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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
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 January 31, 2003
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 Identification No.)
Incorporation or Organization)
114 West 47th Street, New York, NY 10036-1532
- --------------------------------------------------------------------------------
(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 March 1, 2003, 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.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. 1
Portfolio of Investments as of January 31, 2003. 1
Statement of Assets and Liabilities at January 31, 2003 and October 31, 2002. 4
Statement of Operations for the three-month periods ended January 31, 2003 and
January 31, 2002. 5
Statement of Changes in Net Assets for the three-month periods ended January 31,
2003 and January 31, 2002. 6
Statement of Cash Flows for the three-month periods ended January 31, 2003 and
January 31, 2002. 7
Financial Highlights at January 31, 2003 and January 31, 2002. 8
Notes to Financial Statements. 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 14
Item 4. Controls and Procedures. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 14
Item 2. Changes in Securities and Use of Proceeds. 14
Item 3. Defaults Upon Senior Securities. 15
Item 4. Submission of Matters to a Vote of Security Holders. 15
Item 5. Other Information. 15
Item 6. Exhibits and Reports on Form 8-K. 15
SIGNATURES 16
CERTIFICATIONS 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JANUARY 31, 2003
---------------------------
PORTFOLIO STRUCTURE
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS $ 10,574,056 18.13%
INVESTMENT COMPANIES 1,887,983 3.24%
PRIVATE INVESTMENT FUNDS 31,814,768 54.56%
PORTFOLIO COMPANIES 12,263,035 21.03%
------------ ----------
TOTAL INVESTMENTS 56,539,842 96.96%
OTHER ASSETS & LIABILITIES (NET) 1,769,919 3.04%
------------ ----------
NET ASSETS $ 58,309,761 100.00%
============ ==========
Notes to Financial Statements are an integral part of these
Financial Statements.
1
EXCELSIOR PRIVATE EQUITY FUND II, INC.
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JANUARY 31, 2003
------------------------------
PRINCIPAL ACQUISITION COUPON VALUE
AMOUNT/SHARES DATE ## RATE/YIELD (NOTE 1)
------------- ----------- ---------- ---------------
AGENCY OBLIGATIONS - 18.13%
$ 7,600,000 Federal Home Loan Bank Discount Note, 2/04/03 1.18% $
7,599,253
2,975,000 Federal Home Loan Bank Discount Note, 2/03/03 1.19% 2,974,803
---------------
Total - Agency Obligations (Cost $10,574,056) 10,574,056
PRIVATE INVESTMENT FUNDS # , ** - 54.56%
Advanced Technology Ventures V, LP 09/98-10/02 1,663,091
Brand Equity Ventures I, LP 03/98-10/01 685,322
Brentwood Associates III, LP 06/99-10/02 4,584,963
Broadview Capital Partners, LP 04/99-10/02 2,567,800
Commonwealth Capital Ventures II, LP 01/99-10/01 2,025,634
Communications Ventures III, LP 11/98-05/00 1,312,987
Friedman, Fleischer & Lowe Capital Partners, LP 01/99-10/02 4,084,467
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 3,591,948
Quad-C Partners V, LP 04/98-10/02 5,008,933
Sevin Rosen Fund VI, LP 03/98-10/02 1,217,604
Trinity Ventures VI, LP 09/98-10/02 1,025,681
---------------
Total - Private Investment Funds (Cost $55,066,931) 31,814,768
---------------
PRIVATE COMPANIES # , **, @ - 18.02%
COMMON AND PREFERRED STOCKS - 14.64%
BIOTECHNOLOGY - 0.00%
7,100,000 Protogene Laboratories, Inc., Preferred Series B 12/99-08/01 --
--------------
EDUCATIONAL SERVICES - 6.07%
75,059 Mosaica Education, Inc., Preferred Series C 08/01 3,537,722
---------------
INTERNET SERVICES - BUSINESS - 8.57%
1,428,572 Clear Orbit, Inc. 06/00
5,000,013
2,388,345 Firstsource Corp., Series A 02/00 --
---------------
5,000,013
PROMISSORY NOTES - 3.38%
BIOTECHNOLOGY - 0.0%
2,140,000 Protogene Laboratories, Inc., Convertible Promissory 08/01-01/02 4.25% --
Note
EDUCATIONAL SERVICES - 3.38%
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 02/01-08/01 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% --
Total - Private Companies (Cost $33,324,691) 10,506,335
---------------
Notes to Financial Statements are an integral part of these
Financial Statements.
