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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, 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 333-23811
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EXCELSIOR PRIVATE EQUITY FUND II, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 22-3510108
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
114 West 47th Street
New York, NY 10036-1532
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (212) 852-1000
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
None None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
FORM 10-K. [ ]
The number of shares outstanding of the registrant's common stock as of October
31, 1998 was 195,730 shares. No active market for the shares of the registrant
exists; therefore, the market value of such shares cannot be determined.
789109.3
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the Registrant dated June 2, 1997 (the
"Prospectus") are incorporated by reference in Part I, Part II and Part III
hereof.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
INDEX
Form 10-K
Report
Item No. Page
- -------- ---------
PART I
1. Business......................................................................... 3
2. Properties....................................................................... 6
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............................... 22
11. Executive Compensation .......................................................... 22
12. Security Ownership of Certain Beneficial Owners and Management................... 23
13. Certain Relationships and Related Transactions................................... 23
PART IV
14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K............... 24
SIGNATURES
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "RISK FACTORS" AS
SET FORTH IN THE COMPANY'S REGISTRATION STATEMENT ON FORM N-2 (FILE NO.
333-23811) AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS." READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING
STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR
TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
789109.3
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PART I
Item 1. Business.
Formation:
- ---------
Excelsior Private Equity Fund II, Inc. (the "Company" or the
"Registrant") is a Maryland corporation organized on March 20, 1997. The Company
is a non-diversified, closed-end management investment company operating as a
business development company under the Investment Company Act of 1940, as
amended and has registered its shares under the Securities Act of 1933, as
amended. The Company's investment objective is to achieve long-term capital
appreciation by investing in private later-stage venture capital and private
middle-market companies and in certain venture capital, buyout and private
equity funds that the Managing Investment Adviser (defined herein) believes
offer significant long-term capital appreciation.
United States Trust Company of New York (the "Managing Investment
Adviser" or "U.S. Trust") provides investment management services to the Company
pursuant to a management agreement dated May 13, 1997 (the "Management
Agreement"), between the Managing Investment Adviser and the Company. The
Managing Investment Adviser is a subsidiary of U.S. Trust Corporation. All
officers of the Company are employees and/or officers of the Managing Investment
Adviser. The Managing Investment Adviser is responsible for performing the
management and administrative services necessary for the operation of the
Company.
Pursuant to a Registration Statement on Form N-2 (File No. 333-23811)
which was declared effective on June 2, 1997, the Company publicly offered up to
200,000 shares of common stock (the "Shares") at $1,000 per Share. The Company
held its initial and final closings on October 8, 1997 and November 19, 1997
representing over $155.5 million and $40.2 million, respectively. The Company
sold a total of 195,730 Shares in the public offering for gross proceeds
totaling $195,730,000 (after taking into account the 1 Share purchased for
$1,000 on March 20, 1997, by Douglas A Lindgren, the Company's Executive Vice
President and Chief Investment Officer). Shares of the Company were made
available through UST Financial Services Corp. (the "Selling Agent") to clients
of U.S. Trust and its affiliates who meet the Company's investor suitability
standards.
In connection with the public offering of its Shares, the Managing
Investment Adviser paid to the Selling Agent a commission totaling $60,000. The
Company incurred offering and organizational costs associated with the public
offering totaling $417,154. Net proceeds to the Company from the public
offering, after offering and organizational costs, totaled $195,362,846.
The Company's Articles of Incorporation provide that the duration of the
Company will be ten years from the final closing of the sale of the Shares,
subject to the rights of the Managing Investment Adviser and the investors to
extend the term of the Company. Additional characteristics of the Company's
business are discussed in the "Company", "Risk Factors" and "Investment
Objective and Policies" sections of the Prospectus, which sections are
incorporated herein by reference.
Portfolio Investments:
- ---------------------
The Company commenced investment operations on October 8, 1997 and during
the year ended October 31, 1998 ("Fiscal 1998"), the Company's investment
portfolio consisted of securities with an aggregate cost of $201,750,317 and a
fair value of $201,945,731. The Company has invested $46.1 million in twelve
later stage venture capital and private middle market companies and committed to
invest another $34 million in private equity funds, of which $3.9 million has
been drawn. The
789109.3
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Company has invested its cash balances in temporary investments in accordance
with the provisions in the Prospectus.
The following is a description of the Company's investments as of October
31, 1998 and which are more fully set forth in Item 8.
