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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
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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 000-24856
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UST PRIVATE EQUITY INVESTORS FUND, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 13-3786385
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
225 High Ridge Road Stamford, CT 06905
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (203) 352-4400
114 West 47th Street, New York, NY 10036-1532
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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 no shares of the Registrant's Common Stock,
$.01 par value per share, outstanding.
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UST PRIVATE EQUITY INVESTORS FUND, 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 UST Private Equity Investors Fund, 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
Portfolio of Investments as of October 31, 2003 2
Statements of Assets and Liabilities at January 31, 2004
and October 31, 2003 3
Statements of Operations for the three-month periods
ended January 31, 2004 and January 31, 2003 4
Statements of Changes in Net Assets for the three-month
periods ended January 31, 2004 and January 31, 2003 5
Statements of Cash Flows for the three-month periods
ended January 31, 2004 and January 31, 2003 6
Financial Highlights for the three-month periods ended
January 31, 2004 and January 31, 2003 7
Notes to Financial Statements 8
Independent Accountants' Review Report 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
UST Private Equity Investors Fund, Inc.
Portfolio of Investments (Liquidation Basis) (Unaudited)
January 31, 2004
---------------------------
PORTFOLIO STRUCTURE
- -------------------
PRIVATE INVESTMENT FUNDS $ -- 0.00%
PRIVATE COMPANIES -- 0.00%
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS -- 0.00%
INVESTMENT COMPANIES -- 0.00%
------------ ------------
TOTAL INVESTMENTS -- 0.00%
OTHER ASSETS & LIABILITIES (NET) 2,824,487 100.00%
------------ ------------
NET ASSETS $ 2,824,487 100.00%
============ ============
UST Private Equity Investors Fund, Inc.
Portfolio of Investments (Liquidation Basis)
October 31, 2003
---------------------------
PORTFOLIO STRUCTURE
- -------------------
PRIVATE INVESTMENT FUNDS $ 1,658,057 58.70%
PRIVATE COMPANIES -- 0.00%
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS 1,099,884 38.93%
INVESTMENT COMPANIES 30,822 1.09%
------------ ------------
TOTAL INVESTMENTS 2,788,763 98.72%
OTHER ASSETS & LIABILITIES (NET) 36,255 1.28%
------------ ------------
NET ASSETS $ 2,825,018 100.00%
============ ============
1
UST Private Equity Investors Fund, Inc.
Portfolio of Investments October 31, 2003 (Liquidation Basis)
Principal Acquisition
Amount Date## Value (Note 1)
- ----------- -------------- --------------
AGENCY OBLIGATIONS -- 38.93%
$ 1,100,000 Federal Home Loan Bank Discount Notes, 0.95%,
11/05/03 (Cost $1,099,884) $ 1,099,884
--------------
Percentage
Owned
- ----------
PRIVATE INVESTMENT FUNDS #, @ -- 58.70%
3.88% Allegra Capital Partners III,
LP (Cost $1,069,666) 03/96 to 04/00 106,237
1.03% Brentwood Associates Buyout Fund II,
LP (Cost $986,605) 01/96 to 04/00 197,863
0.53% Bruckmann, Rosser, Sherrill & Co.,
LP (Cost $961,263) 12/95 to 04/00 885,000
1.16% Morgenthaler Venture Partners IV,
LP (Cost $647,935) 12/95 to 04/00 143,262
1.81% Sevin Rosen Fund V, LP (Cost $1,722,502) 04/96 to 04/00 195,332
2.45% Vanguard V, LP (Cost $1,484,045) 05/96 to 02/99 130,363
--------------
TOTAL PRIVATE INVESTMENT FUNDS (Cost $6,872,016) 1,658,057
--------------
Shares
- ----------
PRIVATE COMPANIES #, @, -- 0.00%
Common Stocks -- 0.00%
Medical Devices -- 0.00%
550,758 Cardiopulmonary Corp. 11/96 to 07/98 --
--------------
TOTAL PRIVATE COMPANIES (Cost $2,150,000) --
INVESTMENT COMPANIES -- 1.09%
30,822 Dreyfus Government Cash Management Fund
(Cost $30,822) 30,822
--------------
TOTAL INVESTMENTS (Cost $10,152,722) -- 98.72% 2,788,763
OTHER ASSETS & LIABILITIES (NET) -- 1.28% 36,255
--------------
NET ASSETS -- 100.00% $ 2,825,018
--------------
- ----------
# Restricted as to public resale. Acquired between December 1, 1995 and April
30, 2000. Total cost of restricted securities at October 31, 2003
aggregated $9,022,016. Total value of restricted securities owned at
October 31, 2003 was $1,658,057 or 58.70% 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.
