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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2002
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: 000-22277
EXCELSIOR PRIVATE EQUITY FUND II, INC.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 22-3510108
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
114 West 47th Street
New York, New York 10036-1532
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (212) 852-1000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $0.01 PAR VALUE PER SHARE
(Title of Class)
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 [_]
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. [X]
The registrant's common stock is not listed on any exchange nor does it trade on
any established securities market or other market.
As of December 31, 2002 there were 195,730 shares outstanding of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on March 21, 2003 are incorporated by reference into
Part III (Items 10, 11 and 12) to this Form 10-K.
TABLE OF CONTENTS
Form 10-K
Report Page
-----------
Item No.
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PART I
1. Business 1
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 6
6. Selected Financial Data 6
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
7A. Quantitative and Qualitative Disclosures About Market Risk 8
8. Financial Statements and Supplementary Data 9
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 22
PART III
10. Directors and Executive Officers of the Registrant 22
11. Executive Compensation 22
12. Security Ownership of Certain Beneficial Owners and Management 22
13. Certain Relationships and Related Transactions 22
14. Controls and Procedures 22
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22
- --------------------------------------------------------------------------------
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain uncertainties and risks.
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the federal securities laws that also involve substantial
uncertainties and risks. The Company's future results may differ materially from
its historical results and actual results could differ materially from those
projected in the forward-looking statements as a result of certain risk factors.
Readers should pay particular attention to the considerations described in the
section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Readers should also carefully
review the risk factors described in the other documents the Company files, or
has filed, from time to time with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS.
Overview
Excelsior Private Equity Fund II, Inc. (the "Company" or the "Fund") 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, in connection with its initial offering of shares, registered said
offering of 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, acting through its registered
investment advisory division, U.S. Trust-New York Fund Advisers Division, U.S.
Trust Company, acting through its registered investment advisory division, U.S.
Trust-Connecticut Fund Advisers Division, and U.S. Trust Company, N.A., acting
through its registered investment advisory division, U.S. Trust-California Fund
Advisers Division (each an "Investment Adviser" and together, the "Managing
Investment Adviser" or "U.S. Trust") provide investment management services to
the Company pursuant to a management agreement dated July 18, 2000 and an
investment sub-advisory agreement dated December 21, 2001 (the "Management
Agreement"). Each Investment Adviser is a subsidiary of U.S. Trust Corporation.
On May 31, 2000, U.S. Trust Corporation became an indirect wholly owned
subsidiary of The Charles Schwab 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 at $1,000 per share. The Company held its initial
and final closings on each of 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
(including one share purchased for $1,000 on March 20, 1997, by Douglas A.
Lindgren, the Company's Co-Chief Executive Officer 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 met the Company's investor suitability standards.
In connection with the public offering of the Company's shares, the
Managing Investment Adviser paid to the Selling Agent a commission totaling
$60,000. The Company incurred offering costs associated with the public offering
totaling $367,154. Net proceeds to the Company from the public offering, after
offering 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.
Portfolio Investments
As of October 31, 2002, the Company held in its portfolio six private
companies, four public companies and fourteen private equity funds. The Company
had a total value, defined as net asset value as of October 31, 2002 plus
cumulative distributions, of $936.29 per share. The Company has distributed 64%
of investors' original investment to date. During fiscal 2002 alone, the Company
distributed $273.84 per share, or 27% of an initial investment.
The following is a summary of the Company's investment portfolio over its
life.
1
Investments Held-- Public
. Cardiac Science, Inc. (NASDAQ:DFIB), Irvine, CA, develops,
manufactures, and markets automatic external cardiac defibrillators,
or AECDs, which are medical devices used for the treatment of cardiac
arrest. The Fund invested $7.6 million in SurVivaLink, Inc., which
merged with Cardiac Science in September 2001. As a result of the
merger, the Fund received promissory notes in the principal amount of
$6.4 million, 4.2 million shares of Cardiac Science common stock, and
$2.5 million in cash. Cardiac Science closed at $1.90 per share on
October 31, 2002, and the Fund's remaining holding is valued at $1.4
million. Thus far, the Fund's realized proceeds from this investment
are $20.5 million, 2.7x the cost to Fund.
. Concur Technologies, Inc. (NASDAQ: CNQR), Redmond, WA, develops and
provides expense management software and service solutions for large
companies. The Company's products significantly increase the
efficiency and lower the cost of expense reports by providing a
web-based software application that automates much of the process. The
Fund originally invested $6.2 million in Captura Software, Inc. On
July 31, 2002, Concur agreed to acquire Captura. The Fund received
Concur stock as part of the transaction and in the process, realized a
loss of $5.9 million. On October 31, 2002, the stock closed at $3.00
per share.
. Curon Medical, Inc. (NASDAQ: CURN) (formerly known as Conway-Stuart
Medical, Inc.) Sunnyvale, CA, develops and markets medical devices
utilizing radio frequency for the treatment of gastrointestinal
disorders. Curon's current products provide cost-effective procedures
for the treatment of gastroesophageal reflux disease and fecal
incontinence. Curon completed its initial public offering in September
2000. The Fund invested $6 million in Curon at an average cost of
$2.63 per share and currently holds 2.3 million shares of common
stock. On October 31, 2002, Curon closed at $0.65 per share.
. Pivotal Corporation (NASDAQ: PVTL, TSX: PVT), Vancouver, British
Columbia, provides a complete CRM software suite that includes
capabilities in marketing, sales, service, contact centers, partner
management and interactive selling. The Fund originally invested $9.7
million in MarketFirst Software, Inc., a company, which developed
hosted e-marketing software and services targeting middle-market
corporations. On October 3, 2002, MarketFirst was acquired by Pivotal.
The Fund received 94,430 shares of Pivotal common stock as part of the
transaction and in the process, realized a loss of $9.3 million. On
October 31, 2002, the stock closed at $0.68 per share.
Investments Held -- Private
. ClearOrbit, Inc. (formerly known as BPA Systems, Inc.), Austin, TX,
extends enterprise value with proven software solutions that allow
customers to fully leverage their investment in enterprise
applications ClearOrbit products expand rather than duplicate
functionality, eliminating inefficiencies in the supply chain. The
Company was profiled as one of Deloitte & Touche's Texas Technology
Fast 50 companies this year. The Fund invested $5 million in
ClearOrbit and is held at cost.
. Mosaica Education, Inc. (formerly known as Advantage Schools, Inc.),
Boston, MA, is a for-profit provider of public school education
management services. The Fund invested in Advantage Schools, Inc.,
which manages charter schools in troubled urban school districts in
cooperation with local partners. The Fund invested $7 million in
Advantage Schools. In August 2001, Mosaica Education, Inc. a privately
held operator of charter schools acquired Advantage, forming Mosaica
Advantage. The Company's schools are publicly-funded, receiving
per-student capitalization rates generally consistent with those
received by other schools in the district. The Fund received 75,059
shares of preferred stock in Mosaica Education, Inc. and promissory
notes in the principal amount of $2 million from the acquisition of
Advantage. As of October 31, 2002, the investment was valued at $5.5
million.