Direct Investments
- ------------------
o Advantage Schools, Inc., Boston, MA, is a for-profit provider of public
school education management services. Advantage manages charter schools in
troubled urban school districts in cooperation with local partners. Its
schools are publicly funded, receiving per-student capitation rates in line
with those currently received by other schools in the district. Founded in
1996, Advantage has two schools in its second year of operation, and an
additional six schools opened in September 1998. Early results from
Advantage indicate a profitable business model and superior student
performance relative to comparable public schools. An additional ten
schools are planned for 1999. Other investors include Bessemer Ventures,
Fidelity Ventures and Kleiner Perkins.
o Classroom Connect, Inc., Los Angeles, CA, is a leading provider of
educational Internet products. Specifically, the company offers a variety
of products and services to teachers and school districts wishing to
incorporate the Internet into the classroom. Boasting a selection of over
108 proprietary product and service offerings, Classroom Connect sells
instruction guides, teaching plans, seminars, and unique Internet content
via electronic commerce and direct mail. The company has grown its customer
base substantially and has seen the traffic on its website grow to over 4.6
million hits per month. Brentwood Associates is a co-investor in Classroom
Connect.
o Constellar Corp., Redwood Shares, CA, is a leading provider of enterprise
application integration software and services. Currently serving large
organizations in North America, Europe and Australia, Constellar provides
products and services that work to untangle increasingly complex
information technology environments-- managing data, making it accessible,
and moving it across myriad applications. Constellar's blue-chip customer
list includes Sprint, British Telecom, Deutsche Bank, NatWest, Princeton
University, London Stock Exchange, and General Electric. Co-investors
include Brentwood Associates and Technology Crossover Ventures. The Company
currently maintains a seat on the Board of Directors.
o PowerSmart, Inc., Shelton, CT, is a leading provider of "smart" battery
management products. The company's product offerings are designed to
maximize battery run-times and safety in applications such as laptop
computers, cellular telephones, and camcorders as well as a variety of
hand-held industrial devices. PowerSmart recently introduced two new lines
of Application Specific Integrated Circuits (ASICS) and electronic modules
that offer superior performance and flexibility at competitive prices.
PowerSmart was formed as a spin-off of technology and related assets from
Duracell and is led by a team of technical and management professionals who
had been employed by Duracell prior to their self-initiated spin-off. The
Company currently maintains two seats on the Board of Directors.
o Release Software Corp., Menlo Park, CA, is a provider of electronic
software distribution (ESD) services. Release provides software publishers,
software resellers, and content-driven web sites with technology and
services to establish an Internet-based sales and distribution channel. ESD
offers a fast, efficient and cost-effective alternative to distributing
shrink-wrapped software by mail or through traditional retail channels.
Release is a leading provider of ESD services and has successfully
established relationships with a number of high-volume software publishers
(Symantec, Lotus, Macromedia, Intuit) and software retailers (Egghead,
FutureShop, Compaq).
789109.3
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Other investors include Sevin Rosen and Draper Fisher Jurvetson. The
Company currently maintains a seat on the Board of Directors.
o Softcom Microsystems, Inc., Fremont, CA, designs, develops and markets data
acceleration products used in high-speed communications networks. Softcom's
single-chip network accelerator solutions and integrated subsystems provide
processing capabilities which help alleviate the "data bottleneck" at the
point where baseband LAN traffic moves on to a high-speed broadband
Internet backbone. The company believes its products allow network
equipment vendors (i.e., Cisco, Nortel, Lucent) to achieve
price/performance gains of more than ten times over current equipment
solutions. Other investors include Sevin Rosen and Sequoia Capital.
o SurVivaLink Corp., Minnetonka, MN, designs, develops and markets a line of
FDA-cleared automated external defibrillators ("AEDs"), which are portable,
emergency medical devices that deliver life-saving electrical shocks to
resuscitate victims of cardiac arrest. SurVivaLink's AEDs are small,
light-weight and easy to use, making them highly suitable for law
enforcement personnel, firefighters and paramedics. Corporations, such as
Quantas Airlines, Ford Motor Company, General Electric and Harrah's
Entertainment, Inc. (casino chain) have started to purchase AEDs in volume
as they seek to protect the lives of their customers and employees. To
date, SurVivaLink estimates that its AEDs have been responsible for saving
over 100 lives. Co-investors include Fidelity Ventures, CIBC Wood Gundy
Ventures, and The Spray Venture Fund. The Company currently maintains a
seat on the Board of Directors.
o WNP Communications, Inc., Reston, VA, was the most successful bidder in the
recently completed Local Multipoint Distribution Services ("LMDS") auction
conducted by the FCC. WNP now owns broadband spectrum covering 30 of the
top 50 markets at very compelling prices ($1.78 per POP). The company is
now beginning the process of building out its network with the goal of
providing high-speed data services targeted to WAN, Intranet, and Internet
applications. WNP is supported by a strong investor base including Madison
Dearborn, NEA, Columbia Capital, Providence Equity Capital, Alta
Communications, and the Company.
