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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended April 30, 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
EXCELSIOR PRIVATE EQUITY FUND II, INC.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 22-3510108
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
225 High Ridge Road Stamford, CT 06905
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (203) 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 June 1, 2004, there were 195,730 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause Excelsior Private Equity Fund II, Inc.'s (the
"Company's") actual results to differ from future performance suggested herein.
The interim financial statements contained in this quarterly report 10Q
have been reviewed by Ernst & Young LLP, the Company's independent registered
public accountants.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Portfolios of Investments as of April 30, 2004 and
October 31, 2003 2
Statements of Assets and Liabilities at April 30, 2004
and October 31, 2003 6
Statements of Operations for the six-month periods ended
April 30, 2004 and April 30, 2003 7
Statements of Operations for the three-month periods
ended April 30, 2004 and April 30, 2003 8
Statements of Changes in Net Assets for the six-month
periods ended April 30, 2004 and April 30, 2003 9
Statements of Cash Flows for the six-month periods
ended April 30, 2004 and April 30, 2003 10
Financial Highlights at April 30, 2004 and
April 30, 2003 11
Notes to Financial Statements 12
Report of Independent Registered Public Accounting Firm 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments (Unaudited)
April 30, 2004
-----------------------------
Value % of Net Assets
----------- ---------------
PORTFOLIO STRUCTURE
SHORT-TERM INVESTMENTS:
AGENCY OBLIGATIONS $ 5,699,563 11.22%
INVESTMENT COMPANIES 1,887,983 3.72%
PRIVATE INVESTMENT FUNDS 28,766,914 56.62%
PORTFOLIO COMPANIES 14,407,944 28.36%
----------- ------
TOTAL INVESTMENTS 50,762,404 99.92%
OTHER ASSETS & LIABILITIES (NET) 40,293 0.08%
----------- ------
NET ASSETS $50,802,697 100.00%
=========== ======
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments
October 31, 2003
-----------------------------
Value % of Net 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 April 30, 2004 (Unaudited)
Acquisition Value
Par Value Date## (Note 1)
- ---------- ----------- -----------
AGENCY OBLIGATIONS --11.22%
$5,699,563 Federal Home Loan Discount Notes, 0.92%, 5/04/2004 (Cost $5,699,563) $ 5,699,563
PRIVATE INVESTMENT FUNDS #, @ -- 56.62%
Ownership
Percentage
- ----------
1.89% Advanced Technology Ventures V, LP 09/98-10/02 1,276,772
2.63% Brand Equity Ventures I, LP 03/98-10/01 532,270
0.96% Brentwood Associates III, LP 06/99-10/02 4,058,383
1.98% Broadview Capital Partners, LP 04/99-10/02 2,245,649
4.89% Commonwealth Capital Ventures II, LP + 01/99-10/02 1,856,623
3.96% Communications Ventures III, LP 11/98-05/00 811,429
1.34% Friedman, Fleischer & Lowe Capital Partners, LP 01/99-10/02 6,853,264
1.30% Mayfield X, LP 06/99-05/02 935,160
0.62% Mayfield X, Annex 07/02-10/02 209,989
8.70% Mid-Atlantic Venture Fund III, LP + 04/98-02/01 1,576,720
2.64% Morgenthaler Venture Partners V, LP 10/98-08/01 2,319,956
1.67% Quad-C Partners V, LP 04/98-10/02 4,092,524
1.34% Sevin Rosen Fund VI, LP 03/98-10/02 1,118,041
2.12% Trinity Ventures VI, LP 09/98-10/02 880,134
-----------
TOTAL PRIVATE INVESTMENT FUNDS (Cost $49,822,763) 28,766,914
-----------
Shares/Par
Value
- ----------
PRIVATE COMPANIES # -- 21.57%
Preferred Stocks @ -- 16.81%
Educational Services -- 6.97%
75,059 Mosaica Education, Inc., Series C + 08/01 3,537,722
-----------
Internet Services -- Business -- 9.84%
1,428,57 Clear Orbit, Inc., Series A + 06/00 5,000,013
2,388,34 Firstsource Corp., Series A + 02/00 --
-----------
5,000,013
-----------
Total Preferred Stock (Cost $20,119,425) 8,537,735
-----------
Promissory Notes -- 4.76%
Biotechnology -- 0.89%
$ 451,412 Metrigen, Inc., 6.00%, 9/01/2009 @ 07/03 451,412
-----------
Educational Services -- 3.87%
$ 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 April 30, 2004 (Unaudited) -- (continued)
Acquisition Value
Shares Date## (Note 1)
- ------ ----------- -----------
PRIVATE COMPANIES # (Continued)
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 @,+,#-- 6.79%
Common Stock --6.79%
Medical Devices -- 6.79%
2,381,088 Curon Medical, Inc. * 08/99 3,450,197
-----------
Total Common Stock (Cost $6,124,144) 3,450,197
-----------
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) 3,450,197
-----------
INVESTMENT COMPANIES -- 3.72%
1,887,983 Dreyfus Government Cash Management Fund (Cost $1,887,983) 1,887,983
-----------
TOTAL INVESTMENTS (Cost $89,490,557)-- 99.92% 50,762,404
OTHER ASSETS & LIABILITIES (NET)-- 0.08% 40,293
-----------
NET ASSETS -- 100.00% $50,802,697
-----------
- ----------
+ At April 30, 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 April 30, 2004 was $17,389,875.