2
UST Private Equity Investors Fund, Inc.
Statements of Assets and Liabilities
January 31,
2004 October 31,
Liquidation 2003
Basis Liquidation
(Unaudited) Basis
------------- ------------
ASSETS:
Investments in unaffiliated issuers, at value
(Cost $0 and $8,002,722, respectively) $ -- $ 2,788,763
Investments in affiliates, at value (Cost $0
and $2,150,000, respectively -- --
------------- ------------
Investments, at value (Cost $0 and $10,152,722,
respectively)(Note 1) -- 2,788,763
Cash 2,826,360 86,455
Receivable from investment adviser (Note 2) -- 172,851
Interest receivable -- 24
Prepaid expenses -- 88
------------- ------------
Total Assets 2,826,360 3,048,181
LIABILITIES:
Professional fees payable -- 126,104
Directors' fees payable (Note 2) -- 66,000
Management fees payable (Note 2) -- 7,277
Administration fees payable (Note 2) -- 1,076
Accrued expenses 1,873 22,706
------------- ------------
Total Liabilities 1,873 223,163
------------- ------------
NET ASSETS $ 2,824,487 $ 2,825,018
============= ============
NET ASSETS consist of:
Undistributed net investment loss $ (532) $ --
Accumulated net realized loss on investments (13,312,226) (5,948,268)
Net unrealized depreciation on investments -- (7,363,959)
Par value 405 405
Paid-in capital in excess of par value 16,136,840 16,136,840
------------- ------------
Total Net Assets $ 2,824,487 $ 2,825,018
============= ============
Shares of Common Stock Outstanding
($0.01 par value, 100,000 Authorized) 40,463 40,463
============= ============
NET ASSET VALUE PER SHARE $ 69.80 $ 69.82
============= ============
Notes to Financial Statements are an integral part
of these Financial Statements.
3
UST Private Equity Investors Fund, Inc.
Statements of Operations (Unaudited)
Three Months Ended
January 31,
2004
(Liquidation
Basis) 2003
------------- ------------
INVESTMENT INCOME:
Interest income $ 2,151 $ 2,841
Dividend income 63 298
------------- ------------
Total Investment Income 2,214 3,139
------------- ------------
EXPENSES:
Professional fees (15,300) 20,453
Directors' fees and expenses (Note 2) 12,000 15,123
Administration fees (Note 2) 2,417 2,934
Printing fees (2,047) 5,193
Insurance expense 1,859 731
Postage and mailing expenses 2,383 --
Filing fees 631 --
Travel expenses 468 --
Custodial fees 260 252
Managing investment adviser fees (Note 2) -- 11,989
Miscellaneous expenses 75 379
------------- ------------
Total Expenses 2,746 57,054
Expenses reimbursed by Managing Investment
Adviser (Note 2) -- (37,844)
------------- ------------
Net Expenses 2,746 19,210
------------- ------------
NET INVESTMENT LOSS (532) (16,071)
------------- ------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss) on unaffiliated
investments (7,363,958) 2,902
Change in unrealized appreciation (depreciation)
on investments 7,363,959 (14,007)
------------- ------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 1 (11,105)
------------- ------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ (531) $ (27,176)
============= ============
Notes to Financial Statements are an integral part of
these Financial Statements.
4
UST Private Equity Investors Fund, Inc.
