<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1997
REGISTRATION NO. 333-23811
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-2
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[X] POST-EFFECTIVE AMENDMENT NO. 3
AND/OR
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 3
------------------------
EXCELSIOR PRIVATE EQUITY FUND II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
114 WEST 47TH STREET,
NEW YORK, NEW YORK 10036-1532
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (NUMBER, STREET, CITY, STATE, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 852-3949
------------------------
DAVID I. FANN
DOUGLAS A. LINDGREN
EXCELSIOR PRIVATE EQUITY FUND II, INC.
114 WEST 47TH STREET,
NEW YORK, NEW YORK 10036-1532
(NAME AND ADDRESS OF AGENTS FOR SERVICE)
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COPIES TO:
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LAWRENCE G. GRAEV, ESQ. RONALD A. SCHWARTZ, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP UNITED STATES TRUST COMPANY OF NEW YORK
30 ROCKEFELLER PLAZA 114 WEST 47TH STREET
NEW YORK, NEW YORK 10112 NEW YORK, NEW YORK 10036-1532
PHONE NO.: (212) 408-2400 PHONE NO.: (212) 852-1315
FAX NO.: (212) 408-2420 FAX NO.: (212) 852-1310
</TABLE>
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [X] No. 333-23811
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- -------------------------------------------------------------------------------------------------
Common Stock ($0.01 par value)... 30,000 shares $1,000 $30,000,000 $9,091
=================================================================================================
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL
THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
CROSS REFERENCE SHEET
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PART A
ITEM NUMBER LOCATION IN PROSPECTUS
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Item 1. Outside Front Cover..................... Outside Front Cover
Item 2. Inside Front and Outside Back Cover
Page.................................. Inside Front and Outside Back Cover Page
Item 3. Fee Table and Synopsis.................. Fee Table; Prospectus Summary
Item 4. Financial Highlights.................... Not applicable
Item 5. Plan of Distribution.................... Terms of The Offering and Purchase of
Shares; Selling Arrangements
Item 6. Selling Shareholders.................... Not applicable
Item 7. Use of Proceeds......................... Use of Proceeds
Item 8. General Description of the Registrant... Cover Page; The Company; Risk Factors;
Investment Objective and Policies;
Regulation
Item 9. Management.............................. Management
Item 10. Capital Stock, Long-Term Debt, and Other
Securities............................ Description of Shares
Item 11. Defaults and Arrears on Senior
Securities............................ Not applicable
Item 12. Legal Proceedings....................... Not applicable
Item 13. Table of Contents of the Statement of
Additional Information................ Not applicable
</TABLE>
<TABLE>
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PART B
ITEM NUMBER
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Item 14. Cover Page.............................. Not applicable
Item 15. Table of Contents....................... Not applicable
Item 16. General Information and History......... Not applicable
Item 17. Investment Objectives and Policies...... Investment Objective and Policies
Item 18. Management.............................. Management
Item 19. Control Persons and Principal Holders of
Securities............................ Management
Item 20. Investment Advisory and Other
Services.............................. Management
Item 21. Brokerage Allocation and Other
Practices............................. Brokerage Allocation and Other Practices
Item 22. Tax Status.............................. Federal Income Tax Matters
Item 23. Financial Statements.................... Financial Statements
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<PAGE> 3
PROSPECTUS
EXCELSIOR PRIVATE EQUITY FUND II, INC.
180,000 SHARES OF COMMON STOCK $180,000,000
$1,000 PER SHARE MINIMUM INVESTMENT -- 25 SHARES
Excelsior Private Equity Fund II, Inc., a Maryland corporation (the
"Company"), is a newly organized, non-diversified, closed-end management
investment company electing status as a business development company ("BDC")
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), and which has registered its securities under the Securities Act of 1933,
as amended (the "Securities Act"). The Company's investment objective is to
achieve long-term capital appreciation by investing in private later-stage
venture capital and private middle-market companies ("Portfolio Companies") and,
subject to the limitations of the Investment Company Act, in certain venture
capital, buyout and private equity funds ("Private Funds") which the Managing
Investment Adviser (defined below) believes offer significant long-term capital
appreciation. There is no assurance that the Company's investment objective will
be attained. Current income will not be a factor in the selection of
investments. By statute, a BDC must invest at least 70% of its assets in
specified investments including "eligible portfolio companies" (as defined in
the Investment Company Act). See "The Company" and "Regulation."
United States Trust Company of New York is the Managing Investment Adviser
of the Company ("U.S. Trust" or the "Managing Investment Adviser") and is
responsible for the Company's private equity investments. The Managing
Investment Adviser is organized under the laws of New York. The Managing
Investment Adviser will perform the management and administrative services
necessary for the operation of the Company. See "Management."
This Prospectus sets forth concisely the information about the Company that
a prospective investor should know before investing and should be retained for
future reference. The address of the Company and U.S. Trust is 114 West 47th
Street, New York, New York 10036-1532, and the telephone number of the Company
is (212) 852-3949. There is no public market for the Shares and none is expected
to develop. If the Shares are listed on a securities exchange or quoted on
NASDAQ in the future, there is no assurance that an active trading market will
develop.
The minimum number of shares (the "Shares") that may be purchased by an
investor is 25 Shares and the minimum investment amount is $25,000. The Company
has the right to waive the minimum, at its discretion.