# Restricted as to public resale. Acquired between March 1, 1998 and July 31,
2003. Total cost of restricted securities at April 30, 2004 aggregated
$81,903,011. Total value of restricted securities owned at April 30, 2004
was $43,174,858 or 84.98% 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 Value
Percentage Date## (Note 1)
- ---------- ----------- -----------
PRIVATE INVESTMENT FUNDS #, @ -- 60.00%
1.83% Advanced Technology Ventures V, LP 09/98-10/02 $ 1,170,894
2.63% Brand Equity Ventures I, LP 03/98-10/01 554,765
1.37% Brentwood Associates III, LP 06/99-10/02 4,725,483
2.51% Broadview Capital Partners, LP 04/99-10/02 2,253,166
5.73% Commonwealth Capital Ventures II, LP + 01/99-10/02 1,925,198
3.96% Communications Ventures III, LP 11/98-05/00 801,800
1.53% Friedman, Fleischer & Lowe Capital Partners, LP 01/99-10/02 5,664,450
1.30% Mayfield X, LP 06/99-05/02 882,768
1.42% Mayfield X, Annex 07/02-10/02 223,002
8.71% Mid-Atlantic Venture Fund III, LP + 04/98-02/01 1,774,031
2.64% Morgenthaler Venture Partners V, LP 10/98-08/01 2,614,572
1.67% Quad-C Partners V, LP 04/98-10/02 5,177,939
1.34% Sevin Rosen Fund VI, LP 03/98-10/02 1,161,370
3.01% Trinity Ventures VI, LP 09/98-10/02 898,866
-----------
TOTAL PRIVATE INVESTMENT FUNDS (Cost $53,110,261) 29,828,304
-----------
Shares/Par
Value
- ----------
PRIVATE COMPANIES # -- 22.04%
Preferred Stocks @ -- 17.17%
Educational Services -- 7.11%
75,059 Mosaica Education, Inc., Series C + 08/01 3,537,722
---------
Internet Services -- Business -- 10.06%
1,428,572 Clear Orbit, Inc., Series A + 06/00 5,000,013
2,388,345 Firstsource Corp., Series A + 02/00 --
---------
5,000,013
---------
Total Preferred Stock (Cost $20,119,425) 8,537,735
Promissory Notes -- 4.87%
Biotechnology -- 0.91%
$ 451,412 Metrigen, Inc., 6.00%, 9/01/2009 @ 07/03 451,412
---------
Educational Services -- 3.96%
$ 686,415 Mosaica Education, Inc. Bridge Notes, 13.00%, 8/24/2006+ 02/01-08/01 686,415
$1,025,748 Mosaica Education, Inc. (Advantage Schools), 0.00%, 8/24/2006 +@ 02/01-08/01 1,025,748
$ 256,437 Mosaica Education, Inc. (ASI Texas LLC ), 0.00%, 8/24/2006+@ 02/01-08/01 256,437
---------
1,968,600
---------
Internet Services -- Business -- 0.00%
$2,666,667 Firstsource Corp., 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 Value
Shares Date## (Note 1)
- ------ ----------- -----------
PRIVATE COMPANIES # (Continued)
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
April 30, 2004
(Unaudited) October 31, 2003
-------------- ----------------
ASSETS:
Investments in unaffiliated issuers, at value (Cost
$48,558,562 and $46,764,966 respectively) $ 33,372,529 $ 28,468,470
Investments in affiliated issuers, at value (Cost
$40,931,995 and $40,313,526 respectively) 17,389,875 18,448,663
------------ ------------
Investments, at value (Cost $89,490,557 and
$87,078,492 respectively) (Note 1) $ 50,762,404 $ 46,917,133
Cash 37,453 2,852,110
Receivable from investment advisor (Note 2) 47,144 85,833
Interest receivable 241,078 196,706
Other assets 17,348 1,292
------------ ------------
Total Assets 51,105,427 50,053,074
LIABILITIES:
Management fees payable (Note 2) 167,085 181,784
Administration fees payable (Note 2) 58,718 14,318
Professional fees payable 44,580 60,000
Directors' fees payable (Note 2) 29,877 66,000
Accrued expenses and other payables 2,470 14,784
------------ ------------
Total Liabilities 302,730 336,886
------------ ------------
NET ASSETS $ 50,802,697 $ 49,716,188
============ ============