Statements of Changes in Net Assets (Unaudited)
Three Months Ended
January 31,
2004 2003
(Liquidation
Basis)
------------ ------------
OPERATIONS:
Net investment loss $ (532) $ (16,071)
Net realized gain (loss) on investments (7,363,958) 2,902
Net change in unrealized appreciation
(depreciation) on investments 7,363,959 (14,007)
------------ ------------
Net decrease in net assets resulting from
operations (531) (27,176)
------------ ------------
Net decrease in net assets (531) (27,176)
NET ASSETS:
Beginning of period 2,825,018 3,980,977
------------ ------------
End of period (including accumulated net
investment loss of $(532) and $(16,071),
respectively $ 2,824,487 $ 3,953,801
============ ============
Notes to Financial Statements are an integral part of these
Financial Statements.
5
UST Private Equity Investors Fund, Inc.
Statements of Cash Flows (Unaudited)
Three Months Ended
January 31,
2004
(Liquidation
Basis) 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting
from operations $ (531) $ (27,176)
Adjustments to reconcile net decrease in
net assets resulting from operations to
net cash provided by operating
activities:
Net change in unrealized
(appreciation) depreciation on
investments (7,363,959) 14,007
Net change in short-term investments 1,130,706 (693,246)
Proceeds from sales of investments
and distributions received from
private investment funds 1,658,058 389,050
Net realized loss (gain) on
investments 7,363,958 (2,902)
Decrease in interest receivable 24 234
Decrease in receivable from
investment adviser 172,851 439,409
Decrease in prepaid insurance 88 731
Decrease directors' fees payable (66,000) (45,204)
Decrease management fees payable (7,277) (1,039)
Decrease in other expenses payable (148,013) (56,819)
------------ ------------
Net cash provided by operating
activities 2,739,905 17,045
------------ ------------
Net increase in cash 2,739,905 17,045
------------ ------------
Cash at beginning of period 86,455 --
------------ ------------
Cash at end of period $ 2,826,360 $ 17,045
============ ============
Notes to Financial Statements are an integral part of these
Financial Statements.
6
UST Private Equity Investors Fund, Inc.
Financial Highlights--Selected Per Share Data and Ratios (Unaudited)
Per Share Operating Performance (1)
Three Months
Ended
January 31, Three Months
2004 Ended
(Liquidation January 31,
Basis) 2003
------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 69.82 $ 98.39
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss. (0.02) (0.40)
Net realized and unrealized loss on
investments -- (0.28)
------------ ------------
Total from investment operations (0.02) (0.68)
------------ ------------
NET ASSET VALUE, END OF PERIOD $ 69.80 $ 97.71
============ ============
TOTAL NET ASSET VALUE RETURN(3),(4),(6) (0.03)% (0.68)%
Ratios and supplemental data:
Net assets, end of period (thousands) $ 2,824 $ 3,954
Ratios to average net assets (2),(6)
Gross expenses 0.39% 5.75% (5)
Net expenses 0.39% 1.94%
Net investment loss (0.08)% (1.62)%
Portfolio turnover rate (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
(6) Annualized. See Note 5 for discussion of expense reversals in the quarter
ended January 31, 2004
Notes to Financial Statements are an integral part of these
Financial Statements.
7
UST PRIVATE EQUITY INVESTORS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
January 31, 2004 (Unaudited)
Note 1 -- Significant Accounting Policies
UST Private Equity Investors Fund, Inc. (the "Company") was incorporated
under the laws of the State of Maryland on September 16, 1994, and is a
non-diversified, closed-end management investment company that has elected to be
treated as a business development company under the Investment Company Act of
1940, as amended.
The following is a summary of the Company's significant accounting
policies. 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.
As a result of the Board of Directors adopting the Plan of Liquidation on
October 22, 2003, the Company adopted the liquidation basis of accounting as of
October 31, 2003. See Note 5 - Plan of Liquidation and Dissolution. The
liquidation basis of accounting requires that assets and liabilities be stated
at their estimated fair value and settlement amounts. Accordingly, the portfolio
of investments as of October 31, 2003 and the statement of assets and
liabilities as of October 31, 2003 and January 31, 2004 reflect assets and
liabilities based on their estimated fair values and estimated settlement
amounts. Changes in the estimated liquidation value of assets and liabilities
subsequent to October 31, 2003 will be recognized in the period in which such
changes are known.