Investments in third-party funds
- --------------------------------
o Advanced Technology Ventures V, LP ("ATV") is a $175 million private equity
fund committed to investing in seed to later-stage information technology
and health care companies. The fund has invested in five companies since
ATV's final closing in July 1998. Among these companies are Applications
Networks, a start-up that is developing and marketing risk management
record and control software products, and Coulter Cellular Therapies, Inc.,
a pioneer in novel cellular therapies for patients with advanced forms of
cancer and infectious diseases.
o Brand Equity Ventures I, LP ("BEV") is a $95 million fund focused on seed
to later-stage venture financings in consumer and retail companies in the
U.S. The fund is now in the second year of its term and has made six
investments. One portfolio company, Cyberian Outpost (Nasdaq "COOL"), which
is an Internet retailer of computer hardware and software, completed a
public offering in July 1998 and has been performing well. BEV is also an
investor in The J. Peterman Company, a catalogue clothing retailer, and HC
Holdings, which operates The Custom Shop, a provider of custom tailored
clothing.
o Communications Ventures III, LP ("CV") is a $100 million fund that invests
solely in the communications sector, targeting early stage companies. The
Company committed $5M to CV in October 1998. Given the fund's recent
closing, it has made no investments to date.
789109.3
-5-
o Mid-Atlantic Venture Fund III, LP ("Mid-Atlantic") invests in early and
expansion stage technology companies in the Mid-Atlantic region. To date,
the $57 million fund has invested in several companies including Integrated
Chipware which delivers software components for rapidly building custom
application-specific operating systems and Net2000, a competitive local
exchange carrier serving major East Coast metropolitan markets.
o Morgenthaler Venture Partners V, LP ("Morgenthaler") invests in companies
of all stages in the health care and technology sectors. Morgenthaler
closed its $300 million fund in July and has completed one transaction to
date. In October, 1998 the fund invested in Comprehensive Medical
Management, Inc., a manager of medical and surgical eye care services.
o Quad-C Partners V, LP ("Quad-C") is a $303 million fund focused on taking
control positions in leveraged acquisitions and recapitalizations of
middle-market companies. Quad-C has made two investments to date, having
effected the acquisition of a company in the insulation distribution market
as well as the purchase of an Atlanta-based retailer of discount furniture.
o Sevin Rosen VI, LP ("Sevin Rosen") is a $165 million private equity fund
that invests in early-stage technology companies. The fund has made eight
investments to date. Included in the current portfolio are Wayport, Inc.,
which provides high speed Ethernet connectivity to the Internet for
business travelers in hotels and conference facilities, and Cytokinetics,
Inc., which is developing a drug discovery platform and tool set in the
cytoskeletal "molecular motors" field.
o Trinity Ventures VI, LP ("Trinity") closed on $140 million in September,
1998 and will invest in early to late-stage companies in the software,
communications, and electronic commerce sectors. Loop Ventures, Inc. is
Trinity's first and only investment. The company is developing an
electronic commerce business to allow buyers, sellers, lessors and lessees
of commercial real estate to transact business over the Internet.
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.
789109.3
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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.
789109.3
-7-
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.
The Company has 200,000 Shares authorized, of which 195,730 Shares were
issued and outstanding on October 31, 1998. On December 21, 1998, the Company
declared a dividend payable to shareholders of record on December 18, 1998 in
the amount of $39.18 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 year ended October 31, 1998 and the
period commencing on October 8, 1997 (inception) and ending on October 31, 1997
may be found in the financial statements. See Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources:
- -------------------------------
At October 31, 1998, the Company held $20,601 in cash and $201,945,731 in
investments as compared to $63 in cash and $155,610,242 in investments at
October 31, 1997. At October 31, 1998, investments included $56,000,000 in
commercial paper, $17,203,182 in corporate bonds, $74,447,794 in U.S. Government
and agency obligations, $4,061,440 in private investment funds, $46,144,355 in
private companies and $4,088,960 in investment companies.
Results of Operations:
- ---------------------
Investment Income and Expenses
For fiscal 1998, the Company had interest income of $9,813,746, and net
operating expenses of $1,735,761, resulting in net investment income of
$8,077,985 as compared to interest income of $507,951, and net operating expense
of $73,751, resulting in investment income of $434,200 for the fiscal year ended
October 31, 1997.