NET ASSETS consist of:
Undistributed net investment loss $ (346,697) $ --
Accumulated net realized loss on investments (27,414,222) (27,414,222)
Net unrealized (depreciation) on investments (38,728,153) (40,161,359)
Par value 1,957 1,957
Paid-in capital in excess of par value 117,289,812 117,289,812
------------ ------------
Total Net Assets $ 50,802,697 $ 49,716,188
============ ============
Shares of Common Stock Outstanding ($0.01 par
value, 200,000 authorized) 195,730 195,730
NET ASSET VALUE PER SHARE $ 259.55 $ 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)
Six Months Ended
April 30,
------------------------
2004 2003
---------- -----------
INVESTMENT INCOME:
Interest income from affiliated investments $ 44,471 $ 44,226
Interest income from unaffiliated investments 16,698 58,803
Dividend income 8,530 12,541
---------- -----------
Total Investment Income 69,699 115,570
EXPENSES:
Managing investment adviser fees (Note 2) 352,596 360,068
Administration fees (Note 2) 72,705 83,726
Professional fees 62,210 80,831
Directors' fees and expenses (Note 2) 29,877 29,753
Insurance expense 15,623 32,327
Miscellaneous expenses 1,506 18,744
---------- -----------
Total Expenses 534,517 605,449
---------- -----------
Expenses reimbursed by Managing Investment
Adviser (Note 2) (118,121) (174,379)
---------- -----------
Net Expenses 416,396 431,070
---------- -----------
NET INVESTMENT (LOSS) (346,697) (315,500)
---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS: (Note 1)
Net realized loss on affiliated investments -- (7,322,878)
Net change in unrealized appreciation on
investments 1,433,206 4,562,469
---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 1,433,206 (2,760,409)
---------- -----------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,086,509 $(3,075,909)
========== ===========
Notes to Financial Statements are an integral part of these Financial
Statements.
7
Excelsior Private Equity Fund II, Inc.
Statements of Operations (Unaudited)
Three Months Ended
April 30,
-------------------------
2004 2003
----------- -----------
INVESTMENT INCOME:
Interest income from affiliated investments $ 22,236 $ 21,746
Interest income from unaffiliated investments 9,768 30,550
Dividend income 4,188 5,559
----------- -----------
Total Investment Income 36,192 57,855
EXPENSES:
Managing investment adviser fees (Note 2) 167,085 173,133
Administration fees (Note 2) 29,736 40,647
Professional fees 30,738 39,746
Directors' fees and expenses (Note 2) 14,754 14,630
Insurance expense 7,701 13,250
Miscellaneous expenses (3,959) 9,748
----------- -----------
Total Expenses 246,055 291,154
----------- -----------
Expenses reimbursed by Managing Investment
Adviser (Note 2) (47,145) (113,782)
----------- -----------
Net Expenses 198,910 177,372
----------- -----------
NET INVESTMENT (LOSS) (162,718) (119,517)
----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS: (Note 1)
Net realized gain on unaffiliated investments -- 29,645
Net change in unrealized depreciation on
investments (1,949,253) (3,611,956)
----------- -----------
NET REALIZED AND UNREALIZED (LOSS)
ON INVESTMENTS (1,949,253) (3,582,311)
----------- -----------
Net change in allowance for management
incentive fee 316,003 --
----------- -----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(1,795,968) $(3,701,828)
=========== ===========
Notes to Financial Statements are an integral part of these Financial
Statements.
8
Excelsior Private Equity Fund II, Inc.
