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, 2001
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, 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, 2001 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 22, 2002 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
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 6
Operations
7A. Quantitative and Qualitative Disclosures About Market Risk 8
8. Financial Statements and Supplementary Data 8
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
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23
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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.
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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 and U.S. Trust Company
(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 (the "Management Agreement"). The Managing
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 Executive Vice President and Chief Investment Officer). Shares of
the Company were made available through UST Financial Services Corp. (the
"Selling Agent") to clients of U.S. Trust and its affiliates who 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
The broad-based decline in the public markets over the last
eighteen months, coupled with sector re-allocation amongst both
institutional and individual investors, imposed a difficult economic
environment for private equity and venture capital investors. The Company
was not immune to this downturn, and, the past year has been challenging
for Excelsior Private Equity Fund II, Inc.
Direct Investments
Investments Sold
o Softcom Microsystems, Inc., Fremont, CA, designs, develops and
markets data acceleration products used in high-speed
communications networks. Softcom's single-chip network accelerator
solutions and integrated subsystems provide processing
capabilities which help alleviate the "data bottleneck" at the
point where baseband Local Area Network traffic moves on to a
high-speed broadband Internet backbone. In August 1999, Softcom
was sold to Intel for cash. The Company realized a 3.7x return on
its $4.2 million investment.
o 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 Company sold all of the NextLink stock received in the
exchange and realized a 3.3x return on its $5.9 million
investment.
o 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
Company received proceeds of $8.1 million and expects to receive
an additional $1 million currently in escrow, which together
equals 100% of the Company's invested capital.
Investments Held -- Public
o Curon Medical, Inc. (NASDAQ: CURN) (formerly known as
Conway-Stuart Medical, Inc.) Sunnyvale, CA, develops and markets
medical devices utilizing radiofrequency 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 Company 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, 2001, Curon
closed at $2.65 per share.
o Cross Media Marketing Corporation (AMEX: XMM), New York, NY, is a
technology-driven marketing company integrating its direct
marketing skills with cutting-edge technologies, including
interactive voice response and web-based systems, resulting in a
multi-dimensional marketing platform for the international
marketing of products and services. The Company had invested $11.5
million in LifeMinders, Inc., which merged with Cross Media in
October 2001. In November 1999, LifeMinders completed its initial
public offering. From May 2000 through October 2000, the Company
sold 735,000 shares of LifeMinders and realized proceeds of $25.2
million, or 2.2x the cost to the Company. As a result of the
merger, the Company received $3.9 million in cash and 520,539
shares of Cross Media common stock. On October 31, 2001, Cross
Media closed at $7.00 per share.
o 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 Company had invested $7.6 million
in SurVivaLink, Inc., which merged with Cardiac Science in
September 2001. As a result of the merger, the Company received
promissory notes in the principal amount of $6.8 million, 4.2
million shares of Cardiac Science common stock and $2.5 million in
cash. On October 31, 2001, Cardiac Science closed at $2.55 per
share.
Investments Held -- Private
o Mosaica Education, Inc. (formerly known as Advantage Schools,
Inc.), Boston, MA, is a for-profit provider of public school
education management services. Advantage manages charter schools
in troubled urban school districts in cooperation with local
partners. Its schools are publicly-funded, receiving per-student
capitalization rates generally consistent with those received by
other schools in the district. In August 2001, Mosaica Education,
Inc. a privately held operator of charter schools, acquired
Advantage. The Company received 75,059 shares of preferred stock
in Mosaica Education, Inc. and holds $2 million in notes issued by
the company.
o 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.
o Captura Software, Inc., Kirkland, 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.
Captura filed an S-1 registration statement for an initial public
offering in October 2000, which was subsequently withdrawn in
January 2001 due to the change in the capital markets environment.
o MarketFirst Software, Inc., Mountain View, CA, develops and
markets hosted e-marketing software and services targeting
middle-market corporations. The company's solution is focused on
enabling and managing interactive marketing campaigns through the
Internet. The company's customers are motivated by the prospect of
increasing customer revenue, improving customer relationships and
reducing costs by automating key marketing functions with the
MarketFirst solution. Marketfirst filed an S-1 registration
statement for an initial public offering in April 2000, which was
withdrawn in September 2000 due to the change in the capital
markets environment.
o 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
recently introduced a new line of Application Specific Integrated
Circuits and electronic modules that offer performance and
flexibility at competitive prices. PowerSmart was formed as a
spin-off of technology and related assets from Duracell.
Investments Written-Off
o Constellar Corporation, Redwood Shores, CA, 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 investment has
been fully written-off and the Company did not receive any
proceeds.
o 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 has been written-off. The Company
received proceeds of $.7 million from the company's liquidation in
July 2001.
o 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.
o 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 was ceased.
o 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.
o 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 and,
consequently, it is unlikely that the Company will receive any
proceeds from the sale of the company's assets.
o 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 and is in the process of either selling or
licensing its remaining assets.
o 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 Company did not
receive any proceeds from the sale of the company's assets.
o 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, the Company determined that the ReleaseNow
business model was no longer viable and support for the company
was ceased. As a result, the company's assets were assigned to a
liquidating agent.