(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
8
Managing Investment Adviser, 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.
On December 3, 2003, the Company sold its remaining interest in the
Private Investment Fund Bruckmann, Rosser, Sherrill & Co., LP ("BRS") back
to BRS. BRS repurchased the Company's interest in BRS for $885,000 and
assumed all of the Company's commitments with respect to its investment in
BRS. The Company reflected the value of this investment on the October 31,
2003 Portfolio of Investments at this $885,000 sales price. On December 5,
2003, the Company sold its remaining interest in Cardiopulmonary Corp. for
one dollar to an unrelated third party.
The Company executed a "Purchase and Sale Agreement" on October 22,
2003 to sell its Private Investment Fund interests to Landmark Equity
Partners X, L.P. and Landmark IAM Partnership, L.P (the "Purchasers"). This
Purchase and Sale Agreement was amended (the "Agreement") to reflect the
impact of the December 3, 2003 sale of BRS. The sales price under the
Agreement is $832,000, with a reduction for any distributions received by
the Company subsequent to June 30, 2003 from the five remaining Private
Investment Funds. The Company received distributions totaling $58,944 from
the five remaining Private Investment Funds from July 1, 2003 through
October 31, 2003, resulting in an adjusted sales price of $773,056. The
Company reflected this adjusted sales price as the estimated fair value of
the remaining five Private Investment Funds as of October 31, 2003 and has
allocated this value among each of the five individual Private Investment
Funds based upon their respective valuations at June 30, 2003. The
Purchasers are not related parties to the Company.
The Agreement was approved at a meeting of share holders held on
January 21, 2004. See Note 5 - Plan of Liquidation and Dissolution. The
Company subsequently liquidated the five remaining Private Investment Funds
on January 21, 2004 and received cash in the amount of $773,056 from the
Purchasers.
At October 31, 2003, market quotations were not readily available for
securities valued at $1,658,057 or 58.70% of net assets. 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 seller defaults and the value of the collateral declines or if
bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Company may be delayed or
limited.
(d) Federal income taxes:
It is the policy of the Company to continue to qualify as a "regulated
investment company" under subchapter M of the Internal Revenue Code and
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
Dividends from net investment income are declared and paid at least
annually. Any net realized capital gains, unless offset by any available
capital loss carryforwards, are distributed to shareholders at least
annually. Dividends and distributions are determined in accordance with
federal income tax regulations that may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or
9
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 an unused capital loss carryforward of approximately
$6,986,206 available for income tax purposes, to be applied against future
net realized gains, if any, after October 31, 2003. If not applied,
$2,261,586 of the carryover will expire in 2009, $3,881,556 will expire in
2010, and $843,064 will expire in 2011. Upon liquidation and dissolution,
the unused capital loss carryforward will expire. See Footnote 5.
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 or 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
has not received information to determine the tax cost of the Private
Investment Funds as of October 31, 2003 and January 31, 2004, and therefore
the Company's unrealized gain or loss on a tax basis. The cost basis for
federal tax purposes of Company shares owned by its shareholders is
determined separately based upon previous Company distributions and is not
affected by the delay in receiving information from the Private Investment
Funds. At October 31, 2003 cost and unrealized loss for federal tax
purposes of the Private Companies both were $2,150,000. At October 31,
2003, the cost of the U.S. Treasury Obligations and Investment Companies
was $1,099,884 and $30,822, respectively, both resulting in no unrealized
gain or loss.
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 fiscal 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 fiscal 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 during the reporting period 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, $0 and
$7,277, respectively, were payable to the Managing Investment Adviser.
Based on the composition of net assets at January 31, 2004, there were no
management fees earned by the Managing Investment Adviser for the quarter
then ended.