Investments Held -- Third-Party Investment Funds
. Advanced Technology Ventures V, LP ("ATV") is an early-stage focused
fund targeting information technology and health care markets. ATV has
drawn all of the Fund's $3 million commitment. At October 31, 2002,
the total value (fair market value plus distributions) of this
investment was $2 million.
2
. Brand Equity Ventures I, LP ("Brand Equity") is focused on investing
broadly across the consumer sector, particularly in branded
opportunities within e-commerce, retailing, and direct response
markets. Brand Equity has drawn all of the Fund's $2.5 million
commitment. At October 31, 2002, the total value (fair market value
plus distributions) of this investment was $1.5 million.
. Brentwood Associates III, LP ("Brentwood") is focused on middle-market
buyouts and consolidations. Brentwood's strategy is to identify
industries with consolidation characteristics, develop a strategy for
implementation and recruit management to execute that strategy.
Brentwood has drawn all of the Fund's $5 million commitment. At
October 31, 2002, the total value (fair market value plus
distributions) of this investment was $5.1 million.
. Broadview Capital Partners, LP ("Broadview") is focused on buyouts,
recapitalizations and growth financings within the technology sector.
Broadview has drawn all of the Fund's $5 million commitment. At
October 31, 2002, the total value (fair market value plus
distributions) of this investment was $3.3 million.
. Commonwealth Capital Ventures II, LP ("Commonwealth") invests in early
to later-stage information technology companies in the New England
region. Commonwealth maintains a particular focus on communications
technology, Internet software and services, and e-commerce companies.
Commonwealth has drawn all of the Fund's $4 million commitment. At
October 31, 2002, the total value (fair market value plus
distributions) of this investment was $3.6 million.
. Communications Ventures III, LP ("CommVentures") targets early-stage
companies exclusively in the communications sector. CommVentures has
drawn all of the Fund's $5 million commitment. At October 31, 2002,
the total value (fair market value plus distributions) of this
investment was $1.7 million.
. Friedman, Fleischer & Lowe, LP ("Friedman") is a fund focused
exclusively on participation in middle-market buyouts. Friedman
distributed a return of capital to the Fund in January 2001. Friedman
has drawn all of the Fund's $5 million commitment. At October 31,
2002, the total value (fair market value plus distributions) of this
investment was $4.4 million.
. Mayfield X, LP ("Mayfield") invests in early-stage information
technology and healthcare companies, primarily located in Silicon
Valley. Mayfield has drawn all of the Fund's $5 million commitment. At
October 31, 2002, the total value (fair market value plus
distributions) of this investment was $1.6 million.
. Mayfield X Annex, LP ("Annex Fund") invests follow-on capital in
select Mayfield portfolio companies. The Annex Fund has drawn all of
the Fund's $250,000 commitment. As of October 31, 2002, the total
value (fair market value plus distributions) of this investment was
$252,934.
. Mid-Atlantic Venture Fund III, LP ("MAVF") invests in early and
expansion-stage companies throughout the Mid-Atlantic region of the
United States. MAVF has drawn all of the Fund's $5 million commitment.
As of October 31, 2002, the total value (fair market value plus
distributions) of this investment was $2.6 million.
. Morgenthaler Venture Partners V, LP ("Morgenthaler") is primarily an
early-stage venture fund, investing largely in information technology
and healthcare companies but also invests in buyouts of basic
businesses. Morgenthaler has drawn all of the Fund's $8 million
commitment. As of October 31, 2002, the total value (fair market value
plus distributions) of this investment was $6.2 million.
. Quad-C Partners V, LP ("Quad C") is focused on taking controlling
positions in leveraged acquisitions and recapitalizations of
middle-market companies. Quad C has drawn all of the Fund's $5 million
commitment. As of October 31, 2002, the total value (fair market value
plus distributions) of this investment was $6.7 million.
. Sevin Rosen Fund VI, LP ("Sevin Rosen") invests in early-stage
technology companies, focusing specifically on companies in
communications and eBusiness infrastructure and solutions, as well as
those companies with Internet-enabled business models. Sevin Rosen has
drawn all of the Fund's $2.5 million commitment. As of October 31,
2002, the total value (fair market value plus distributions) of this
investment was $4.7 million.
3
. Trinity Ventures VI, LP ("Trinity") is an early to later-stage fund,
which invests in the software, communications and electronic commerce
sectors. Trinity has drawn all of the Fund's $3 million commitment. As
of October 31, 2002, the total value (fair market value plus
distributions) of this investment was $1.7 million.
Investments Sold
. Classroom Connect, Inc., Los Angeles, CA, is a provider of
Internet-based educational products for students in kindergarten to
eighth grade. The company's product and service offerings include
proprietary instruction guides, teaching plans, seminars and unique
Internet content. The company is targeting teachers and school
districts wishing to incorporate the Internet into the classroom. In
September 2001, Classroom Connect was acquired by Harcourt Education,
Inc., a subsidiary of Reed Elsevier PLC. The Fund received proceeds of
$8.1 million from the sale. In 2002, the Fund received an additional
$1 million held in escrow. The Fund has received total proceeds equal
to 100% of its invested capital.
. LifeMinders, Inc., Herndon, VA is an online direct marketing company
that provides personalized information and advertisements via e-mail
to a community of members. The Fund invested $11.5 million in
LifeMinders, Inc. In November 1999, LifeMinders completed its initial
public offering. From May 2000 through October 2000, the Fund sold
735,000 shares of LifeMinders and realized proceeds of $25.2 million,
2.2x the cost to the Fund. LifeMinders merged with Cross Media
Marketing Corp. (AMEX: XMM) in October 2001. As a result of the
merger, the Fund received $3.9 million in cash and 520,539 shares of
Cross Media common stock. During the year, the Fund sold its entire
holding of Cross Media stock for $483,071. The Fund received a total
of $30.5 million, or 2.6x the cost, from its investment in
LifeMinders, Inc.
. PowerSmart, Inc., Shelton, CT, is a provider of "smart" battery
management products designed to maximize battery run-times and safety
in laptop computers, cellular telephones and camcorders, as well as a
variety of hand-held electronic devices. PowerSmart was formed as a
spin-off of technology and related assets from Duracell. In May 2002,
Microchip Technologies, Inc. (NASDAQ: MCHP), a fabless semiconductor
company, acquired PowerSmart. The Fund received $16 million in cash at
closing. An additional $1.8 million is being held in escrow on behalf
of the Fund for 12 months. In the event there are no claims against
it, the escrow will be released to the Fund. The value received was
close to 2x the Fund's cost.
