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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-22277
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)
225 High Ridge Road
Stamford, CT 06905
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (203) 352-4400
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No[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, 2003 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 26, 2004 are incorporated by reference into
Part III (Items 10, 11 and 12) to this Form 10-K.
TABLE OF CONTENTS
Form 10-K
Item No. Report Page
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PART I
1. Business 1
2. Properties 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 5
6. Selected Financial Data 6
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6
7A. Quantitative and Qualitative Disclosures About Market Risk 9
8. Financial Statements and Supplementary Data 9
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25
9A Controls and Procedures 25
PART III
10. Directors and Executive Officers of the Registrant 25
11. Executive Compensation 25
12. Security Ownership of Certain Beneficial Owners and Management 26
13. Certain Relationships and Related Transactions 26
14. Principal Accountant Fees and Services 26
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain uncertainties and risks.
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the federal securities laws that also involve substantial
uncertainties and risks. The Company's future results may differ materially from
its historical results and actual results could differ materially from those
projected in the forward-looking statements as a result of certain risk factors.
Readers should pay particular attention to the considerations described in the
section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Readers should also carefully
review the risk factors described in the other documents the Company files, or
has filed, from time to time with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS.
Overview
Excelsior Private Equity Fund II, Inc. (the "Company" or the "Fund") is a
Maryland corporation organized on March 20, 1997. The Company is a
non-diversified, closed-end management investment company operating as a
business development company under the Investment Company Act of 1940
("Investment Company Act"), as amended, and, in connection with its initial
offering of shares, registered said offering of shares under the Securities Act
of 1933, as amended. BDCs are a special type of investment company, as defined
and regulated by the Investment Company Act, which focus primarily on investing
in the privately issued securities of eligible portfolio companies, as defined
by the Investment Company Act. A BDC must also make available significant
managerial assistance to such companies. 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.
U.S. Trust Company, N.A., acting through its registered investment advisory
division, U.S. Trust Company, N.A. Asset Management Division serves with United
States Trust Company of New York, acting through its registered investment
advisory division, U.S. Trust - New York Asset Management Division (each an
"Investment Adviser" and together, the "Managing Investment Adviser" or "U.S.
Trust") provide investment management services to the Company pursuant to a
management agreement dated July 18, 2000 (the "Management Agreement"). U.S.
Trust Company, N.A. and United States Trust Company of New York are each a
wholly-owned subsidiary of U.S. Trust Corporation, a registered bank holding
company. U.S. Trust Corporation is 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 October 8, 1997 and November 19, 1997, representing over
$155.5 million and $40.2 million, respectively. The Company sold a total of
195,730 shares in the public offering for gross proceeds totaling $195,730,000
(including one share purchased for $1,000 on March 20, 1997, by Douglas A.
Lindgren, the Company's Co-Chief Executive Officer and Chief Investment
Officer). Shares of the Company were made available through UST Financial
Services Corp. (the "Selling Agent") to clients of U.S. Trust and its affiliates
who met the Company's investor suitability standards.
In connection with the public offering of the Company's shares, the
Managing Investment Adviser paid to the Selling Agent a commission totaling
$60,000. The Company incurred offering costs associated with the public offering
totaling $367,154. Net proceeds to the Company from the public offering, after
offering costs, totaled $195,362,846.
The Company's Articles of Incorporation provide that the duration of the
Company will be ten years from the final closing of the sale of the shares,
subject to the rights of the Managing Investment Adviser and the investors to
extend the term of the Company.
The following is a summary of the Company's investment portfolio over its
life.
Investments Held -- Public
. 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 Fund invested $6 million in Curon at an average cost of
$2.57 per share and currently holds 2.4 million shares of common
stock. On October 31, 2003, Curon closed at $2.97 per share.
Investments Held -- Private
1
. ClearOrbit, Inc. (formerly known as BPA Systems, Inc.), Austin, TX,
extends enterprise value with proven software solutions that allow
customers to fully leverage their investment in enterprise
applications. ClearOrbit products expand rather than duplicate
functionality, eliminating inefficiencies in the supply chain. The
Company has been profiled as one of Deloitte & Touche's Texas
Technology Fast 50 companies. The Fund invested $5 million in
ClearOrbit, and the investment is currently being held at a cost of
$5.0 million.
. Mosaica Education, Inc. (formerly known as Advantage Schools, Inc.),
Boston, MA, is a for-profit provider of public school education
management services. The Fund invested in Advantage Schools, Inc.,
which manages charter schools in troubled urban school districts in
cooperation with local partners. The Fund invested $7 million in
Advantage Schools. In August 2001, Mosaica Education, Inc. a privately
held operator of charter schools acquired Advantage, forming Mosaica
Advantage. The Company's schools are publicly-funded, receiving
per-student capitalization rates generally consistent with those
received by other schools in the district. The Fund received 75,059
shares of preferred stock in Mosaica Education, Inc. and promissory
notes in the principal amount of $2 million from the acquisition of
Advantage. As of October 31, 2003, the investment was valued at $5.5
million.
Investments Held -- Third-Party Investment Funds
. Advanced Technology Ventures V, LP ("ATV") is an early-stage focused
fund targeting information technology and health care markets. ATV has
drawn all of the Fund's $3 million commitment. At October 31, 2003,
the total value (fair market value plus distributions) of this
investment was $1.5 million.
. Brand Equity Ventures I, LP ("Brand Equity") is focused on investing
broadly across the consumer sector, particularly in branded
opportunities within e-commerce, retailing, and direct response
markets. Brand Equity has drawn all of the Fund's $2.5 million
commitment. At October 31, 2003, the total value (fair market value
plus distributions) of this investment was $1.3 million.
. Brentwood Associates III, LP ("Brentwood") is focused on middle-market
buyouts and consolidations. Brentwood's strategy is to identify
industries with consolidation characteristics, develop a strategy for
implementation and recruit management to execute that strategy.
Brentwood has drawn all of the Fund's $5 million commitment. At
October 31, 2003, the total value (fair market value plus
distributions) of this investment was $5.8 million.
. Broadview Capital Partners, LP ("Broadview") is focused on buyouts,
recapitalizations and growth financings within the technology sector.
Broadview has drawn all of the Fund's $5 million commitment. At
October 31, 2003, the total value (fair market value plus
distributions) of this investment was $3.1 million.
. Commonwealth Capital Ventures II, LP ("Commonwealth") invests in early
to later-stage information technology companies in the New England
region. Commonwealth maintains a particular focus on communications
technology, Internet software and services, and e-commerce companies.
Commonwealth has drawn all of the Fund's $4 million commitment. At
October 31, 2003, the total value (fair market value plus
distributions) of this investment was $3.6 million.
. Communications Ventures III, LP ("CommVentures") targets early-stage
companies exclusively in the communications sector. CommVentures has
drawn all of the Fund's $5 million commitment. At October 31, 2003,
the total value (fair market value plus distributions) of this
investment was $1.4 million.
. Friedman, Fleischer & Lowe, LP ("Friedman") is a fund focused
exclusively on participation in middle-market buyouts. Friedman
distributed a return of capital to the Fund in January 2001. Friedman
has drawn all of the Fund's $5 million commitment. At October 31,
2003, the total value (fair market value plus distributions) of this
investment was $6.4 million.
. Mayfield X, LP ("Mayfield") invests in early-stage information
technology and healthcare companies, primarily located in Silicon
Valley. Mayfield has drawn all of the Fund's $5 million commitment. At
October 31, 2003, the total value (fair market value plus
distributions) of this investment was $1.0 million.
. Mayfield X Annex, LP ("Annex Fund") invests follow-on capital in
select Mayfield portfolio companies. The Annex Fund has drawn all of
the Fund's $250,000 commitment. As of October 31, 2003, the total
value (fair market value plus distributions) of this investment was
$0.2 million.
. Mid-Atlantic Venture Fund III, LP ("MAVF") invests in early and
expansion-stage companies throughout the Mid-Atlantic region of the
United States. MAVF has drawn all of the Fund's $5 million commitment.
As of October 31, 2003, the total value (fair market value plus
distributions) of this investment was $2.1 million.
2
. Morgenthaler Venture Partners V, LP ("Morgenthaler") is primarily an
early-stage venture fund, investing largely in information technology
and healthcare companies but also invests in buyouts of basic
businesses. Morgenthaler has drawn all of the Fund's $8 million
commitment. As of October 31, 2003, the total value (fair market value
plus distributions) of this investment was $5.5 million.
. Quad-C Partners V, LP ("Quad C") is focused on taking controlling
positions in leveraged acquisitions and recapitalizations of
middle-market companies. Quad C has drawn all of the Fund's $5 million
commitment. As of October 31, 2003, the total value (fair market value
plus distributions) of this investment was $7.3 million.
. Sevin Rosen Fund VI, LP ("Sevin Rosen") invests in early-stage
technology companies, focusing specifically on companies in
communications and eBusiness infrastructure and solutions, as well as
those companies with Internet-enabled business models. Sevin Rosen has
drawn all of the Fund's $2.5 million commitment. As of October 31,
2003, the total value (fair market value plus distributions) of this
investment was $4.7 million.