United States Trust Company of New York (the "Managing Investment
Adviser") provides investment management and administrative services required
for the operation of the Company. In consideration of the services rendered by
the Managing Investment Adviser, the Company pays a management fee based upon a
percentage of the net assets of the Company invested or committed to be invested
in certain types of investments and an incentive fee based in part on a
percentage of realized capital gains of the Company. Such fee is determined and
payable quarterly. For the fiscal year ended October 31, 1998 and for the period
commencing on October 8, 1997 (inception) and ending October 31, 1997, the
Managing Investment Adviser earned $1,409,748 and $49,167 in management fees,
respectively. For the same periods, the Managing Investment Adviser reimbursed
other operating expenses of the Company in the amount of $0 and $33,346 as a
result of expenses incurred in excess of those permitted pursuant to the
Company's Prospectus.
789109.3
-8-
Net Assets
The Company's net asset value per common share was $1,033.37 at October
31, 1998 up $29.91 per share from the net asset value per common share of
$1,003.46 at October 31, 1997.
For Fiscal 1998, the Company had a net increase in net assets resulting
from operations of $8,170,466 ($40.06 per share), comprised of net investment
income totaling $8,077,985 ($41.84 per share), and a net change in realized and
unrealized appreciation of investments of $92,481 (($1.78) per share).
At October 31, 1998, the Company's net assets were $202,261,263, an
increase of $46,211,722 from net assets of $156,049,541 at October 31, 1997.
This increase was the result of an $8,170,466 net increase in net assets
resulting from operations, a $1,763,590 distribution to shareholders and
$39,804,846 in new share subscriptions.
Realized and Unrealized Gains and Losses from Portfolio Investments:
- -------------------------------------------------------------------
For the fiscal year ended October 31, 1998, the Company had a $92,481 net
realized and unrealized gain from investments, comprised of a ($592) net
realized loss on security transactions and a $93,073 net change in unrealized
appreciation of investments as compared to a $102,341 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Equity Price Risk:
- -----------------
A significant portion 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.
789109.3
-9-
Item 8. Financial Statements and Supplementary Data.
EXCELSIOR PRIVATE EQUITY FUND II, 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 year ended October 31, 1998 and the
period October 8, 1997 (commencement of operations) to October 31, 1997.
Statement of Cash Flows for the year ended October 31, 1998.
Financial Highlights -- Selected Per Share Data and Ratios for the year ended
October 31, 1998 and the period October 8, 1997 (commencement of operations) to
October 31, 1997.
Notes to Financial Statements
Independent Auditors' Report
Note - All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is
included in the financial statements or the notes thereto.
Please refer to attached pages for above-referenced
Financial Statements and Supplementary Data.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
789109.3
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Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 1998
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
------------- ---------- --------
COMMERCIAL PAPER -- 27.69%
$8,000,000 American Express Co., 11/12/98.................. 5.27% $ 8,000,000
8,000,000 Associates Corp., 12/04/98...................... 5.06 8,000,000
8,000,000 Chevron Transport Corp., 11/09/98............... 5.45 8,000,000
8,000,000 General Electric Capital Corp., 12/11/98........ 5.07 8,000,000
8,000,000 General Motors Acceptance Corp., 11/05/98....... 5.23 8,000,000
8,000,000 Prudential Funding Corp., 11/13/98.............. 5.28 8,000,000
8,000,000 Sears & Roebuck Acceptance Corp., 11/12/98...... 5.30 8,000,000
-----------
TOTAL COMMERCIAL PAPER (Cost $56,000,000)....... 56,000,000
-----------
CORPORATE BONDS -- 8.50%
5,610,000 Chase Manhattan Corp., 6/15/99.................. 8.00 5,703,182
1,000,000 Lehman Brothers Holdings Inc., 11/01/98......... 8.88 1,000,000
3,500,000 PepsiCo Inc., 11/01/98.......................... 7.63 3,500,000
7,000,000 Sears Roebuck Co., 11/01/98..................... 8.45 7,000,000
-----------
TOTAL CORPORATE BONDS (Cost $17,209,372)........ 17,203,182
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 36.81%
8,000,000 Federal Home Loan Bank, 11/02/98................ 5.40** 7,998,800
26,641,000 Federal Home Loan Bank, 12/04/98................ 4.75** 26,525,000
14,000,000 Federal Home Loan Mortgage Corp., 11/16/98...... 4.78** 13,972,117
10,000,000 Federal Home Loan Mortgage Corp., 11/30/98...... 5.09** 9,958,997
16,000,000 Federal National Mortgage Association, 11/04/98. 5.34** 15,992,880