2
EXCELSIOR PRIVATE EQUITY FUND II, INC.
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 2003
-----------------------------
PRINCIPAL ACQUISITION COUPON VALUE
AMOUNT/SHARES DATE ## RATE/YIELD (NOTE 1)
------------- ----------- ---------- ---------------
PUBLIC COMPANIES /#/, ** - 3.01%
COMMON STOCK - 3.01%
MEDICAL DEVICES - 1.98%
$ 2,381,088 Curon Medical, Inc. /@/ 08/99 $ 1,157,209
INTERNET SERVICES - BUSINESS - 1.03%
211,987 Concur Technologies 10/02 540,567
94,430 Pivotal Corporation 10/02 58,924
---------------
599,491
WARRANTS - BUSINESS - 0.00%
76,950 Curon Medical, Inc. 08/00 --
Total - Public Companies (Cost $6,566,163) 1,756,700
---------------
INVESTMENT COMPANIES - 3.04%
1,887,983 Dreyfus Government Cash Management Fund
1,887,983
---------------
Cost ($1,887,983)
---------------
TOTAL INVESTMENTS (Cost $107,419,824*) - 96.96% 56,539,842
OTHER ASSETS & LIABILITIES (NET) - 3.04% 1,769,919
---------------
NET ASSETS - 100.00% $ 58,309,761
===============
* Aggregate cost for federal tax and book purposes.
** Restricted as to public resale. Acquired between March 1, 1998 and October
31, 2002. Total cost of restricted securities at January 31, 2003
aggregated $94,957,785. Total market value of restricted securities owned
at January 31, 2003 was $44,077,803 or 75.59% of net assets.
# Non-income producing security.
## Required disclosure for restricted securities only.
@ At January 31, 2003, 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 January 31, 2003 was $11,663,544.
Notes to Financial Statements are an integral part of these
Financial Statements.
3
EXCELSIOR PRIVATE EQUITY FUND II, INC.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JANUARY 31, 2003 OCTOBER 31, 2002
---------------- ----------------
(UNAUDITED)
ASSETS:
Investment Securities, at Cost $ 107,419,824 $ 113,801,501
================ ================
Investment Securities, at Value $ 56,539,842 $ 54,747,094
Cash 23,309 -
Receivables:
Escrow receivable 1,817,148 1,817,148
From Investment Adviser (Note 2) 60,597 1,441,952
Interest 130,318 109,702
Other Assets 38,518 52,616
---------------- ----------------
Total Assets 58,609,732 58,168,512
LIABILITIES:
Managing Investment Advisory Fees Payable (Note 2) 186,935 191,628
Professional Fees Payable 48,442 140,000
Administration Fees Payable (Note 2) 28,654 30,314
Directors' Fees Payable (Note 2) 15,123 60,000
Accrued Expenses and Other Payables 20,817 62,728
---------------- ----------------
Total Liabilities 299,971 484,670
---------------- ----------------
NET ASSETS $ 58,309,761 $ 57,683,842
================ ================
NET ASSETS consist of:
Undistributed Net Investment Loss $ (195,983) $ -
Accumulated Net Realized Loss on Investments (29,857,122) (22,504,599)
Net Unrealized Depreciation on Investments (50,879,982) (59,054,407)
Par Value 1,957 1,957
Paid in Capital in Excess of Par Value 139,240,891 139,240,891
---------------- ----------------
Total Net Assets $ 58,309,761 $ 57,683,842
================ ================
Shares of Common Stock Outstanding 195,730 195,730
---------------- ----------------
NET ASSET VALUE PER SHARE $ 297.91 $ 294.71
================ ================
Notes to Financial Statements are an integral part of these
Financial Statements.