Investments in Third-Party Investment Funds
o Advanced Technology Ventures V, LP ("ATV") is an early-stage
focused fund targeting information technology and health care
markets. ATV has drawn 95% of our $3 million commitment. At
October 31, 2001, the total value (fair market value plus
distributions) of this investment was $2.7 million.
o 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 our $2.5 million
commitment. At October 31, 2001, the total value (fair market
value plus distributions) of this investment was $1.9 million.
o 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. The Company recently received a return of capital
from Brentwood. Brentwood has drawn 65% of our $5 million
commitment. At October 31, 2001, the total value (fair market
value plus distributions) of this investment was $2.6 million.
o Broadview Capital Partners, LP ("Broadview") is focused on
buyouts, recapitalizations and growth financings within the
technology sector. The Company received a cash distribution from
Broadview's position in Peregrine Systems, Inc. (NASDAQ: PRGN).
Broadview has drawn 71% of our $5 million commitment. At October
31, 2001, the total value (fair market value plus distributions)
of this investment was $2.5 million.
o 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. From Commonwealth, the Company received a
stock distribution of Watchguard Technologies (NASDAQ: WGRD).
Commonwealth has drawn 90% of our $4 million commitment. At
October 31, 2001, the total value (fair market value plus
distributions) of this investment was $4.2 million.
o Communications Ventures III, LP ("CommVentures") targets
early-stage companies exclusively in the communications sector.
The Company received a stock distribution of CoSine Communications
(NASDAQ: COSN) from CommVentures. CommVentures has drawn all of
our $5 million commitment. At October 31, 2001, the total value
(fair market value plus distributions) of this investment was $6.5
million.
o Friedman, Fleischer & Lowe, LLP ("Friedman") is a fund focused
exclusively on participation in middle-market buyouts. Friedman
distributed a return of capital to the Company in January 2001.
Friedman has drawn 30% of our $5 million commitment. At October
31, 2001, the total value (fair market value plus distributions)
of this investment was $827,179.
o Mayfield X, LP ("Mayfield") invests in early-stage information
technology and healthcare companies, primarily located in Silicon
Valley. Mayfield has drawn 95% of our $5 million commitment. At
October 31, 2001, the total value (fair market value plus
distributions) of this investment was $3.5 million.
o 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 our $5 million
commitment. At October 31, 2001, the total value (fair market
value plus distributions) of this investment was $3.7 million.
o Morgenthaler Venture Partners V, LP ("Morgenthaler") is primarily
an early-stage venture fund, investing largely in information
technology and healthcare companies but also investing in buyouts
of basic businesses. The Company received a distribution of New
Focus common stock (NASDAQ: NUFO) from Morgenthaler. Morgenthaler
has drawn all of our $8 million commitment. At October 31, 2001,
the total value (fair market value plus distributions) of this
investment was $10.3 million.
o Quad-C Partners V, LP ("Quad C") is focused on taking controlling
positions in leveraged acquisitions and recapitalizations of
middle-market companies. The Company received two cash
distributions from Quad C's position in C & A Service Partners.
Quad C has drawn 81% of our $5 million commitment. At October 31,
2001, the total value (fair market value plus distributions) of
this investment was $5.7 million.
o 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 91% of our $2.5 million commitment. At October 31,
2001, the total value (fair market value plus distributions) of
this investment was $5.9 million.
o Trinity Ventures VI, LP ("Trinity") is an early to later-stage
fund, which invests in the software, communications and electronic
commerce sectors. The Company received a distribution of cash,
which was held in escrow, from Trinity's sale of its position of
Nokia (NYSE:NOK). The Company also received stock distributions of
SciQuest (NASDAQ:SQST) from Trinity. Trinity has drawn 87% of our
$3 million commitment. At October 31, 2001, the total value (fair
market value plus distributions) of this investment was $2.1
million.
For additional information concerning the Company's investments
see the financial statements beginning on page 10 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, 2001, the Company had no full-time employees. All
personnel of the Company are employed by and compensated by the Managing
Investment Adviser pursuant to the Management Agreement.
ITEM 2. PROPERTIES.
The Company does not own or lease 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,
2001, 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, 2001. There were no dividends paid
during fiscal year 2001.
Fiscal Year Ended October 31, 2000. On December 17, 1999, the
Company paid a dividend in the amount of $137.71 per share, $88.70 of the
amount as long-term capital gain and $49.01 of the amount as return of
capital. On December 23, 1999, the Company paid a dividend of $25.56 per
share of short-term capital gain. On October 31, 2000, the Company paid a
dividend of $160.70 per share, $156.11 of the amount as long-term capital
gain and $4.59 of the amount as return of capital.