In addition to the management fee, the Company has agreed to pay the
Managing Investment Adviser an incentive fee in an amount equal to 10% of
the cumulative realized capital gains (net of realized capital losses and
unrealized net capital depreciation), 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 period ended January 31, 2004 and
the year ended October 31, 2003, the Company recouped $0, and $0,
respectively, 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 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
10
investment advisory division, U.S. Trust - New York Asset Management
Division, as Managing Investment Adviser to the Company with no investment
sub-adviser. 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, subject to 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 0.42% of the Company's average net assets,
and will waive or reimburse, exclusive of management fees, all such
expenses with respect to that portion of the Company's net assets,
determined as of the end of each fiscal quarter, that is invested in
short-term investments. This reimbursement amounted to $0 and $37,844 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 $1,500 for each meeting attended, and is reimbursed for
expenses incurred for attending meetings. No person who is an officer,
director or employee of the Managing Investment Adviser, or U.S. Trust
Corporation or its subsidiaries, who serves as an officer, director or
employee of the Company receives any compensation from the Company.
Note 3 -- Purchases and Sales of Securities
Excluding short-term investments, the Company's purchases and sales of
securities for the period ended January 31, 2004, and January 31, 2003 were as
follows:
Period Ended Proceeds
January 31, Purchases ($) Received ($)
- ------------ ------------- ------------
2004 -- 1,658,058
2003 -- 389,050
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. The Company did not receive dividend or
interest income from affiliated companies during the period ended January 31,
2004 and January 31, 2003. Transactions with companies, which are or were
affiliates, were as follows:
For the Period Ended January 31, 2004
Shares
Shares Held Held at Cumulative
at October October 31, Conversion Sale Realized January Value
Name of Investment 31, 2003 2003 Value Acquisitions Proceeds Gain (Loss) 31, 2004 (Note 1)
- --------------------------------------------------------- ------------ ----------- -----------------------------------
Affiliated Companies
Cardiopulmonary Corp., Inc.,
Common Stock 550,758 $ -- $ -- $ 1 $ 2,149,999 -- $ --
------------------------------------------------------ ----------
Total Affiliated Companies $ -- $ -- $ 1 $ 2,149,999 $ --
11
For the Period Ended January 31, 2003
Shares
Shares Held Held at Cumulative
at October October 31, Conversion Conversion Realized January Value
Name of Investment 31, 2002 2002 Value Acquisitions Disposition Gain (Loss) 31, 2003 (Note 1)
- --------------------------------------------------------- ------------ ----------- -----------------------------------
Affiliated Companies
Cardiopulmonary Corp.,Inc.,
Series D Preferred 515,464 $ -- $ -- $ -- $ -- 515,464 $ --
Cardiopulmonary Corp.,Inc.,
Series F Preferred 35,294 -- -- -- -- 35,294 --
----------- ----------------------------------------------------------------
Total Affiliated Companies $ -- $ -- $ -- $ -- $ --
Note 5 -- Plan of Liquidation and Dissolution
The Company held a Special Meeting of Shareholders on December 23, 2003 for
the purpose of seeking shareholder approval of the Purchase and Sale Agreement
(the "Agreement" -- see Note 1(a)) and a Plan of Liquidation and Dissolution
(the "Plan"). The Agreement and Plan must be approved by a shareholder vote of
at least two-thirds of the Company's shares issued and outstanding. Under the
Plan, the Company will liquidate its assets, make a provision for the
satisfaction of its remaining obligations, and make a final liquidating
distribution to its shareholders. At the December 23, 2003 Special Meeting of
Shareholders, 53% of the outstanding shares of the company were represented by
proxy vote. Therefore, the Special Meeting of Shareholders was adjourned until
January 21, 2004 in order to permit the further solicitation of proxy votes. At
the January 21, 2004 Special Meeting of Shareholders, the required number of
votes were obtained and the Agreement and Plan were approved. As of January 31,
2004, the Company liquidated its remaining assets, was in the process of
satisfying its remaining obligations, and intends to make a final liquidating
distribution to shareholders.