Statements of Changes in Net Assets (Unaudited)
Six Months Ended
April 30,
-------------------------
2004 2003
----------- -----------
OPERATIONS:
Net investment loss $ (346,697) $ (315,500)
Net realized gain (loss) on investments -- (7,322,878)
Net change in unrealized appreciation on
investments 1,433,206 4,562,469
----------- -----------
Net increase (decrease) in net assets
resulting from operations 1,086,509 (3,075,909)
----------- -----------
Net increase (decrease) in net assets 1,086,509 (3,075,909)
----------- -----------
NET ASSETS:
Beginning of period 49,716,188 57,683,842
----------- -----------
End of period (including accumulated net
investment loss of $(346,697) and
$(315,500), respectively) $50,802,697 $54,607,933
=========== ===========
Notes to Financial Statements are an integral part of these Financial
Statements.
9
Excelsior Private Equity Fund II, Inc.
Statements of Cash Flows (Unaudited)
Six Months Ended
April 30,
-------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations $ 1,086,509 $(3,075,909)
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by (used in) operating activities:
Net change in unrealized appreciation on investments (1,433,206) (4,562,469)
Net decrease in short-term investments (5,699,563) (2,647,881)
Proceeds received from the sale of investments and distributions
received from private investment funds 3,287,498 1,951,672
Net realized loss on investments -- 7,322,878
Decrease in receivable from investment adviser 38,689 1,328,169
Increase in interest receivable (44,372) (42,442)
Decrease (increase) in other assets (16,056) 27,348
Decrease in management fee payable (14,699) (18,496)
Decrease in directors' fees payable (36,123) (30,247)
Increase (decrease) in other expenses payable 16,666 (119,369)
----------- -----------
Net cash provided by (used in) operating activities (2,814,657) 133,254
----------- -----------
Net increase (decrease) in cash (2,814,657) 133,254
----------- -----------
Cash at beginning of period 2,852,110 --
----------- -----------
Cash at end of period $ 37,453 $ 133,254
=========== ===========
Notes to Financial Statements are an integral part of these Financial
Statements.
10
Excelsior Private Equity Fund II, Inc.
Financial Highlights--Selected Per Share Data and Ratios (Unaudited)
Per Share Operating Performance (1)
Six Months Ended Six Months Ended
April 30, 2004 April 30, 2003
---------------- ----------------
NET ASSET VALUE, BEGINNING OF PERIOD. $254.00 $294.71
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (1.77) (1.61)
Net realized and unrealized gain (loss) on investments 7.32 (14.10)
------- -------
Total from Investment Operations 5.55 (15.71)
------- -------
NET ASSET VALUE, END OF PERIOD $259.55 $279.00
======= =======
TOTAL NET ASSET VALUE RETURN (3) (4) 2.19% (5.33)%
Ratios and supplemental data:
Net assets, end of period (thousands) $50,803 $54,608
Ratios to average net assets (2)
Gross expenses (5) 2.09% 2.13%
Net expenses 1.63% 1.52%
Net investment loss (1.36)% (1.11)%
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.
11
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 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
April 30, 2004 and October 31, 2003, these contributions paid in advance
totaled $4,679,968, or 9.2% and 9.4% of net assets,
12
respectively, and are included in investments on the statement of assets
and liabilities. These contributions paid in advance are non-income
producing.
At April 30, 2004 and October 31, 2003, market quotations were not
readily available for securities valued at $39,724,661 or 78.19% 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 April 30, 2004 and April 30, 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 April 30, 2004, the Company
had not received information to determine the tax cost of the Private
Investment Funds as of October 31, 2003 and April 30, 2004, and therefore
to determine the Company's unrealized gain or loss on a tax basis. At April
30, 2004, the cost of all other investments for federal tax purposes was
$39,667,794, and those investments had a tax basis net unrealized
depreciation of $17,672,304, consisting of gross appreciation of $13 and
gross depreciation of $17,672,317. 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. There is no appreciation or depreciation for tax purposes on
Investment Companies.
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
13
Investment Funds. Prior to June 1, 2003, and pursuant to a sub-advisory
agreement (the "Sub-Advisory Agreement") among the Company, U.S. Trust NY, U.S.
Trust and U.S. Trust Company, N.A., U.S. Trust Company, N.A. served as the
investment sub-adviser to the Company and received an investment management fee
from the Managing Investment Adviser. As of April 30, 2004 and October 31, 2003,
$167,085 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 six months ended April
30, 2004 and April 30, 2003, no incentive fee was 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 $118,121 and $174,379, for the six month periods ended
April 30, 2004 and April 30, 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 $1,889 in brokerage commissions.