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 by reference
herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
At October 31, 2001, the Company held $351,782 in cash and
$129,498,052 in investments as compared to $2,174 in cash and $271,883,525
in investments at October 31, 2000 and $136 in cash and $254,708,299 in
investments at October 31, 1999. At October 31, 2001, investments included
$16,975,764 in U.S. Government and agency obligations, $40,369,664 in
private investment funds, $38,807,759 in private companies, $24,173,521 in
public companies and $4,173,080 in investment companies. As of October 31,
2001, the Company had committed $58,000,000 to private investment funds and
$9,128,992 of these commitments remain outstanding.
Results of Operations
Investment Income and Expenses
For the fiscal year ended October 31, 2001, the Company had
interest income of $1,141,825 and net operating expenses, net of expenses
reimbursed by the Managing Investment Adviser, of $2,961,970, resulting in
net investment loss of ($1,820,145) as compared to interest income of
$4,202,089 and net operating expenses of $4,663,686, resulting in net
investment loss of ($461,597) for the year ended October 31, 2000. For the
fiscal year ended October 31, 1999 the Company had interest income of
$6,991,973 and net operating expenses of $2,823,677, resulting in net
investment income of $4,168,296. The decrease in the Company's net
investment income over time is due primarily to the declining balance of
interest-bearing cash and short-term securities resulting from continued
investment in private companies and private investment funds, distributions
to shareholders and reduced proceeds from sales of securities. The increase
in net operating expenses is primarily attributable to the increase in
Managing Investment Adviser fees, except from October 2000 to October 2001,
in which case the fees declined as a result of a decline in net assets. 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 managment fee is determined and payable
quarterly. For the fiscal years ended October 31, 2001, 2000 and 1999, the
Managing Investment Adviser earned $2,531,868, $4,196,214 and $2,364,920 in
management fees, respectively. During fiscal years 2001, 2000 and 1999,
respectively, the Managing Investment Adviser reimbursed other operating
expenses of the Company, in the amount of $212,131, $0, and $0, as a result
of expenses incurred in excess of those permitted pursuant to the Company's
prospectus. The increase/decrease in the fees earned by the Managing
Investment Adviser over time can be attributed primarily to the
increase/decrease in value of the Company's assets and continued investment
in private companies and private investment funds.
Net Assets
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 funds, including the write-offs of firstsource Corp., Foster
and Gallagher, Inc. (MySeasons.com), Killerbiz, Inc., Protogene
Laboratories, Inc. and ReleaseNow, Inc. In addition, ePod Corp. and Zeus
Wireless, Inc. were written-off and subsequently sold, resulting in
realized losses. This was offset by realized gains as a result of the
merger between SurVivaLink Corp. and Cardiac Science, Inc., as well as a
decrease in the allowance for management incentive fee of $93.66 per share.
For the fiscal year ended October 31, 2001, the Company had a net
decrease in net assets resulting from operations of ($116,281,881)
(($594.10) per share), comprised of net investment loss totaling
($1,820,145) (($9.30) per share), net realized and unrealized loss on
investments of ($132,793,435) (($678.46) per share) and a net change in
allowance for the management incentive fee of $18,331,699 ($93.66 per
share), a reduction in accumulated management incentive fees payable to the
Managing Investment Adviser.
At October 31, 2001, the Company's net assets were $141,423,325, a
decrease of ($116,281,881) from net assets of $257,705,206 at October 31,
2000. This decrease was the result of a ($116,281,881) decrease in net
assets resulting from operations.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the fiscal year ended October 31, 2001, the Company had 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 of investments as compared to a
$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 of investments for the fiscal year ended October
31, 2000. For the fiscal year ended October 31, 1999, the Company had a
$57,098,372 net realized and unrealized gain from investments, comprised of
a $24,838,281 net realized gain on investments and a $32,260,091 net change
in unrealized appreciation. The net unrealized depreciation on investments
for the fiscal year ended October 31, 2001 is primarily the result of
depreciation of a number of private and public companies and private funds,
including the write-off of firstsource Corp., Foster and Gallagher, Inc.
(MySeasons.com), Killerbiz, Inc., Protogene Laboratories, Inc. and
ReleaseNow, Inc. The net realized gain on investments for the fiscal year
ended October 31, 2001 is primarily the result of a combination of sales of
ePod Corp. and Zeus Wireless, Inc., resulting in realized losses, offset by
realized gains as a result of the merger between SurVivaLink Corp. and
Cardiac Science, Inc.
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 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. Nevertheless, the Company
is exposed to equity price risk through its investments in the equity
securities of three public companies. At October 31, 2001, these publicly
traded equity securities were valued at $17,171,418. 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, of
approximately a ($1,763,309) decrease in the value of these securities. At
October 31, 2000, publicly traded equity securities were valued at
$53,306,657 and there was exposire to equity price risk of approximately a
($5,330, 666) decrease in the value of those securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Independent Auditors' Report
Portfolio of Investments at October 31, 2001
Statement of Assets and Liabilities at October 31, 2001 and October 31,
2000
Statement of Operations for the years ended October 31, 2001, October 31,
2000 and October 31, 1999
Statement of Changes in Net Assets for the years ended October 31, 2001,
October 31, 2000 and October 31, 1999
Statement of Cash Flows for the years ended October 31, 2001, October 31,
2000 and October 31, 1999
Financial Highlights -- Selected Per Share Data and Ratios for the years
ended October 31, 2001, October 31, 2000, October 31, 1999, October 31,
1998 and the period October 8, 1997 (commencement of operations) to October
31, 1997
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.
