,500
2,586,207 QuickLogic Corp., Series F..................................... 3,000,000
-------------
4,249,500
-------------
Specialty Industry Machinery -- 0.00%
572,190 P2 Holdings Corp., Series A.................................... --
1,395,442 P2 Holdings Corp., Series B.................................... --
-------------
--
-------------
Specialty Retail -- 7.91%
2,608,696 !Best Friends Pet Care, Inc., Series F ........................ 3,000,000
-------------
17,898,409
-------------
See Notes to Financial Statements
788996.3
-12-
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- --------------------- ----------- -----------
PRIVATE COMPANIES - (Continued)
Warrants -- 0.64%
Communication Services -- 0.64%
236,650 !CommSite International Inc., Series C......................... 243,749
34,764 +!Signius Corporation.......................................... --
-------------
243,749
-------------
TOTAL PRIVATE COMPANIES (Cost $21,701,078)..................... 18,142,158
-------------
PUBLIC COMPANIES -- 5.55%
Common Stocks -- 5.55%
Telecommunications-- 5.55%
363,637 Corsair Communications, Inc.................................... 1,818,185
6,668 Northern Telecom Ltd........................................... 285,474
-------------
TOTAL PUBLIC COMPANIES (Cost $3,046,895)....................... 2,103,659
-------------
INVESTMENT COMPANIES-- 4.17%
981,500 Dreyfus Treasury Cash Management Fund.......................... 981,500
600,413 Fidelity Cash Portfolio, U.S. Treasury II...................... 600,413
-------------
TOTAL INVESTMENT COMPANIES
(Cost $1,581,913).............................................. 1,581,913
-------------
TOTAL INVESTMENTS (Cost $47,979,593*)................................................. 119.92% 45,459,390
-------------
OTHER ASSETS & LIABILITIES (NET)...................................................... (19.92) (7,552,198)
----------- -------------
NET ASSETS............................................................................ 100.00% $37,907,192
=========== =============
* Aggregate cost for Federal tax and book purposes.
** Discount Rate.
*** Held as collateral for the note payable.
+ The company changed its name from ProCommunications, Inc.
! At October 31, 1998, 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, 1998 these
securities were valued at the cost at which they were acquired during
the year. There were no sales of shares of any affiliates during the
year. Total market value of affiliated securities owned at October 31,
1998 was $13,892,658.
# Restricted as to public resale. Acquired between January 3, 1996 and
October 30, 1998. Total cost of restricted securities at October 31,
1998 aggregated $30,010,557. Total market value of restricted
securities owned at October 31, 1998 was $28,432,314 or 75.0% of net
assets.
@ Non-Income Producing Security.
See Notes to Financial Statements
788996.3
-13-
UST Private Equity Investors Fund, Inc.
Statement of Assets and Liabilities
October 31, 1998
ASSETS:
Investments, at value (Cost $47,979,593) (Note 1)...........................................$ 45,459,390
Cash........................................................................................ 603,540
Interest receivable......................................................................... 29,488
Prepaid expenses............................................................................ 19,428
--------------------
Total Assets............................................................................. 46,111,846
LIABILITIES:
Management fees payable (Note 2)............................................................ 91,688
Directors' fees payable (Note 2)............................................................ 30,000
Administration fees payable (Note 2)........................................................ 15,531
Note payable (Note 5)....................................................................... 8,000,000
Accrued expenses and other payables......................................................... 67,435
--------------------
Total Liabilities........................................................................ 8,204,654
--------------------
NET ASSETS.....................................................................................$ 37,907,192
====================
NET ASSETS consist of:
Undistributed net investment income.........................................................$ 417,716
Accumulated net realized gain on investments................................................ 239,917
Net unrealized depreciation of investments.................................................. (2,520,203)
Par value................................................................................... 405
Paid-in capital in excess of par value...................................................... 39,769,357
--------------------
Total Net Assets...............................................................................$ 37,907,192
====================
Shares of Common Stock Outstanding ($0.01 par value, 100,000 authorized) 40,463
NET ASSET VALUE PER SHARE $ 936.84
====================
See Notes to Financial Statements
788996.3
-14-
UST Private Equity Investors Fund, Inc.
