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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended January 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________________to________________
Commission file number 000-22277
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EXCELSIOR PRIVATE EQUITY FUND II, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 22-3510108
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
225 High Ridge Road Stamford, CT 06905
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (302) 352-4400
114 West 47th Street, New York, NY 10036-1532
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed
Since last Report.
----------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act).
Yes [_] No [X]
As of March 1, 2004, there were 195,730 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
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EXCELSIOR PRIVATE EQUITY FUND II, INC.
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause Excelsior Private Equity Fund II, Inc.'s (the
"Company's") actual results to differ from future performance suggested herein.
The interim financial statements contained in this quarterly report 10Q
have been reviewed by Ernst & Young LLP, the Company's independent public
accountants.
INDEX PAGE NO.
------------------------------------------------------- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Portfolios of Investments as of January 31, 2004 and
October 31, 2003 2
Statements of Assets and Liabilities at January 31,
2004 and October 31, 2003 6
Statements of Operations for the three-month periods
ended January 31, 2004 and January 31, 2003 7
Statements of Changes in Net Assets for the three-month
periods ended January 31, 2004 and January 31, 2003 8
Statements of Cash Flows for the three-month periods
ended January 31, 2004 and January 31, 2003 9
Financial Highlights at January 31, 2004 and
January 31, 2003 10
Notes to Financial Statements 11
Independent Accountants' Review Report 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments (Unaudited)
January 31, 2004
-----------------------------
% of Net
Value Assets
------------- -------------
PORTFOLIO STRUCTURE
- -------------------
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS $ 2,799,335 5.32%
INVESTMENT COMPANIES 1,887,983 3.59%
PRIVATE INVESTMENT FUNDS 27,720,809 52.70%
PORTFOLIO COMPANIES 18,374,836 34.94%
------------- -------------
TOTAL INVESTMENTS 50,782,963 96.55%
OTHER ASSETS & LIABILITIES (NET) 1,815,702 3.45%
------------- -------------
NET ASSETS $ 52,598,665 100.00%
============= =============
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments
October 31, 2003
-----------------------------
% of Net
Value Assets
------------- -------------
PORTFOLIO STRUCTURE
- -------------------
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS $ -- 0.00%
INVESTMENT COMPANIES 1,887,983 3.80%
PRIVATE INVESTMENT FUNDS 29,828,304 60.00%
PORTFOLIO COMPANIES 15,200,846 30.57%
------------- -------------
TOTAL INVESTMENTS 46,917,133 94.37%
OTHER ASSETS & LIABILITIES (NET) 2,799,055 5.63%
------------- -------------
NET ASSETS $ 49,716,188 100.00%
============= =============
Notes to Financial Statements are an integral part of
these Financial Statements.
1
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments January 31, 2004 (Unaudited)
Acquisition Value
Par Value Date## (Note 1)
- ------------ ----------- ------------
AGENCY OBLIGATIONS -- 5.32%
$ 2,799,335 Federal Home Loan Discount Notes, 0.95%, 2/09/2004
(Cost $2,799,335) $ 2,799,335
PRIVATE INVESTMENT FUNDS #, @ -- 52.70%
Ownership
Percentage
- ------------
1.71% Advanced Technology Ventures V, LP 9/98-10/02 1,168,025
2.63% Brand Equity Ventures I, LP 03/98-10/01 555,283
0.96% Brentwood Associates III, LP 06/99-10/02 4,078,945
1.98% Broadview Capital Partners, LP 04/99-10/02 2,253,166
4.89% Commonwealth Capital Ventures II, LP + 01/99-10/02 1,921,311
3.96% Communications Ventures III, LP 11/98-05/00 808,203
1.53% Friedman, Fleischer & Lowe Capital Partners, LP 01/99-10/02 4,701,850
1.30% Mayfield X, LP 06/99-05/02 882,768
0.62% 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 2,665,024
1.67% Quad-C Partners V, LP 04/98-10/02 4,501,859
1.34% Sevin Rosen Fund VI, LP 03/98-10/02 1,288,476
2.12% Trinity Ventures VI, LP 09/98-10/02 898,866
------------
TOTAL PRIVATE INVESTMENT FUNDS (Cost $50,794,297) 27,720,809
------------
Shares/Par
Value
- ------------
PRIVATE COMPANIES # -- 20.84%
Preferred Stocks @ -- 16.24%
Educational Services -- 6.73%
75,059 Mosaica Education, Inc., Series C + 08/01 3,537,722
------------
Internet Services -- Business -- 9.51%
