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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended July 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
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Commission file number 000-22277
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EXCELSIOR PRIVATE EQUITY FUND II, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 22-3510108
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
114 West 47th Street, New York, NY 10036-1532
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (212) 852-1000
----------------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since last Report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 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 [ ]
As of September 1, 2002, there were 195,730 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause Excelsior Private Equity Fund II, Inc.'s (the
"Company's") actual results to differ from future performance suggested herein.
INDEX PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. 1
Portfolio of Investments as of July 31, 2002. 2
Statement of Assets and Liabilities at July 31, 2002
and October 31, 2001. 6
Statement of Operations for the nine-month periods
ended July 31, 2002 and July 31, 2001. 7
Statement of Changes in Net Assets for the nine-month
periods ended July 31, 2002 and July 31, 2001. 8
Statement of Cash Flows for the nine-month periods
ended July 31, 2002 and July 31, 2001. 9
Financial Highlights at July 31, 2002 and
October 31, 2001. 10
Notes to Financial Statements (Unaudited). 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities and Use of Proceeds. 16
Item 3. Defaults Upon Senior Securities. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 5. Other Information. 16
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
CERTIFICATIONS 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments (Unaudited)
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July 31, 2002
--------------------------------------
PORTFOLIO STRUCTURE
- -------------------
SHORT-TERM INVESTMENTS:
U.S. GOVERNMENT & AGENCY
OBLIGATIONS $ 54,566,359 47.19%
INVESTMENT COMPANIES 3,107,513 2.69%
PRIVATE INVESTMENT FUNDS 31,489,998 27.23%
PORTFOLIO COMPANIES 25,802,525 22.32%
---------------- ----------------
TOTAL INVESTMENTS 114,966,395 99.43%
OTHER ASSETS & LIABILITIES (NET) 662,394 0.57%
---------------- ----------------
NET ASSETS $ 115,628,789 100.00%
================ ================
See Notes to Financial Statements
1
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments (Unaudited)
- --------------------------------------------------------------------------------
July 31, 2002
----------------------------------------
Principal Acquisition Coupon Value
Amount/Shares Date ## Rate/Yield (Note 1)
- ------------- ----------- ---------- --------
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 47.19%
$ 46,600,000 U.S. Treasury Bills, 08/15/02 1.69% $46,569,373
5,000,000 Federal Home Loan Mortgage Corp. Discount Note, 8/06/02 1.72% 4,998,806
3,000,000 Federal Home Loan Bonds Discount Note, 8/14/02 1.68% 2,998,180
------------
Total -- U.S. Government & Agency Obligations 54,566,359
(Cost $54,566,359)
------------
PRIVATE INVESTMENT FUNDS #, ** - 27.23%
Advanced Technology Ventures V, LP 09/98-05/02 2,146,236
Brand Equity Ventures I, LP 03/98-10/01 777,870
Brentwood Associates III, LP 06/99-06/02 2,882,684
Broadview Capital Partners, LP 04/99-07/02 2,671,650
Commonwealth Capital Ventures II, LP 01/99-09/01 2,177,000
Communications Ventures III, LP 11/98-05/00 2,326,835
Friedman, Fleischer & Lowe Capital Partners, LP 01/99-07/02 1,840,583
Mayfield X, LP 06/99-05/02 2,355,159
Mayfield X Annex 07/02 50,000
Mid-Atlantic Venture Fund III, LP 04/98-02/01 2,505,247
Morgenthaler Venture Partners V, LP 10/98-08/01 4,901,735
Quad-C Partners V, LP 04/98-07/02 4,077,245
Sevin Rosen Fund VI, LP 03/98-06/02 1,730,744
Trinity Ventures VI, LP 09/98-04/02 1,047,010
------------
Total - Private Investment Funds (Cost $48,676,040) 31,489,998
------------
PRIVATE COMPANIES #, **, @ - 16.27%
Common and Preferred Stocks - 14.12%
Biotechnology - 0.00%
7,100,000 Protogene Laboratories, Inc., Preferred Series B 12/99-08/01 --
------------
--
Educational Services - 3.58%
75,059 Mosaica Education, Inc., Preferred Series C 08/01 3,537,722
N/A Reed Elsevier PLC, Escrow 09/01 601,592
------------
4,139,314
Internet Services - Business - 9.00%
16,534 Captura Software, Inc. 5/02 --
726,744 Captura Software, Inc., Series 3 Preferred 5/02 500,000
2,032,205 Captura Software, Inc., Series 1 Preferred 02/99 --
533,777 Captura Software, Inc., Junior Preferred 02/00 --
769,082 Captura Software, Inc., Series 2 Preferred 08/01 --
See Notes to Financial Statements.