The Company has reflected in the October 31, 2003 financial statements
accrued liquidation expenses of $65,000 which were estimated to be incurred as
part of its implementation of the Plan. The liquidation expenses were reimbursed
to the Company by the Managing Investment Adviser as part of the voluntary
reimbursement described in Note 2. Negative professional fees and printing fees
in the statement of operations relate to the reversal of accruals estimated in
connection with the liquidation of the Company. In the absence of these
reversals, the gross expense, net expense, and net investment loss ratios would
be 2.85%, 2.85%, and (2.54)%, respectively. The total net asset value return
would be (0.63)%.
Note 6 -- Subsequent Event
On February 17, 2004, the Company made a final liquidating distribution to
shareholders in the amount of $2,825,935.92, or $69.84 per share.
12
Independent Accountants' Review Report
To the Shareholders and Board of Directors of
UST Private Equity Investors Fund, Inc.
We have reviewed the accompanying statement of assets and liabilities of UST
Private Equity Investors Fund, Inc. ("the Company"), 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.
As discussed in Notes 1 and 5 to the financial statements, the Company's Board
of Directors and shareholders approved the liquidation of the Company. As a
result, the company has changed its basis of accounting as of October 31, 2003
from a going concern basis to a liquidation basis.
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 liquidation basis 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
(liquidation basis), including the portfolio of investments (liquidation basis),
as of October 31, 2003, and the related statements of operations, changes in net
assets and cash flows, and, 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
13
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 gain/(loss) on security transactions of ($7,363,958) and
$2,902, respectively. For the three-month periods ended January 31, 2004 and
2003, the Company had a net change in unrealized appreciation/(depreciation) on
investments of $7,363,959 and ($14,007), respectively. The realized loss for the
period ended January 31, 2004 was due to the completion of the sale on January
21, 2004 of all of the non-cash assets of pursuant to a Purchase and Sale
Agreement and a Plan of Liquidation and Dissolution adopted by the Board of
Directors of the Company. The Company made a final liquidating distribution to
shareholders in the amount of $2,825,935.92, or $69.84 per share, on February
17, 2004. The net change in unrealized appreciation/(depreciation) for the
period ended January 31, 2004 was due to a reversal of unrealized depreciation
as a result of the fact that the Company's remaining assets were sold at a loss.
The realized gain for the period ended January 31, 2003 was the result of a
final distribution received from the Company's investment in CommSite
International. The net change in unrealized appreciation/(depreciation) for the
period ended January 31, 2003 was due to the disposition of the Company's entire
investment portfolio.
Investment Income and Expenses
For the three-month period ended January 31, 2004, the Company had
investment income of $2,214 and net operating expenses, net of expenses
reimbursed by the Managing Investment Adviser (as defined below) of $2,746,
resulting in a net investment loss of ($532) as compared to investment income of
$3,139 and net operating expenses, net of expenses reimbursed by the Managing
Investment Adviser of $19,210 resulting in a net investment loss of ($16,071)
for the three-month period ended January 31, 2003. Net expenses declined as
management advisory fees were not paid during the period and professional fees
accrued in a prior period were subsequently reversed due to the fact that the
Company wound down its operations and satisfied its remaining obligations.
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 $0 and $11,989 in management advisory fees,
respectively. 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 0.42%, 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 $0 and $37,844, respectively, as a result of expenses incurred
in excess of these limits. The Company completed the sale and the disposition of
all of its non-cash assets on January 21, 2004 and therefore, management
advisory fees were not accrued during the period ending January 31, 2004. The
Company did not incur expenses in excess of the amount permitted during the
period and therefore, there was no expense reimbursement accrued for the period
ended January 31, 2004.
Net Assets
At January 31, 2004, the Company's net assets were $2,824,487 or a net
asset value per common share of $69.80, down $0.02 per share from a net asset
value per common share of $69.82 at October 31, 2003. This represents a decrease
of $531 from net assets of $2,825,018 at October 31, 2003. This decrease is
principally the result of operating
14
expenses of $2,746 exceeding investment income of $2,214.