. Softcom Microsystems, Inc., Fremont, CA, designs, develops and markets
data acceleration products used in high-speed communications networks.
Softcom's single-chip network accelerator solutions and integrated
subsystems provide processing capabilities which help alleviate the
"data bottleneck" at the point where baseband Local Area Network
traffic moves onto a high-speed broadband Internet backbone. In August
1999, Softcom was sold to Intel for cash, and the Fund realized a 3.7x
return on its $4.2 million investment.
. WNP Communications, Inc., Reston, VA, acquired broadband spectrum
covering 30 of the top 50 markets in the United States in the Local
Multipoint Distribution Services auction conducted by the FCC in 1998.
In May 1999, the company was acquired by NextLink, a leading wireless
communication services provider, for cash and stock. The Fund has sold
all of the NextLink stock received in exchange, realizing a 3.3x
return on its $5.9 million investment.
Investments Written Off
. Constellar Corporation, Redwood Shores, CA, was a provider of
enterprise application integration software and services to large
organizations in North America, Europe and Australia, was sold in an
asset purchase transaction to the Data Mirror Group in September 2000.
The purchase price was $15 million, which was used to satisfy the
company's debts. Although the transaction calls for certain
contingency payments to shareholders, the Fund's $7 million investment
was written off.
. ePod Corporation, New York, NY, provided and distributed e-commerce,
content syndication and rich media advertising services to
manufacturers, retailers, web publishers and content providers in the
entertainment, retail and advertising industries. In March 2001, ePod
filed for the Canadian equivalent of a Chapter 7 bankruptcy and the
investment was written-off. The Fund received proceeds of $.7 million
from the Company's liquidation in July 2001 and realized a loss of
$1.4 million.
4
. firstsource Corporation, Santa Ana, CA, was a provider of
e-procurement infrastructure solutions for both buyers and sellers. In
April 2001, the Company's asset-based lender pulled its credit
facility, placing the Company in a significant capital crunch, which
could not be overcome in a depressed fundraising environment. As a
result, the Company's assets are in the process of being liquidated.
The Fund's $12.7 million investment was written off.
. KillerBiz, Inc., Santa Clara, CA was an online business-to-business
marketplace and software solution connecting small businesses to
suppliers of goods and services. In 2001, we determined that the
KillerBiz business model was no longer viable and support for the
Company ceased. The Fund's $.8 million investment was written off.
. MySeasons.com, Inc., New York, NY, was a business-to-consumer and
business-to-business Internet commerce site aimed at selling gardening
and related horticultural products, as well as providing associated
content to the gardening community. In February 2001, MySeasons.com
merged with Foster & Gallagher, Inc., a direct to consumer marketer of
horticulture products. In July 2001, Foster & Gallagher filed for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and
the Fund realized a loss of $2.0 million.
. Managemark, Inc. (formerly known as On the Go Software, Inc.),
Sunnyvale, CA was an Internet application software company focused on
developing finance and administration software and services for small
and middle-market firms. The company's bank foreclosed on its credit
line when Managemark failed to raise additional capital. The assets
were assigned to a liquidating agent in October 2000. Consequently the
Fund did not receive any proceeds from the sale of the assets and
realized a loss of $5.5 million.
. Protogene Laboratories, Inc., Palo Alto, CA, was a developer and
manufacturer of DNA gene chip technology used in molecular biology and
genetic research. In 2001, Protogene could not raise additional
capital. The company is in the process of selling its remaining assets
and therefore, the Fund's $7.8 million investment has been written
off.
. ReleaseNow, Inc., Menlo Park, CA was an outsourced provider of
e-commerce services for vendors and resellers of software and other
digital goods. ReleaseNow provided software publishers, software
resellers and content-driven web sites with technology and services to
establish an Internet-based sales and distribution channel. In 2001,
we determined that the ReleaseNow business model was no longer viable
and support for the Company ceased. As a result, the Company's assets
were assigned to a liquidating agent. The Fund's $8.0 million
investment in ReleaseNow has been written off.
. Zeus Wireless, Inc., Columbia, MD, built and marketed long-range
frequency hopping radios for commercial and industrial facilities. The
company utilized radio frequency technology as a substitute for wire
with comparable range, reliability and security at a lower price while
offering the flexibility associated with wireless solutions. Zeus
Wireless could not raise additional capital in 2001 and has sold its
assets. The Fund realized a loss of $5.0 million on this investment.
For additional information concerning the Company's investments see
the financial statements beginning on page 11 of this report.
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, 2002, 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.
5
ITEM 2. PROPERTIES.
The Company does not own or lease any physical properties.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company has 200,000 authorized shares. As of December 31, 2002, 195,730
shares were issued and outstanding. There is no established public trading
market for the Company's shares.
Dividends
Fiscal Year Ended October 31, 2002. On December 28, 2001, the Company paid
a dividend of $30.56 per share of ordinary income. On January 7, 2002, the
Company paid a dividend of $19.53 per share of return of capital. On October 31,
2002, the Company paid a dividend of $223.75 per share of return of capital.
Fiscal Year Ended October 31, 2001. There were no dividends paid during
fiscal year 2001.
For additional information concerning the payment of dividends, see
"Significant Accounting Policies" in the notes to the financial statements of
the Company included in Item 8 hereof.
ITEM 6. SELECTED FINANCIAL DATA.
The information provided under Item 8 is incorporated herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Liquidity and Capital Resources
At October 31, 2002, the Company held $0 in cash and $54,747,094 in
investments as compared to $351,782 in cash and $129,498,052 in investments at
October 31, 2001. At October 31, 2002, investments included $31,923,122 in
private investment funds, $10,506,335 in private companies, and $2,680,289 in
public companies. With respect to short-term securities, the Company held
$9,637,348 in U.S. Treasury bills, government agency obligations and the Dreyfus
Government Cash Fund. As of October 31, 2002, the Company had committed
$58,250,000 to private investment funds and has no remaining outstanding
commitments. During fiscal 2002, the Company received proceeds totaling
$40,060,602 from the sale of several public and private portfolio investments,
including PowerSmart, Inc., Cardiac Science, Inc., and Cross Media Marketing
Corp. The Company also received cash distributions from it private fund
investments in the amount of $896,262. The Company paid a total of $53,598,940
or $273.84 per share to its shareholders during fiscal 2002.