2
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments (Unaudited)
- --------------------------------------------------------------------------------
July 31, 2002
------------------------------------------
Principal Acquisition Coupon Value
Amount/Shares Date ## Rate/Yield (Note 1)
- ------------- ----------- ---------- --------
1,428,572 Clear Orbit, Inc. 06/00 $ 5,000,013
2,388,345 Firstsource Corp., Series A 02/00 --
1,481 Foster & Gallagher, Inc. 02/00-03/00 --
4,694,407 Marketfirst Software, Inc., Series D 09/99-05/01 --
787,166 Marketfirst Software, Inc., Series E 09/99-05/01 --
7,728,932 Marketfirst Software, Inc., Series F 09/99-05/01 4,907,693
1,676,229 Release Software. Corp., Series D 06/98 --
115,000 ReleaseNow, Inc., Series E 07/99 --
176,000 ReleaseNow, Inc., Series F 12/00 --
100,000 ReleaseNow, Inc., Series G 12/00 --
-------------
10,407,706
Semiconductors - 1.54%
N/A PowerSmart, Inc., Escrow 7/02 1,776,194
------------
Promissory Notes - 1.70%
Biotechnology - 0.0%
670,000 Protogene Laboratories, Inc., Convertible
Promissory Note 08/01-01/02 4.25% --
670,000 Protogene Laboratories, Inc., Convertible
Promissory Note 08/01-01/02 4.25% --
800,000 Protogene Laboratories, Inc., Convertible
Promissory Note 08/01-01/02 4.25% --
------------
--
Educational Services - 1.70%
686,415 Mosaica Education, Inc., Bridge Notes 02/01-08/01 0-13.00% 686,415
1,025,748 Mosaica Education, Inc. (Advantage Schools), Promissory Note 01/01-08/01 0-13.00% 1,025,748
256,437 Mosaica Education, Inc. (ASI Texas LLC), Promissory Note 02/01-08/01 0-13.00% 256,437
------------
1,968,600
Internet Services - Business - 0.00%
750,000 Killerbiz, Inc., Promissory Note 12/99-08/00 8.00% --
133,333 ReleaseNow, Inc., Promissory Note 7/01-10/01 16.00% --
133,333 ReleaseNow, Inc., Promissory Note 8/01-10/01 16.00% --
------------
--
See Notes to Financial Statements.
3
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments (Unaudited)
- --------------------------------------------------------------------------------
July 31, 2002
------------------------------------------
Principal Acquisition Coupon Value
Amount/Shares Date ## Rate/Yield (Note 1)
- ------------- ----------- ---------- --------
Warrants - 0.45%
Internet Services - Business - 0.45%
76,950 Curon Medical, Inc. 08/00 $ --
815,223 Marketfirst Software, Inc., Series E 09/99-05/01 517,648
782,562 Marketfirst Software, Inc., Series F 09/99-05/01 --
------------
517,648
Total - Private Companies (Cost $60,595,260) 18,809,462
------------
PUBLIC COMPANIES #, ** - 6.05%
Common Stock - 5.77%
Medical Devices - 4.71%
1,467,482 Cardiac Science, Inc. 09/01 3,366,928
219,190 Cardiac Science, Inc. Escrow 09/01 414,269
2,381,088 Curon Medical, Inc.@ 08/99 1,659,618
------------
5,440,815
Media and Entertainment - 1.06%
520,609 Cross Media Marketing Corp. 10/01 1,223,431
------------
Promissory Notes - 0.28%
Medical Devices - 0.28%
438,422 Cardiac Science, Inc., Bridge Notes Escrow 09/01 10.00% 328,817
------------
Total - Public Companies (Cost $15,272,646) 6,993,063
------------
See Notes to Financial Statements.