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 -- 4.60%
Biotechnology -- 0.86%
$ 451,412 Metrigen, Inc., 6.00%, 9/01/2009 @ 07/03 451,412
------------
Educational Services -- 3.74%
$ 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., 8.00%, 6/30/2001 +@ 12/00 --
$ 750,000 Killerbiz, Inc., 8.00%, 6/10/2000 and 1/17/2001 +@ 12/99-08/00 --
------------
--
------------
Total Promissory Notes (Cost $5,836,679) 2,420,012
2
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments January 31, 2004 (Unaudited) -- (continued)
Acquisition Value
Shares Date## (Note 1)
- ------------ ----------- ------------
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
------------
PUBLIC COMPANIES @+# -- 14.10%
Common Stock -- 14.10%
Medical Devices -- 14.10%
2,381,088 Curon Medical, Inc.* 08/99 7,417,089
------------
Total Common Stock (Cost $6,124,144) 7,417,089
------------
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) 7,417,089
------------
INVESTMENT COMPANIES -- 3.59%
1,887,983 Dreyfus Government Cash Management Fund (Cost $1,887,983) 1,887,983
------------
TOTAL INVESTMENTS (Cost $87,561,863) -- 96.55% 50,782,963
OTHER ASSETS & LIABILITIES (NET) -- 3.45% 1,815,702
------------
NET ASSETS -- 100.00% $ 52,598,665
------------
- ----------
+ At January 31, 2004, 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 January 31, 2004 was $21,618,766.
# Restricted as to public resale. Acquired between March 1, 1998 and July 31,
2003. Total cost of restricted securities at January 31, 2004 aggregated
$82,874,545. Total value of restricted securities owned at January 31, 2004
was $46,095,645 or 87.64% of net assets.
## Required disclosure for restricted securities only.
@ Non-income producing security.
* Carrying value per unit reflects a 30% discount to the closing price.
Notes to Financial Statements are an integral part of
these Financial Statements.
3
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 2003
Ownership Acquisition
Percentage Date## Value (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., 8.00%, 6/30/2001 +@ 12/00 --
$ 750,000 Killerbiz, Inc., 8.00%, 6/10/2000 and
1/17/2001 +@ 12/99-08/00 --
--------------
--
--------------
Total Promissory Notes (Cost $5,836,679) 2,420,012
4
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 2003 -- (continued)
Acquisition
Shares Date## Value (Note 1)
- ----------- -------------- --------------
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
--------------
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 -- 3.59%
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 July 31,
2003. 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.
* Carrying value per unit reflects a 40% discount to the closing price.
Notes to Financial Statements are an integral part of these Financial
Statements.
5
Excelsior Private Equity Fund II, Inc.
Statements of Assets and Liabilities
January 31,
2004 October 31,
(Unaudited) 2003
------------- -------------
ASSETS:
Unaffiliated Issuers, at value (Cost $47,248,337
and $46,764,966 respectively) $ 29,164,197 $ 28,468,470
Affiliated Issuers, at value (Cost $40,313,526
and $40,313,526 respectively) 21,618,766 18,448,663
------------- -------------
Investments, at value (Cost $87,561,863 and
$87,078,492 respectively) (Note 1) $ 50,782,963 $ 46,917,133
Cash 2,107,436 2,852,110
Receivable from investment advisor ( Note 2) 70,976 85,833
Interest receivable 218,927 196,706
Other assets 21,709 1,292
------------- -------------
Total Assets 53,202,011 50,053,074
LIABILITIES:
Incentive fees payable (Note 2) 316,003 --
Management fees payable (Note 2) 185,511 181,784
Professional fees payable 42,017 60,000
Administration fees payable (Note 2) 28,982 14,318
Directors' fees payable (Note 2. 15,123 66,000
Accrued expenses and other payables 15,710 14,784
------------- -------------
Total Liabilities 603,346 336,886
------------- -------------
NET ASSETS $ 52,598,665 $ 49,716,188
============= =============
NET ASSETS consist of:
Undistributed net investment loss $ (183,979) $ --
Accumulated net realized loss on investments (27,414,222) (27,414,222)
Net unrealized (depreciation) on investments (36,778,900) (40,161,359)
Allowance for management incentive fee (316,003) --
Par value 1,957 1,957
Paid-in capital in excess of par value 117,289,812 117,289,812
------------- -------------
Total Net Assets $ 52,598,665 $ 49,716,188
============= =============
Shares of Common Stock Outstanding ($0.01 par
value, 200,000 authorized) 195,730 195,730
NET ASSET VALUE PER SHARE $ 268.73 $ 254.00
============= =============
Notes to Financial Statements are an integral part of these Financial
Statements.