Results of Operations
Investment Income and Expenses
For the fiscal year ended October 31, 2002, the Company had investment
income of $1,477,513 and net operating expenses, net of expenses reimbursed by
the Managing Investment Adviser, of $1,505,909, resulting in a net investment
loss of ($28,396) as compared to investment income of $1,141,825 and net
operating expenses of $2,961,970, resulting in a net investment loss of
($1,820,145) for the year ended October 31, 2001. For the fiscal year ended
October 31, 2000, the Company had investment income of $4,202,089 and net
operating expenses of
6
$4,663,686, resulting in a net investment loss of ($461,597). The reduced level
of the Company's total income is due primarily to declining balances of
interest-bearing short-term securities resulting from further investment in
private investment funds and distributions to shareholders. Also, in general,
since many of the investments have been either sold or written off in prior
years, there is a trend toward a reduced level of proceeds from sales of
securities that would result in reinvestment in interest-bearing investments and
therefore, a decrease in interest income. In fiscal 2002, however, there was an
increase in investment income over fiscal 2001 because the Company sold its
investment in PowerSmart, Inc. as well as 3,428,449 shares of Cardiac Science,
Inc. public stock and received redemption proceeds on its Cardiac Science, Inc.
senior secured notes. The reinvestment of sales proceeds in interest-bearing
securities, as well as interest earned on the senior secured notes, contributed
to an increase in interest income over the previous year. The decrease in net
operating expenses from fiscal year 2000 through fiscal year 2002 is primarily
attributable to the decrease in managing investment adviser fees as a result of
the decline in the net assets on which fees are charged.
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. The management fee is determined and payable quarterly. For the fiscal
years ended October 31, 2002, 2001 and 2000, the Managing Investment Adviser
earned $1,214,443, $2,531,868 and $4,196,214 in management fees, respectively.
During fiscal years 2002, 2001 and 2000, respectively, the Managing Investment
Adviser reimbursed other operating expenses of the Company, in the amount of
$243,246, $212,131, and $0, as a result of expenses incurred in excess of those
permitted pursuant to the Company's prospectus. The decrease in the fees earned
by the Managing Investment Adviser over time can be attributed to the decrease
in the Company's net assets.
Net Assets
For the fiscal year ended October 31, 2002, the Company's net assets were
$57,683,842, a decline of ($83,739,483) from net assets of $141,423,325 at
October 31, 2001. The Company's net asset value per common share was $294.71 at
October 31, 2002, down ($427.83) per share from the net asset value per common
share of $722.54 at October 31, 2001. This decline stemmed from the Company's
net decrease in net assets resulting from operations of ($153.99) per share as
well as substantial distributions in the amount of ($273.84) per share paid to
shareholders during the fiscal year. The Company's net asset value per common
share was $722.54 at October 31, 2001, down ($594.10) per share from the net
asset value per common share of $1,316.64 at October 31, 2000. This decrease was
the result of the unrealized depreciation of a number of private and public
companies and private investment funds.
For the fiscal year ended October 31, 2002, the Company posted a net
decrease in net assets resulting from operations of ($30,140,543) or ($153.99)
per share and paid distributions to shareholders during the period totaling
($53,598,940) or ($273.84) per share. The net loss from operations was the
result of several factors including: 1) net realized loss on portfolio
transactions totaling ($9,382,815) or ($47.94) per share and 2) total net
unrealized loss on portfolio investments in the amount of ($22,085,704) or
($112.84) per share. The largest decline in value from October 31, 2001 to
October 31, 2002 was related to the Company's private investment funds, which
comprised ($17,590,120) or 80% of the change in unrealized depreciation. The
Company also had a net change in allowance for the management incentive fee of
$1,356,372 or $6.93 per share, a reduction in accumulated management incentive
fees payable to the Managing Investment Adviser, which offset the net realized
and unrealized losses.
For the fiscal year ended October 31, 2001, the Company had a net decrease
in net assets resulting from operations of ($116,281,881) or ($594.10) per
share. This is comprised of net investment loss totaling ($1,820,145) or ($9.30)
per share, net realized and unrealized loss on investments of ($132,793,435) or
($678.46) per share, and a net change in allowance for the management incentive
fee of $18,331,699 or $93.66 per share (a reduction in accumulated management
incentive fees payable to the Managing Investment Adviser).
Realized and Unrealized Gains and Losses from Portfolio Investments
For the fiscal year ended October 31, 2002, the Company had a ($31,468,519)
net realized and unrealized loss from investments, comprised of a ($9,382,815)
net realized loss on investments and a ($22,085,704) net change in unrealized
depreciation of investments as compared to a ($132,793,435) net realized and
unrealized loss from investments, comprised of a ($9,042,377) net realized loss
on investments and a ($123,751,058) net change in unrealized depreciation on
investments for the fiscal year ended October 31, 2001. For the fiscal year
ended
7
October 31, 2000, the Company had an $85,407,625 net realized and unrealized
gain from investments, comprised of a $31,080,775 net realized gain on
investments and a $54,326,850 net change in unrealized appreciation. The net
unrealized depreciation on investments for the fiscal year ended October 31,
2002 is primarily the result of depreciation on a number of the Company's
private investment funds as well as write-downs taken during the year on
MarketFirst Software, Inc. (aka Pivotal Corporation) and Captura Software, Inc.
(aka Concur Technologies, Inc.). The net realized loss on investments for the
fiscal year ended October 31, 2002 is the result of the sales/mergers of several
companies collectively. The Company sold its shares in PowerSmart, Inc., a
private company, and Cardiac Science, Inc., a public company, at a gain. On the
other hand, the Company sold its shares in Cross Media Marketing Corp., a public
company, at a loss and recorded realized losses on Concur Technologies, Inc. and
Pivotal Corporation due to merger transactions. In general, the losses produced
over the last two years have been the result of a very challenging economic and
market environment where valuations across the industry, both in public and
private equity, have declined and have had a negative impact on the Company's
holdings.
Application of Critical Accounting Policies
Under the supervision of the Company's Valuation and Audit Committees,
consisting of the independent directors of the Company, the Investment Advisers
make certain critical accounting estimates with respect to the valuation of
private portfolio investments. These estimates could have a material impact on
the presentation of the Company's financial condition because in total, they
currently represent 73.6% of the Company's net assets at October 31, 2002.
During the fiscal year, changes to these estimates, i.e. changes in the
valuations of private investments, resulted in a $28.3 million decrease in net
asset value.
The value for securities for which no public market exists is difficult to
determine. Generally speaking, 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.
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.
Initially, direct private company 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 private company investments
will be valued by the "private market" or "appraisal" methods 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
Investment Adviser or a committee of the Board and, in any event, not less
frequently than quarterly. However, there can be no assurance that such value
will represent the return that might ultimately be realized by the Company from
the investments.
The valuation of the Company's private funds is based upon its pro-rata
share of the value of the assets of a private fund as determined by such private
fund, in accordance with its partnership agreement, constitutional or other
documents governing such valuation, on the valuation date. If such valuation
with respect to the Company's investments in private funds is not available by
reason of timing or other event on the valuation date, or are deemed to be
unreliable by the Investment Advisers, the Investment Advisers, under
supervision of the Board, shall determine such value based on its judgment of
fair value on the appropriate date, less applicable charges, if any.
The Investment Advisers also make estimates regarding discounts on market
prices of publicly traded securities where appropriate. For securities which
have legal, contractual or practical restrictions on transfer, a discount of 10%
to 40% from the public market price will be applied.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion includes forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements.