4
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments (Unaudited) (continued)
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July 31, 2002
-----------------------------------------
Principal Acquisition Coupon Value
Amount/Shares Date ## Rate/Yield (Note 1)
- ------------- ----------- ---------- --------
INVESTMENT COMPANIES - 2.69%
3,107,513 Dreyfus Government Cash Management Fund $ 3,107,513
------------
Cost ($3,107,513)
TOTAL INVESTMENTS (Cost $182,217,818*) - 99.43% 114,966,395
OTHER ASSETS & LIABILITIES (NET) - 0.57% 662,394
--------------
NET ASSETS - 100.00% $115,628,789
==============
* Aggregate cost for federal tax and book purposes.
** Restricted as to public resale. Acquired between January 1, 1998 and July
31, 2002. Total cost of restricted securities at July 31, 2002 aggregated
$124,543,946. Total market value of restricted securities owned at July 31,
2002 was $57,292,523 or 49.55% of net assets.
# Non-income producing security.
## Required disclosure for restricted securities only.
@ At July 31, 2002, the Company owned 5% or more of the company's outstanding
shares thereby making the company an affiliate as defined by the Investment
Company Act of 1940. Total market value of affiliated securities owned at
July 31, 2002 was $20,469,080.
See Notes to Financial Statements.
5
Excelsior Private Equity Fund II, Inc.
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
July 31, 2002 October 31, 2001
--------------- ----------------
(Unaudited)
ASSETS:
Investment Securities, at Cost $ 182,217,818 $ 166,466,755
============= ==============
Investment Securities, at Value $ 114,966,395 $ 129,498,052
Cash -- 351,782
Receivables:
From Investment Adviser 65,429 7,723,112
Interest 91,855 19,731
Incentive Fee Receivable 1,077,914 --
For Investments Sold -- 3,920,263
Other Assets 19,107 175,686
------------- -------------
Total Assets 116,220,700 141,688,626
------------- -------------
LIABILITIES:
Managing Investment Advisory Fees Payable 289,151 --
Administration and Shareholder Servicing Fees Payable 105,862 28,999
Directors' Fees Payable 38,865 59,989
Accrued Expenses and Other Payables 158,033 176,313
------------- -------------
Total Liabilities 591,911 265,301
------------- -------------
NET ASSETS $ 115,628,789 $ 141,423,325
============= =============
NET ASSETS consist of:
Undistributed Net Investment Income/(Loss) $ (3,809,557 $ 2,230,182
Accumulated Net Realized Gain/(Loss) on Investments 4,674,533 (8,598,006)
Net Unrealized Depreciation on Investments (67,251,423 (36,968,703)
Allowance for Management Incentive Fee (278,457 (1,356,372)
Par Value 1,957 1,957
Paid in Capital in Excess of Par Value 182,291,736 186,114,267
------------- -------------
Total Net Assets $ 115,628,789 $ 141,423,325
============= =============
Shares of Common Stock Outstanding 195,730 195,730
------------- -------------
NET ASSET VALUE PER SHARE $ 590.76 $ 722.54
============= =============
See Notes to Financial Statements.
6
Excelsior Private Equity Fund II, Inc.