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, 2001
and 2000, including the portfolio of investments at October 31, 2001, the
related statements of operations, changes in net assets and cash flows for
each of the three years ended October 31, 2001, 2000 and 1999, and the
financial highlights for each of the indicated periods. 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 audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities
owned as of October 31, 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, 2001 and 2000, the
results of its operations and its cash flows and the changes in its net
assets for the years ended October 31, 2001, 2000 and 1999, and the
financial highlights for each of the indicated periods in conformity with
accounting principles generally accepted in the United States.
/s/Ernst & Young LLP
New York, New York
December 10, 2001
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2001
Principal Acquisition Coupon Value
Amount/Shares Date## Rate/Yield (Note 1)
- ---------------- ----------- ---------- ----------
COMMERCIAL PAPER -- 3.53%
$5,000,000 Morgan Stanley, 11/06/01 (Cost $4,998,264).......... 2.50% $ 4,998,264
U.S. GOVERNMENT & AGENCY OBLIGATIONS-- 12.00%
2,000,000 Federal Farm Credit Discount Notes, 11/08/01........ 2.32* 1,999,098
15,000,000 Federal Farm Credit Discount Notes, 11/26/01........ 2.24* 14,976,666
----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS(Cost
$16,975,764)........................................ 16,975,764
----------
PRIVATE INVESTMENT FUNDS #, @ -- 28.55%
Advanced Technology Ventures V, LP.................. 2,369,165
Brand Equity Ventures I, LP......................... 1,105,751
Brentwood Associates III, LP........................ 2,639,450
Broadview Capital Partners, LP...................... 2,302,395
Commonwealth Capital Ventures II, LLP............... 2,554,957
Communications Ventures III, LP..................... 6,126,073
Friedman, Fleischer & Lowe, LLP..................... 827,176
Mayfield X, LP...................................... 3,375,949
Mid-Atlantic Venture Fund III, LP................... 3,499,949
Morgenthaler Venture Partners V, LP................. 7,683,713
Quad-C Partners V, LP............................... 4,213,861
Sevin Rosen Fund VI, LP............................. 2,186,866
Trinity Ventures VI, LP............................. 1,484,359
------------
TOTAL PRIVATE INVESTMENT FUNDS (Cost $45,935,101)... 40,369,664
------------
PRIVATE COMPANIES #, +, @ -- 27.44%
Common and Preferred Stocks -- 25.67%
Biotechnology -- 0.00%
9,240,000 Protogene Laboratories, Inc., Series B.............. 12/99-08/01 --
Educational Services -- 3.17%
75,059 Mosaica Education, Inc.............................. 08/01 3,537,994
N/A Reed Elsevier PLC................................... 09/01 947,400
------------
4,485,394
Internet Services -- Business -- 10.48% ------------
769,082 Captura Software, Inc., Junior Preferred............ 02/00 403,502
2,032,205 Captura Software, Inc., Series 1.................... 02/00 3,023,797
533,777 Captura Software, Inc., Series 2.................... 02/00 1,485,059
1,428,572 Clear Orbit, Inc.................................... 06/00 5,000,000
2,388,345 firstsource Corp., Series A......................... 02/00 --
2,000,000 Foster & Gallagher, Inc............................. 02/00-03/00 --
2,140,216 Marketfirst Software, Inc., Series D................ 09/99-05/01 --
787,166 Marketfirst Software, Inc., Series E................ 09/99-05/01 --
7,728,932 Marketfirst Software, Inc., Series F................ 09/99-05/01 4,907,733
1,676,229 Release Software Corp............................... 06/98 --
115,000 ReleaseNow, Inc., Series E.......................... 07/99 --
100,000 ReleaseNow, Inc., Series F.......................... 01/00 --
176,000 ReleaseNow, Inc., Series G.......................... 12/00 --
------------
14,820,091
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2001--(continued)
Principal Acquisition Coupon Value
Amount/Shares Date## Rate/Yield (Note 1)
-------------- -------- ------------ --------
PRIVATE COMPANIES #, +, @ -- (continued)
Common and Preferred Stocks -- (continued)
Semiconductors -- 12.02%
4,850,000 PowerSmart, Inc., Common................. 10/99 $ 5,194,593
7,960,371 PowerSmart, Inc., Series A............... 01/98 9,924,115
530,786 PowerSmart, Inc., Series B............... 08/99 1,139,210
252,780 PowerSmart, Inc., Series D............... 10/00 741,237
------------
16,999,155
------------
Promissory Notes -- 1.40%
Educational Services -- 1.40%
1,968,600 Mosaica Education, Inc. Bridge Notes..... 02/01-08/01 0.00-13.00% 1,985,471
Internet Services--Business--0.00%
750,000 Killerbiz, Inc. 12/99-08/00 8.00% --
Warrants -- 0.37%
Internet Services -- Business -- 0.37%
173,913 Captura Software, Inc., Series D......... 02/99 --
782,562 Marketfirst Software, Inc., Series E..... 09/99-05/01 --
815,223 Marketfirst Software, Inc., Series F..... 09/99-05/01 517,648
-------
517,648
-------
Semiconductors -- 0.00%
11,308 PowerSmart, Inc., Series D............... 03/01
--
TOTAL PRIVATE COMPANIES (Cost $68,323,699).