. Trinity Ventures VI, LP ("Trinity") is an early to later-stage fund,
which invests in the software, communications and electronic commerce
sectors. Trinity has drawn all of the Fund's $3 million commitment. As
of October 31, 2003, the total value (fair market value plus
distributions) of this investment was $1.6 million.
Investments Sold
. Cardiac Science, Inc. (NASDAQ:DFIB), Irvine, CA, develops,
manufactures, and markets automatic external cardiac defibrillators,
or AECDs, which are medical devices used for the treatment of cardiac
arrest. The Fund invested $7.6 million in SurVivaLink, Inc., which
merged with Cardiac Science in September 2001. As a result of the
merger, the Fund received promissory notes in the principal amount of
$6.4 million, 4.2 million shares of Cardiac Science common stock, and
$2.5 million in cash. The Fund realized proceeds from its investment
in Cardiac Science in the amount of $22.2 million, or 2.9x its
original investment.
. Classroom Connect, Inc., Los Angeles, CA, is a provider of
Internet-based educational products for students in kindergarten to
eighth grade. The company's product and service offerings include
proprietary instruction guides, teaching plans, seminars and unique
Internet content. The company is targeting teachers and school
districts wishing to incorporate the Internet into the classroom. In
September 2001, Classroom Connect was acquired by Harcourt Education,
Inc., a subsidiary of Reed Elsevier PLC. The Fund received proceeds of
$8.1 million from the sale. In 2002, the Fund received an additional
$.9 million held in escrow. The Fund received total proceeds equal to
$9.0 million or 1.0x its invested capital.
. Concur Technologies, Inc. (NASDAQ: CNQR), Redmond, WA, develops and
provides expense management software and service solutions for large
companies. The Company's products significantly increase the
efficiency and lower the cost of expense reports by providing a
web-based software application that automates much of the process. The
Fund originally invested $6.2 million in Captura Software, Inc. On
July 31, 2002, Concur agreed to acquire Captura. The Fund received
Concur stock as part of the transaction. The Fund sold its Concur
stock in 2003 for $1.3 million, for a net realized loss of $4.6
million.
. LifeMinders, Inc., Herndon, VA was an online direct marketing company
that provides personalized information and advertisements via e-mail
to a community of members. The Fund invested $11.5 million in
LifeMinders, Inc. In November 1999, LifeMinders completed its initial
public offering. From May 2000 through October 2000, the Fund sold
735,000 shares of LifeMinders and realized proceeds of $26.1 million,
2.3x the cost to the Fund. LifeMinders merged with Cross Media
Marketing Corp. (AMEX: XMM) in October 2001. As a result of the
merger, the Fund received $3.9 million in cash and 520,539 shares of
Cross Media common stock. During the year, the Fund sold its entire
holding of Cross Media stock for $483,071. The Fund received a total
of $30.5 million, or 2.6x the original cost, from its investment in
LifeMinders, Inc.
. Pivotal Corporation (NASDAQ: PVTL, TSX: PVT), Vancouver, British
Columbia, provides a complete CRM software suite that includes
capabilities in marketing, sales, service, contact centers, partner
management and interactive selling. The Fund originally invested $9.7
million in MarketFirst Software, Inc., a company which developed
hosted e-marketing software and services targeting middle-market
corporations. On October 3, 2002, MarketFirst was acquired by Pivotal.
The Fund received 94,430 shares of Pivotal common stock as part of the
transaction and in the process, realized a loss of $9.3 million. The
Fund sold its Pivotal stock in 2003 for $.1 million.
3
. PowerSmart, Inc., Shelton, CT, is a provider of "smart" battery
management products designed to maximize battery run-times and safety
in laptop computers, cellular telephones and camcorders, as well as a
variety of hand-held electronic devices. PowerSmart was formed as a
spin-off of technology and related assets from Duracell. In May 2002,
Microchip Technologies, Inc. (NASDAQ: MCHP), a fabless semiconductor
company, acquired PowerSmart. The Fund received $15.9 million in cash
at closing and an additional $1.7 million escrow proceeds for a total
of $17.6 million or 1.8x the Fund's original cost.
. Softcom Microsystems, Inc., Fremont, CA, designs, develops and markets
data acceleration products used in high-speed communications networks.
Softcom's single-chip network accelerator solutions and integrated
subsystems provide processing capabilities which help alleviate the
"data bottleneck" at the point where baseband Local Area Network
traffic moves onto a high-speed broadband Internet backbone. In August
1999, Softcom was sold to Intel for cash, and the Fund realized $15.4
million in proceeds or a 3.7x return on its $4.2 million investment.
. WNP Communications, Inc., Reston, VA, acquired broadband spectrum
covering 30 of the top 50 markets in the United States in the Local
Multipoint Distribution Services auction conducted by the FCC in 1998.
In May 1999, the company was acquired by NextLink, a leading wireless
communication services provider, for cash and stock. The Fund realized
$19.2 million in proceeds or a 3.3x return on its $5.9 million
investment.
Investments Written Off
. 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.
The Fund's $7 million investment was written off.
. ePod Corporation, New York, NY, provided and distributed e-commerce,
content syndication and rich media advertising services to
manufacturers, retailers, web publishers and content providers in the
entertainment, retail and advertising industries. In March 2001, ePod
filed for the Canadian equivalent of a Chapter 7 bankruptcy and the
investment was written-off. The Fund received proceeds of $.7 million
from the Company's liquidation in July 2001 and realized a loss of
$1.4 million.
. 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 were liquidated. The Fund's $12.7 million
investment was written off.
. KillerBiz, Inc., Santa Clara, CA was an online business-to-business
marketplace and software solution connecting small businesses to
suppliers of goods and services. In 2001, we determined that the
KillerBiz's business model was no longer viable and ceased supporting
the Company. The Fund's $.8 million investment was written off.
. MySeasons.com, Inc., New York, NY, was a business-to-consumer and
business-to-business Internet commerce site aimed at selling gardening
and related horticultural products, as well as providing associated
content to the gardening community. In February 2001, MySeasons.com
merged with Foster & Gallagher, Inc., a direct to consumer marketer of
horticulture products. In July 2001, Foster & Gallagher filed for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and
the Fund realized a loss of $2.0 million.
. Managemark, Inc. (formerly known as On the Go Software, Inc.),
Sunnyvale, CA was an Internet application software company focused on
developing finance and administration application software and
services for small and middle-market firms. The company's bank
foreclosed on its credit line when Managemark failed to raise
additional capital. The assets were assigned to a liquidating agent in
October 2000. Consequently the Fund did not receive any proceeds from
the sale of the assets and realized a loss of $5.5 million.
. Protogene Laboratories, Inc., Palo Alto, CA, was a developer and
manufacturer of DNA gene chip technology used in molecular biology and
genetic research. In 2001, Protogene was unable to raise additional
capital. The company is in the process of selling its remaining assets
and therefore, the Fund's $7.8 million investment had been written
off. In December 2002, Protogene negotiated a transaction in which it
sold substantially all of its assets; in exchange for its Protogene
ownership, the Fund received $0.1 million in cash, a $0.5 million
promissory note and warrants in Metrigen, Inc. Metrigen is a
newly-formed, privately-held corporation.
4
. ReleaseNow, Inc., Menlo Park, CA was an outsourced provider of
e-commerce services for vendors and resellers of software and other
digital goods. ReleaseNow provided software publishers, software
resellers and content-driven web sites with technology and services to
establish an Internet-based sales and distribution channel. In 2001,
we determined that the ReleaseNow business model was no longer viable
and support for the Company ceased. As a result, the Company's assets
were assigned to a liquidating agent. The Fund's $8.0 million
investment in ReleaseNow has been written off.
. Zeus Wireless, Inc., Columbia, MD, built and marketed long-range
frequency hopping radios for commercial and industrial facilities. The
company utilized radio frequency technology which offered reliability
and security at a lower price as a substitute for wired communications
and the flexibility associated with wireless solutions. Zeus Wireless
could not raise additional capital in 2001 and sold its assets. The
Fund realized a loss of $5.0 million on this investment.
For additional information concerning the Company's investments see the
financial statements beginning on page 11 of this report.
Competition
The Company encounters competition from other entities and individuals
having similar investment objectives. Primary competition for desirable
investments comes from investment partnerships, venture capital affiliates of
large industrial and financial companies, investment companies and wealthy
individuals. Some of the competing entities and individuals have investment
managers or advisers with greater experience, resources and managerial
capabilities than the Company and may therefore be in a stronger position than
the Company to obtain access to attractive investments. To the extent that the
Company can compete for such investments, it may not be able to do so on terms
as favorable as those obtained by larger, more established investors.
Employees
At October 31, 2003, 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.
Market Information
The Company has 200,000 authorized shares. As of December 31, 2003, 195,730
shares were issued and outstanding. There is no established public trading
market for the Company's shares.