Statement of Operations (Unaudited)
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Nine Months Ended
July 31,
----------------------------------
2002 2001
--------------- ---------------
INVESTMENT INCOME:
Interest Income $ 1,211,110 $ 1,781,061
--------------- ---------------
Total Income 1,211,110 1,781,061
--------------- ---------------
EXPENSES:
Managing Investment Advisory Fees 1,022,816 2,035,901
Administrative Fees 122,463 52,242
Custodial Fees 3,366 31,179
Legal Fees 103,267 164,548
Audit and Other Professional Service Fees 65,820 59,836
Directors' Fees and Expenses 44,876 60,612
Shareholder Reports 19,956 19,961
Insurance Expense 37,397 40,221
Miscellaneous Expense 6,731 6,732
--------------- ---------------
Total Expenses 1,426,692 2,471,232
Fees Waived and Reimbursed by Adviser (157,666) (94,341)
--------------- ---------------
Net Expenses 1,269,026 2,376,891
--------------- ---------------
NET INVESTMENT LOSS (57,916) (595,830)
--------------- ---------------
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS:
Net Realized Gain /(Loss) on Security 13,272,539 (51,898)
Transactions
Change in Unrealized Depreciation
on Investments (30,282,720) (117,089,784)
--------------- ---------------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS (17,010,181) (117,141,682)
Change in Management Incentive Fee 1,077,914 17,513,239
--------------- ---------------
NET DECREASE IN NET
ASSETS RESULTING FROM OPERATIONS $(15,990,183) $ (100,224,273)
============ ==============
See Notes to Financial Statements.
7
Excelsior Private Equity Fund II, Inc.
Statement of Changes in Net Assets (Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
July 31,
--------------------------------
2002 2001
------------- -------------
OPERATIONS:
Net Investment Loss $ (57,916) $ (595,830)
Net Realized Gain/Loss on Investments 13,272,539 (51,898)
Change in Unrealized Depreciation
On Investments (30,282,720) (117,089,784)
Change in Allowance for Management
Incentive Fee 1,077,914 17,513,239
------------- -------------
Net Decrease in Net Assets
Resulting From Operations (15,990,183) (100,244,273)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income (5,981,822) --
Return of Capital (3,822,531) --
------------- -------------
Total Distributions (9,804,353) --
NET DECREASE IN NET ASSETS (25,794,536) (100,224,273)
NET ASSETS:
Beginning of Period 141,423,325 257,705,206
------------- -------------
End of Period $ 115,628,789 $ 157,480,933
============= =============
See Notes to Financial Statements.
8
Excelsior Private Equity Fund II, Inc.
Statement of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
July 31,
-----------------------------
2002 2001
------------ -------------
CASH FLOWS FROM INVESTING
AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments $ 38,261,186 $ 6,284,026
Purchases of Investments (5,168,544) (15,849,217)
Net (Increase)/Decrease in Short Term Investments (31,526,764) 13,953,466
Investment Income 1,138,986 1,210,510
Decrease in Receivable from Investment Adviser 7,657,683 --
Operating Expenses Paid (909,976) (5,600,959)
------------ -------------
Net Cash Provided from/(Used for) Investing and
Operating Activities 9,452,571 (2,174)
------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distributions Paid:
From Net Investment Income (5,981,822) --
From Return of Capital (3,822,531) --
------------ -------------
Net Cash Used for Financing Activities (9,804,353) --
------------ -------------
Net Decrease in Cash (351,782) 2,174
CASH AT BEGINNING OF PERIOD 351,782 2,174
------------ --------------
CASH AT END OF PERIOD $ -- $ -
============ =============
See Notes to Financial Statements.
9
Excelsior Private Equity Fund II, Inc.
Financial Highlights (Unaudited)
- --------------------------------------------------------------------------------
Per Share Operating Performance: (1)
July 31, 2002 October 31, 2001
------------- ----------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 722.54 $ 1,316.64
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Loss (0.30) (9.30)
Net Realized and Unrealized Loss
on Investments (86.90) (678.46)
Change in Allowance for Management
Incentive Fee 5.51 93.66
-------- ----------
Total from Investment Operations (81.69) (594.10)
-------- ----------
DISTRIBUTIONS:
From Investment Income (30.56) --
Return of Capital (19.53) --
-------- ----------
Total Distributions (50.09) --
-------- ----------
NET ASSET VALUE, END OF PERIOD $ 590.76 $ 722.54
======== ==========
TOTAL NET ASSET VALUE RETURN (3) (11.31)% (44.58)%
======== ==========
Ratios and supplemental data:
Net Assets, End of Period (000's) $115,629 $ 141,423
Ratios to Average Net Assets (2)
Gross Expenses 1.45% 1.59%
Net Expenses 1.29% 1.48%
Net Investment Loss (0.06)% (0.91)%
Interest Expense N/A N/A
Portfolio Turnover (3) 5.68% 11.00%
- -----------------
(1) For a share outstanding throughout the period
(2) Annualized
(3) Non-annualized
See Notes to Financial Statements.