38,807,759
------------
PUBLIC COMPANIES #, +, @ -- 17.10%
Common Stock -- 12.14%
Medical Devices -- 10.08%
4,384,200 Cardiac Science, Inc..................... 09/01 9,181,348
2,280,000 Curon Medical, Inc....................... 08/99 5,075,052
------------
14,256,400
------------
Media and Entertainment -- 2.06%
520,539 Cross Media Marketing Corp............... 10/01 2,915,018
Promissory Notes -- 4.96%
Medical Devices -- 4.96%
$6,817,118 Cardiac Science, Inc. Bridge Notes....... 12/99-09/01 10.00-12.00% 7,002,103
TOTAL PUBLIC COMPANIES (Cost $26,060,847).
24,173,521
------------
INVESTMENT COMPANIES -- 2.95%
4,173,080 Dreyfus Government Cash Management Fund
(Cost $4,173,080)........................ 4,173,080
TOTAL INVESTMENTS (Cost $166,466,755**)............................... 91.57% 129,498,052
OTHER ASSETS & LIABILITIES (NET)...................................... 8.43% 11,925,273
--------- -------------
NET ASSETS............................................................ 100.00% $141,423,325
========= =============
* Discount rate.
** Aggregate cost for federal tax and book purposes.
+ At October 31, 2001, the Fund owned 5% or more of the company's outstanding shares thereby making the Fund an
affiliate as defined by the Investment Company Act of 1940. Total market value of affiliated securities owned at
October 31, 2001 was $62,981,280.
# Restricted as to public resale. Acquired between January 1, 1998 and October 31, 2001. Total cost of restricted
securities owned at October 31, 2001 aggregated $140,319,647. Total market value of restricted securities owned at
October 31, 2001 was $103,350,944 or 73.08% of net assets.
## Required disclosure for restricted securities only.
@ Non-income producing security.
See Notes to Financial Statement.
Excelsior Private Equity Fund II, Inc.
Statement of Assets and Liabilities
Year Ended October 31,
2001 2000
---- ----
ASSETS:
Investments, at value (cost $166,466,755 and
$185,101,170, respectively) (Note 1)............ $ 129,498,052 $ 271,883,525
Receivable for investments sold...................... 3,920,263 2,022,282
Receivable from investment advisor ( Note 2)......... 7,723,112 --
Interest receivable.................................. 19,731 103,053
Cash................................................. 351,782 2,174
Other Assets......................................... 175,686 159,126
--------------- ---------------
Total Assets....................................... 141,688,626 274,170,160
LIABILITIES:
Incentive fee payable (Note 2)....................... -- 5,059,389
Deferred incentive fee payable (Note 2).............. -- 9,714,201
Management fees payable (Note 2)..................... -- 928,875
Payable for investments purchased.................... -- 574,999
Directors' fees payable (Note 2)..................... 59,989 66,489
Administration fees payable (Note 2)................. 28,999 14,499
Accrued expenses and other payables.................. 176,313 106,502
--------------- ---------------
Total Liabilities.................................. 265,301 16,464,954
--------------- ---------------
NET ASSETS............................................. $ 141,423,325 $ 257,705,206
=============== ===============
NET ASSETS consist of:
Undistributed net investment income.................. 2,230,182 $ 1,304,582
Accumulated net realized gain/(loss) on investments. (8,598,006) 4,174
Net unrealized appreciation/(depreciation) of
investments..................................... (36,968,703) 86,782,355
Allowance for management incentive fee............... (1,356,372) (19,688,071)
Par value............................................ 1,957 1,957
Paid-in capital in excess of par value............... 186,114,267 189,300,209
--------------- ---------------
Total Net Assets....................................... $141,423,325 $ 257,705,206
=============== ===============
Shares of Common Stock Outstanding ($0.01 par
Value, 200,000 authorized)....................... 195,730 195,730
NET ASSET VALUE PER SHARE.............................. $ 722.54 $ 1,316.64
=============== ===============
See Notes to Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statement of Operations
Year Ended October 31,
2001 2000 1999
---- ---- ----
INVESTMENT INCOME:
Interest income............................................ 1,141,825 $ 4,202,089 $ 6,991,973
--------- ------------ -----------
EXPENSES:
Managing Investment Adviser fees (Note 2).................. 2,531,868 4,196,214 2,364,920
Legal fees................................................. 277,000 128,390 175,000
Directors' fees and expenses (Note 2)...................... 82,000 66,689 43,500
Administration fees (Note 2)............................... 58,000 58,000 58,000
Custody fees............................................... 39,442 -- --
Audit fees................................................. 88,000 44,200 26,000
Printing fees.............................................. -- 8,570 6,500
Miscellaneous expenses..................................... 97,791 161,623 149,757
--------- ------------ -----------
Total Expenses........................................ 3,174,101 4,663,686 2,823,677
--------- ------------ -----------
Expenses reimbursed by Managing Investment Adviser (212,131) -- --
--------- ------------ -----------