Holders
There were 2,158 holders of the Company's shares as of December 31, 2003.
Dividends and Distributions
Fiscal Year Ended October 31, 2003. On October 30, 2003, the Company paid a
distribution of $65.00 per share of return of capital.
5
Fiscal Year Ended October 31, 2002. On December 28, 2001, the Company paid
a dividend of $30.56 per share of net investment income. On January 7, 2002, the
Company paid a distribution of $19.53 per share of return of capital. On October
31, 2002, the Company paid a distribution of $223.75 per share of return of
capital.
For additional information concerning the payment of dividends, see
"Significant Accounting Policies" in the notes to the financial statements of
the Company included in Item 8 hereof.
ITEM 6. SELECTED FINANCIAL DATA.
($ in 000's except for per share data)
Fiscal Year Ended 10/31/03 10/31/02 10/31/01 10/31/00 10/31/99
- ------------------------------ -------- -------- -------- -------- --------
Financial Position
Investments in securities 46,917 54,747 129,498 271,884 254,708
Other Assets 3,136 3,422 12,191 2,286 1,976
Total Assets 50,053 58,169 141,689 274,170 256,684
Liabilities 337 485 265 16,465 11,577
Net Assets 49,716 57,684 141,423 257,705 245,107
Changes in Net Assets
Net investment income (loss) (621) (28) (1,820) (462) 4,168
Net gain (loss) on investments 5,376 (31,469) (132,793) 85,408 57,098
Net change in incentive fees -- 1,356 18,332 (8,937) (10,752)
Dividends 12,722 53,599 -- 63,411 7,669
Per Share Data
Net Assets 254.00 294.71 722.54 1,316.64 1,252.27
Dividends Paid 65.00 273.84 -- 323.97 39.18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 pending
distributions to shareholders or to provide the liquidity necessary to make
portfolio investments as investment opportunities arise.
At October 31, 2003, the Company held $2,852,110 in cash and $1,887,983 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 cash and short-term investments
from October 31, 2002 was primarily the result of proceeds received from (i)
sales of Cardiac Science, Inc. common shares, (ii) sales of Concur Technologies,
Inc. common shares, (iii) receipt of the PowerSmart, Inc. escrow receivable, and
(iv) the prior year incentive fee receivable paid by the Managing Investment
Adviser. Total proceeds received in the amount of $8,630,054 were offset by a
return of capital distribution in the amount of $12,722,245 or $65.00 per share,
as well as operating expenses incurred by the Company. In connection with the
Company's commitments to private investment funds, a total of $58,250,000 has
been contributed by the Company through October 31, 2003. The Company has no
additional capital commitment obligations to the private investment funds. The
Company made no follow-on investments in its private company investments during
the fiscal year ended October 31, 2003.
The Company believes that its liquidity and capital resources are adequate
to satisfy its operational needs.
Results of Operations
6
Investment Income and Expenses
For the fiscal year ended October 31, 2003, the Company had investment
income of $239,388 and net operating expenses, net of expenses reimbursed by the
Managing Investment Adviser, of $860,783, resulting in a net investment loss of
($621,395). For the fiscal year ended October 31, 2002, the Company had
investment income of $1,477,513 and operating expenses, net of expenses
reimbursed by the Managing Investment Adviser, of $1,505,909, resulting in a net
investment loss of ($28,396). For the fiscal year ended October 31, 2001, the
Company had investment income of $1,141,825 and operating expenses, net of
expenses reimbursed by the Managing Investment Adviser, of $2,961,970, resulting
in a net investment loss of ($1,820,145). The reduced level of the Company's
investment income from the fiscal year ended October 31, 2002 to the fiscal year
ended October 31, 2003 is due primarily to declining balances of
interest-bearing short-term securities resulting from the investments in the
private investment funds, as well as distributions to shareholders. During the
fiscal year ended October 31, 2002, the Company maintained larger balances in
short-term securities due to the sale of several of its public positions and
merger proceeds received from one private company investment. Proceeds from the
sale of these securities and distributions received from private investment
funds were part of a distribution paid to shareholders on October 31, 2002.
Because the Company is in the midst of harvesting its portfolio investments
and distributing proceeds, there is a trend toward a reduced level of net assets
that would result in reinvestment in interest-bearing investments and therefore,
a decrease in interest income. During the fiscal year ended October 31, 2002,
however, there was an increase in investment income over fiscal 2001 because the
Company received redemption proceeds on its Cardiac Science, Inc. senior secured
notes. The reinvestment of sales proceeds in interest-bearing securities, as
well as interest earned on the senior secured notes, contributed to an increase
in interest income over the previous year. The decrease in net operating
expenses from fiscal year 2001 through fiscal year 2003 is primarily
attributable to the decrease in managing investment adviser fees as a result of
the decline in the net assets upon which fees are charged.
The Managing Investment Adviser provides investment management and
administrative services required for the operation of the Company. In
consideration of the services rendered by the Managing Investment Adviser, the
Company pays a management fee based upon a percentage of the net assets of the
Company invested or committed to be invested in certain types of investments and
an incentive fee based in part on a percentage of realized capital gains of the
Company. The management fee is determined and payable quarterly. For the fiscal
years ended October 31, 2003, 2002 and 2001, the Managing Investment Adviser
earned $721,837, $1,214,443, and $2,531,868 in management fees, respectively.
The decrease in the fees earned by the Managing Investment Adviser over time can
be attributed to the decrease in the Company's net assets. . 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 average net assets. During fiscal years 2003, 2002 and
2001, respectively, the Managing Investment Adviser reimbursed other operating
expenses of the Company, in the amount of $322,717, $243,246, and $212,131 as a
result of expenses incurred in excess of those permitted pursuant to the
Company's prospectus. This reimbursement has increased from fiscal year 2001,
2002 and 2003 as a result of the decrease in net assets, and therefore, a
reduced threshold upon which to calculate the maximum allowable expenses. With
the exception of legal fees, the Company's other operating expenses tend to be
more fixed in nature. In addition, for the fiscal years ended October 31, 2002
and 2001, the change in allowance for the management incentive fee was
$1,356,372 and $18,331,699, respectively, resulting in receivables to the
Company. The Company received payment of the management fee receivables of
$1,356,372 and $8,617,498 during the fiscal years ended October 31, 2003 and
2002, respectively. As of October 31, 2003, there was no incentive fee
receivable from the Managing Investment Adviser or payable by the Company.
Net Assets
For the fiscal year ended October 31, 2003, the Company's net assets were
$49,716,188, or a net asset value per common share of $254.00. This represents a
decrease of ($7,967,654) or ($40.71) from net assets of $57,683,842, or a net
asset value per common share of $294.71, at October 31, 2002. The decline is a
combination of a return of capital distribution of ($12,722,250) or ($65.00) per
share paid to shareholders on October 30, 2003, partially offset by an incresase
resulting from investment income and net gain on investments exceeding operating
expenses by $4,754,796 or $24.29 per share. This net operating increase is
comprised primarily of: 1) net realized loss on portfolio transactions totaling
($13,516,857) and 2) total net unrealized gain on portfolio investments in the
amount of $18,893,048, totaling $5,376,191 or $27.46 per share.
7
For the fiscal year ended October 31, 2002, the Company posted a net
decrease in net assets resulting from operations of ($30,140,543) or ($153.99)
per share and paid distributions to shareholders during the period totaling
($53,598,940) or ($273.84) per share. The net loss from operations was the
result of several factors including: 1) net realized loss on portfolio
transactions totaling ($9,382,815) and 2) total net unrealized loss on portfolio
investments in the amount of ($22,085,704), totaling ($31,468,519) or ($160.77)
per share. The largest decline in value from October 31, 2001 to October 31,
2002 was related to the Company's private investment funds, which comprised
($17,590,120) or 80% of the change in unrealized depreciation. The Company also
had a net change in allowance for the management incentive fee of $1,356,372 or
$6.93 per share, a reduction in accumulated management incentive fees payable to
the Managing Investment Adviser, which partially offset the net realized and
unrealized losses.
For the fiscal year ended October 31, 2002, the Company's net assets were
$57,683,842, a decline of ($83,739,483) from net assets of $141,423,325 at
October 31, 2001. The Company's net asset value per common share was $294.71 at
October 31, 2002, down ($427.83) per share from the net asset value per common
share of $722.54 at October 31, 2001. This decline stemmed from the Company's
net decrease in net assets resulting from operations of ($153.99) per share as
well as a return of capital distribution in the amount of ($273.84) per share
paid to shareholders on October 31, 2002.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the fiscal year ended October 31, 2003, the Company had a net realized
loss on security transactions of ($13,516,857) and a net change in unrealized
appreciation/(depreciation) on investments of $18,893,048. The net realized loss
for the fiscal year was primarily the result of (i) the conclusion of the
assignment for the benefit of creditors of ReleaseNow, Inc., resulting in a
realized loss of ($7,890,854). 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, and (ii) the acquisition of the assets of Protogene Laboratories,
Inc. by Metrigen, Inc., resulting in a realized loss of ($7,262,497). The
Company, in concluding its sale of shares of common stock of Cardiac Science,
Inc. and Concur Technologies, Inc., also recorded realized gains of $538,331 and
$1,099,061 during the period, respectively.