Note 3 -- Purchases and Sales of Securities
Excluding short-term investments, the Company's purchases and sales of
securities including distributions received for the six-month periods ended
April 30, 2004, and April 30, 2003 were as follows:
Six-Month Period Ended
April 30, Purchases ($) Proceeds ($)
---------------------- ------------- ------------
2004 -- 3,287,498
2003 -- 1,951,672
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 six months ended April 30, 2004 and the year
ended October 31, 2003. Transactions with companies which are or were affiliates
are as follows:
14
For the Six Months Ended
April 30, 2004
------------------------------------------------
Shares/
Principal
Amount/
Percentage
Held at Sales/
October 31, October 31, Conversion Conversion Realized
Name of Investment 2003 2003 Value Cost Proceeds Interest Gain (Loss)
- ------------------------------------- ----------- ----------- ---------- ---------- -------- -----------
Affiliated Companies
Mid- Atlantic Venture Fund III, LP 8.71% $ 1,774,031 $-- $-- $ -- $--
Clear Orbit Inc., Preferred Series A 1,428,572 5,000,013 -- -- -- --
Commonwealth Capital Ventures II, LLP 5.73% 1,925,198 -- -- -- --
Curon Medical,Inc., Common Stock 2,381,088 4,243,099 -- -- -- --
Curon Medical , Inc., Warrants 76,950 -- -- -- -- --
Firstsource Corp., Preferred Series A 2,388,345 -- -- -- -- --
Firstsource Corp., Promissory Note
8.00%, 6/30/2001 $2,666,667 -- -- -- -- --
Killerbiz, Inc., Promissory Note
8.00%, 6/10/2000 and 1/17/2001 $ 750,000 -- -- -- -- --
Mosaica Education, Inc., Preferred
Series C 75,059 3,537,722 -- -- -- --
Mosaica Education, Inc. Bridge Notes,
13.00%, 8/24/2006 $ 686,415 686,415 -- -- 44,471 --
Mosaica Education, Inc. (Advantage
Schools), 0.00%, 8/24/2006 $1,025,748 1,025,748 -- -- -- --
Mosaica Education, Inc. (ASI Texas
LLC ), 0.00%, 8/24/2006 $ 256,437 256,437 -- -- -- --
----------- --- --- ------- ---
Total Non Controlled Affiliates $18,448,663 $-- $-- $44,471 $--
Shares/
Principal
Amount/
Percentage
Held at April 30,
April 30, 2004
Name of Investment 2004 Value (Note 1)
- ------------------------------------- ----------- --------------
Affiliated Companies
Mid- Atlantic Venture Fund III, LP 8.70% $ 1,576,720
Clear Orbit Inc., Preferred Series A 1,428,572 5,000,013
Commonwealth Capital Ventures II, LLP 4.89% 1,856,623
Curon Medical,Inc., Common Stock 2,381,088 3,450,197
Curon Medical , Inc., Warrants 76,950 --
Firstsource Corp., Preferred Series A 2,388,345 --
Firstsource Corp., Promissory Note
8.00%, 6/30/2001 $2,666,667 --
Killerbiz, Inc., Promissory Note
8.00%, 6/10/2000 and 1/17/2001 $ 750,000 --
Mosaica Education, Inc., Preferred
Series C 75,059 3,537,722
Mosaica Education, Inc. Bridge Notes,
13.00%, 8/24/2006 $ 686,415 686,415
Mosaica Education, Inc. (Advantage
Schools), 0.00%, 8/24/2006 $1,025,748 1,025,748
Mosaica Education, Inc. (ASI Texas
LLC ), 0.00%, 8/24/2006 $ 256,437 256,437
-----------
Total Non Controlled Affiliates $17,389,875
For the Year Ended October 31, 2003
------------------------------------------------
Shares/
Principal
Amount/
Percentage
Held at Sales/
October 31, October 31, Conversion Conversion Realized
Name of Investment 2002 2002 Value Cost Proceeds Interest Gain (Loss)
- ------------------------------------- ----------- ----------- ---------- ---------- -------- -----------
Affiliated Companies
Cardiac Science, Inc., Common Stock * 840,484 $ 1,421,986 $-- 1,776,246 $ -- $ 538,331
Mid- Atlantic Venture Fund III, LP 8.71% 2,337,915 -- 87,418 -- --
Clear Orbit Inc., Preferred Series A 1,428,572 5,000,013 -- -- -- --
Commonwealth Capital Ventures II, LLP 5.73% 2,019,502 -- -- -- --