6
Excelsior Private Equity Fund II, Inc.
Statements of Operations (Unaudited)
Three Months Ended
January 31,
2004 2003
------------- -------------
INVESTMENT INCOME:
Interest income from affiliated investments $ 22,235 $ 22,480
Interest income from unaffiliated investments 6,930 28,253
Dividend income 4,342 6,982
------------- -------------
Total Investment Income 33,507 57,715
EXPENSES:
Managing investment adviser fees (Note 2) 185,511 186,935
Administration fees (Note 2) 42,969 43,079
Professional fees 31,472 41,085
Directors' fees and expenses (Note 2) 15,123 15,123
Insurance expense 7,922 19,077
Miscellaneous expenses 5,465 8,996
------------- -------------
Total Expenses 288,462 314,295
------------- -------------
Expenses reimbursed by Managing Investment Adviser (70,976) (60,597)
------------- -------------
Net Expenses 217,486 253,698
------------- -------------
NET INVESTMENT (LOSS) (183,979) (195,983)
------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS: (Note 1)
Net realized loss on affiliated investments -- (7,352,523)
Net change in unrealized appreciation on investments 3,382,459 8,174,425
------------- -------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 3,382,459 821,902
------------- -------------
Net change in allowance for management incentive fee (316,003) --
------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,882,477 $ 625,919
============= =============
Notes to Financial Statements are an integral part of these Financial
Statements.
7
Excelsior Private Equity Fund II, Inc.
Statement of Changes in Net Assets (Unaudited)
Three Months Ended
January 31,
2004 2003
------------- -------------
OPERATIONS:
Net investment loss $ (183,979) $ (195,983)
Net realized gain (loss) on investments -- (7,352,523)
Net change in unrealized appreciation on
investments 3,382,459 8,174,425
Net change in allowance for management
incentive fee (316,003) --
------------- -------------
Net increase in net assets resulting from
operations 2,882,477 625,919
Net increase in net assets 2,882,477 625,919
------------- -------------
NET ASSETS:
Beginning of period 49,716,188 57,683,842
------------- -------------
End of period(including accumulated net
investment loss of $(183,979) and
$(195,983), respectively) $ 52,598,665 $ 58,309,761
============= =============
Notes to Financial Statements are an integral part of these Financial
Statements.
8
Excelsior Private Equity Fund II, Inc.
Statement of Cash Flows (Unaudited)
Three Months Ended
January 31,
2004 2003
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 2,882,477 $ 625,919
Adjustments to reconcile net increase in net
assets resulting from operations to net cash
provided by/(used in) operating activities:
Net change in unrealized appreciation on investments (3,382,459) (8,174,425)
Net change in short-term investments (2,799,335) (2,824,691)
Proceeds received from the sale of investments and
distributions received from private investment
funds 2,315,964 1,853,845
Net realized loss (gain) on investments -- 7,352,523
Decrease in receivable from investment adviser 14,857 1,381,355
Increase in interest receivable (22,221) (20,616)
Decrease (increase) in other assets (20,417) 14,098
Increase in incentive fee payable 316,003 --
Increase (decrease) in management fee payable 3,727 (4,693)
Decrease in directors' fees payable (50,877) (44,877)
Decrease in other expenses payable (2,393) (135,129)
------------- -------------
Net cash provided by/(used in) operating activities (744,674) 23,309
------------- -------------
Net increase (decrease) in cash (744,674) 23,309
------------- -------------
Cash at beginning of period 2,852,110 --
------------- -------------
Cash at end of period $ 2,107,436 $ 23,309
============= =============
Notes to Financial Statements are an integral part of these Financial
Statements.