Net Expenses.......................................... 2,961,970 4,663,686 2,823,677
--------- ------------ -----------
NET INVESTMENT INCOME/(LOSS).................................. (1,820,145) (461,597) 4,168,296
--------- ------------ -----------
NET REALIZED AND UNREALIZED GAIN/(LOSS): (Note 1)
Net realized gain/(loss) on investments.................... (9,042,377) 31,080,775 24,838,281
Net change in unrealized appreciation/(depreciation)
of investments........................................... (123,751,058) 54,326,850 32,260,091
------------ ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)....................... (132,793,435) 85,407,625 57,098,372
------------ ----------- -----------
Net change in allowance for management incentive fee....... 18,331,699 (8,936,514) (10,751,557)
------------ ----------- -----------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................... $(116,281,881) $ 76,009,514 $ 50,515,111
============= ============= ============
See Notes to Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statement of Changes in Net Assets
Year Ended October 31,
2001 2000 1999
------- ------ ------
OPERATIONS:
Net investment income/(loss)......................... $ (1,820,145) $ (461,597) $ 4,168,296
Net realized gain/(loss) on investments.............. (9,042,377) 31,080,775 24,838,281
Net change in unrealized appreciation/(depreciation)
of investments.................................. (123,751,058) 54,326,850 32,260,091
Net change in allowance for management
incentive fee................................... 18,331,699 (8,936,514) (10,751,557)
------------- ----------- ------------
Net increase/(decrease) in net assets resulting from
operations......................................... (116,281,881) 76,009,514 50,515,111
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ -- -- (7,669,460)
Net realized gain.................................... (52,919,404) --
Paid-in capital...................................... -- (10,491,818) --
------------- ----------- ------------
Total Distributions................................ -- (63,411,222) (7,669,460)
------------- ----------- ------------
Net increase/(decrease) in net assets.................. (116,281,881) 12,598,292 42,845,651
NET ASSETS:
Beginning of period.................................. 257,705,206 245,106,914 202,261,263
------------- ----------- ------------
End of period (including undistributed net
investment income of $2,230,182, $1,304,582 and
$5,259,727 respectively)....................... $141,423,325 $257,705,206 $245,106,914
============ ============ ============
See Notes to Financial Statement.
Excelsior Private Equity Fund II, Inc.
Statement of Cash Flows
Year Ended October 31,
2001 2000 1999
---- ---- ----
CASH FLOWS FROM INVESTING
AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments....................... $29,699,936 $ 32,345,524 $ 33,609,816
Purchases of Investments................................. (30,666,565) (59,491,934) (54,190,497)
Net Increase in Short-Term Investments................... 7,903,391 95,513,291 23,210,576
Investment Income........................................ 1,225,147 4,340,858 7,610,895
Management Incentive Fee Paid............................ (5,059,389) (4,914,480) --
Operating Expenses Paid.................................. (2,752,912) (4,379,999) (2,591,795)
----------- ------------- ---------------
Net Cash Provided from Investing and
Operating Activities............................... 349,608 63,413,260 7,648,995
----------- ------------- ---------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distributions Paid....................................... -- (63,411,222) (7,669,460)
----------- ------------- ---------------
Net Cash Used by Financing Activities.................... (63,411,222) (7,669,460)
----------- ------------- ---------------
Net Increase/(Decrease) in Cash.......................... 349,608 2,038 (20,465)
----------- ------------- ---------------
Cash at Beginning of Year.................................. 2,174 136 20,601
----------- ------------- ---------------
Cash at End of Year........................................ $ 351,782 $ 2,174 $ 136
=========== ============= ===============
Reconciliation of Net Investment Loss to Net
Cash Provided/(Used) for Investing and
Operating Activities:
Net Investment Gain/(Loss)............................... (1,820,145) $ (461,597) $ 4,168,295
Proceeds from Sales of Investments....................... 29,699,936 32,345,524 33,609,816
Purchases of Investments................................. (30,666,565) (59,491,934) (54,190,497)
Net decrease in Short-Term Investments................... 7,903,391 95,513,291 23,210,576
Net Increase in Receivables Related
to Operations....................................... 849,125 132,055 602,045
Net Decrease in Payables Related to Operations.......... (4,833,771) (6,868,574) (1,602,328)
Accretion/Amortization of Discounts and
Premiums............................................ (782,363) 2,244,495 1,851,088
----------- ------------- ---------------
Net Cash Provided from Investing and Operating
Activities.......................................... $ 349,608 $ 63,413,260 $ 7,648,995
=========== ============= ===============
See Notes to Financial Statements.