Equity Price Risk
A majority of the Company's investment portfolio consists of equity
securities in private companies and private investment funds, representing 73.6%
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
8
Company is exposed to equity price risk through its investments in the equity
securities of four public companies, Cardiac Science, Inc. (NASDAQ: DFIB),
Concur Technologies, Inc. (NASDAQ: CNQR), Curon Medical, Inc. (NASDAQ: CURN),
and Pivotal Corporation (NASDAQ: PVTL, TSX: PVT). At October 31, 2002, these
publicly traded equity securities were valued at $2,680,289, representing 4.7%
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 $268,029. At October 31, 2001, publicly traded equity securities
were valued at $17,171,418 and there was exposure to equity price risk of
$1,717,142 due to a hypothetical 10% decrease in the market prices of those
securities. The decrease in market value during the fiscal year ended October
31, 2002 was principally the result of depreciation in the price of shares of
Cardiac Science, Inc. (NASDAQ: DFIB) and Curon Medical, Inc. (NASDAQ: CURN),
each a publicly traded equity security. In addition, the Company sold 3,428,449
shares of Cardiac Science, Inc. and 520,609 shares of Cross Media Marketing
Corp. during fiscal 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Independent Auditors' Report
Portfolio of Investments at October 31, 2002
Statement of Assets and Liabilities at October 31, 2002 and October 31, 2001
Statement of Operations for the years ended October 31, 2002, October 31, 2001
and October 31, 2000
Statement of Changes in Net Assets for the years ended October 31, 2002, October
31, 2001 and October 31, 2000
Statement of Cash Flows for the years ended October 31, 2002, October 31, 2001
and October 31, 2000
Financial Highlights -- Selected Per Share Data and Ratios for the years ended
October 31, 2002, October 31, 2001, October 31, 2000, October 31, 1999 and
October 31, 1998
Notes to Financial Statements
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.
9
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Excelsior Private Equity Fund II, Inc.
We have audited the accompanying statements of assets and liabilities of
Excelsior Private Equity Fund II, Inc. (the "Fund") as of October 31, 2002 and
2001, including the portfolio of investments at October 31, 2002, the related
statements of operations, changes in net assets and cash flows for each of the
three years then ended, and the financial highlights for each of five years then
ended. These financial statements and financial highlights are the
responsibility of the Fund'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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 and financial highlights. Our procedures included
confirmation of securities owned as of October 31, 2002 and 2001 by
correspondence with the custodian and brokers, or other appropriate auditing
procedures where replies from brokers were not received. 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, 2002 and 2001, the results
of its operations, its changes in net assets and its cash flows for the three
years ended October 31, 2002, and the financial highlights for each of the five
years ended October 31, 2002 in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
December 17, 2002
10
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2002
Principal Acquisition Coupon Value
Amount/Shares Date## Rate/Yield (Note 1)
------------- ------ ---------- --------
U.S. TREASURY AND GOVERNMENT AGENCY OBLIGATIONS -- 15.50%
$6,700,000 U.S. Treasury Bills, 11/29/02 ............................... 1.49% $ 6,692,235
2,000,000 Federal Home Loan Bank Discount Note, 11/13/02 .............. 1.68% 1,998,880
250,000 Federal National Mortgage Association Discount
Note, 11/20/02 .............................................. 1.69% 249,777
-----------
TOTAL U.S. TREASURY AND GOVERNMENT AGENCY OBLIGATIONS
(Cost $8,940,892) ........................................... 8,940,892
-----------
PRIVATE INVESTMENT FUNDS #, @ -- 55.34%
Advanced Technology Ventures V, LP .......................... 09/98-10/02 1,659,204
Brand Equity Ventures I, LP ................................. 03/98-10/01 688,274
Brentwood Associates III, LP ................................ 06/99-10/02 4,705,305
Broadview Capital Partners, LP .............................. 04/99-10/02 2,567,801
Commonwealth Capital Ventures II, LLP ....................... 01/99-10/02 2,019,502
Communications Ventures III, LP ............................. 11/98-05/00 1,352,438
Friedman, Fleischer & Lowe, LLC, LP ......................... 01/99-10/02 4,084,947
Mayfield X, LP .............................................. 06/99-05/02 1,455,489
Mayfield X, Annex ........................................... 07/02-10/02 252,934
Mid-Atlantic Venture Fund III, LP ........................... 04/98-02/01 2,337,915
Morgenthaler Venture Partners V, LP ......................... 10/98-08/01 3,598,085
Quad-C Partners V, LP ....................................... 04/98-10/02 5,008,933
Sevin Rosen Fund VI, LP ..................................... 03/98-10/02 1,166,614
Trinity Ventures VI, LP ..................................... 09/98-10/02 1,025,681
-----------
TOTAL PRIVATE INVESTMENT FUNDS
(Cost $55,078,679) .......................................... 31,923,122
-----------
PRIVATE COMPANIES #, +, @ -- 18.21%
Common and Preferred Stocks -- 14.80%
Biotechnology -- 0.00%
7,100,000 Protogene Laboratories, Inc., Preferred Series B ............ 12/99-08/01 --
Educational Services -- 6.13%
75,059 Mosaica Education, Inc., Preferred Series C. ................ 08/01 3,537,722
-----------
Internet Services -- Business -- 8.67%
1,428,572 Clear Orbit, Inc. ........................................... 06/00 5,000,013
2,388,345 Firstsource Corp., Series A ................................. 02/00 --
1,676,229 Release Software Corp., Series D. ........................... 06/98 --
115,000 ReleaseNow, Inc., Series E .................................. 07/99 --
100,000 ReleaseNow, Inc., Series F .................................. 12/00 --
176,000 ReleaseNow, Inc., Series G .................................. 12/00 --
-----------
5,000,013
-----------
11
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2002--(continued)
Principal Acquisition Coupon Value
Amount/Shares Date## Rate/Yield (Note 1)
-------------- -------- ---------- --------
PRIVATE COMPANIES #, +, @ -- (continued)
Promissory Notes -- 3.41%
Biotechnology -- 0.00%
$ 2,140,000 Protogene Laboratories, Inc., Convertible
Promissory Notes ....................................... 08/01-01/02 4.25% $ --
Educational Services -- 3.41%
686,415 Mosaica Education, Inc. Bridge Notes ................... 02/01-08/01 0.00-13.00% 686,415
1,025,748 Mosaica Education, Inc. (Advantage Schools)
Promissory Note ........................................ 02/01-08/01 0.00-13.00% 1,025,748
256,437 Mosaica Education, Inc. (ASI Texas LLC)
Promissory Note ........................................ 02/01-08/01 0.00-13.00% 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 ...................... 07/01-10/01 16.00% --
133,333 ReleaseNow, Inc., Promissory Note ...................... 08/01-10/01 16.00% --