4
EXCELSIOR PRIVATE EQUITY FUND II, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
JANUARY 31,
2003 2002
---------- -----------
INVESTMENT INCOME:
Interest Income $ 50,733 $ 385,961
Dividend Income 6,982 -
---------- -----------
Total Income 57,715 385,961
EXPENSES:
Managing Investment Advisory Fees (Note 2) 186,935 439,197
Administrative Fees (Note 2) 43,079 22,677
Professional Fees 41,085 92,000
Directors' Fees (Note 2) 15,123 15,123
Insurance Expense 19,077 17,148
Miscellaneous Expense 8,996 18,880
---------- -----------
Total Expenses 314,295 605,025
Fees Waived and Reimbursed by Adviser (Note 2) (60,597) (81,114)
---------- -----------
Net Expenses 253,698 523,911
---------- -----------
NET INVESTMENT LOSS (195,983) (137,950)
---------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net Realized Gain (Loss) on Security Transactions (7,352,523) 3,806,368
Change in Unrealized Appreciation
on Investments 8,174,425 6,762,724
---------- -----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 821,902 10,569,092
Change in Management Incentive Fee - (2,113,818)
---------- -----------
NET INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS $ 625,919 $ 8,317,324
========== ===========
Notes to Financial Statements are an integral part of these
Financial Statements.
5
EXCELSIOR PRIVATE EQUITY FUND II, INC.
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
THREE MONTHS ENDED
JANUARY 31,
2003 2002
------------- -------------
OPERATIONS:
Net Investment Loss $ (195,983) $ (137,950)
Net Realized Gain (Loss) on Investments (7,352,523) 3,806,368
Change in Unrealized Appreciation
on Investments 8,174,425 6,762,724
Change in Allowance for Management Incentive
Fee - (2,113,818)
------------- -------------
Net Increase in Net Assets
Resulting From Operations 625,919 8,317,324
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Distributions - (9,804,353)
------------- -------------
Total Distributions - (9,804,353)
NET INCREASE (DECREASE) IN NET ASSETS 625,919 (1,487,029)
NET ASSETS:
Beginning of Period 57,683,842 141,423,325
------------- -------------
End of Period $ 58,309,761 $ 139,936,296
============= =============
Notes to Financial Statements are an integral part of these
Financial Statements.
6
EXCELSIOR PRIVATE EQUITY FUND II, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31,
2003 2002
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Increase in Net Assets resulting from Operations ............................... $ 625,919 $ 8,317,324
Adjustments to reconcile net increase in net assets from operations to net cash
provided by operating activities:
Change in unrealized appreciation on investments .................................. (8,174,425) (6,762,724)
Change in short-term investments .................................................. (2,824,691) (7,631,794)
Purchase of investments ........................................................... -- (1,283,851)
Proceeds from sales of investments ................................................ 1,853,845 6,161,535
Realized loss (gain) on investments ............................................... 7,352,523 (3,806,368)
Decrease in receivable from investment adviser .................................... 1,381,355 7,704,696
Increase in interest receivable ................................................... (20,616) (237,159)
Decrease in receivable for investments sold ....................................... -- 3,920,263
Decrease in other assets .......................................................... 14,098 142,231
Increase (decrease) in expenses payable ........................................... (184,699) 2,928,418
--------------- ---------------
Net cash provided by operating activities ........................................ 23,309 9,452,571
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to shareholders ....................................................... --- (9,804,353)
--------------- ---------------
Net cash used by financing activities ............................................ -- (9,804,353)
Net change in cash ............................................................... 23,309 (351,782)
--------------- ---------------
Cash at beginning of period -- 351,782
--------------- ---------------
Cash at end of period ........................................................... $ 23,309 $ --
=============== ===============
Notes to Financial Statements are an integral part of these
Financial Statements.
7
EXCELSIOR PRIVATE EQUITY FUND II, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
PER SHARE OPERATING PERFORMANCE: (1)
THREE MONTHS ENDED THREE MONTHS ENDED
JANUARY 31, 2003 JANUARY 31, 2002
------------------ ------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 294.71 $ 722.54
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Loss (1.00) (0.70)
Net Realized and Unrealized Gain on Investments
4.20 54.00
Change in Allowance for Management Incentive Fee -- (10.80)
------------------ ------------------
Total from Investment Operations 3.20 42.50
------------------ ------------------
DISTRIBUTIONS:
From Investment Income -- (30.56)
Return of Capital -- (19.53)
------------------ ------------------
Total Distributions -- (50.09)
------------------ ------------------
NET ASSET VALUE, END OF PERIOD $ 297.91 $ 714.95
================== ==================
TOTAL NET ASSET VALUE RETURN (3),(4) 1.09% 5.88%
================== ==================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $ 58,310 $ 139,936
Ratios to Average Net Assets (2)
Gross Expenses (5) 2.17% 1.72%
Net Expenses 1.75% 1.49%
Net Investment Loss (1.35)% (0.39)%
Portfolio Turnover (3) 0.00% 0.82%
(1) For a share outstanding throughout the period
(2) Annualized
(3) Non-annualized
(4) 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.