9
Excelsior Private Equity Fund II, Inc.
Financial Highlights--Selected Per Share Data and Ratios (Unaudited)
Per Share Operating Performance (1)
Three Months Three Months
Ended Ended
January 31, January 31,
2004 2003
------------- -------------
NET ASSET VALUE, BEGINNING OF PERIOD. $ 254.00 $ 294.71
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.94) (1.00)
Net realized and unrealized gain (loss) on investments 17.28 4.20
Net change in allowance for management incentive fee (1.61) --
------------- -------------
Total from investment operations 14.73 3.20
------------- -------------
NET ASSET VALUE, END OF PERIOD $ 268.73 $ 297.91
============= =============
TOTAL NET ASSET VALUE RETURN (3) (4) 5.80% 1.09%
Ratios and supplemental data:
Net assets, end of period (thousands) $ 52,599 $ 58,310
Ratios to average net assets (2)
Gross expenses (5) 2.26% 2.17%
Net expenses 1.70% 1.75%
Net investment loss (1.44)% (1.35)%
Portfolio turnover (3) 0.00% 0.00%
(1) For a share outstanding throughout the period
(2) Annualized
(3) Not annualized
(4) Total investment return based on per share net asset value reflects the
effects of changes in net asset value based on the performance of the
Company during the period, 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
(5) 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.
10
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
January 31, 2004 (Unaudited)
Note 1 -- Significant Accounting Policies
Excelsior Private Equity Fund II, Inc. (the "Company") was incorporated
under the laws of the State of Maryland on March 20, 1997, and is a
non-diversified, closed-end management investment company that has elected to be
treated as a business development company 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 to 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
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
January 31, 2004 and October 31, 2003, these contributions paid in advance
totaled $4,679,968, and are included in investments on
11
the statement of assets and liabilities. These contributions paid in
advance are non-income producing.
At January 31, 2004 and October 31, 2003, market quotations were not
readily available for securities valued at $38,678,556 or 73.54% of net
assets and $40,786,051 or 82.04% 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, 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.
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. No distributions were made in the
quarters ended January 31, 2004 and January 31, 2003.
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 January 31, 2004, the Company
had not received information to determine the tax cost of the Private
Investment Funds as of October 31, 2003 and January 31, 2004, and therefore
to determine the Company's unrealized gain or loss on a tax basis. At
January 31, 2004, the cost of all other investments for federal tax
purposes was $36,767,566, and those investments had a tax basis net
unrealized depreciation of $13,705,412, consisting of gross appreciation of
$1,292,958 and gross depreciation of $14,998,370. 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.
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
12
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 January
31, 2004 and October 31, 2003, $185,511 and $181,784, 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 quarters ended January
31, 2004 and January 31, 2003, $316,003 and $0, respectively, were earned by and
payable to the Managing Investment Adviser.
U.S. Trust NY is a New York state-chartered bank and trust company and a
member bank of the Federal Reserve System. 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 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 $70,976 and $60,597, for the periods ended January 31,
2004 and January 31, 2003, 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 $1,889 in brokerage commissions.
Note 3 -- Purchases and Sales of Securities
Excluding short-term investments, the Company's purchases and sales of
securities for the three month periods ended January 31, 2004, and January 31,
2003 were as follows:
Three-Month Period Ended
January 31, Purchases ($) Proceeds ($)
- ------------------------ ------------- ------------
2004 -- 2,315,964
2003 -- 1,853,845
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 quarters ended January 31, 2004 and the year
ended October 31, 2003. Transactions with companies which are or were affiliates
are as follows:
13
For the Three Months Ended
January 31, 2004
-----------------------------------------------
Shares/ Shares/
Principal Principal
Amount/ Amount/
Percentage Percentage
Held at Sales/ Realized Held at January 31,
October 31, October 31, Conversion Conversion Gain January 31, Value 2004
Name of Investment 2003 2003 Value Cost Proceeds Interest (Loss) 2004 (Note 1)
- -------------------------------------------------------- ---------- -------------------------------------------------------------
Affiliated Companies
Mid- Atlantic Venture Fund
III, LP 8.71% $ 1,774,031 $ -- $ -- $ -- $ -- 8.71% $ 1,774,031
Clear Orbit Inc., Preferred
Series A 1,428,572 5,000,013 -- -- -- -- 1,428,572 5,000,013
Commonwealth Capital
Ventures II, LLP 5.73% 1,925,198 -- -- -- -- 4.89% 1,921,311
Curon Medical,Inc., Common
Stock 2,381,088 4,243,099 -- -- -- -- 2,381,088 7,417,089
Mosaica Education, Inc.,
Preferred Series C 75,059 3,537,722 -- -- -- -- 75,059 3,537,722
Mosaica Education, Inc. Bridge
Notes, 13.00%, 8/24/2006 $ 686,415 686,415 -- -- 22,235 -- $ 686,415 686,415
Mosaica Education, Inc.