------------
TOTAL PRIVATE COMPANIES
(Cost $41,281,397) ..................................... 10,506,335
------------
PUBLIC COMPANIES #, @ -- 4.65%
Common Stock -- 4.65%
Medical Devices -- 4.08%
840,484 Cardiac Science, Inc. .................................. 09/01 1,421,986
2,381,088 Curon Medical, Inc. + .................................. 08/99 928,624
------------
2,350,610
Internet Services--Business--0.57%
161,751 Concur Technologies, Inc ............................... 10/02 291,152
73,278 Concur Technologies, Inc., Escrow ...................... 10/02 --
94,430 Pivotal Corporation .................................... 10/02 38,527
------------
329,679
Warrants -- 0.00%
Medical Devices -- 0.00%
76,950 Curon Medical, Inc. .................................... 08/00 --
------------
TOTAL PUBLIC COMPANIES
(Cost $7,804,077) ...................................... 2,680,289
------------
INVESTMENT COMPANIES -- 1.21%
696,456 Dreyfus Government Cash Management Fund
Institutional Shares (Cost $696,456) ................... 696,456
------------
TOTAL INVESTMENTS (Cost $113,801,501**) ................................ 94.91% 54,747,094
OTHER ASSETS & LIABILITIES (NET) ....................................... 5.09% 2,936,748
------ ------------
NET ASSETS ............................................................. 100.00% $ 57,683,842
====== ============
** Aggregate cost for federal tax and book purposes.
+ At October 31, 2002 the Fund owned 5% or more of the company's outstanding
shares thereby making the Company an affiliate as defined by the Investment
Company Act of 1940. Total market value of affiliated securities owned at
October 31, 2002 was $11,434,959.
# Restricted as to public resale. Acquired between January 1, 1998 and
October 31, 2002. Total cost of restricted securities at October 31, 2002
aggregated $104,164,153. Total market value of restricted securities owned
at October 31, 2002 was $45,109,749 or 78.20% of net assets.
## Required disclosure for restricted securities only.
@ Non-Income Producing Security.
See Notes to Financial Statements.
12
Excelsior Private Equity Fund II, Inc.
Statement of Assets and Liabilities
October 31,
--------------------------------
2002 2001
---- ----
ASSETS:
Investments, at value (Cost $113,801,501 and $166,466,755
respectively) (Note 1) ........................................ $ 54,747,094 $ 129,498,052
Escrow receivable ............................................. 1,817,148 --
Receivable for investments sold ............................... -- 3,920,263
Receivable from investment advisor ( Note 2) .................. 1,441,952 7,723,112
Interest receivable ........................................... 109,702 19,731
Cash .......................................................... -- 351,782
Other assets .................................................. 52,616 175,686
------------- -------------
Total Assets ................................................ 58,168,512 141,688,626
LIABILITIES:
Management fees payable (Note 2) .............................. 191,628 --
Professional fees payable ..................................... 140,000 126,521
Directors' fees payable (Note 2) .............................. 60,000 59,989
Administration fees payable (Note 2) .......................... 30,314 28,999
Accrued expenses and other payables ........................... 62,728 49,792
------------- -------------
Total Liabilities ........................................... 484,670 265,301
------------- -------------
NET ASSETS ...................................................... $ 57,683,842 $ 141,423,325
============= =============
NET ASSETS consist of:
Undistributed net investment income ........................... $ -- $ 2,230,182
Accumulated net realized (loss) on investments ................ (22,504,599) (8,598,006)
Net unrealized (depreciation) on investments .................. (59,054,407) (36,968,703)
Allowance for management incentive fee ........................ -- (1,356,372)
Par value ..................................................... 1,957 1,957
Paid-in capital in excess of par value ........................ 139,240,891 186,114,267
------------- -------------
Total Net Assets ................................................ $ 57,683,842 $ 141,423,325
============= =============
Shares of Common Stock Outstanding ($0.01 par
value, 200,000 authorized) ................................ 195,730 195,730
NET ASSET VALUE PER SHARE ....................................... $ 294.71 $ 722.54
============= =============
See Notes to Financial Statements.
13
Excelsior Private Equity Fund II, Inc.
Statement of Operations
Year Ended October 31,
---------------------------------------------
2002 2001 2000
---- ---- ----
INVESTMENT INCOME:
Interest income .......................................... $ 1,403,448 $ 1,141,825 $ 4,202,089
Dividend income .......................................... 74,065 -- --
------------- ------------- -------------
Total Income ............................................ 1,477,513 1,141,825 4,202,089
EXPENSES:
Managing investment adviser fees (Note 2) ................ 1,214,443 2,531,868 4,196,214
Administration fees (Note 2) ............................. 163,130 58,000 58,000
Legal fees ............................................... 142,176 277,000 128,390
Audit fees ............................................... 72,106 88,000 44,200
Directors' fees and expenses (Note 2) .................... 66,011 82,000 66,689
Printing fees ............................................ 26,680 26,680 8,570
Interest expense ......................................... 4,675 -- --
Miscellaneous expenses ................................... 59,934 110,553 161,623
------------- ------------- -------------
Total Expenses .......................................... 1,749,155 3,174,101 4,663,686
------------- ------------- -------------
Expenses reimbursed by managing investment adviser
(Note 2) ................................................ (243,246) (212,131) --
------------- ------------- -------------
Net Expenses ............................................ 1,505,909 2,961,970 4,663,686
------------- ------------- -------------
NET INVESTMENT (LOSS) ...................................... (28,396) (1,820,145) (461,597)
------------- ------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS: (Note 1)
Net realized gain (loss) on investments .................. (9,382,815) (9,042,377) 31,080,775
Net change in unrealized appreciation (depreciation) on
investments ............................................. (22,085,704) (123,751,058) 54,326,850
------------- ------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ..... (31,468,519) (132,793,435) 85,407,625
------------- ------------- -------------
Net change in allowance for management incentive fee ..... 1,356,372 18,331,699 (8,936,514)
------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ............................................... $ (30,140,543) $(116,281,881) $ 76,009,514
============= ============= =============
See Notes to Financial Statements.
14
Excelsior Private Equity Fund II, Inc.