The net change in appreciation for the fiscal year ended October 31, 2003
was principally the result of a reclassification of ReleaseNow, Inc. and
Protogene Laboratories, Inc. from unrealized depreciation to realized loss,
thereby increasing unrealized appreciation/(depreciation). In addition to these
increases, the Company's position in Curon Medical, Inc. increased in value by
$3,314,474.
For the fiscal year ended October 31, 2002, the Company had a ($31,468,519)
net realized and unrealized loss from investments, comprised of a ($9,382,815)
net realized loss on investments and a ($22,085,704) net change in unrealized
depreciation of investments as compared to a ($132,793,435) net realized and
unrealized loss from investments, comprised of a ($9,042,377) net realized loss
on investments and a ($123,751,058) net change in unrealized depreciation on
investments for the fiscal year ended October 31, 2001. The net unrealized
depreciation on investments for the fiscal year ended October 31, 2002 is
primarily the result of depreciation on a number of the Company's private
investment funds as well as write-downs taken during the year on MarketFirst
Software, Inc. (aka Pivotal Corporation) and Captura Software, Inc. (aka Concur
Technologies, Inc.). The net realized loss on investments for the fiscal year
ended October 31, 2002 is the result of the sales/mergers of several companies
collectively. The Company shares in PowerSmart, Inc., a private company, were
sold as part of a merger agreement between PowerSmart, Inc. and Microchip
Technology, Inc. The Company also sold the majority of its holding of Cardiac
Science, Inc., a public company, at a gain. On the other hand, the Company sold
its shares in Cross Media Marketing Corp., a public company, at a loss and
recorded realized losses on Concur Technologies, Inc. and Pivotal Corporation
due to merger transactions.
For the fiscal year ended October 31, 2001, the net unrealized depreciation
on investments is primarily the result of depreciation on the 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.
Application of Critical Accounting Policies
Under the supervision of the Company's Valuation and Audit Committees,
consisting of the independent directors of the Company, the Investment Advisers
make certain critical accounting estimates with respect to the valuation of
private portfolio investments. These estimates could have a material impact on
the presentation of the Company's financial condition because in total, they
currently represent 82.0% of the Company's net assets at October 31, 2003. For
the private investments held at October 31, 2003changes to these estimates, i.e.
changes in the valuations of these private investments, resulted in a $.4
million increase in net asset value.
8
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, both under the supervision of
the Board, and, in any event, not less frequently than quarterly. However, there
can be no assurance that such value will represent the return that might
ultimately be realized by the Company from the investments.
The valuation of the Company's private funds is based upon its pro-rata
share of the value of the assets of a private fund as determined by such private
fund, in accordance with its partnership agreement, constitutional or other
documents governing such valuation, on the valuation date. If such valuation
with respect to the Company's investments in private funds is not available by
reason of timing or other event on the valuation date, or are deemed to be
unreliable by the Investment Advisers, the Investment Advisers, under
supervision of the Board, shall determine such value based on its judgment of
fair value on the appropriate date, less applicable charges, if any.
The Investment Advisers also make estimates regarding discounts on market
prices of publicly traded securities where appropriate. For securities which
have legal, contractual or practical restrictions on transfer, a discount of 10%
to 40% from the public market price will be applied.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion includes forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements.
Equity Price Risk
A majority of the Company's investment portfolio consists of equity
securities in private companies and private investment funds, representing 82.0%
of the Company's net assets, 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 investment in the equity securities of one public company, Curon
Medical, Inc. (NASDAQ: CURN). At October 31, 2003, this publicly traded equity
security was valued at $4,243,099, representing 8.5% of the net assets. 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 $428,596. At October 31, 2002,
publicly traded equity securities were valued at $2,680,289, representing 4.7%
of the net assets. The increase in market value during the fiscal year ended
October 31, 2003 was principally the result of appreciation in the price of
shares of Curon Medical, Inc., which increased the total value of the holding by
$3,314,474. This was offset by sales of Cardiac Science, Inc. (NASDAQ: DFIB),
Concur Technologies, Inc. (NASDAQ: CNQR), and Pivotal Corporation (NASDAQ: PVTL,
TSX: PVT) during the fiscal year ended October 31, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Independent Auditors' Report
Portfolios of Investments at October 31, 2003 and October 31, 2002
Statements of Assets and Liabilities at October 31, 2003 and October 31, 2002
9
Statements of Operations for the years ended October 31, 2003, October 31, 2002
and October 31, 2001
Statements of Changes in Net Assets for the years ended October 31, 2003,
October 31, 2002 and October 31, 2001
Statements of Cash Flows for the years ended October 31, 2003, October 31, 2002
and October 31, 2001
Financial Highlights -- Selected Per Share Data and Ratios for the years ended
October 31, 2003, October 31, 2002, October 31, 2001, October 31, 2000 and
October 31, 1999
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.
10
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 "Company"), including the portfolios
of investments, as of October 31, 2003 and 2002, the related statements of
operations, changes in net assets and cash flows for each of the three years in
the period ended October 31, 2003, and the financial highlights for each of five
years in the period ended October 31, 2003. These financial statements and
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with 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, 2003 and 2002, by
correspondence with the custodian, the general partners of the private
investment funds and the private investment companies. 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, 2003 and 2002, the results
of its operations, its changes in net assets and its cash flows for each of the
three years in the period ended October 31, 2003, and the financial highlights
for each of the five years in the period ended October 31, 2003, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 6, 2004
11
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 2003
Ownership Acquisition Value
Percentage Date## (Note 1)
- ------------- ----------- -----------
PRIVATE INVESTMENT FUNDS #, @ -- 60.00%
1.83% Advanced Technology Ventures V, LP 09/98-10/02 $ 1,170,894
2.63% Brand Equity Ventures I, LP 03/98-10/01 554,765
1.37% Brentwood Associates III, LP 06/99-10/02 4,725,483
2.51% Broadview Capital Partners, LP 04/99-10/02 2,253,166
5.73% Commonwealth Capital Ventures II, LP + 01/99-10/02 1,925,198
3.96% Communications Ventures III, LP 11/98-05/00 801,800
1.53% Friedman, Fleischer & Lowe Capital Partners, LP 01/99-10/02 5,664,450
1.30% Mayfield X, LP 06/99-05/02 882,768
1.42% Mayfield X, Annex 07/02-10/02 223,002
8.71% Mid-Atlantic Venture Fund III, LP + 04/98-02/01 1,774,031
2.64% Morgenthaler Venture Partners V, LP 10/98-08/01 2,614,572
1.67% Quad-C Partners V, LP 04/98-10/02 5,177,939
1.34% Sevin Rosen Fund VI, LP 03/98-10/02 1,161,370
3.01% Trinity Ventures VI, LP 09/98-10/02 898,866
-----------
TOTAL PRIVATE INVESTMENT FUNDS (Cost $53,110,261) 29,828,304
-----------
Shares/Par
Value
- -------------
PRIVATE COMPANIES #, -- 22.04%
Preferred Stocks @ -- 17.17%
Educational Services -- 7.11%
75,059 Mosaica Education, Inc., Series C + 08/01 3,537,722
----------
Internet Services -- Business -- 10.06%
1,428,572 Clear Orbit, Inc., Series A + 06/00 5,000,013
2,388,345 Firstsource Corp., Series A + 02/00 --
----------
5,000,013
----------
Total Preferred Stock (Cost $20,119,425) 8,537,735
Promissory Notes -- 4.87%
Biotechnology -- 0.91%
$ 451,412 Metrigen, Inc., 6.00%, 9/01/2009 @ 07/03 451,412
----------
Educational Services -- 3.96%
$ 686,415 Mosaica Education, Inc. Bridge Notes, 13.00%, 8/24/2006+ 02/01-08/01 686,415
$ 1,025,748 Mosaica Education, Inc. (Advantage Schools), 0.00%, 8/24/2006 +@ 02/01-08/01 1,025,748
$ 256,437 Mosaica Education, Inc. (ASI Texas LLC), 0.00%, 8/24/2006+@ 02/01-08/01 256,437
----------
1,968,600
Internet Services -- Business -- 0.00%
$ 2,666,667 Firstsource Corp., Promissory Note, 8.00%, 6/30/2001 +@ 12/00 --
$ 750,000 Killerbiz, Inc., Promissory Note 8.00%, 6/10/2000 and 1/17/2001 +@ 12/99-08/00 --
----------
--
----------
2,420,012
Total Promissory Notes (Cost $5,836,679)
Warrants -- 0.00%
Biotechnology -- 0.00%
62,326 Metrigen, Inc.@ 07/03 --
----------
Total Warrants (Cost $0) --
----------
----------
TOTAL PRIVATE COMPANIES (Cost $25,956,104) 10,957,747
----------
12
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 2003 -- (continued)
Acquisition Value
Shares Date## (Note 1)
---------- ------------ -----------
PUBLIC COMPANIES @+#- 8.53%
Common Stock -- 8.53%
Medical Devices -- 8.53%
2,381,088 Curon Medical, Inc. 08/99 $ 4,243,099
-----------
Total Common Stock (Cost $6,124,144) 4,243,099
-----------
Warrants -- 0.00%
Medical Devices -- 0.00%
76,950 Curon Medical, Inc. 08/00 --
-----------
Total Warrants (Cost $0) --
-----------
TOTAL PUBLIC COMPANIES (Cost $6,124,144) 4,243,099
-----------
INVESTMENT COMPANIES -- 3.80%
1,887,983 Dreyfus Government Cash Management Fund (Cost $1,887,983) 1,887,983
-----------
TOTAL INVESTMENTS (Cost $87,078,492) -- 94.37% 46,917,133
OTHER ASSETS & LIABILITIES (NET) -- 5.63% 2,799,055
-----------
NET ASSETS -- 100.00% $49,716,188
-----------
- ----------
+ At October 31, 2003, the Company owned 5% or more of the company's
outstanding voting shares thereby making the company an affiliate as
defined by the Investment Company Act of 1940. Total market value of
affiliated securities owned at October 31, 2003 was $18,448,663.