Curon Medical , Inc., Common Stock 2,381,088 928,624 -- -- -- --
Curon Medical , Inc., Warrants 76,950 -- -- -- -- --
Firstsource Corp., Preferred Series A 2,388,345 -- -- -- -- --
Firstsource Corp., Promissory Note
8.00%, 6/30/2001 $2,666,667 -- -- -- -- --
Killerbiz, Inc., Promissory Note
8.00%, 6/10/2000 and 1/17/2001 $ 750,000 -- -- -- -- --
Mosaica Education, Inc., Preferred
Series C 75,059 3,537,722 -- -- -- --
Mosaica Education, Inc. Bridge Notes,
13.00%, 8/24/2006 $ 686,415 686,415 -- -- 89,196 --
Mosaica Education, Inc. (Advantage
Schools), 0.00%, 8/24/2006 $1,025,748 1,025,748 -- -- -- --
Mosaica Education, Inc. (ASI Texas
LLC ), 0.00%, 8/24/2006 $ 256,437 256,437 -- -- -- --
Protogene Laboratories, Inc.,
Preferred Series B 7,100,000 -- -- -- -- (5,122,497)
Protogene Laboratories, Inc.,
Promissory Note $2,140,000 -- -- -- -- (2,140,000)
Shares/
Principal
Amount/
Percentage
Held at October 31,
October 31, 2003
Name of Investment 2003 Value (Note 1)
- ------------------------------------- ----------- --------------
Affiliated Companies
Cardiac Science, Inc., Common Stock * -- $ --
Mid- Atlantic Venture Fund III, LP 8.71% 1,774,031
Clear Orbit Inc., Preferred Series A 1,428,572 5,000,013
Commonwealth Capital Ventures II, LLP 5.73% 1,925,198
Curon Medical , Inc., Common Stock 2,381,088 4,243,099
Curon Medical , Inc., Warrants 76,950 --
Firstsource Corp., Preferred Series A 2,388,345 --
Firstsource Corp., Promissory Note
8.00%, 6/30/2001 $2,666,667 --
Killerbiz, Inc., Promissory Note
8.00%, 6/10/2000 and 1/17/2001 $ 750,000 --
Mosaica Education, Inc., Preferred
Series C 75,059 3,537,722
Mosaica Education, Inc. Bridge Notes,
13.00%, 8/24/2006 $ 686,415 686,415
Mosaica Education, Inc. (Advantage
Schools), 0.00%, 8/24/2006 $1,025,748 1,025,748
Mosaica Education, Inc. (ASI Texas
LLC ), 0.00%, 8/24/2006 $ 256,437 256,437
Protogene Laboratories, Inc.,
Preferred Series B -- --
Protogene Laboratories, Inc.,
Promissory Note -- --
15
ReleaseNow, Inc. /Release Software
Corp. Series D 1,676,229 -- -- -- -- (5,850,039)
ReleaseNow, Inc., Preferred Series E 115,000 -- -- -- -- (460,000)
ReleaseNow, Inc., Preferred Series F 100,000 -- -- -- -- (500,000)
ReleaseNow, Inc., Preferred Series G 176,000 -- -- -- -- (880,000)
ReleaseNow, Inc., Promissory Note $ 133,333 -- -- 65,850 -- (67,483)
ReleaseNow, Inc., Promissory Note $ 133,333 -- -- -- -- (133,333)
----------- --- ---------- ------- ------------
Total Non Controlled Affiliates $17,214,362 $-- $1,929,514 $89,196 $(14,615,021)
ReleaseNow, Inc. /Release Software
Corp. Series D -- --
ReleaseNow, Inc., Preferred Series E -- --
ReleaseNow, Inc., Preferred Series F -- --
ReleaseNow, Inc., Preferred Series G -- --
ReleaseNow, Inc., Promissory Note -- --
ReleaseNow, Inc., Promissory Note -- --
-----------
Total Non Controlled Affiliates $18,448,663
* Cardiac Science, Inc. was an affiliated company prior to October 31, 2002 but
was not an affiliated company as of October 31, 2002.
Note 5 -- Pending Litigation
U.S. Trust Company, N.A. has been contacted by the Office of the New York
State Attorney General and the Securities and Exchange Commission in connection
with the investigation of practices in the mutual fund industry. U.S. Trust
Company, N.A. has also been named in certain class actions which allege that
U.S. Trust Company, N.A. allowed certain parties to engage in illegal and
improper trading practices which have caused injury to certain investors in
mutual funds and a derivative action alleging common law breach of fiduciary
duty toward certain mutual funds by various parties including U.S. Trust
Company, N.A.