(Advantage Schools), 0.00%,
8/24/2006 $ 1,025,748 1,025,748 -- -- -- -- $ 1,025,748 1,025,748
Mosaica Education, Inc. (ASI
Texas LLC ), 0.00%, 8/24/2006 $ 256,437 256,437 -- -- -- -- $ 256,437 256,437
------------------------------------------------------------- ------------
Total Non Controlled
Affiliates $ 18,448,663 $ -- $ -- $ 22,235 $ -- $ 21,618,766
For the Year Ended October 31, 2003
-----------------------------------------------
Shares/ Shares/
Principal Principal
Amount/ Amount/
Percentage Percentage
Held at Sales/ Realized Held at October 31,
October 31, October 31, Conversion Conversion Gain October 31, 2003 Value
Name of Investment 2002 2002 Value Cost Proceeds Interest (Loss) 2003 (Note 1)
- -------------------------------------------------------- ---------- --------------------------------------------------------------
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 -- -- 8.71% 1,774,031
Clear Orbit Inc., Preferred
Series A 1,428,572 5,000,013 -- -- -- -- 1,428,572 5,000,013
Commonwealth Capital
Ventures II, LLP 5.73% 2,019,502 -- -- -- -- 5.73% 1,925,198
Curon Medical , Inc., Common
Stock 2,381,088 928,624 -- -- -- -- 2,381,088 4,243,099
Curon Medical , Inc., Warrants 76,950 -- -- -- -- -- 76,950 --
Firstsource Corp., Preferred
Series A 2,388,345 -- -- -- -- -- 2,388,345 --
Firstsource Corp., Promissory
Note 8.00%, 6/30/2001 $ 2,666,667 -- -- -- -- -- $ 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 -- -- -- -- 75,059 3,537,722
Mosaica Education, Inc. Bridge
Notes, 13.00%, 8/24/2006 $ 686,415 686,415 -- -- 89,196 -- $ 686,415 686,415
Mosaica Education, Inc.
(Advantage Schools), 0.00%,
8/24/2006 $ 1,025,748 1,025,748 -- -- -- -- $ 1,025,748 1,025,748
Mosaica Education, Inc. (ASI
Texas LLC ), 0.00%, 8/24/2006 $ 256,437 256,437 -- -- -- -- $ 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 $ (14,615,02) $ 18,448,663
14
* Cardiac Science, Inc. was an affiliated company prior to October 31, 2002 but
was not an affiliated company as of October 31, 2002.
15
Independent Accountants' Review Report
To the Shareholders and Board of Directors of
Excelsior Private Equity Fund II, Inc.
We have reviewed the accompanying statement of assets and liabilities of
Excelsior Private Equity Fund II, Inc. ("the Company"), including the portfolio
of investments, as of January 31, 2004, and the related statements of
operations, changes in net assets, cash flows, and the financial highlights for
the three-month periods ended January 31, 2004 and 2003. These financial
statements and financial highlights are the responsibility of the Fund's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures,
and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements and financial highlights
referred to above for them to be in conformity with accounting principles
generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the statement of assets and liabilities,
including the portfolio of investments, as of October 31, 2003, and the related
statements of operations, changes in net assets and cash flows, and the
financial highlights for the year then ended (not presented herein) and in our
report dated January 6, 2004, we expressed an unqualified opinion on those
financial statements and financial highlights.