# Restricted as to public resale. Acquired between March 1, 1998 and October
31, 2002. Total cost of restricted securities at October 31, 2003
aggregated $85,190,509. Total value of restricted securities owned at
October 31, 2003 was $45,029,150 or 90.57% of net assets.
## Required disclosure for restricted securities only.
@ Non-income producing security.
Notes to Financial Statements are an integral part of these Financial
Statements.
13
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2002
Princi pal Acquisition Coupon Value
Amount/Sh ares Date## Rate/Yield (Note 1)
- --------- ----- ----------- ---------- -----------
U.S. TREASURY AND GOVERNMENT AGENCY OBLIGATIONS -- 15.50%
$6,700,000 U.S. Treasury Bills, 11/29/02................................... 1.49% $ 6,692,235
2,000,000 Federal Home Loan Bank Discount Note, 11/13/02... 1.68% 1,998,880
250,000 Federal National Mortgage Association Discount Note, 11/20/02... 1.69% 249,777
-----------
TOTAL U.S. TREASURY AND GOVERNMENT AGENCY OBLIGATIONS (Cost
$8,940,892)..................................................... 8,940,892
-----------
PRIVATE INVESTMENT FUNDS #, @ -- 55.34%
1.83% Advanced Technology Ventures V, LP.............................. 09/98-10/02 1,659,204
2.63% Brand Equity Ventures I, LP..................................... 03/98-10/01 688,274
1.37% Brentwood Associates III, LP.................................... 06/99-10/02 4,705,305
2.51% Broadview Capital Partners, LP.................................. 04/99-10/02 2,567,801
5.73% Commonwealth Capital Ventures II, LLP+.......................... 01/99-10/02 2,019,502
3.96% Communications Ventures III, LP................................. 11/98-05/00 1,352,438
1.53% Friedman, Fleischer & Lowe, LLC, LP............................. 01/99-10/02 4,084,947
1.30% Mayfield X, LP.................................................. 06/99-05/02 1,455,489
1.42% Mayfield X, Annex............................................... 07/02-10/02 252,934
8.71% Mid-Atlantic Venture Fund III, LP+.............................. 04/98-02/01 2,337,915
2.64% Morgenthaler Venture Partners V, LP............................. 10/98-08/01 3,598,085
1.67% Quad-C Partners V, LP........................................... 04/98-10/02 5,008,933
1.34% Sevin Rosen Fund VI, LP......................................... 03/98-10/02 1,166,614
3.01% Trinity Ventures VI, LP......................................... 09/98-10/02 1,025,681
-----------
TOTAL PRIVATE INVESTMENT FUNDS
(Cost $55,078,679).............................................. 31,923,122
-----------
PRIVATE COMPANIES #, +, @ --18.21%
Common and Preferred Stocks -- 14.80%
Biotechnology -- 0.00%
7,100,000 Protogene Laboratories, Inc., Preferred Series B................ 12/99-08/01 --
Educational Services -- 6.13%
75,059 Mosaica Education, Inc., Preferred Series C..................... 08/01 3,537,722
-----------
Internet Services -- Business -- 8.67%
1,428,572 Clear Orbit, Inc................................................ 06/00 5,000,013
2,388,345 Firstsource Corp., Series A..................................... 02/00 --
1,676,229 Release Software Corp., Series D................................ 06/98 --
115,000 ReleaseNow, Inc., Series E...................................... 07/99 --
100,000 ReleaseNow, Inc., Series F...................................... 12/00 --
176,000 ReleaseNow, Inc., Series G...................................... 12/00 --
-----------
5,000,013
-----------
14
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments at October 31, 2002--(continued)
Principal Acquisition Coupon Value
Amount/Shares Date## Rate/Yield (Note 1)
- -------------- ----------- ---------- -----------
PRIVATE COMPANIES #, +, @ -- (continued)
Promissory Notes --3.41%
Biotechnology -- 0.00%
$2,140,000 Protogene Laboratories, Inc., Convertible Promissory
Notes................................................ 08/01-01/02 4.25% $ --
EducationalServices -- 3.41%
686,415 Mosaica Education, Inc. Bridge Notes................. 02/01-08/01 13.00% 686,415
1,025,748 Mosaica Education, Inc. (Advantage Schools)
Promissory Note...................................... 02/01-08/01 0.00% 1,025,748
256,437 Mosaica Education, Inc. (ASI Texas LLC)
Promissory Note...................................... 02/01-08/01 0.00% 256,437
-----------
1,968,600
Internet Services--Business--0.00%
750,000 Killerbiz, Inc., Promissory Note..................... 12/99-08/00 8.00% --
133,333 ReleaseNow, Inc., Promissory Note.................... 07/01-10/01 16.00% --
133,333 ReleaseNow, Inc., Promissory Note.................... 08/01-10/01 16.00%
--
TOTAL PRIVATE COMPANIES
(Cost $41,281,397)................................. 10,506,335
-----------
PUBLIC COMPANIES #, @ -- 4.65%
Common Stock -- 4.65%
Medical Devices -- 4.08%
840,484 Cardiac Science, Inc................................. 09/01 1,421,986
2,381,088 Curon Medical, Inc. +................................ 08/99 928,624
2,350,610
Internet Services--Business--0.57%
161,751 Concur Technologies, Inc............................. 10/02 291,152
73,278 Concur Technologies, Inc., Escrow.................... 10/02 --
94,430 Pivotal Corporation.................................. 10/02 38,527
-----------
329,679
Warrants -- 0.00%
Medical Devices-- 0.00%
76,950 Curon Medical, Inc................................... 08/00 --
-----------
TOTAL PUBLIC COMPANIES
(Cost $7,804,077).................................... 2,680,289
-----------
INVESTMENT COMPANIES -- 1.21%
696,456 Dreyfus Government Cash Management Fund
Institutional Shares (Cost $696,456)........ 696,456
-----------
TOTAL INVESTMENTS (Cost $113,801,501)--94.91%......................... 54,747,094
OTHER ASSETS & LIABILITIES (NET)-- 5.09%.............................. 2,936,748
-----------
NET ASSETS-- 100.00%.................................................. $57,683,842
===========
+ At October 31, 2002 the Fund owned 5% or more of the company's outstanding
shares thereby making the Company an affiliate as defined by the Investment
Company Act of 1940. Total market value of affiliated securities owned at
October 31, 2002 was $15,792,376.
# Restricted as to public resale. Acquired between January 1, 1998 and
October 31, 2002. Total cost of restricted securities at October 31, 2002
aggregated $104,164,153. Total market value of restricted securities owned
at October 31, 2002 was $45,109,746 or 78.20% of net assets.
## Required disclosure for restricted securities only.
@ Non-Income Producing Security.
Notes to Financial Statements are an integral part of these Financial
Statements.
15
Excelsior Private Equity Fund II, Inc.