Statement of Operations
For the Year Ended October 31, 1998
INVESTMENT INCOME:
Interest income................................................................................$ 569,706
-----------------
EXPENSES:
Managing investment advisory fees (Note 2)..................................................... 549,137
Legal fees..................................................................................... 60,000
Administration fees (Note 2)................................................................... 58,000
Interest Expense on Loans (Note 5)............................................................. 37,227
Directors' fees and expenses (Note 2).......................................................... 30,000
Amortization of organization expense (Note 4).................................................. 16,490
Insurance expense.............................................................................. 13,685
Miscellaneous expenses......................................................................... 41,787
-----------------
Total Expenses.............................................................................. 806,326
Expenses reimbursed by Managing Investment Adviser (Note 2).................................... (76,165)
-----------------
Net Expenses................................................................................ 730,161
-----------------
NET INVESTMENT LOSS............................................................................... (160,455)
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS): (Note 1)
Net realized gain on investments............................................................... 356,562
Net change in unrealized depreciation of investments........................................... (7,706,795)
-----------------
NET REALIZED AND UNREALIZED LOSS.................................................................. (7,350,233)
Net change in Allowance for Management Incentive fee.............................................. 122,095
-----------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS..............................................$ (7,388,593)
=================
See Notes to Financial Statements
788996.3
-15-
UST Private Equity Investors Fund, Inc.
Statement of Changes in Net Assets
Years Ended October 31,
1998 1997
---------------- ---------------
OPERATIONS:
Net investment income (loss)............................................ $ (160,455) $ 216,671
Net realized gain on investments........................................ 356,562 1,926,352
Net change in unrealized appreciation (depreciation) of investments..... (7,706,795) 3,907,992
Net change in Allowance for Management Incentive fee.................... 122,095 (117,732)
---------------- ---------------
Net increase (decrease) in net assets resulting from operations...... (7,388,593) 5,933,283
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................... -- (1,429,792)
Net realized gain....................................................... (1,883,686) (43,640)
---------------- ---------------
Net increase in net assets................................................. (9,272,279) 4,459,851
NET ASSETS:
Beginning of year ...................................................... 47,179,471 42,719,620
---------------- ---------------
End of year (including undistributed net investment income
of $417,716 and $229,824, respectively).............................. $ 37,907,192 $ 47,179,471
================ ===============
See Notes to Financial Statements
788996.3
-16-
UST Private Equity Investors Fund, Inc.
Statement of Cash Flows
For the Year Ended October 31, 1998
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments.........................................................$ 4,641,123
Purchases of Investments................................................................... (7,074,067)
Net Increase in Short-Term Investments..................................................... (3,012,027)
Investment Income.......................................................................... 747,943
Interest Paid.............................................................................. (33,241)
Operating Expenses Paid.................................................................... (725,821)
---------------------
Net Cash Used for Investing and Operating Activities....................................... (5,456,090)
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid......................................................................... (1,883,686)
Cash Receipts from Borrowings.............................................................. 8,000,000
---------------------
Net Cash Provided by Financing Activities.................................................. 6,116,314
---------------------
Net Increase in Cash ...................................................................... 660,224
Cash at Beginning of Year..................................................................... (56,684)
---------------------
Cash at End of Year...........................................................................$ 603,540
=====================
Reconciliation of Net Investment Income to Net Cash
Used for Investing and Operating Activities:
Net Investment Loss........................................................................$ (160,455)
Proceeds from Sales of Investments......................................................... 4,641,123
Purchases of Investments................................................................... (7,074,067)
Net Increase In Short-Term Investments..................................................... (3,012,027)
Net Decrease in Receivables Related to Operations.......................................... 195,833
Net Decrease in Payables Related to Operations............................................. (204,297)
Amortization of Organization Costs......................................................... 16,490
Accretion/Amortization of Discounts and Premiums........................................... 141,310
---------------------
Net Cash Used for Investing and Operating Activities.......................................$ (5,456,090)
=====================
See Notes to Financial Statements
788996.3
-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,
1998 1997 1996 1995
---------------- ---------------- --------------- ----------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1,165.99 $ 1,055.77 $ 992.32 $ 1,000.00
Offering Costs.............................. -- -- -- (8.53)
---------------- ---------------- --------------- ----------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss) ......... (3.97) 5.35 40.33 12.86
Net Realized and Unrealized Gain
(Loss) on Investments.................. (181.64) 144.20 32.84 (0.17)
Net Change in Allowance for Management
Incentive fee...................... 3.01 (2.91) (0.10) --
---------------- ---------------- --------------- ----------------
Total from Investment Operations....... (182.60) 146.64 73.07 12.69
---------------- ---------------- --------------- ----------------
DISTRIBUTIONS
Net Investment Income.................. -- (35.34) (9.62) (11.84)
Net Realized Gain...................... (46.55) (1.08) -- --
---------------- ---------------- --------------- ----------------
NET ASSET VALUE, END OF PERIOD $ 936.84 $ 1,165.99 $ 1,055.77 $ 992.32
================ ================ =============== ================
TOTAL NET ASSET VALUE RETURN+ (16.22)% 14.37% 7.41% 0.39%
================ ================ =============== ================
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands).. $ 37,907 $ 47,179 $ 42,720 $ 40,152
Ratio of Net Operating Expenses to Average
Net Assets......................... 1.77% 1.65% 1.00% 0.50%**
Ratio of Gross Operating Expenses to
Average Net Assets++............... 1.95% 2.02% 1.56% 2.44%**
Ratio of Net Investment Income to Average
Net Assets......................... (0.39)% 0.48% 3.96% 5.18%**
Interest Expense Ratio................. 0.09% N/A N/A N/A
Portfolio Turnover Rate................ 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
788996.3
-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
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
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, 1998, market quotations were not readily available for
securities valued at $28,432,314. 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.