10
Excelsior Private Equity Fund II, Inc.
(Notes to Financial Statements Unaudited)
Note 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 a
non-diversified, closed-end management investment company that 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 the financial statements. Generally accepted accounting
principles in the United States 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 such other
times as, in the Board of Directors' view, circumstances warrant.
Investments in securities for which market quotations are readily available
generally will be valued at the last sale price on the date of valuation
or, if no sale occurred, at the mean of the latest bid and ask prices;
provided that, as to such securities that may have legal, contractual or
practical restrictions on transfer, a discount of 10% to 40% from the
public market price will be applied. Securities for which no public market
exists and other assets will be valued at fair value as determined in good
faith by the Managing Investment Adviser (as defined below) or a committee
of the Board of Directors under the supervision of the Board of Directors
pursuant to certain valuation procedures summarized below. Securities
having remaining maturities of 60 days or less are valued at amortized
cost.
The value for securities for which no public market exists is
difficult to determine. Generally, such investments will be valued on a
"going concern" basis without giving effect to any disposition costs. There
is a range of values that is reasonable for such investments at any
particular time. Initially, direct investments are valued based upon their
original cost, until developments provide a sufficient basis for use of a
valuation other than cost. Upon the occurrence of developments providing a
sufficient basis for a change in valuation, direct investments will be
valued by the "private market" or "appraisal" method of valuation. The
private market method shall only be used with respect to reliable third
party transactions by sophisticated, independent investors. The appraisal
method shall be based upon such factors affecting the company such as
earnings, net worth, reliable private sale prices of the company's
securities, the market prices for similar securities of comparable
companies, an assessment of the company's future prospects or, if
appropriate, liquidation value. The values for the investments referred to
in this paragraph will be estimated regularly by the Managing Investment
Adviser or a committee of the Board of Directors and, in any event, not
less frequently than quarterly. However, there can be no assurance that
such values will represent the return that might ultimately be realized by
the Company from the investments.
At July 31, 2002, market quotations were not readily available for
securities valued at $50,299,460. Such securities were valued by the
Managing 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
discounts on investments, is earned from settlement date and is recorded on
the accrual basis. Dividend income is recorded on the ex-dividend date.
11
(c) Repurchase agreements:
The Company enters into agreements to purchase securities and to
resell them at a future date. It is the Company's policy to take custody of
securities purchased and to ensure that the market value of the collateral
including accrued interest is sufficient to protect the Company from losses
incurred in the event the counterparty does not repurchase the securities.
If the seller defaults and the value of the collateral declines or if
bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Company may be delayed or
limited.
(d) Federal income taxes:
It is the policy of the Company to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code and
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
Dividends from net investment income are declared and paid at least
annually. Any net realized capital gains, unless offset by any available
capital loss carryforwards, are distributed to shareholders at least
annually. Dividends and distributions are determined in accordance with
federal income tax regulations that 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.
The Company has an unused capital loss carryforward of $8,602,181
available for income tax purposes, to be applied against future net
security profits, if any, realized after October 31, 2001. If not applied,
the carryover expires in fiscal year 2009.
At July 31, 2002, the tax basis of the Company's investments for
federal income tax purposes amounted to $182,217,818. The net unrealized
depreciation amounted to $67,251,423 which is comprised of gross unrealized
appreciation of $5,869,612 and aggregate gross unrealized depreciation of
$73,121,035.