-----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (Cost $74,447,794).................. 74,447,794
-----------
PRIVATE INVESTMENT FUNDS #, @ -- 2.01%
1 Advanced Technology Ventures V, LP.............. 134,108
4 Brand Equity Ventures I, LP..................... 824,267
1 MidAtlantic Venture Fund III, LP................ 1,667,665
1 Morgenthaler Venture Partners V, LP............. 400,000
3 Quad-C Partners V, LP........................... 472,378
3 Sevin Rosen Fund VI, LP......................... 375,522
1 Trinity Ventures VI, LP......................... 187,500
-----------
TOTAL PRIVATE INVESTMENT FUNDS
(Cost $3,859,836).......................... 4,061,440
-----------
PRIVATE COMPANIES #, @ -- 22.81%
Preferred and Common Stocks -- 22.81%
Computer Software -- 3.46%
1,151,315 +Constellar Corp., Series C................. 6,999,995
-----------
Educational Services -- 3.95%
7,548 +Advantage Schools Inc., Series C........... 3,000,330
388,810 +Classroom Holdings, Inc.................... 4,999,988
-----------
8,000,318
-----------
Medical Devices -- 3.46%
522,388 +SurVivaLink Corp., Series B................ 6,999,999
-----------
See Notes to Financial Statements
789109.3
-11-
PRIVATE COMPANIES -- (Continued)
Preferred and Common Stocks -- (Continued)
Semiconductors -- 6.14%
7,960,371 +PowerSmart Inc., Series A................. $ 7,960,371
4,850,000 +PowerSmart Inc. Common.................... 277,129
736,975 +Softcom Microsystems Inc., Series B....... 4,178,649
------------
12,416,149
------------
Software Distribution Services -- 2.89%
1,676,229 +Release Software Corp., Series D.......... 5,850,039
------------
Telecommunications -- 2.91%
5,878 WNP Communications, Inc. Series A.......... 5,877,557
29,806 WNP Communications, Inc. Common............ 298
------------
5,877,855
------------
TOTAL PRIVATE COMPANIES
(Cost $46,144,355)....................... 46,144,355
------------
INVESTMENT COMPANIES -- 2.02%
2,230,163 Dreyfus Treasury Cash Management Fund...... 2,230,163
1,858,797 Fidelity Cash Portfolio, U.S. Treasury II.. 1,858,797
------------
TOTAL INVESTMENT COMPANIES (Cost
$4,088,960)................................ 4,088,960
------------
TOTAL INVESTMENTS (Cost $201,750,317*).............................. 99.84% 201,945,731
OTHER ASSETS & LIABILITIES (NET).................................... 0.16 315,532
------ ------------
NET ASSETS.......................................................... 100.00% $202,261,263
====== ============
* Aggregate cost for Federal tax and book purposes.
** Discount Rate.
+ 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 $40,266,500.
# Restricted as to public resale. Acquired between November 1, 1997 and
October 30, 1998. Total cost of restricted securities at October 31, 1998
aggregated $50,004,191. Total market value of restricted securities owned
at October 31, 1998 was $50,205,795 or 24.8% of net assets.
@ Non-Income Producing Security.
See Notes to Financial Statements
789109.3
-12-
Excelsior Private Equity Fund II, Inc.
Statement of Assets and Liabilities
October 31, 1998
ASSETS:
Investments, at value (Cost $201,750,317) (Note 1)...................... $ 201,945,731
Cash.................................................................... 20,601
Interest receivable..................................................... 860,744
Prepaid insurance....................................................... 11,391
-----------------
Total Assets....................................................... 202,838,467
-----------------
LIABILITIES:
Management fees payable (Note 2)...................................... 445,607
Directors' fees payable (Note 2)...................................... 30,000
Administration fees payable (Note 2)................................... 16,591
Accrued expenses and other payables.................................... 85,006
-----------------
Total Liabilities.................................................. 577,204
-----------------
NET ASSETS................................................................. $ 202,261,263
=================
NET ASSETS consist of:
Undistributed net investment income.................................... $ 6,748,595
Accumulated net realized loss on investments........................... (592)
Net unrealized appreciation of investments............................. 195,414
Par value.............................................................. 1,957
Paid-in capital in excess of par value................................. 195,315,889
-----------------
Total Net Assets........................................................... $ 202,261,263
=================
Shares of Common Stock Outstanding ($0.01 par value, 200,000 authorized)... 195,730
NET ASSET VALUE PER SHARE.................................................. $ 1,033.37
=================
See Notes to Financial Statements
789109.3
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Excelsior Private Equity Fund II, Inc.