Statement of Changes in Net Assets
Year Ended October 31,
------------------------------------------------------
2002 2001 2000
---- ---- ----
OPERATIONS:
Net investment (loss) ............................................. $ (28,396) $ (1,820,145) $ (461,597)
Net realized gain (loss) on investments ........................... (9,382,815) (9,042,377) 31,080,775
Net change in unrealized appreciation (depreciation)
on investments ............................................... (22,085,704) (123,751,058) 54,326,850
Net change in allowance for management incentive fee .............. 1,356,372 18,331,699 (8,936,514)
------------- ------------- -------------
Net increase (decrease) in net assets resulting from
operations ...................................................... (30,140,543) (116,281,881) 76,009,514
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. (1,596,637) -- --
In excess of net investment income ................................ (4,385,185) -- --
Net realized gain ................................................. -- -- (52,919,404)
Paid-in capital ................................................... (47,617,118) -- (10,491,818)
------------- ------------- -------------
Total distributions ............................................. (53,598,940) -- (63,411,222)
------------- ------------- -------------
Net increase (decrease) in net assets ............................... (83,739,483) (116,281,881) 12,598,292
NET ASSETS:
Beginning of year ................................................. 141,423,325 257,705,206 245,106,914
------------- ------------- -------------
End of year (including undistributed net investment income of
$0, $2,230,182, and $1,304,582 respectively) .................... $ 57,683,842 $ 141,423,325 $ 257,705,206
============= ============= =============
See Notes to Financial Statement.
15
Excelsior Private Equity Fund II, Inc.
Statement of Cash Flows
Year Ended October 31,
------------------------------------------------
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Increase (Decrease) in Net Assets Resulting from
Operations ....................................................... $(30,140,543) $ (116,281,881) $ 76,009,514
Adjustments to reconcile net increase (decrease) in net
assets resulting from operations to net cash provided by
operating activities:
Change in unrealized depreciation (appreciation) on
investments ...................................................... 22,085,704 123,751,058 (54,326,850)
Proceeds from sales of investments ............................... 43,706,387 31,635,084 34,368,859
Net realized loss (gain) on investments .......................... 9,382,815 9,042,377 (31,080,775)
Purchases of investments ......................................... (16,933,708) (29,946,437) (60,621,658)
Change in short-term investments ................................. 16,509,760 7,903,391 94,485,198
Increase in escrow receivable .................................... (1,817,148) -- --
Decrease (increase) in receivable for investments sold ........... 3,920,263 (1,897,981 (316,373)
Decrease (increase) in receivable from investment adviser ........ 6,281,160 (7,723,112) --
Increase (decrease) in interest receivable ....................... (89,971) 83,322 138,769
Decrease (increase) other assets ................................. 123,070 (16,560) (130,857)
Increase (decrease) in expenses payable .......................... 219,369 (16,199,653) 4,887,433
------------ -------------- ------------
Net cash provided by operating activities ........................ 53,247,158 349,608 63,413,260
------------ -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to shareholders ..................................... (53,598,940) -- (63,411,222)
------------ -------------- ------------
Net cash used by financing activities ............................ (53,598,940) -- (63,411,222)
------------ -------------- ------------
Net increase (decrease) in cash .................................. (351,782) 349,608 2,038
Cash at beginning of year .......................................... 351,782 2,174 136
------------ -------------- ------------
Cash at end of year ................................................ $ -- $ 351,782 $ 2,174
============ ============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ............................. $ 4,675 $ -- $ --
============ ============== ============
See Notes to Financial Statements.
16
Excelsior Private Equity Fund II, Inc.
Financial Highlights -- Selected Per Share Data and Ratios
For a share outstanding throughout each period
Year Ended October 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING OF PERIOD ..................... $ 722.54 $ 1,316.64 $ 1,252.27 $ 1,033.37 $ 1,003.46
--------- ---------- ----------- ---------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss) ........................... (0.15) (9.30) (2.36) 21.29 41.84
Net Realized and Unrealized Gain (Loss) on
Investments ........................................... (160.77) (678.46) 436.36 291.72 (1.78)
Net Change in Allowance for Management
Incentive fee ......................................... 6.93 93.66 (45.66) (54.93) --
--------- ---------- ----------- ---------- -----------
Total From Investment Operations ..................... (153.99) (594.10) 388.34 258.08 40.06
--------- ---------- ----------- ---------- -----------
DISTRIBUTIONS
Net Investment Income .................................. (8.16) -- -- (39.18) (10.15)
In Excess of Net Investment Income ..................... (22.40) -- -- -- --
Net Realized Gain ...................................... -- -- (270.37) -- --
Paid-in Capital ........................................ (243.28) (53.60) -- --
--------- ---------- ----------- ---------- -----------
Total Distributions .................................. (273.84) -- (323.97) (39.18) (10.15)
-----=--- ---------- ----------- ---------- -----------
NET ASSET VALUE, END OF PERIOD ........................... $ 294.71 $ 722.54 $ 1,316.64 $ 1,252.27 $ 1,033.37
========= ========== =========== ========== ===========
TOTAL NET ASSET VALUE RETURN+ ............................ (21.31)% (44.58)% 35.89% 25.94% 4.04%
========= ========== =========== ========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) .................. $ 57,684 $ 141,423 $ 257,705 $ 245,107 $ 202,261
Ratio of Net Operating Expenses to Average
Net Assets ............................................ 1.29% 1.48% 1.55% 1.26% 0.87%
Ratio of Gross Operating Expenses to
Average Net Assets++ .................................. 1.50% 1.59% 1.55% 1.26% 0.87%
Ratio of Net Investment Income (Loss) to
Average Net Assets .................................... (0.02)% (0.91)% (0.15)% 1.86% 4.05%
Portfolio Turnover Rate ................................ 21% 11% 14% 40% 0%
+ 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 Fund
during the period, and assumes dividends and distributions, if any, were
reinvested. The Fund's shares were issued in a private placement and are not
traded. Therefore market value total investment return is not calculated.
++ Expense ratio before waiver of fees and reimbursement of expenses by
adviser.
See Notes to Financial Statements.
17
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
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, which approximates market value.
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" methods 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 October 31, 2002 and October 31, 2001, market quotations were not
readily available for securities valued at $42,429,457 or 73.6% of net
assets and $79,177,423 or 55.9% of net assets, respectively. 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.
18
(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 unused capital loss carryforwards of approximately
$22,323,602 available for income tax purposes, to be applied against future
net security profits, if any, realized after October 31, 2002. If not
applied, $8,602,181 of the carryover will expire in 2009 and $13,721,421
will expire in 2010.
The tax character of distributions paid may differ from the character
of distributions shown on the statement of changes in net assets due to tax
treatment of certain distributions. The tax character of distributions paid
during the fiscal years ended October 31, 2002 and 2001 were as follows:
Year Ended October 31,
---------------------------------
2002 2001
------------- -------------
Net Investment Income $ 5,981,822 $ --
Return of Capital 47,617,118 --
------------- -------------
Total $ 53,598,940 $ --
------------- -------------
At October 31, 2002, the tax basis of the Company's investments for
federal income tax purposes amounted to $113,801,501. The net unrealized
depreciation amounted to $59,054,407, which is comprised of gross
unrealized appreciation of $1,142,387 and aggregate gross unrealized
depreciation of $60,196,794.
(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.
19
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. As of October 31, 2002, $1,356,372 has been paid to and is
subject to potential repayment by the Managing Investment Adviser.