ERNST & YOUNG LLP
Boston, Massachusetts
March 12, 2004
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three-month Period Ended January 31, 2004 as Compared to the Similar Period in
2003
Realized and Unrealized Gains and Losses from Portfolio Investments
For the three-month periods ended January 31, 2004 and 2003, the Company
had a net realized loss on security transactions of $0 and ($7,352,523),
respectively. For the three-month periods ended January 31, 2004 and 2003, the
Company had a net change in unrealized appreciation on investments of $3,382,459
and $8,174,425, respectively. The net realized loss for the period ended January
31, 2003 was primarily the result of the conclusion of the assignment for the
benefit of creditors of ReleaseNow, Inc. The liquidation of ReleaseNow concluded
and the Company received $65,850 as a pro rata distribution of claims against
the assets. The Company, in concluding its sale of shares of common stock of
Cardiac Science, Inc., recorded a realized gain of $538,331, which offset the
realized loss attributed to ReleaseNow.
The net change in unrealized appreciation for the period ended January 31,
2004 was primarily related to an increase in the value of Curon Medical, Inc.
(NASDAQ: CURN), a publicly-traded common stock held by the Company. The increase
in Curon's value during the period was driven by the appreciation of Curon's
closing market price, as well as a reduction of the discount rate applied to
this security from 40% to 30%, as determined by the Adviser. The Company holds
2,381,088 shares of common stock of Curon. The net change in unrealized
appreciation for the period ended January 31, 2003 was principally the result of
the realization of ReleaseNow, Inc. and therefore, reclassification from
unrealized depreciation to a realized loss.
Investment Income and Expenses
For the three-month period ended January 31, 2004, the Company had
investment income of $33,507 and net operating expenses, net of expenses
reimbursed by the Managing Investment Adviser (as defined below), of $217,486,
resulting in a net investment loss of ($183,979). In comparison, the Company had
investment income of $57,715 and net operating expenses, net of expenses
reimbursed by the Managing Investment Adviser, of $253,698, resulting in net
investment loss of ($195,983) for the three-month period ended January 31, 2003.
There was a decrease in investment income during the period ended January 31,
2004 in comparison to investment income earned during the period ended January
31, 2003 due to a decrease in short-term securities held by the Company. The
reduction in net operating expenses during the same periods is principally
attributable to lower professional fees and insurance expense accrued during the
period ended January 31, 2004.
United States Trust Company of New York, acting through its registered
investment advisory division, U.S. Trust - New York Asset Management Division,
and U.S. Trust Company, N.A., acting through its registered investment advisory
division, U.S. Trust Company, N.A. Asset Management Division (together, the
"Managing Investment Adviser"), provide investment management and administrative
services required for the operation of the Company. The term Managing Investment
Adviser includes, where applicable, U.S. Trust Company, the entity that merged
into U.S. Trust Company, N.A. on June 1, 2003 as described in Note 2 to Item 1
above. In consideration of the services rendered by the Managing Investment
Adviser, the Company pays a management fee based upon a percentage of the net
assets of the Company invested or committed to be invested in certain types of
investments and an incentive fee based in part on a percentage of realized
capital gains of the Company. Such management fee is determined and payable
quarterly.
For the three-month periods ended January 31, 2004 and 2003, the Managing
Investment Adviser earned $185,511 and $186,935 in management fees,
respectively. In addition, for the three-month periods ended January 31, 2004
and 2003, the change in allowance for the management incentive fee was
($316,003) and $0, respectively. There was an incentive fee payable to the
Managing Investment Adviser of $316,003 at January 31, 2004. 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%, on an annual basis, of the Company's average net assets. For the
three-month periods ended January 31, 2004 and 2003, the Managing Investment
Adviser reimbursed other operating expenses of the Company in the amounts of
$70,976 and $60,597, respectively, as a result of expenses incurred in excess of
these limits.
17
Net Assets
At January 31, 2004, the Company's net assets were $52,598,665 or a net
asset value per common share of $268.73. This represents an increase of
$2,882,477 from net assets of $49,716,188, or a net asset value per common share
of $254.00, at October 31, 2003. The increase in net assets during the period is
principally due to the net change in unrealized appreciation of Curon Medical,
Inc. (NASDAQ: CURN), a publicly-traded common stock held by the Company.