Statement of Operations
For the Year Ended October 31, 1998
INVESTMENT INCOME:
Interest income....................................................... $ 9,813,746
----------------
EXPENSES:
Managing investment advisory fees (Note 2)............................ 1,409,748
Legal fees............................................................ 82,500
Insurance expense..................................................... 59,119
Administration fees (Note 2).......................................... 58,000
Directors' fees and expenses (Note 2)................................. 30,000
Audit fees............................................................ 27,000
Amortization of organization expense (Note 4)......................... 14,811
Printing fees......................................................... 8,800
Miscellaneous expenses................................................ 45,783
----------------
Total Expenses.................................................... 1,735,761
----------------
NET INVESTMENT INCOME 8,077,985
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS): (Note 1)
Net realized loss on investments...................................... (592)
Net change in unrealized appreciation of investments.................. 93,073
----------------
NET REALIZED AND UNREALIZED GAIN......................................... 92,481
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $ 8,170,466
================
See Notes to Financial Statements
789109.3
-14-
Excelsior Private Equity Fund II, Inc.
Statement of Changes in Net Assets
Year Ended October 8, 1997*
October 31, to October 31,
1998 1997
------------------- ---------------------
OPERATIONS:
Net investment income.............................................. $ 8,077,985 $ 434,200
Net realized loss on investments................................... $ (592) ----
Net change in unrealized appreciation of investments............... $ 93,073 $ 102,341
------------------- ---------------------
Net increase in net assets resulting from operations............... $ 8,170,466 $ 536,541
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................. $ (1,763,590) ----
CAPITAL SHARE TRANSACTIONS:
Subscriptions (40,218 and 155,511 shares, respectively)............ $ 39,804,846 $ 155,512,000
------------------- ---------------------
Net increase in net assets......................................... $ 46,211,722 $ 156,048,541
NET ASSETS:
Beginning of period................................................ $ 156,049,541 $ 1,000
------------------- ---------------------
End of period (including undistributed net investment income of
$6,748,595 and $434,200, respectively) ............................ $ 202,261,263 $ 156,049,541
=================== =====================
* Commencement of operations
See Notes to Financial Statements
789109.3
-15-
Excelsior Private Equity Fund II, Inc.
Statement of Cash Flows
For the Year Ended October 31, 1998
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Purchase of Investments............................................ $ (50,004,190)
Net Decrease in Short-Term Investments............................. 3,761,182
Investment Income.................................................. 9,465,989
Operating Expenses Paid............................................ (1,243,699)
-------------------
Net Cash Used for Investing and Operating Activities............... (38,020,718)
-------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid................................................. (1,763,590)
Capital Share Transactions......................................... 39,804,846
-------------------
Net Cash Provided by Financing Activities.......................... 38,041,256
-------------------
Net Increase in Cash............................................... 20,538
Cash at Beginning of Year.............................................. 63
-------------------
Cash at End of Year.................................................... $ 20,601
===================
Reconciliation of Net Investment Income to Net Cash Used for Investing
and Operating Activities:..............................................
Net Investment Income ............................................. $ 8,077,985
Purchases of Investments........................................... (50,004,190)
Net Decrease in Short-Term Investments............................. 3,761,182
Net Increase in Receivables Related to Operations.................. (359,148)
Net Decrease in Payables Related to Operations..................... (2,643,748)
Amortization of Organization Costs................................. 14,811
Accretion/Amortization of Discounts and Premiums................... 3,132,390
-------------------
Net Cash Used for Investing and Operating Activities............... $ (38,020,718)
===================
See Notes to Financial Statements
789109.3
-16-
Excelsior Private Equity Fund II, Inc.
Financial Highlights - Selected Per Share Data and Ratios
For a fund share outstanding throughout the period
October 8,
Year Ended 1997* to
October 31, October 31,
1998 1997
------------------- --------------------
NET ASSET VALUE, BEGINNING OF PERIOD....................... $ 1,003.46 $ 1,000.00
------------------- --------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income...................................... $ 41.84 $ 2.79
Net Realized and Unrealized Gain (Loss) on Investments..... (1.78)# $ 0.67
------------------- --------------------
Total from Investment Operations........................... $ 40.06 $ 3.46
------------------- --------------------
DISTRIBUTIONS
Net Investment Income...................................... (10.15) ----
------------------- --------------------
NET ASSET VALUE, END OF PERIOD............................. $ 1,033.37 $ 1,003.46
=================== ====================
TOTAL NET ASSET VALUE RETURN+.............................. 4.04% 0.35%
=================== ====================
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands)...................... $ 202,261 $ 156,050
Ratio of Net Operating Expenses to Average Net Assets...... 0.87% 0.72% **
Ratio of Gross Operating Expenses to Average Net Assets++.. 0.87% 1.04% **
Ratio of Net Investment Income to Average Net Assets....... 4.05% 4.23% **
Portfolio Turnover Rate.................................... 0% 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.