On December 20, 2001, the Board (including a majority of the directors that
are not interested persons of the 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. Prior to these dates administration, accounting, custody and
transfer agent services were provided by J.P. Morgan Investor Services, Co. and
JPMorgan Chase Bank. 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 $243,246 for the year ended October 31, 2002.
Each director of the Company receives an annual fee of $15,000, and is
reimbursed for expenses incurred for attending meetings. No person who is an
officer, director or employee of the Managing Investment Adviser, or U.S. Trust
Corporation or its subsidiaries, who serves as an officer, director or employee
of the Company receives any compensation from the Company.
3. Purchases and Sales of Securities
Excluding short-term investments, the Fund's purchases and sales of
securities for the years ended October 31, 2002, October 31, 2001, and October
31, 2000 were as follows:
Year Ended
October 31, Purchases ($) Sales ($)
----------- ------------- ---------
2002 16,933,708 43,706,387
2001 18,570,218 31,635,084
2000 60,066,932 34,368,859
Sales of securities includes distributions received from private investment
funds.
20
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:
For the Year Ended October 31, 2002
--------------------------------------------------------
October 31, Sale/Merger Realized Cumulative
Affiliate 2001 Value Purchases Proceeds Interest Gain (Loss) Value (Note 1)
- --------------------------------- ----------- ----------- ----------- ----------- ----------- --------------
Cardiac Science, Inc. $16,183,451 $ -- $17,738,849 $ 560,867 $ 5,207,589 $ 1,421,986
PowerSmart, Inc. 16,999,155 -- 17,663,477 8,272 7,708,839 1,776,194*
Captura Software, Inc. 4,912,358 450,000 440,479 -- (5,799,560) --
Mosaica Education, Inc. 5,523,465 -- -- 106,041 -- 5,506,322
MarketFirst Software, Inc. 5,425,381 -- 42,493 -- (9,255,036) --
Reed Elsevier PLC (fake
Classroom Connect, Inc.) 947,400 -- 954,529 -- 954,529 --
----------- ----------- ----------- ----------- ----------- -----------
Total $49,991,210 $ 450,000 $36,839,827 $ 675,180 $(1,183,639) $ 8,704,502
=========== =========== =========== =========== =========== ===========
- -----------------
*Escrow receivable
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the headings "Election of Directors" and
"Additional Information--Officers" appearing in the Company's definitive Proxy
Statement for the 2003 Annual Meeting of Stockholders to be held on March 21,
2003, which will be filed with the Securities and Exchange Commission not later
than 120 days after October 31, 2002, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Election of Directors" and
"Additional Information--Officers" in the Company's definitive Proxy Statement
for the 2003 Annual Meeting of Stockholders to be held on March 21, 2003, which
will be filed with the Securities and Exchange Commission not later than 120
days after October 31, 2002, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" appearing in the Company's definitive Proxy
Statement for the 2003 Annual Meeting of Stockholders to be held on March 21,
2003, which will be filed with the Securities and Exchange Commission not later
than 120 days after October 31, 2002, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
principal executive officers and principal financial officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on January 28, 2003, have
concluded that, based on such evaluation, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company was made known to them by others within those entities,
particularly during the period in which this Annual Report on Form 10-K was
being prepared.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. Accordingly, no corrective actions were required or undertaken.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The financial statements listed in Item 8, "Financial Statements and
Supplementary Data," beginning on page 10 are filed as part of this
report.
2. Financial Statement Schedules
The financial statement schedules listed in Item 8, "Financial
Statements and Supplementary Data," beginning on page 10 are filed as
part of this report.
22
3. Exhibits
Exhibit
Number Description
------ -----------
(3)(i) Articles of Incorporation of the Company/1/
(3)(ii) By-Laws of the Company/1/
(10.1) Form of Management Agreement/2/
(10.2) Form of Transfer Agency and Custody Agreement/3/
(10.3) Investment Sub-Advisory Agreement dated as of December 21,
2001, among the Company, United States Trust Company of New
York, U.S. Trust Company and U.S. Trust Company, N.A./4/
(10.4) Administration and Accounting Services Agreement dated
January 1, 2002, between the Company and PFPC Inc./4/
(10.5) Custodian Services Agreement dated January 1, 2002, between
the Company and PFPC Trust Company./4/
(10.6) Transfer Agency Services Agreement dated February 1, 2002,
between the Company and PFPC Inc./4/
(23) Consent of Independent Auditors
(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.
/1/ Incorporated by reference to the Company's Registration Statement on Form
N-2, (File No. 333-23811), filed with the Securities Exchange Commission on
March 24, 1997.
/2/ Incorporated by reference to the Company's definitive Proxy Statement for
the 2000 Annual Meeting of Shareholders, filed with the Securities and
Exchange Commission on May 25, 2000.
/3/ Incorporated by reference to the Company's Registration Statement on Form
N-2/A (File No. 333-23811), filed with the Securities and Exchange
Commission on May 13, 1997.
/4/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on March 18, 2002.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, 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: January 29, 2003 By: /s/ DAVID I. FANN
-------------------------------------
David I. Fann, President and Co-Chief Executive
Officer
(principal executive officer)
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:
Signature Title Date
/s/ DAVID I. FANN President and Co-Chief Executive Officer January 29, 2003
- -------------------------- (principal executive officer)
David I. Fann
/s/ DOUGLAS A. LINDGREN Co-Chief Executive Officer and
- -------------------------- Chief Investment Officer January 29, 2003
Douglas A. Lindgren (principal executive officer)
/s/ BRIAN F. SCHMIDT Chief Financial Officer January 29, 2003
- -------------------------- (principal financial and accounting officer)
Brian F. Schmidt
/s/ JOHN C. HOVER II Chairman of the Board and Director January 29, 2003
- --------------------------
John C. Hover II
/s/ GENE M. BERNSTEIN Director January 29, 2003
- --------------------------
Gene M. Bernstein
/s/ STEPHEN V. MURPHY Director January 29, 2003
- --------------------------
Stephen V. Murphy
/s/ VICTOR F. IMBIMBO, JR. Director January 29, 2003
- --------------------------
Victor F. Imbimbo, Jr.
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
I, David I. Fann, certify that:
1. I have reviewed this annual report on Form 10-K of Excelsior Private Equity
Fund II, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
24
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 29, 2003
/s/ David I. Fann
- ---------------------
David I. Fann, Co-Chief Executive Officer
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
I, Douglas A. Lindgren, certify that:
1. I have reviewed this annual report on Form 10-K of Excelsior Private Equity
Fund II, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
25
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 29, 2003
/s/ Douglas A. Lindgren
- ---------------------------
Douglas A. Lindgren, Co-Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Brian F. Schmidt, certify that:
1. I have reviewed this annual report on Form 10-K of Excelsior Private Equity
Fund II, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
26
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 29, 2003
/s/ Brian F. Schmidt
- -------------------------
Brian F. Schmidt, Chief Financial Officer
27