(5) Expense ratio before waiver of fees and reimbursement of expenses by
adviser.
Notes to Financial Statements are an integral part of these
Financial Statements.
8
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 January 31, 2003, market quotations were not readily available for
securities valued at $42,321,103. 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.
9
(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 $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 $13,721,421will expire
in 2010.
At January 31, 2003, the tax basis of the Company's investments for
federal income tax purposes amounted to $107,419,824. The net unrealized
depreciation amounted to $50,879,982 which is comprised of gross unrealized
appreciation of $1,115,789 and aggregate gross unrealized depreciation of
$51,995,771.
(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 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.
10
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 $60,597 for the period ended January 31, 2003.
Each director of the Company receives an annual fee of $9,000, plus a
meeting fee of $1,500 for each meeting attended, and is reimbursed for expenses
incurred for attending meetings. No person who is an officer, director or
employee of 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 $0 in purchases and
$1,842,096 in sales of securities for the three-month period ended January 31,
2003. Excluding short-term investments, the Company had $1,159,703 in purchases
and $6,161,535 in sales of securities for the three-month period ended January
31, 2002.
The Company received distributions from private investment funds in the
amount of $11,749 for the three-month period ended January 31, 2003.
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:
CUMULATIVE
OCTOBER 31, SALE/ MERGER REALIZED VALUE
AFFILIATE 2002 VALUE PURCHASES INTEREST PROCEEDS GAIN (LOSS) (NOTE 1)
============================================================================================================================
Cardiac Science, Inc. $ 1,421,986 $ -- $ -- $ 1,241,040 $ 538,331 $ --
ReleaseNow, Inc. -- -- -- 65,850 (7,890,855) --
============================================================================================================================
Total $ 1,421,986 $ -- $ -- $ 1,306,890 $ (7,352,524) $ --
===============================================================================================
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JANUARY 31, 2003 AS COMPARED TO THE SIMILAR PERIOD IN
2002
The Company's net asset value per common share was $297.91 at January 31,
2003, an increase of $3.20 per share from the net asset value per common share
of $294.71 at October 31, 2002. The increase in net asset value was principally
the result of (i) an increase in unrealized appreciation in connection with the
valuation of public stocks, and (ii) a realized gain from the sale of 840,484
shares of Cardiac Science, Inc. common. The Company's net asset value per common
share was $714.95 at January 31, 2002, down ($7.59) per share from the net asset
value per common share of $722.54 at October 31, 2001. The decrease in net asset
value during this period was principally the result of a distribution to
shareholders, which was partially offset by realized gains from the sale of
Cardiac Science, Inc. common stock and an increase in the value of
publicly-traded positions.
REALIZED AND UNREALIZED GAINS AND LOSSES FROM PORTFOLIO INVESTMENTS
For the three-month periods ended January 31, 2003 and 2002, the Company
had a net realized gain/(loss) on security transactions of ($7,352,523) and
$3,806,368, respectively. For the three-month periods ended January 31, 2003 and
2002, the Company had a net change in unrealized appreciation on investments of
$8,174,425 and $6,762,724, respectively. The net realized loss for the period
ended January 31, 2003 was primarily the result of the conclusion of the
assignment for the benefit of creditors of ReleaseNow, Inc. ReleaseNow, Inc. a
private company investment, transferred ownership of its assets for liquidation;
the liquidation concluded and the Company received $65,850 as a pro rata
distribution of claims against the assets. The Company, in concluding its sale
of shares of common stock of Cardiac Science, Inc., recorded a realized gain of
$538,331. The net change in unrealized appreciation for the period ended January
31, 2003 was principally the result of a reclassification of ReleaseNow, Inc.
from unrealized depreciation to realized loss. For the period ended January 31,
2002, the net realized gain was primarily the result of the Company's sale of
shares of Cardiac Science, Inc. The net change in unrealized appreciation was
principally the result of an increase in the value of public positions held by
the Company.