# The amount shown for the year ended October 31, 1998 for a share
outstanding throughout that period does not accord with the aggregate net
gains on investments for that period because of the timing of sales and
repurchases of the portfolio shares in relation to fluctuating market of
the investments in the Company.
See Notes to Financial Statements
789109.3
-17-
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Excelsior Private Equity Fund II, Inc. ("the Company") was incorporated
under the laws of the State of Maryland on March 20, 1997 and is registered
under the Securities Act of 1933, as amended, as a non-diversified, closed-end
management investment company which has elected to be treated as a business
development company under the Investment Company Act of 1940, as amended.
The following is a summary of the Company's significant accounting
policies. Such policies are in conformity with generally accepted accounting
principles for investment companies and are consistently followed in the
preparation of financial statements. Generally accepted accounting principles
require management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from these estimates.
(a) Portfolio valuation:
The Company values portfolio securities quarterly and at other such times
as, in the Board of Directors' view, circumstances warrant. Investments in
securities that are traded on a recognized stock exchange or on the national
securities market are valued at the last sale price for such securities on the
valuation date. Short-term debt instruments with remaining maturities of 60 days
or less are valued at amortized cost, which approximates market value. Direct
equity investments that are the same class as a class of stock that is
registered and publicly traded, but are subject to regulatory holding periods or
other restrictions, are valued based upon the last sales price of the
unrestricted stock on the securities exchange on which such securities are
primarily traded, less a liquidity discount determined by the Investment
Advisor. Direct equity investments for which market quotations are not readily
available are carried at fair value as determined in good faith by the
Investment Adviser after considering certain pertinent factors, including the
cost of the investment, developments since the acquisition of the investment,
comparisons to similar publicly traded investments, subsequent purchases of the
same investment by other investors, the current financial position and operating
results of the issuer and such other factors as may be deemed relevant.
Investments in limited partnerships are carried at fair value as determined by
the Investment Adviser. In establishing the fair value of investments in other
partnerships, the Investment Adviser takes into consideration information
received from those partnerships, including their financial statements and the
fair value established by the general partner of the investee partnership.
At October 31, 1998, market quotations were not readily available for
securities valued at $50,205,795. 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
789109.3
-18-
does not repurchase the securities. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Company may be
delayed or limited.
(d) Federal income taxes:
It is the policy of the Company to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code and
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
Dividends from net investment income are declared and paid at least
annually. Any net realized capital gains, unless offset by any available capital
loss carryforward, are distributed to shareholders at least annually. Dividends
and distributions are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent. To
the extent these differences are permanent, such amounts are reclassified within
the capital accounts based on their federal tax basis treatment; temporary
differences do not require reclassification.
At October 31, 1998 the tax basis of the Company's investments for Federal
income tax purposes amounted to $201,750,317. The net unrealized appreciation
amounted to $195,414, which is comprised of gross unrealized appreciation of
$241,974 and aggregate gross unrealized depreciation of $46,560.
2. Investment Advisory Fee, Administration Fee, and Related Party Transactions
Pursuant to an Investment Management Agreement ("Agreement"), United States
Trust Company of New York ("U.S. Trust") serves as the Managing Investment
Adviser to the Company. Under the Agreement, for the services provided, U.S.
Trust is entitled to receive a fee, at the annual rate of 1.50% of the net
assets of the Company, determined as of the end of each fiscal quarter, that are
invested or committed to be invested in Portfolio Companies or Private Funds and
a fee equal to an annual rate of 0.50% of the net assets of the Company,
determined as of the end of each fiscal quarter, that are invested in short-term
investments and are not committed to Portfolio Companies or Private Funds.
In addition to the management fee, the Company has agreed to pay U.S. Trust
an incentive fee in an amount equal to 20% of the cumulative realized capital
gains (net of realized capital losses and unrealized net capital depreciation)
on investments other than Private Funds, less the aggregate amount of incentive
fee payments in prior years. If the amount of the incentive fee in any year is a
negative number, or cumulative net realized gains less net unrealized capital
depreciation at the end of any year is less than such amount calculated at the
end of the previous year, U.S. Trust will be required to repay the Company all
or a portion of the incentive fee previously paid.