Statements of Assets and Liabilities
October 31,
---------------------------
2003 2002
------------ ------------
ASSETS:
Unaffiliated Issuers, at value (Cost $46,764,966 and
$57,623,852 respectively) ....................... $ 28,468,470 $ 38,954,718
Affiliated Issuers, at value (Cost $40,313,526 and
$56,177,649 respectively) ....................... 18,448,663 15,792,376
------------ ------------
Investments, at value (Cost $87,078,492 and
$113,801,501 respectively) (Note 1) ............. $ 46,917,133 $ 54,747,094
Cash ............................................... 2,852,110 --
Escrow receivable .................................. -- 1,817,148
Receivable from investment advisor ( Note 2) ....... 85,833 1,441,952
Interest receivable ................................ 196,706 109,702
Other assets ....................................... 1,292 52,616
------------ ------------
Total Assets .................................... 50,053,074 58,168,512
LIABILITIES:
Management fees payable (Note 2) ................... 181,784 191,628
Professional fees payable .......................... 60,000 140,000
Directors' fees payable (Note 2) ................... 66,000 60,000
Administration fees payable (Note 2) ............... 14,318 30,314
Accrued expenses and other payables ................ 14,784 62,728
------------ ------------
Total Liabilities ............................... 336,886 484,670
------------ ------------
NET ASSETS ............................................ $ 49,716,188 $ 57,683,842
============ ============
NET ASSETS consist of:
Accumulated net realized (loss) on investments ..... $(27,414,222) $(22,504,599)
Net unrealized (depreciation) on investments ....... (40,161,359) (59,054,407)
Par value .......................................... 1,957 1,957
Paid-in capital in excess of par value ............. 117,289,812 139,240,891
------------ ------------
Total Net Assets ...................................... $ 49,716,188 $ 57,683,842
============ ============
Shares of Common Stock Outstanding ($0.01 par
value, 200,000 authorized) ...................... 195,730 195,730
NET ASSET VALUE PER SHARE ............................. $ 254.00 $ 294.71
============ ============
Notes to Financial Statements are an integral part of these Financial
Statements.
16
Excelsior Private Equity Fund II, Inc.
Statements of Operations
Year Ended October 31,
-------------------------------------------
2003 2002 2001
------------ ------------ -------------
INVESTMENT INCOME:
Interest income from unaffiliated investments .......................... $ 128,156 $ 728,268 $ 782,580
Interest income from affiliated investments ............................ 89,186 675,180 359,245
Dividend income ........................................................ 22,046 74,065 --
------------ ------------ -------------
Total Income ........................................................ 239,388 1,477,513 1,141,825
EXPENSES:
Managing investment adviser fees (Note 2) .............................. 721,837 1,214,443 2,531,868
Administration fees (Note 2) ........................................... 169,766 163,130 58,000
Legal fees ............................................................. 92,310 142,176 277,000
Audit fees ............................................................. 43,150 72,106 88,000
Directors' fees and expenses (Note 2) .................................. 66,000 66,011 82,000
Printing fees .......................................................... 26,680 26,680 26,680
Interest expense ....................................................... -- 4,675 --
Miscellaneous expenses ................................................. 63,757 59,934 110,553
------------ ------------ -------------
Total Expenses ...................................................... 1,183,500 1,749,155 3,174,101
------------ ------------ -------------
Expenses reimbursed by Managing Investment Adviser (Note 2) ............ (322,717) (243,246) (212,131)
------------ ------------ -------------
Net Expenses ........................................................ 860,783 1,505,909 2,961,970
------------ ------------ -------------
NET INVESTMENT (LOSS) ..................................................... (621,395) (28,396) (1,820,145)
------------ ------------ -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 1)
Net realized gain (loss) on unaffiliated investments ................... 1,098,164 (8,199,176) 2,662,786
Net realized (loss) on affiliated investments .......................... (14,615,021) (1,183,639) (11,705,163)
Net change in unrealized appreciation (depreciation) on investments .... 18,893,048 (22,085,704) (123,751,058)
------------ ------------ -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS .................... 5,376,191 (31,468,519) (132,793,435)
------------ ------------ -------------
Net change in allowance for management incentive fee ................... -- 1,356,372 18,331,699
------------ ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ........... $ 4,754,796 $(30,140,543) $(116,281,881)
============ ============ =============
Notes to Financial Statements are an integral part of these Financial
Statements.
17
Excelsior Private Equity Fund II, Inc.
Statements of Changes in Net Assets
Year Ended October 31,
-------------------------------------------
2003 2002 2001
------------ ------------ -------------
OPERATIONS:
Net investment loss....................................... $ (621,395) $ (28,396) $ (1,820,145)
Net realized loss on investments.......................... (13,516,857) (9,382,815) (9,042,377)
Net change in unrealized appreciation (depreciation)
on investments......................................... 18,893,048 (22,085,704) (123,751,058)
Net change in allowance for management incentive fee...... -- 1,356,372 18,331,699
------------ ------------ -------------
Net increase (decrease) in net assets resulting from
operations............................................. 4,754,796 (30,140,543) (116,281,881)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... -- (1,596,637) --
In excess of net investment income........................ -- (4,385,185) --
Return of capital......................................... (12,722,450) (47,617,118) --
------------ ------------ -------------
Total distributions.................................... (12,722,450) (53,598,940) --
------------ ------------ -------------
Net decrease in net assets................................... (7,967,654) (83,739,483) (116,281,881)
NET ASSETS:
Beginning of year......................................... 57,683,842 141,423,325 257,705,206
------------ ------------ -------------
End of year (including undistributed net investment
income of $0, $0, and $2,230,182 respectively)......... $ 49,716,188 $ 57,683,842 $ 141,423,325
============ ============ =============
Notes to Financial Statements are an integral part of these Financial
Statements.
18
Excelsior Private Equity Fund II, Inc.
Statements of Cash Flows
Year Ended October 31,
-------------------------------------------
2003 2002 2001
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations... $ 4,754,796 $(30,140,543) $(116,281,881)
Adjustments to reconcile net increase (decrease) in net a assets
resulting from operations to net cash provided by operating
activities:
Net change in unrealized depreciation (appreciation) on
investments.................................................... (18,893,048) 22,085,704 123,751,058
Proceeds received from the sale of investments and distributions
received from private investment funds......................... 7,273,935 45,809,502 29,737,103
Net realized loss on investments.................................. 13,516,857 9,382,815 9,042,377
Purchases of investments.......................................... -- (16,933,708) (30,521,436)
Net change in short-term investments.............................. 7,749,365 16,509,760 7,903,391
Decrease (increase) in receivable from investment adviser......... 1,356,119 6,281,160 (7,723,112)
Decrease (increase) in interest receivable........................ (87,004) (89,971) 83,322
Decrease (increase) in other assets............................... 51,324 123,070 (16,560)
Decrease in incentive fee payable................................. -- -- (5,059,389)
Decrease in deferred incentive fee payable........................ -- -- (9,714,201)
Increase (decrease) in management fee payable..................... (9,844) 191,628 (928,875)
Increase (decrease) in directors' fees payable.................... 6,000 11 (6,500)
Increase (decrease) in other expenses payable..................... (143,940) 27,730 84,311
------------ ------------ -------------
Net cash provided by operating activities......................... 15,574,560 53,247,158 349,608
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to shareholders...................................... (12,722,450) (53,598,940) --
----------- ------------ -------------
Net cash used by financing activities............................. (12,722,450) (53,598,940) --
----------- ------------ -------------
Net increase (decrease) in cash................................... 2,852,110 (351,782) 349,608
Cash at beginning of year........................................... -- 351,782 2,174
------------ ------------ -------------
Cash at end of year................................................. $ 2,852,110 $ -- $ 351,782
============ ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest............................ $ -- $ 4,675 $ --
============ ============ =============
Notes to Financial Statements are an integral part of these Financial
Statements.
19
Excelsior Private Equity Fund II, Inc.
Financial Highlights -- Selected Per Share Data and Ratios
Per Share Operating Performance (1)
Year Ended October 31,
-------------------------------------------------------
2003 2002 2001 2000 1999
------- -------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF YEAR $294.71 $ 722.54 $1,316.64 $1,252.27 $1,033.37
------- -------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss)................... (3.17) (0.15) (9.30) (2.36) 21.29
Net Realized and Unrealized Gain (Loss) on
Investments................................. 27.46 (160.77) (678.46) 436.36 291.72
Net Change in Allowance for Management
Incentive fee............................... -- 6.93 93.66 (45.66) (54.93)
------- -------- --------- --------- ---------
Total from Investment Operations............ 24.29 (153.99) (594.10) 388.34 258.08
------- -------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income.......................... -- (8.16) -- -- (39.18)
In Excess of Net Investment Income............. -- (22.40) -- -- --
Net Realized Gain.............................. -- -- -- (270.37) --
Paid-in Capital................................ (65.00) (243.28) -- (53.60) --
------- -------- --------- --------- ---------
Total Distributions......................... (65.00) (273.84) -- (323.97) (39.18)
------- -------- --------- --------- ---------
NET ASSET VALUE, END OF YEAR...................... $254.00 $ 294.71 $ 722.54 $1,316.64 $1,252.27
======= ======== ========= ========= =========
TOTAL NET ASSET VALUE RETURN (2).................. 8.24% (21.31)% (44.58)% 35.89% 25.94%
======= ======== ========= ========= =========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (Thousands)............ $49,716 $ 57,684 $ 141,423 $ 257,705 $ 245,107
Ratio of Net Operating Expenses to Average
Net Assets.................................. 1.55% 1.29% 1.48% 1.55% 1.26%
Ratio of Gross Operating Expenses to
Average Net Assets(3)....................... 2.13% 1.50% 1.59% 1.55% 1.26%
Ratio of Net Investment Income (Loss) to
Average Net Assets.......................... (1.12)% (0.02)% (0.91)% (0.15)% 1.86%
Portfolio Turnover Rate........................ 0% 21% 11% 14% 40%
(1) For a share outstanding throughout each year.