(e) Cash Equivalents
The Company treats all highly-liquid financial instruments that mature
within three months as cash equivalents.
Note 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 NY") and U.S. Trust Company ("U.S.
Trust") serve as the Managing Investment Adviser to the Company. Under the
Agreement, for the services provided, the Managing Investment Adviser is
entitled to receive a management fee at the annual rate of 1.50% of the net
assets of the Company, determined as of the end of each calendar quarter, that
are invested or committed to be invested in portfolio companies or private funds
and equal to an annual rate of 0.50% of the net assets of the Company,
determined as of the end of each calendar 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 the
Managing Investment Adviser 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, the Managing Investment
Adviser will be required to repay the Company all or a portion of the incentive
fee previously paid.
On December 20, 2001, the Board (including a majority of the directors that
are not interested persons of the
12
Company) approved an Investment Sub-Advisory Agreement (the "Sub-Advisory
Agreement") among the Company, U.S. Trust NY, U.S. Trust and U.S. Trust Company,
N.A. Pursuant to the Sub-Advisory Agreement, U.S. Trust Company, N.A. serves as
the investment sub-adviser to the Company and receives an investment management
fee from the Managing Investment Adviser.
U.S. Trust NY is a New York state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust is a Connecticut state
bank and trust company. U.S. Trust Company, N.A. is a nationally chartered bank.
Each is a wholly-owned subsidiary of U.S. Trust Corporation, a registered bank
holding company. U.S. Trust Corporation is a wholly-owned subsidiary of The
Charles Schwab Corporation.
Beginning January 1, 2002, PFPC, Inc. ("PFPC") began providing
administrative and accounting services to the Company pursuant to an
Administration and Accounting Services Agreement. Also beginning January 1,
2002, PFPC Trust Company began providing custodian services to the Company
pursuant to a Custodian Services Agreement. Beginning February 1, 2002, PFPC
began providing transfer agency services to the Company pursuant to a Transfer
Agency Agreement. For the services provided to the Company by PFPC and its
affiliates, PFPC is entitled to an annual fee of 0.02% of average net assets
plus reimbursement of reasonable expenses, and a base fee, payable monthly.
The Managing Investment Adviser has voluntarily agreed to waive or
reimburse other operating expenses of the Company, exclusive of management fees,
to the extent they exceed 0.25% of the Company's net assets. This reimbursement
amounted to $157,666 for the period ended July 31, 2002.
Each director of the Company receives an annual fee of $9,000, and is
reimbursed for expenses incurred for attending meetings. No person who is an
officer, director or employee of the Managing Investment Adviser, or U.S. Trust
Corporation or its subsidiaries, who serves as an officer, director or employee
of the Company receives any compensation from the Company.
Note 3 -- Purchases and Sales of Securities
Excluding short-term investments, the Company had $5,168,544 in purchases
and $34,149,523 in sales of securities for the nine-month period ended July 31,
2002. Excluding short-term investments, the Company had $15,073,509 in purchases
and $3,902,739 in sales of securities for the nine-month period ended July 31,
2001.
At July 31, 2002, the Company had outstanding investment commitments
totaling $6,486,642.
The Company received distributions from private investment funds in the
amount of $151,400 for the nine-month period ended July 31, 2002.