Chase Global Funds Services Company ("CGFSC"), a corporate affiliate of The
Chase Manhattan Bank, (the "Administrator") provides administrative services to
the Company. For the services provided to the Portfolio, the Administrator is
entitled to an annual fee of $58,000, which is paid quarterly.
U.S. Trust has voluntarily agreed to waive or reimburse operating expenses
of the Company, exclusive of management fees, to the extent they exceed 0.25% of
the Company's net assets.
Each Director of the Company receives an annual fee of $15,000, and is
reimbursed for expenses incurred for attending meetings. No person who is an
officer, director or employee of U.S. Trust, or of any parent or subsidiary
thereof, who serves as an officer, director or employee of the Company receives
any compensation from the Company.
789109.3
-19-
3. Purchases and Sales of Securities
Purchases and sales of securities, excluding short-term investments, for
the Company aggregated $50,004,190 and $0, respectively.
At October 31, 1998 the Company had outstanding investment commitments
totaling $30,323,818.
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
$14,811 as of October 31, 1998.
789109.3
-20-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Excelsior Private Equity Fund II, Inc.
We have audited the accompanying statement of assets and liabilities of
Excelsior Private Equity Fund II, Inc., including the portfolio of investments,
as of October 31, 1998, the related statement of operations and statement of
cash flows for the year then ended, and the statement of changes in net assets
and financial highlights for the year then ended and for the period from October
8, 1997 (commencement of operations) to October 31, 1997. 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
Excelsior Private Equity Fund II, Inc. at October 31, 1998, the results of its
operations and its cash flows for the year then ended, and the changes in its
net assets and the financial highlights for the year then ended and for the
period from October 8, 1997 (commencement of operations) to October 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
December 16, 1998
789109.3
-21-
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 March 20, 1997
Executive Officer
Douglas A. Lindgren [36] Executive March 20, 1997
Vice President;
Chief Investment Officer
Brian Schmidt [39] Chief Financial Officer March 20, 1997
Frank Bruno [39] Treasurer March 20, 1997
Ronald A. Schwartz [50] Secretary March 20, 1997
Edith A. Cassidy* [45] Director March 20, 1997
Gene M. Bernstein [51] Director March 20, 1997
Stephen V. Murphy [53] Director March 20, 1997
*Indicates director who is an "interested person" of the Company within the
meaning of the Investment Company Act of 1940.
Additional information concerning the directors and executive officers of the
Company is incorporated herein by reference from the section entitled
"Management -- Directors, Officers and Investment Professionals" in the
Prospectus dated June 2, 1997.
Item 11. Executive Compensation.
At October 31, 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 certain types of investments and an incentive fee based in part on a
percentage of realized capital gains of the Company. Additional information with
respect to the management fee payable to the Managing Investment Adviser is set
forth in the "Management" section of the Prospectus, dated June 2, 1997, which
section is incorporated herein by reference.
The disinterested directors receive compensation of $15,000 on an annual basis
plus reasonable expenses. For Fiscal 1998, the disinterested directors of the
Company each received compensation totaling $15,000.
789109.3
-22-
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 261
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.
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.
789109.3
-23-
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 the period from October 8, 1997
(commencement of operations) to October 31, 1997
Statement of Cash Flows for the year ended October 31, 1998
Financial Highlights -- Selected Per Share Data and
Ratios for the year ended October 31, 1998 and the
period from October 8, 1997 (commencement of
operations) to October 31, 1997
Notes to Financial Statements
Independent Auditors' Report
2. Exhibits
(3)(a) Articles of Incorporation of the Company (1)
(3)(b) By-Laws of the Company (1)
(10)(a) Management Agreement (l)
(10)(b) Transfer Agency and Custody Agreement (l)
(23) Consent of Independent Auditors
(27) Financial Data Schedule (included in EDGAR electronic
filing only)
(29) Prospectus of the Company dated June 2, 1997, filed with
the Securities and Exchange Commission (l)
(b) No reports on Form 8-K have been filed during the last quarter of the
period for which this report is filed.
(1) Incorporated by reference to the Company's Form N-2, as amended, filed
November 7, 1997.
789109.3
-24-
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 29, 1999
789109.3
-25-
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
year ended October 31, 1998, of Excelsior Private Equity Fund II, Inc.
ERNST & YOUNG LLP
New York, New York
January 27, 1999
789109.3