Excelsior Private Equity Fund II, Inc.
Financial Highlights -- Selected Per Share Data and Ratios
For a share outstanding throughout each period
October 8,*
to
Year Ended October 31, October 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING OF
PERIOD........................................ $ 1,316.64 $ 1,252.27 $ 1,033.37 $ 1,003.46 $ 1,000.00
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income/(Loss).................. (9.30) (2.36) 21.29 41.84 2.79
Net Realized and Unrealized Gain/(Loss) on
Investments.............................. (678.46) 436.36 291.72 (1.78) 0.67
Net Change in Allowance for Management
Incentive fee............................ 93.66 (45.66) (54.93) -- --
---------- ---------- ---------- ---------- ----------
Total From Investment Operations............ (594.10) 388.34 258.08 40.06 3.46
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income......................... -- -- (39.18) (10.15) --
Net Realized Gain............................. -- (270.37) -- -- --
Paid-in Capital............................... -- (53.60) -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions......................... -- (323.97) (39.18) (10.15) --
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD.................. $722.54 $1,316.64 $ 1,252.27 $1,033.37 $ 1,003.46
========== ========== ========== ========== ==========
TOTAL NET ASSET VALUE RETURN+................... (44.58)% 35.89% 25.94% 4.04% 0.35%
========== ========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands)......... $ 141,423 $ 257,705 $ 245,107 $ 202,261 $ 156,050
Ratio of Net Operating Expenses to Average
Net Assets............................... 1.48% 1.55% 1.26% 0.87% 0.72%**
Ratio of Gross Operating Expenses to
Average Net Assets++..................... 1.59% 1.55% 1.26% 0.87% 1.04%**
Ratio of Net Investment Income/(Loss) to
Average Net Assets....................... (0.91)% (0.15)% 1.86% 4.05% 4.23%**
Portfolio Turnover Rate....................... 11 % 14 % 40% 0% 0%
* Commencement of operations
** Annualized
+ Total investment return based on per share net asset value reflects the effects of changes in net asset value based
on the performance of the 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. Total return for periods of less than one year are not annualized.
++ Expense ratio before waiver of fees and reimbursement of expenses by Managing Investment Adviser.
See Notes to Financial Statements.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Excelsior Private Equity Fund II, Inc. ("the Fund") 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 Fund'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 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 Fund values portfolio securities quarterly and at other such
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 or a committee of the Board under the supervision of the Board
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 investment 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 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 Fund from the investments.
At October 31, 2001, market quotations were not readily available
for securities valued at $103,350,944. 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.
(c) Repurchase agreements:
The Fund enters into agreements to purchase securities and to
resell them at a future date. It is the Fund'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
Fund 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 Fund may be delayed or limited.
(d) Federal income taxes:
It is the policy of the Fund 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 which may differ from
generally accepted accounting principles. These "book/tax" differences
are either considered temporary or permanent. To the extent these
differences are permanent, such amounts are reclassified within the
capital accounts based on their federal tax basis treatment; temporary
differences do not require reclassification. During the current year,
permanent differences, primarily due to net operating losses, resulted
in decreases in undistributed net investment income and accumulated
net realized gain on investments and a corresponding increase in
paid-in capital. The reclassification had no effect on net assets.
The Fund has an unused capital loss carryforward of $8,602,181
available for income tax purposes, to be applied against future net
security profits, if any, realized after October 31, 2001. If not
applied, the carryover expires in fiscal year 2009.
At October 31, 2001 the tax basis of the Fund's investments for
federal income tax purposes amounted to $166,466,755. The net
unrealized depreciation amounted to $36,968,703, which is comprised of
gross unrealized appreciation of $12,979,433 and aggregate gross
unrealized depreciation of $49,948,136.
In November 2000 the American Institute of Certified Public
Accountants (AICPA) issued a revised version of the AICPA Audit and
Accounting Guide for Investment Companies (the Guide). The Guide is
effective for annual financial statements issued for fiscal years
beginning after December 15, 2000. Management of the Company does not
anticipate that the adoption of the Guide will have a significant
effect on the financial statements.
2. Investment Advisory Fee, Administration Fee, and Related Party Transactions
Pursuant to an Investment Management Agreement ("Management
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 Fund. Under the Management Agreement, for the services provided, the
Managing Investment Adviser is entitled to receive a fee, at the annual
rate of 1.50% of the net assets of the Fund, 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 Fund, 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 Fund 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 Fund all or a portion of the incentive fee previously paid.
U.S. Trust NY is a New York state-chartered bank and trust company and
a member bank of the Federal Reserve System and U.S. Trust is a Connecticut
state bank and trust company. 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.
J.P. Morgan Investor Services, Co., a corporate affiliate of JPMorgan
Chase Bank, (the "Administrator") provides administrative services to the
Fund. For the services provided to the Fund, the Administrator is entitled
to an annual fee of $58,000, which is paid quarterly.