(2) Total investment return based on per share net asset value reflects the
effects of changes in net asset value based on the performance of the
Company during the year, and assumes dividends and distributions, if any,
were reinvested. The Company's shares were issued in a private placement
and are not traded. Therefore, market value total investment return is not
presented.
(3) Expense ratio before waiver of fees and reimbursement of expenses by
Managing Investment Adviser.
Notes to Financial Statements are an integral part of these Financial
Statements.
20
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2003
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 or "BDC" under the Investment Company
Act of 1940, as amended.
As a BDC, the Company must be primarily engaged in the business of
furnishing capital and making available managerial assistance to companies that
generally do not have ready access to capital through conventional financial
channels. The Company's investment objective is to achieve long-term capital
appreciation primarily by investing in private later-stage venture capital
companies and private middle-market companies in which the equity is closely
held by company founders, management and/or a limited number of institutional
investors and, to a lesser extent, privately offered venture capital, buyout and
private equity funds managed by third parties which have attractive investment
return prospects and offer compelling strategic benefits to the Company. The
Company does not have the right to demand that such any investee securities be
registered.
The following is a summary of the Company's significant accounting
policies. Such policies are in conformity with generally accepted accounting
principles in the United States 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. Certain
amounts in the prior years' financial statements have been reclassified to
conform with the current year's financial statements.
(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 or both under the supervision of the Board of
Directors pursuant to certain valuation procedures summarized below.
Securities having remaining maturities of 60 days or less from the date of
purchase 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" 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 investee such as
earnings, net worth, reliable private sale prices of the investee's
securities, the market prices for similar securities of comparable
companies, an assessment of the investee'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 under the supervision of
the Board of Directors and, in any event, not less frequently than
21
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.
The valuation of the Company's Private Investment Funds is based upon
its pro-rata share of the value of the net assets of a Private Investment
Fund as determined by such Private Investment 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 Investment Funds is not available by
reason of timing or other event on the valuation date, or are deemed to be
unreliable by the Managing Investment Adviser, the Managing Investment
Adviser, under the supervision of the Board of Directors, shall determine
such value based on its judgment of fair value on the appropriate date,
less applicable charges, if any. The valuation of the Company's Private
Investment Funds also includes capital contributions to such Private
Investment Funds made in advance of remaining capital commitments being
called by the Private Investment Funds' respective general partners. At
October 31, 2003 and October 31, 2002, these contributions paid in advance
totaled $4,679,968 and $6,869,447, respectively, and are included in
investments on the statement of assets and liabilities. These contributions
paid in advance are non-income producing.
At October 31, 2003 and October 31, 2002, market quotations were not
readily available for securities valued at $40,786,051 or 82.04% of net
assets and $42,429,457 or 73.6% of net assets, respectively. Such
securities were valued by the Managing Investment Adviser under the
supervision of the Board of Directors. Because of the inherent uncertainty
of valuation, the estimated values may differ significantly from the values
that would have been used had a ready market for the securities existed,
and the differences could be material.
(b) Security transactions and investment income:
Security transactions are recorded on a trade date basis. Realized
gains and losses on investments sold are recorded on the basis of
identified cost. Interest income, adjusted for amortization of premiums and
discounts on investments, is earned from settlement date and is recorded on
the accrual basis. Dividend income is recorded on the ex-dividend date.
(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 receipt 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 counterparty 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 and may be reclassified within the capital accounts
based on their federal tax basis treatment. At October 31, 2003 and October
31, 2002, the Company has reclassified certain amounts of net investment
loss and net realized loss on investments to paid-in capital due to net
operating losses and investment partnership adjustments.
The Company has unused capital loss carryforwards of approximately
$40,794,739 available for income tax purposes, to be applied against future
net realized gains, if any, after October 31, 2003. If not applied,
$8,602,181 of the carryover will expire in 2009, $13,721,421 will expire in
2010, and $18,471,137 will expire in 2011. At October 31, 2002, the Company
had an unused capital loss carryforward of approximately $22,323,602
available
22
for income tax purposes, to be applied against future net realized gains,
if any, after October 31, 2002. If not applied, $8,602,181 of the carryover
will expire in 2009 and $13,721,421 will expire in 2010.
The tax character of distributions paid may differ from the character
of distributions shown on the statement of changes in net assets due to tax
treatment of certain distributions. The tax character of distributions paid
during the fiscal years ended October 31, 2003 and 2002 were as follows:
Year Ended October 31,
-------------------------
2003 2002
----------- -----------
Ordinary Income $ -- $ 5,981,822
Return of Capital 12,722,450 47,617,118
----------- -----------
Total $12,722,450 $53,598,940
----------- -----------
The cost of the Private Investment Funds for federal tax purposes is
based on amounts reported to the Company on Schedule K-1 from the Private
Investment Funds. As of October 31, 2003 and October 31, 2002, the Company
had not received information to determine the tax cost of the Private
Investment Funds as of October 31, 2003, and October 31, 2002, and
therefore to determine the Company's unrealized gain or loss on a tax
basis. At October 31, 2003, the cost of all other investments for federal
tax purposes was $33,968,231, and those investments had a tax basis net
unrealized depreciation of $16,879,402, consisting of gross appreciation of
$13 and gross depreciation of $16,879,415. At October 31, 2002, the cost of
all other non-Private Investment Fund investments for federal tax purposes
was $58,722,822, and those investments had a tax basis net unrealized
depreciation of $35,898,850, consisting of gross unrealized appreciation of
$184,084 and gross unrealized depreciation of $36,082,934.
Note 2 -- Investment Advisory Fee, Administration Fee and Related Party
Transactions
Prior to June 1, 2003, and 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") served 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 Private
Companies or Private Investment 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
Private Companies or Private Investment Funds. Prior to June 1, 2003, and
pursuant to a sub-advisory agreement (the "Sub-Advisory Agreement") among the
Company, U.S. Trust NY, U.S. Trust and U.S. Trust Company, N.A., U.S. Trust
Company, N.A. served as the investment sub-adviser to the Company and received
an investment management fee from the Managing Investment Adviser. As of October
31, 2003 and October 31, 2002, $181,784 and $191,628, respectively, were payable
to the Managing Investment Adviser.
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 Investment 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. During the years ended October 31,
2003, 2002, and 2001, respectively, the Company recouped $0, $1,356,372, and
$18,331,699 of incentive fees which had been paid by the Company to the Managing
Investment Adviser in prior years.
U.S. Trust NY is a New York state-chartered bank and trust company and a
member bank of the Federal Reserve System. Effective June 1, 2003, U.S. Trust
merged into U.S. Trust Company, N.A., a nationally chartered bank. Pursuant to
an assumption agreement dated June 1, 2003, U.S. Trust Company, N.A. assumed the
duties and obligations of U.S. Trust under the Agreement. Pursuant to a
termination agreement among the Company, U.S. Trust NY, U.S. Trust and U.S.
Trust Company, N.A., the Sub-Advisory Agreement terminated on June 1, 2003. As a
result, U.S. Trust
23
Company, N.A., acting through its registered investment advisory division, U.S.
Trust Company, N.A. Asset Management Division, now serves with U.S. Trust NY,
acting through its registered investment advisory division, U.S. Trust - New
York Asset Management Division, as Managing Investment Adviser to the Company.
The merger had no impact on the management or operations of the investment
advisory functions performed for the Company, and did not constitute a change in
control. U.S. Trust NY and U.S. Trust Company, N.A. are each 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.
PFPC, Inc. ("PFPC") provides administrative and accounting services to the
Company pursuant to an Administration and Accounting Services Agreement. PFPC
Trust Company provides custodian services to the Company pursuant to a Custodian
Services Agreement. Also, PFPC provides 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 average net assets. This
reimbursement amounted to $322,717, $243,246, and $212,131 for the years ended
October 31, 2003, 2002, and 2001, respectively.
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.
During the year ended October 31, 2003, the Company executed a sale of
94,430 shares of Pivotal Corporation common stock through Charles Schwab
Strategic Trading Group ("CSSTG"), an affiliate of the Company. As part of this
transaction, CSSTG received $1,889 in brokerage commissions.
3. Purchases and Sales of Securities
Excluding short-term investments, the Company's purchases and sales of
securities for the years ended October 31, 2003, October 31, 2002, and October
31, 2001 were as follows:
Year Ended
October 31, Purchases ($) Proceeds ($)
- ----------- ------------- ------------
2003 -- 5,456,787
2002 16,933,708 43,706,387
2001 18,570,218 31,635,084
Note 4 -- Transactions with Affiliated Portfolio Companies
An affiliated company is a company in which the Company has ownership of
over 5% of the voting securities. No dividend income was received from
affiliated companies during the years ended October 31, 2003 and 2002.