Liquidity and Capital Resources
The Company has focused its investments in the private equity securities of
expansion and later- stage venture capital companies and middle-market companies
that the Company believes offer significant long-term capital appreciation. The
Company may offer managerial assistance to certain of these companies. The
Company invests its available cash in short-term investments of marketable
securities pending distributions to shareholders or to provide the liquidity
necessary to make portfolio investments as investment opportunities arise.
At January 31, 2004, the Company held $2,107,436 in cash and $4,687,318 in
short-term investments as compared to $2,852,110 in cash and $1,887,983 in
short-term investments at October 31, 2003. The increase in cash and short-term
investments during the period is due to cash distributions received from private
investment funds. In connection with the Company's commitments to private
investment funds, a total of $58,250,000 has been contributed by the Company
through January 31, 2004. The Company has no additional capital commitment
obligations to the private funds it has invested in. The Company made no
follow-on investments during the three-month period ended January 31, 2004.
The Company believes that its liquidity and capital resources are adequate
to satisfy its operational needs.
Application of Critical Accounting Policies
Under the supervision of the Company's Valuation and Audit Committees,
consisting of the independent directors of the Company, the Investment Advisers
make certain critical accounting estimates with respect to the valuation of
private portfolio investments. These estimates could have a material impact on
the presentation of the Company's financial condition because in total, they
currently represent 73.5% of the Company's net assets at January 31, 2004. For
the private investments held at January 31, 2004, changes to these estimates,
i.e. changes in the valuations of these private investments, resulted in a $.2
million increase in net asset value.
The value for securities for which no public market exists is difficult to
determine. Generally speaking, such investments will be valued on a "going
concern" basis without giving effect to any disposition costs. There is a range
of values that is reasonable for such investments at any particular time.
Because of the inherent uncertainty of valuation, the estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
Initially, direct private company investments are valued based upon their
original cost until developments provide a sufficient basis for use of a
valuation other than cost. Upon the occurrence of developments providing a
sufficient basis for a change in valuation, direct private company investments
will be valued by the "private market" or "appraisal" methods of valuation. The
private market method shall only be used with respect to reliable third party
transactions by sophisticated, independent investors. The appraisal method shall
be based upon such factors affecting the company such as earnings, net worth,
reliable private sale prices of the company's securities, the market prices for
similar securities of comparable companies, an assessment of the company's
future prospects or, if appropriate, liquidation value. The values for the
investments referred to in this paragraph will be estimated regularly by the
Investment Adviser or a committee of the Board, 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.
18
The valuation of the Company's private funds is based upon its pro-rata
share of the value of the assets of a private fund as determined by such private
fund, in accordance with its partnership agreement, constitutional or other
documents governing such valuation, on the valuation date. If such valuation
with respect to the Company's investments in private funds is not available by
reason of timing or other event on the valuation date, or are deemed to be
unreliable by the Investment Advisers, the Investment Advisers, under
supervision of the Board, shall determine such value based on its judgment of
fair value on the appropriate date, less applicable charges, if any.
The Investment Advisers also make estimates regarding discounts on market
prices of publicly traded securities where appropriate. For securities which
have legal, contractual or practical restrictions on transfer, a discount of 10%
to 40% from the public market price will be applied.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Equity Price Risk
A majority of the Company's investment portfolio consists of equity
securities in private companies and private investment funds, representing 73.5%
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 January 31, 2004, this publicly traded equity
security was valued at $7,417,089, representing 14.1% 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 $750,043. 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.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. As of January 31,
2004 (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 changes in the Company's
internal control over financial reporting identified in connection with the
evaluation of such internal control that occurred during the Company's last
fiscal quarter, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
19
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
15 Independent Accountants' Acknowledgement Letter.
31.1 Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Treasurer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 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.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
Date: March 16, 2004 By: /s/ David I. Fann
----------------------------------
David I. Fann
Co-Chief Executive Officer
Date: March 16, 2004 By: /s/ Douglas A. Lindgren
----------------------------------
Douglas A. Lindgren
Co-Chief Executive Officer
Date: March 16, 2004 By: /s/ Robert F. Aufenanger
----------------------------------
Robert F. Aufenanger
Treasurer
(Principal Financial Officer)
21