788996.3
-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.
At October 31, 1998 the tax basis of the Company's investments for Federal
income tax purposes amounted to $47,979,593. The net unrealized depreciation
amounted to $2,520,203, which is comprised of gross unrealized appreciation of
$4,243,097 and aggregate gross unrealized depreciation of $6,763,300.
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.
3. Purchases and Sales of Securities
Purchases and sales of securities, excluding short-term investments, for
the Company aggregated $7.074,067 and $3,870,893, respectively.
At October 31, 1998, the Company had outstanding investment commitments
totaling $2,919,821.
788996.3
-20-
4. Organization Costs
The Company has borne all costs in connection with the initial organization
of the Company. The Company expensed all remaining organization costs, totaling
$16,490, as of October 31, 1998.
5. Note Payable
At October 31, 1998 the Company had an $8,000,000 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 2, 1998.
The average daily amount of borrowings during the period ended October 31, 1998
was $589,041 with a weighted average annualized interest rate of 6.09%.
788996.3
-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, 1998, 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.
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, 1998 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, 1998, 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 16, 1998
788996.3
-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, 1998.
Served in Present
Name and Age Position Capacity Since
- ------------ -------- -----------------
David I. Fann [34] President; Chief September 16, 1994
Executive Officer
Douglas A. Lindgren [36] Executive July 6, 1995
Vice President
Brian Schmidt [39] Chief Financial Officer May 31, 1996
Chief Accounting Officer
Treasurer
Frank Bruno [39] Assistant Treasurer March 4, 1997
Ronald A. Schwartz [50] Secretary September 16, 1994
Frank J. Hearn, Jr. [34] Assistant Secretary March 4, 1997
Edith A. Cassidy* [45] Director September 16, 1994
Gene M. Bernstein [51] Director December 1, 1994
Stephen V. Murphy [53] 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, 1998, 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
788996.3
-23-
certain types of investments and an incentive fee based in part on a percentage
of realized capital gains of the Company. For Fiscal 1998, the Managing
Investment Adviser reimbursed $76,165 to the Company pursuant to a voluntary
agreement, representing operating expenses (excluding its management fee of
$549,137). 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 Fiscal 1998, 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, 1998, 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. The Company is not aware of any arrangement which may, at a subsequent
date, result in a change of control of the Company.
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, Schmidt and Ms. Cassidy 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 and
Ms. Cassidy 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.
788996.3
-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, 1998
Statement of Assets and Liabilities as of October 31, 1998
Statement of Operations for the year ended October 31, 1998
Statement of Changes in Net Assets for the year ended
October 31, 1998 and October 31, 1997
Statement of Cash Flows for the year ended October 31, 1998
Financial Highlights -- Selected Per Share Data and Ratios
for the years ended October 31, 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.
788996.3
-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, Treasurer
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 29, 1999
788996.3
-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 16, 1998, included in this Annual Report (Form 10-K), for
the fiscal year ended October 31, 1998, of UST Private Equity Investors Fund,
Inc.
ERNST & YOUNG LLP
New York, New York
January 27, 1999
788996.3