Liquidity and Capital Resources
The Company completed the sale and the disposition of all of its non-cash
assets on January 21, 2004, satisfied its remaining obligations, and made a
final liquidating distribution of $69.84 per share to shareholders on February
17, 2004.
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 Managing Investment
Adviser makes 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. At
October 31, 2003, private portfolio investments represented 58.7% of the
Company's net assets. The Company completed the sale and the disposition of all
of its non-cash assets on January 21, 2004 and therefore, at January 31, 2004,
made no estimates with respect to the valuation of private portfolio
investments.
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.
On December 3, 2003, the Company sold its remaining interest in the Private
Investment Fund, Bruckmann, Rosser, Sherrill & Co., LP ("BRS"), back to BRS. BRS
repurchased the Company's interest in BRS for $885,000 and assumed all of the
Company's commitments with respect to its investment in BRS. The Company has
reflected the value of this investment on the October 31, 2003 Portfolio of
Investments at this $885,000 sales price. On December 5, 2003, the Company sold
its remaining interest in Cardiopulmonary Corp. for one dollar to an unrelated
third party. The Company executed a "Purchase and Sale Agreement" on October 22,
2003 to sell its remaining five private investment fund interests to Landmark
Equity Partners X, L.P. and Landmark IAM Partnership, L.P (the "Purchasers").
This Purchase and Sale Agreement was amended (the "Agreement") to reflect the
impact of the December 3, 2003 sale of BRS. The sales price under the Agreement
is $832,000, with a reduction for any distributions received by the Company
15
subsequent to June 30, 2003 from these private investment funds. The Company has
received distributions totaling $58,944 from these private investment funds from
July 1, 2003 through October 31, 2003, resulting in an adjusted sales price of
$773,056. The Company has reflected this adjusted sales price as the estimated
fair value of the remaining five private investment funds and has allocated this
value among each of the five individual Private Investment Funds based upon
their respective valuations prior to execution of the Agreement. The Purchasers
are not related parties to the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Equity Price Risk
At January 31, 2004, the Company held no investments in the equity
securities of public companies or private investment funds. At October 31, 2003,
the Company's investment portfolio consisted of equity securities and private
investment funds, representing 58.7% 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 securities in response to changes in
market prices. Thus, these securities are not subject to equity price risk
normally associated with public equity markets, except that to the extent that
the private investment funds hold underlying public securities, the Company is
indirectly exposed to equity price risk associated with the public markets.
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.
Item 3. Defaults Upon Senior Securities.
None.
16
Item 4. Submission of Matters to a Vote of Security Holders.
(a) A special meeting of the shareholders of the Company was held on
January 21, 2004, at the offices of United States Trust Company of New York (the
"Special Meeting').
(b) Not Applicable.
(c) At the Special Meeting the holders of 28,371 shares of the
Company, which represented more than two- thirds of all the votes entitled to be
cast at the Special Meeting, voted in favor of (i) the sale and the disposition
of substantially all of the Company's non-cash assets pursuant to the terms of a
Purchase and Sale Agreement, dated as of October 22, 2003, by and among the
Company, Landmark Equity Partners X, L.P. ("LEX") and Landmark IAM Partnership,
L.P. ("Landmark IAM, and together with LEX, collectively referred to as
"Landmark"), the Company sold all of its investment interests in Allegra Capital
Partners III, L.P., Brentwood Associates Buyout Fund II, L.P., Morgenthaler
Venture Partners IV, L.P., Sevin Rosen Fund V, L.P. and Vanguard V, L.P, to
Landmark for a cash purchase price payment of $773,056.23; and (ii) the
liquidation and dissolution of the Company pursuant to the terms of a Plan of
Liquidation and Dissolution. A total of 520 shares abstained from the vote and
no shares were voted in the negative.
(d) Not Applicable.
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.
A Form 8-K was filed with the Securities and Exchange Commission on
February 5, 2004 to report the sale and disposition of substantially all of the
Company's non-cash assets and the approval by the stockholders of the Company's
liquidation and dissolution.
17
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.
UST PRIVATE EQUITY INVESTORS FUND,
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)