Based upon currently available information, U.S. Trust Company, N.A
believes that the pending class actions and investigation are not likely to
materially affect its ability or the ability of the Managing Investment Adviser
to provide investment management services to the Company.
Note 6 - Guarantees
In the normal course of business, the Company enters into contracts that
provide general indemnifications. The Company's maximum exposure under these
agreements is dependent on future claims that may be made against the Company,
and therefore cannot be established; however, based on experience, the risk of
loss from such claims is considered remote.
16
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Excelsior Private Equity Fund II, Inc.
We have reviewed the statement of assets and liabilities of Excelsior Private
Equity Fund II, Inc. (the "Company"), including the portfolio of investments, as
of April 30, 2004, and the related statements of operations for the three-month
and six-month periods ended April 30, 2004 and 2003, and the statements of
changes in net assets, cash flows, and the financial highlights for the
six-month periods ended April 30, 2004 and 2003. These financial statements and
financial highlights are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the interim financial statements and financial highlights referred to
above for them to be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the statement of assets and
liabilities, including the portfolio of investments, as of October 31, 2003
(presented herein), 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
June 11, 2004
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Six-month and Three-month Periods Ended April 30, 2004 as Compared to the
Similar Periods in 2003
Realized and Unrealized Gains and Losses from Portfolio Investments
For the six-month periods ended April 30, 2004 and 2003, the Company had a
net realized loss on security transactions of $0 and ($7,322,878), respectively.
For the six-month periods ended April 30, 2004 and 2003, the Company had a net
change in unrealized appreciation on investments of $1,433,206 and $4,562,469,
respectively. The net realized loss for the period ended April 30, 2003 was
primarily the result of the conclusion of the assignment for the benefit of
creditors of ReleaseNow, Inc. ReleaseNow, Inc. a private company investment,
transferred ownership of its assets for liquidation; the liquidation concluded
and the Company received $65,850 as a pro rata distribution of claims against
the assets. The resulting realized loss was ($7,890,854). The Company, in
concluding its sale of shares of common stock of Cardiac Science, Inc., recorded
a realized gain of $538,331, which partially offset the loss. The net change in
unrealized appreciation on investments for the six-month period ended April 30,
2004 is the result of an increase in the valuation of the Company's private
investment funds. This was offset partially by the overall decline in the value
of Curon Medical, Inc. (NASDAQ: CURN), a publicly-traded common stock held by
the Company, which was net of the effect of the decrease in discount rate
applied to this security from 40% to 30% at October 31, 2003 and April 30, 2004,
respectively. The net change in unrealized appreciation for the period ended
April 30, 2003 was principally the result of a reclassification of ReleaseNow,
Inc. from unrealized depreciation to realized loss, offset in part by declines
in the valuations of private investment funds held by the Company.
For the three-month periods ended April 30, 2004 and 2003, the Company had
a net realized gain on security transactions of $0 and $29,645, respectively.
For the three-month periods ended April 30, 2004 and 2003, the Company had a net
change in unrealized depreciation on investments of ($1,949,253) and
($3,611,956), respectively. The net realized gain for the period ended April 30,
2003 was primarily the result of the disposition of the Company's shares of
Pivotal Corporation, a publicly-traded common stock. The net change in
unrealized depreciation on investments for the three-month period ended April
30, 2004 is the result of a decline in the value of Curon Medical, Inc. (NASDAQ:
CURN), a publicly-traded common stock held by the Company. This decline was
offset by an increase in the overall valuation of the Company's private
investment funds. The net change in unrealized depreciation on investments for
the three-month periods ended April 30, 2003 is the result a decrease in the
overall valuation of the Company's private investment funds.
Investment Income and Expenses
For the six-month periods ended April 30, 2004, the Company had investment
income of $69,699 and net operating expenses, net of expenses reimbursed by the
Managing Investment Adviser (as defined below), of $416,396, resulting in a net
investment loss of ($346,697). In comparison, the Company had investment income
of $115,570 and net operating expenses, net of expenses reimbursed by the
Managing Investment Adviser of $431,070, resulting in net investment loss of
($315,500) for the six-month period ended April 30, 2003. The primary reason for
the decrease in investment income was a decrease in short-term securities held
by the Company. The reduction in net expenses is principally attributable to
lower management investment advisory and administrative fees due to a decrease
in the value of assets under management, as well as a decline in professional
fees and other expenses.