INVESTMENT INCOME AND EXPENSES
For the three-month period ended January 31, 2003, the Company had
investment income of $57,715 and net operating expenses, net of expenses
reimbursed by the Managing Investment Adviser (as defined below), of $253,698,
resulting in a net investment loss of ($195,983) as compared to interest income
of $385,961 and net operating expenses, net of expenses reimbursed by the
Managing Investment Adviser, of $523,911, resulting in net investment loss of
($137,950) for the three-month period ended January 31, 2002. The primary reason
for the decrease in investment income was a decrease in portfolio short-term
securities. 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
three-month periods ended January 31, 2003 and 2002, the Managing Investment
Adviser earned $186,935 and $439,197 in management fees, respectively. In
addition, for the three-month periods ended January 31, 2003 and 2002, the
change in allowance for the management incentive fee was $0 and ($2,113,818),
respectively. As of January 31, 2003, there is no incentive fee receivable from
the Adviser or payable by the Company. There was a payable by the Company to the
Adviser of $2,113,818 at January 31, 2002. For the same periods, the Managing
Investment Adviser reimbursed other operating expenses of the Company in the
amounts of $60,597 and $81,114, respectively, as a result of expenses incurred
in excess of those permitted pursuant to the Company's prospectus.
12
NET ASSETS
At January 31, 2003, the Company's net assets were $58,309,761, an increase
of $625,919 from net assets of $57,683,842 at October 31, 2002 due to (i) an
increase in unrealized appreciation of $498,397 in connection with the valuation
of public stocks, and (ii) a realized gain of $538,331 from the sale of 840,484
shares of Cardiac Science, Inc. common. At January 31, 2002, the Company's net
assets were $139,936,296, a decrease of $1,487,029 from net assets of
$141,423,325 at October 31, 2001. The decrease in net asset value during this
period was principally the result of a distribution to shareholders, which was
partially offset by realized gains of from the sale of Cardiac Science, Inc.
common stock and an increase in the value of publicly-traded positions.
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.
At January 31, 2003, the Company held $23,309 in cash and $12,462,039 in
short-term investments as compared to $0 in cash and $9,637,348 in short-term
investments at October 31, 2002. The change in short-term investments from
October 31, 2002 was the result of proceeds received for the sale of Cardiac
Science, Inc. common shares as well as the prior year incentive fee receivable
paid by the Adviser. At January 31, 2002, the Company held $0 in cash and
$33,778,902 in short-term investments as compared to $351,782 in cash and
$26,147,108 in short-term investments at October 31, 2001. In connection with
the Company's commitments to private investment funds, a total of $58,250,000
has been contributed by the Company through January 31, 2003. The Company made
no follow-on investments during the three-month period ended January 31, 2003.
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
portfolio investments. These estimates could have a material impact on the
presentation of the Company's financial condition, because in total, they
currently represent 75.6% of the Company's net assets at January 31, 2003.
During the period ended January 31, 2003, changes to these estimates, i.e.
changes in the valuations of private investments, resulted in a $.5 million
increase 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.
13
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 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 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 Company is exposed to equity price risk
through its investments in the equity securities of three public companies,
Concur Technologies, Inc. (NASDAQ: CNQR), Curon Medical, Inc. (NASDAQ: CURN),
and Pivotal Corporation (NASDAQ: PVTL, TSX: PVT). At January 31, 2003, these
publicly traded equity securities were valued at $1,756,700, representing 3.0%
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 $175,670. At October 31, 2002, 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. The decrease in market
value during the period ended January 31, 2003 was principally the result of the
sale of the Company's remaining shares of Cardiac Science, Inc.
ITEM 4. 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 March 13, 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 Quarterly Report on Form 10-Q 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 II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
14
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.
15
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: March 17, 2003 By: /s/ David I. Fann
-----------------------------------
David I. Fann
Co-Chief Executive Officer
Date: March 17, 2003 By: /s/ Douglas A. Lindgren
-----------------------------------
Douglas A. Lindgren
Co-Chief Executive Officer
Date: March 17, 2003 By: /s/ Brian F. Schmidt
-----------------------------------
Brian F. Schmidt
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
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;
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;
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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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):
16
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
quarterly 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: March 17, 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 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;
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;
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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to
17
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 17, 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 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;
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;
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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: March 17, 2003
/s/ Brian F. Schmidt
- ----------------------------
Brian F. Schmidt, Chief Financial Officer
18