The Managing Investment Adviser has voluntarily agreed to waive or
reimburse other operating expenses of the Fund, exclusive of management
fees, to the extent they exceed 0.25% of the Fund's net assets. This
reimbursement amounted to $212,131 for the year ended October 31, 2001.
Each Director of the Fund receives an annual fee of $15,000, and is
reimbursed for expenses incurred for attending meetings. No person who is
an officer, director or employee of U.S. Trust, or of any parent or
subsidiary thereof, who serves as an officer, director or employee of the
Fund receives any compensation from the Fund.
3. Purchases and Sales of Securities
Excluding short-term investments, the Fund's purchases and sales of
securities for the years ended October 31, 2001, October 31, 2000 and
October 31, 1999 aggregated:
Year Ended
October 31, Purchases ($) Sales ($)
----------- ------------- ---------
2001 18,570,218 31,635,084
2000 60,066,932 34,368,859
1999 54,183,529 35,315,725
At October 31, 2001, the Fund had outstanding investment commitments
totaling $9,128,992.
4. Transactions with Affiliated Companies
An affiliated company is a company in which the fund has ownership of
at least 5% of the voting securities. The Fund did not receive dividend or
interest income from affiliated companies during the period. Transactions
with companies which are or were affiliates are as follows:
Sale/Merger Realized Value
Affiliate Purchases Proceeds Gain (Loss) (Note 1)
------------- ------------- -------------- -------------
Captura Software, Inc........................... $ 990,040 -- -- $4,912,356
Cardiac Science, Inc............................ -- $8,330,023 $ 8,330,023 16,183,452
Constellar Corp................................. -- -- (6,999,995) --
Cross Media Marketing Corp...................... -- 3,920,263 -- 2,915,017
ePod Corp....................................... -- 725,026 (1,374,972) --
firstsource Corp................................ 2,666,667 -- -- --
Managemark, Inc................................. -- -- (5,500,002) --
Marketfirst Software, Inc....................... 2,497,530 -- -- 5,425,341
Mosaica Education, Inc.......................... 1,968,600 -- -- 5,523,465
Protogene Laboratories, Inc..................... 2,140,000 -- -- --
Reed Elsevier PLC (fka Classroom Connect,
Inc.)........................................ 1,248,937 8,088,671 (1,160,217) 947,400
ReleaseNow, Inc................................. 1,146,666 -- -- --
Zeus Wireless, Inc.............................. -- -- (5,000,000) --
------------- ------------- -------------- -------------
$12,658,440 $21,063,983 $(11,705,163) $35,907,031
============= ============= ============== =============
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 2002 Annual Meeting of
Stockholders to be held on March 22, 2002, which will be filed with the
Securities and Exchange Commission not later than 120 days after October
31, 2001, 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 2002 Annual Meeting of Stockholders to
be held on March 22, 2002, which will be filed with the Securities and
Exchange Commission not later than 120 days after October 31, 2001, 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 2002 Annual Meeting of Stockholders to
be held on March 22, 2002, which will be filed with the Securities and
Exchange Commission not later than 120 days after October 31, 2001, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. 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.
3. Exhibits
Exhibit
Number Description
------- -----------
(3)(i) Articles of Incorporation of the Company1
(3)(ii) By-Laws of the Company1
(10)(a) Form of Management Agreement2
(10)(b) Form of Transfer Agency and Custody Agreement3
(23) Consent of Independent Auditors
(b) Reports on Form 8-K
None.
- -------------------
1 Incorporated by reference to Excelsior Private Equity Fund II, Inc.'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 Excelsior Private Equity Fund II, Inc.'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 Excelsior Private Equity Fund II, Inc.'s
Registration Statement on Form N-2/A (File No. 333-23811), filed with
the Securities and Exchange Commission on May 13, 1997.
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 25, 2002 By: /S/DAVID I. FANN
--------------------------------------
David I. Fann, Chief Executive Officer
and President
(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 Chief Executive Officer and President (principal January 25, 2002
- -------------------------------- executive officer)
David I. Fann
/S/BRIAN F. SCHMIDT Chief Financial Officer January 25, 2002
- -------------------------------- (principal financial and accounting officer)
Brian F. Schmidt
/S/JOHN C. HOVER II Chairman of the Board and Director January 29, 2002
- --------------------------------
John C. Hover II
/S/GENE M. BERNSTEIN Director January 29, 2002
- --------------------------------
Gene M. Bernstein
/S/STEPHEN V. MURPHY Director January 29, 2002
- --------------------------------
Stephen V. Murphy
/S/VICTOR F. IMBIMBO, JR. Director January 29, 2002
- --------------------------------
Victor F. Imbimbo, Jr.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated December 10,
2001, included in this Annual Report (Form 10-K No. 000-22277), for the
year ended October 31, 2001, of Excelsior Private Equity Fund II, Inc.
ERNST & YOUNG LLP
New York, New York
January 29, 2002