For the three-month period ended April 30, 2004, the Company had investment
income of $36,192 and net operating expenses, net of expenses reimbursed by the
Managing Investment Adviser (as defined below), of $198,910, resulting in a net
investment loss of ($162,718). In comparison, the Company had investment income
of $57,855 and net operating expenses, net of expenses reimbursed by the
Managing Investment Adviser, of $177,372, resulting in a net investment loss of
($119,517) for the similar period ended April 30, 2003. The primary reason for
the decrease in investment income was a decrease in interest income due to a
decline in short-term securities held. Total expenses declined due to lower
managing investment advisory fees and administration fees which resulted from a
lower level of assets under management as well as a reduction in professional
fees and other expenses. Net expenses increased as a result of a higher level of
adjusted expense reimbursement by the Managing Investment Adviser for the period
ended April 30, 2003.
18
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 six-month periods ended April 30, 2004 and 2003, the Managing
Investment Adviser earned $352,596 and $360,068 in management fees,
respectively. In addition, for the six-month periods ended April 30, 2004 and
2003, there was no incentive fee payable by the Managing Investment Adviser. 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 six-month periods ended April 30, 2004 and 2003, the Managing Investment
Adviser reimbursed other operating expenses of the Company in the amounts of
$118,121 and $174,379, respectively, as a result of expenses incurred in excess
of these limits.
For the three-month periods ended April 30, 2004 and 2003, the Managing
Investment Adviser earned $167,085 and $173,133 in management fees,
respectively. In addition, for the three-month periods ended April 30, 2004 and
2003, the decrease in allowance for the management incentive fee was $316,003
and $0, respectively. There was an incentive fee payable to the Company by the
Managing Investment Adviser of $316,003 at January 31, 2004, however this
accrual has been reversed during the period due to the net decrease in the value
of the Fund's investments during the period. 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 April 30,2004 and 2003, the Managing Investment Adviser reimbursed other
operating expenses of the Company in the amounts of $47,145 and $113,782,
respectively, as a result of expenses incurred in excess of these limits.
Net Assets
At April 30, 2004, the Company's net assets were $50,802,697 or a net asset
value per common share of $259.55. This represents an increase of $1,086,509
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 the Company's
private investment funds, partially offset by a decline in the value of Curon
Medical, Inc. (NASDAQ: CURN), a publicly-traded common stock held by the
Company, and the net investment loss for the period ended April 30, 2004.
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 April 30, 2004, the Company held $37,453 in cash and $7,587,546 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 April 30, 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 six-month period ended April 30, 2004.
19
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 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 because
in total, they currently represent 78.2% of the Company's net assets at April
30, 2004. For the private investments held at April 30, 2004, changes to these
estimates, i.e. changes in the valuations of these private investments, resulted
in a $2.2 million increase in net asset value as compared to October 31, 2003.
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
Managing 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 Managing Investment Adviser, 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.
The Managing Investment Adviser also makes 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 78.2%
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 April 30, 2004, this publicly traded equity
security was valued at $3,450,197, representing 6.8% of the net assets. Thus,
20
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 $345,020. 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 $424,309.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. As of April 30, 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.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held at the offices
of United States Trust Company 114 West 47th Street, New York, New York 10036 at
10:00 a.m. (New York time) on March 26, 2004 (the "Meeting"). Of the 195,730
shares outstanding as of January 20, 2004, the record date for the Meeting,
113,847 were present or represented by proxy at the Meeting. The shareholders of
the Company approved the following matter: to elect each of Mr. Hover, Mr.
Bernstein, Mr. Murphy and Mr. Imbimbo as Directors of the Company. The results
of the voting for this proposal were as follows:
1. Election of Directors: For Withheld
--- --------
John C. Hover II 112,208 1,639
Gene M. Bernstein 112,570 1,277
Stephen V. Murphy 112,570 1,277
Victor F. Imbimbo, Jr. 112,570 1,277
Item 5. Other Information.
None.
21
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
15 Independent Registered Public Accounting Firm's Acknowledgement
Letter.
31.1 Certification of 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 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.
22
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: June 14, 2004 By: /s/ Douglas A. Lindgren
-----------------------------------
Douglas A. Lindgren
Chief Executive Officer
Date: June 14, 2004 By: /s/ Robert F. Aufenanger
-----------------------------------
Robert F. Aufenanger
Treasurer
(Principal Financial Officer)
23