Note 4 -- Transactions with Affiliated Companies
An affiliated company is a company in which the Company has ownership of at
least 5% of the voting securities. Transactions with companies, which are or
were affiliates are as follows:
Sale Realized Value
Affiliate Purchases Proceeds Interest Gain (Loss) (Note 1)
- --------- --------- -------- -------- ----------- --------
Cardiac Science, Inc. $ -- $16,130,238 $ 560,867 $ 5,217,892 $ 4,110,014
PowerSmart, Inc. -- 17,663,477 8,272 7,708,839 1,776,194
Captura Software, Inc., Series 3 Preferred 450,000 -- -- -- 500,000
Reed Elsevier PLC (fka Classroom Connect,
Inc.) -- 345,808 -- 345,808 601,592
--------- ----------- --------- ----------- -----------
Total $450,000 $34,139,523 $ 569,139 $13,272,539 $ 6,987,800
========= =========== ========= =========== ===========
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
- ---------------------
Nine-month Period Ended July 31, 2002 as Compared to the Similar Period in 2001
The Company's net asset value per common share was $592.18 at July 31,
2002, down $130.36 per share from the net asset value per common share of
$722.54 at October 31, 2001. The decrease in net asset value was principally the
result of the combined effect of decreases due to (i) a distribution of ordinary
income in the amount of $5,981,822 on December 28, 2001, (ii) a return of
capital distribution in the amount of $3,822,531 on January 7, 2002, and (iii)
declines in the valuations of private investment funds and public company
investments held by the Company. The declines were offset by realized gains of
$5,217,893 from the sale of 2,697,528 shares of Cardiac Science, Inc. common
stock as well as gains of $7,708,839 from the sale of PowerSmart, Inc. The
Company's net asset value per common share was $804.58 at July 31, 2001, down
$512.06 per share from the net asset value per common share of $1,316.64 at
October 31, 2000.
Realized and Unrealized Gains and Losses from Portfolio Investments
- -------------------------------------------------------------------
For the nine-month periods ended July 31, 2002 and 2001, the Company had a
net realized gain/(loss) on security transactions of $10,700,080 and ($51,898),
respectively. For the nine-month periods ended July 31, 2002 and 2001, the
Company had a net change in unrealized depreciation on investments of
($30,282,720) and ($117,089,784), respectively. The net realized gain for the
period ended July 31, 2002 was primarily the result of the Company's sale of
shares of common stock of Cardiac Science, Inc., as well as the Company's sale
of PowerSmart, Inc., a private company investment. The change in unrealized
depreciation for the period ended July 31, 2002 was principally the result of
declines in the valuations of private investment funds and public company
investments.
Investment Income and Expenses
- ------------------------------
For the nine-month period ended July 31, 2002, the Company had investment
income of $3,783,569 and net operating expenses, net of expenses reimbursed by
the Managing Investment Adviser (as defined below), of $1,269,851, resulting in
net investment gain of $2,513,718 as compared to interest income of $1,781,061
and net operating expenses, net of expenses reimbursed by the Managing
Investment Adviser, of $2,376,891, resulting in net investment loss of $595,830
for the nine-month period ended July 31, 2001. The primary reason for the
increase in investment income was dividend income earned due to the sale of
PowerSmart, Inc. as well as interest income received as part of the redemption
of Cardiac Science, Inc. senior secured notes. These investment gains were
offset by a decrease in interest income earned on short-term instruments due to
lower short-term interest rates. The reduction in net operating expenses is
principally attributable to lower management investment advisory fees due to a
decrease in the value of assets under management.
United States Trust Company of New York and U.S. Trust Company (together,
the "Managing Investment Adviser") provide 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 management fee is determined and payable quarterly. For the
nine-month periods ended July 31, 2002 and 2001, the Managing Investment Adviser
earned $1,023,510 and $2,035,901 in management fees, respectively. In addition,
for the nine-month periods ended July 31, 2002 and 2001, the change in allowance
for the management incentive fee was $1,077,914 and $17,513,239 (both decreases
in accumulated management incentive fees), respectively. This is primarily due
to changes in cumulative net realized and unrealized gains and losses during
these periods, which resulted in a payable by the Adviser to the Company of
$1,356,372 at July 31, 2002. For the same periods, the Managing Investment
Adviser reimbursed other operating expenses of the Company in the amounts of
$157,536 and $94,341 respectively, as a result of expenses incurred in excess of
those permitted pursuant to the Company's prospectus.