Transactions with companies which are or were affiliates are as follows:
Shares/
Principal
Amount/ For the Year Ended October 31, 2003
Percentage -------------------------------------------------
Held at Sales/
October October 31, Conversion Conversion Realized
Name of Investment 31, 2002 2002 Value Cost Proceeds Interest Gain (Loss)
- ------------------ ---------- ----------- ---------- ---------- -------- ------------
Affiliated Companies
Cardiac Science, Inc., Common Stock* 840,484 $1,421,986 $-- $1,776,246 $ -- $ 538,331
Mid- Atlantic Venture Fund III, LP 8.71% 2,337,915 -- 87,418 -- --
Shares/
Principal
Amount/
Percentage
Held at
October October 31, 2003
Name of Investment 31, 2003 Value (Note 1)
- ------------------ ---------- ----------------
Affiliated Companies
Cardiac Science, Inc., Common Stock* -- $ --
Mid- Atlantic Venture Fund III, LP 8.71% 1,774,031
24
Clear Orbit Inc., Preferred Series A 1,428,572 5,000,013 -- -- -- --
Commonwealth Capital Ventures II, LLP 5.73% 2,019,502 -- -- -- --
Curon Medical ,Inc., Common Stock 2,381,088 928,624 -- -- -- --
Curon Mediical ,Inc., Warrants 76,950 -- -- -- -- --
Firstsource Corp., Preferred Series A 2,388,345 -- -- -- -- --
Firstsource Corp., Promissory Note 8.00%, 6/30/2001 $2,666,667 -- -- -- -- --
Killerbiz, Inc., Promissory Note 8.00%, 6/10/2000
and 1/17/2001 $ 750,000 -- -- -- -- --
Mosaica Education, Inc., Preferred Series C 75,059 3,537,722 -- -- -- --
Mosaica Education, Inc. Bridge Notes, 13.00%,
8/24/2006 $ 686,415 686,415 -- -- 89,196 --
Mosaica Education, Inc. (Advantage Schools),
0.00%, 8/24/2006 $1,025,748 1,025,748 -- -- -- --
Mosaica Education, Inc. (ASI Texas LLC ), 0.00%,
8/24/2006 $ 256,437 256,437 -- -- -- --
Protogene Laboratories, Inc., Preferred Series B 7,100,000 -- -- -- -- (5,122,497)
Protogene Laboratories, Inc., Promissory Note $2,140,000 -- -- -- -- (2,140,000)
ReleaseNow, Inc. /Release Software Corp. Series D 1,676,229 -- -- -- -- (5,850,039)
ReleaseNow, Inc., Preferred Series E 115,000 -- -- -- -- (460,000)
ReleaseNow, Inc., Preferred Series F 100,000 -- -- -- -- (500,000)
ReleaseNow, Inc., Preferred Series G 176,000 -- -- -- -- (880,000)
ReleaseNow, Inc., Promissory Note $ 133,333 -- -- 65,850 -- (67,483)
ReleaseNow, Inc., Promissory Note $ 133,333 -- -- -- -- (133,333)
----------- --- ---------- ------- ------------
Total Non Controlled Affiliates $17,214,362 $-- $1,929,514 $89,196 $(14,615,021)
Clear Orbit Inc., Preferred Series A 1,428,572 5,000,013
Commonwealth Capital Ventures II, LLP 5.73% 1,925,198
Curon Medical ,Inc., Common Stock 2,381,088 4,243,099
Curon Mediical ,Inc., Warrants 76,950 --
Firstsource Corp., Preferred Series A 2,388,345 --
Firstsource Corp., Promissory Note 8.00%, 6/30/2001 2,666,667 --
Killerbiz, Inc., Promissory Note 8.00%, 6/10/2000
and 1/17/2001 -- --
Mosaica Education, Inc., Preferred Series C 75,059 3,537,722
Mosaica Education, Inc. Bridge Notes, 13.00%,
8/24/2006 $ 686,415 686,415
Mosaica Education, Inc. (Advantage Schools),
0.00%, 8/24/2006 $1,025,748 1,025,748
Mosaica Education, Inc. (ASI Texas LLC ), 0.00%,
8/24/2006 $ 256,437 256,437
Protogene Laboratories, Inc., Preferred Series B -- --
Protogene Laboratories, Inc., Promissory Note -- --
ReleaseNow, Inc. /Release Software Corp. Series D -- --
ReleaseNow, Inc., Preferred Series E -- --
ReleaseNow, Inc., Preferred Series F -- --
ReleaseNow, Inc., Preferred Series G -- --
ReleaseNow, Inc., Promissory Note -- --
ReleaseNow, Inc., Promissory Note -- --
-----------
Total Non Controlled Affiliates $18,448,663
* Cardiac Science, Inc. was an affiliated company prior to October 31, 2002
but was not an affiliated company as of October 31, 2002.
For the Year Ended October 31, 2002
---------------------------------------
Realized
Affiliate Interest Gain (Loss)
- --------------------------- -------- -----------
Cardiac Science, Inc. $560,867 $ 5,207,589
PowerSmart, Inc. 8,272 7,708,839
Captura Software, Inc. -- (5,799,560)
Mosaica Education, Inc. 106,041 --
Marketfirst Software, Inc. -- (9,255,036)
Reed Elsevier PLC (fka
Classroom Connect, Inc.) -- 954,529
-------- -----------
Total $675,180 $(1,183,639)
-------- -----------
- ----------
* Escrow receivable
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. As of October 31,
2003 (the end of the period covered by this report), the Company's principal
executive officers and principal financial officer evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e))and 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.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls over financial reporting 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 over financial reporting. Accordingly, no
corrective actions were required or undertaken.
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 2004 Annual Meeting of Stockholders to be held on March 26,
2004, which will be filed with the Securities and Exchange Commission not later
than 120 days after October 31, 2003, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
25
The information set forth under the captions "Election of Directors"
and "Additional Information--Officers" in the Company's definitive Proxy
Statement for the 2004 Annual Meeting of Stockholders to be held on March 26,
2004, which will be filed with the Securities and Exchange Commission not later
than 120 days after October 31, 2003, 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 2004 Annual Meeting of Stockholders to be held on March
26, 2004, which will be filed with the Securities and Exchange Commission not
later than 120 days after October 31, 2003, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not Applicable.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The financial statements listed in Item 8, "Financial Statements
and Supplementary Data," beginning on page 10 are filed as part
of this report.
2. Financial Statement Schedules
The financial statement schedules listed in Item 8, "Financial
Statements and Supplementary Data," beginning on page 10 are
filed as part of this report.
3. Exhibits
Exhibit
Number Description
------- -----------
(3)(i) Articles of Incorporation of the Company/1/
(3)(ii) By-Laws of the Company/1/
(10.1) Form of Management Agreement/2/
(10.2) Form of Transfer Agency and Custody Agreement/3/
(10.3) Investment Sub-Advisory Agreement dated as of December 21,
2001, among the Company, United States Trust Company of New
York, U.S. Trust Company and U.S. Trust Company, N.A./4/
/1/ Incorporated by reference to the Company's Registration Statement on Form
N-2, (File No. 333-23811), filed with the Securities Exchange Commission
on March 24, 1997.
/2/ Incorporated by reference to the Company's definitive Proxy Statement for
the 2000 Annual Meeting of Shareholders, filed with the Securities and
Exchange Commission on May 25, 2000.
/3/ Incorporated by reference to the Company's Registration Statement on Form
N-2/A (File No. 333-23811), filed with the Securities and Exchange
Commission on May 13, 1997.
26
(10.4) Administration and Accounting Services Agreement dated
January 1, 2002, between the Company and PFPC Inc./4/
(10.5) Custodian Services Agreement dated January 1, 2002, between
the Company and PFPC Trust Company./4/
(10.6) Transfer Agency Services Agreement dated February 1, 2002,
between the Company and PFPC Inc./4/
(14) Code of Ethics
(31.1) Certification of Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.3) Certification of Treasurer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32.1) 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.
/4/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on March 18, 2002.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
Date: January 29, 2004 By: /S/ DOUGLAS A. LINDGREN
-------------------------------------------
Douglas A. Lindgren, Co-Chief Executive Officer
and Chief Investment Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ DAVID I. FANN President and Co-Chief Executive Officer January 29, 2004
- -------------------------- (principal executive officer)
David I. Fann
/s/ DOUGLAS A. LINDGREN Co-Chief Executive Officer and
- -------------------------- Chief Investment Officer January 29, 2004
Douglas A. Lindgren (principal executive officer)
/S/ ROBERT F. AUFENANGER Treasurer January 29, 2004
- -------------------------- (principal financial and accounting officer)
Robert F. Aufenanger
/S/ JOHN C. HOVER II Chairman of the Board and Director January 29, 2004
- --------------------------
John C. Hover II
/S/ GENE M. BERNSTEIN Director January 29, 2004
- --------------------------
Gene M. Bernstein
/S/ STEPHEN V. MURPHY Director January 29, 2004
- --------------------------
Stephen V. Murphy
/S/ VICTOR F. IMBIMBO, JR. Director January 29, 2004
- --------------------------
Victor F. Imbimbo, Jr.
28