14
Net Assets
- ----------
At July 31, 2002, the Company's net assets were $115,906,422, a decrease of
$25,516,903 from net assets of $141,423,325 at October 31, 2001 due to the
combined effect of decreases due to (i) a distribution of ordinary income in the
amount of $5,981,822 on December 28, 2001, (ii) a return of capital distribution
in the amount of $3,822,531 on January 7, 2002, and (iii) declines in the
valuations of private investment funds and public company investments held by
the Company. The declines were offset by realized gains of $5,217,893 from the
sale of 2,697,528 shares of Cardiac Science, Inc. common stock as well as gains
of $7,708,839 from the sale of PowerSmart, Inc. The Company's net assets at July
31, 2001 were $157,480,933.
Liquidity and Capital Resources
- ------------------------------
The Company has focused its investments in the private equity securities of
expansion and later-stage venture capital companies and middle-market companies
that the Company believes offer significant long-term capital appreciation. The
Company may offer managerial assistance to certain of these companies. The
Company invests its available cash in short-term investments of marketable
securities pending distributions to shareholders or to provide the liquidity
necessary to make portfolio investments as investment opportunities arise.
The Company made one follow-on investment during the nine-month period
ended July 31, 2002, in the amount of $450,000, in Captura Software's round of
Series 3 preferred stock financing.
At July 31, 2002, the Company held $0 in cash and $114,966,395 in
investments as compared to $351,782 in cash and $129,498,052 in investments at
October 31, 2001. The change from October 31, 2001 was the result of decreases
in the value of publicly traded holdings and declines in the value of private
investment funds. At July 31, 2002, the Company held $57,673,872 in short-term
investments as compared to $26,147,108 at October 31, 2001. The increase during
the nine-month period is due to the sale of the Company's holdings in
PowerSmart, Inc., the redemption of Cardiac Science, Inc. senior secured notes
and accrued interest, and the sale of common shares of Cardiac Science, Inc.
held in the Company's portfolio. In connection with the Company's commitments to
private investment funds in the amount of $58,000,000 since inception, a total
of $51,763,358 has been contributed by the Company through July 31, 2002.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Equity Price Risk
A majority of the Company's investment portfolio consists of equity
securities in private companies and private investment funds, representing 51.4%
of the investment portfolio, which are not publicly traded. These investments
are recorded at fair value as determined by the Managing 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 normally associated with
public equity markets. Nevertheless, the Company is exposed to equity price risk
through its investments in the equity securities of three public companies. At
July 31, 2002, these publicly traded equity securities were valued at
$6,664,246, representing 5.77% of the investment portfolio. Thus, there is
exposure to equity price risk, estimated as the potential loss in fair value due
to a hypothetical 10% decrease in quoted market prices, representing a decrease
in the value of these securities of $720,357. At October 31, 2001, publicly
traded equity securities were valued at $17,171,418 and there was exposure to
equity price risk of $1,763,309 due to a hypothetical 10% decrease in the market
prices of those securities. The decrease in market value during the period ended
July 31, 2002 was principally the result of depreciation in the price of shares
of Cardiac Science, Inc. (NASDAQ: DFIB), Cross Media Marketing Corp. (AMEX: XMM)
and Curon Medical, Inc. (NASDAQ: CURN), each a publicly traded equity security.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
Date: September 13, 2002 By: /s/ David I. Fann
---------------------------
David I. Fann
Co-Chief Executive Officer
Date: September 13, 2002 By: /s/ Douglas A. Lindgren
-----------------------------
Douglas A. Lindgren
Co-Chief Executive Officer
Date: September 13, 2002 By: /s/ Brian F. Schmidt
----------------------------
Brian F. Schmidt
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATIONS
I, David I. Fann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Excelsior Private
Equity Fund II, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002
/s/ David I. Fann
------------------------------------
Name: David I. Fann
Title: Co-Chief Executive Officer
I, Douglas A. Lindgren, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Excelsior Private
Equity Fund II, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002
/s/ Douglas A. Lindgren
-------------------------------------
Name: Douglas A. Lindgren
Title: Co-Chief Executive Officer
17
I, Brian F. Schmidt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Excelsior Private
Equity Fund II, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002
/s/ Brian F. Schmidt
-------------------------------------
Name: Brian F. Schmidt
Title: Chief Financial Officer
(Principal Financial Officer)
18