Investors may obtain other information or make inquiries about the Company
by writing or calling the Company at (212) 852-3949.
SHARES OF THE COMPANY ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, U.S. TRUST, AND THE SHARES ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
------------------------
THESE ARE SPECULATIVE SECURITIES. THE COMPANY IS A NEWLY ORGANIZED ENTITY AND
PRIOR TO THIS OFFERING THERE HAS BEEN NO PUBLIC MARKET FOR THE COMPANY'S
SECURITIES, AND THERE CAN BE NO ASSURANCE THAT ANY SUCH MARKET WILL DEVELOP. SEE
"RISK FACTORS" BEGINNING ON PAGE 9.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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SALES LOAD
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS
PUBLIC(1) AND COMMISSIONS TO COMPANY(2)
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Per Share (25 Share Minimum)................ $1,000 None $1,000
- -----------------------------------------------------------------------------------------------------------
Total Minimum (100,000 Shares) $100,000,000 None $100,000,000
- -----------------------------------------------------------------------------------------------------------
Total Maximum (180,000 Shares) $180,000,000 None $180,000,000
===========================================================================================================
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(1) The Shares are made available through UST Financial Services Corp. (the
"Selling Agent") to clients of U.S. Trust and its affiliates who meet the
investor suitability standards set forth herein. See "Investor Suitability
Standards" and "Selling Arrangements."
(2) Before deducting organizational and initial offering expenses estimated at
$222,000 payable by the Company.
The Company reserves the right to withdraw, cancel or modify the offering
and to reject any subscription in whole or in part. The offering will terminate
on October 31, 1997 or such other subsequent date not later than December 31,
1997 as the Managing Investment Adviser and the Company may determine (the
"Termination Date"). If a minimum of 100,000 Shares or $100,000,000 has not been
subscribed for by the Termination Date, the offering will terminate and all
proceeds from the offering will be refunded to investors with any interest
earned thereon and without any deductions. It is expected that a first closing
will be held and that certificates representing the Shares will be delivered on
or about the fifth business day after receipt by U.S. Trust of subscription
funds representing 100,000 Shares or $100,000,000. Funds paid by investors will
be deposited in an interest-bearing bank escrow account with U.S. Trust pending
each closing. The Company may continue to offer for sale the remaining unsold
Shares and accept subscriptions for such Shares from time to time at subsequent
closings until the earlier of the Termination Date or the date all the Shares
are sold.
The date of this Prospectus is October 7, 1997.
<PAGE> 4
FEE TABLE
STOCKHOLDER TRANSACTION EXPENSES
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Sales Load
Underwriting Discounts and Commissions...................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to common shares)
Management Fees............................................................. 1.50%*
Other Expenses.............................................................. 0.25%**
Total Annual Expenses....................................................... 1.75%
</TABLE>
- ---------------
* Does not include the Managing Investment Adviser's incentive fee of 20% of
the Company's cumulative realized capital gains (net of realized capital
losses and unrealized net capital depreciation) on investments other than
investments in Private Funds ("Direct Investments"). No incentive fee will be
paid to the Managing Investment Adviser with respect to the Company's
investments in Private Funds. The Management Fee will amount to 1.5% of the
Company's net assets, determined as of the end of each calendar quarter, that
are invested or committed to be invested in Portfolio Companies and Private
Funds and will amount to 0.5% of the Company's net assets, determined as of
the end of each calendar quarter, that are invested in Short-Term Investments
(defined below) and are not committed to Portfolio Companies or Private
Funds. See "Investment Objective and Policies," "Management" and
"Regulation."
** "Other Expenses" are based on estimated amounts for the current fiscal year
and may be less than the maximum of 0.25% of the Company's net assets if
actual expenses incurred by the Company are lower. U.S. Trust has agreed to
waive or reimburse such expenses to the extent they exceed 0.25% of the
Company's net assets. "Other Expenses" include organizational expenses of
approximately $15,000 and offering expenses of approximately $207,000. See
"Management -- Expenses of the Company."
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EXAMPLE 1 YEAR 3 YEARS
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You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return:
Example 1(1)................................................ $ 18 $55
Example 2(2)................................................ $ 28 $85
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN IN THE EXAMPLES.
The purpose of the above table is to assist the investor in understanding
the various costs and expenses that an investor in the Company will bear
directly or indirectly. For a more complete description of the various costs and
expenses, see "Management."
- ---------------
(1) Assumes Management Fee of 1.50% and other expenses of 0.25% of the Company's
net assets and does not include the Managing Investment Adviser's incentive
fee of 20% of the Company's cumulative realized capital gains (net of
realized capital losses and unrealized net capital depreciation) on Direct
Investments.
(2) Assumes Management Fee of 1.50% and other expenses of 0.25% of the Company's
net assets and includes the Managing Investment Adviser's incentive fee of
20% of the Company's cumulative realized capital gains (net of realized
capital losses and unrealized net capital depreciation) on Direct
Investments. These expense estimates are based on the assumption that the
entire 5% annual return is the result of realized capital gains on Direct
Investments.
2
<PAGE> 5
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and annual reports and other information with the Securities
and Exchange Commission (the "Commission"). The reports, proxy statements and
annual reports and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at certain of its
Regional Offices located at 7 World Trade Center, New York, New York 10048 and
Northwest Atrium Center, 500 Madison Street, Room 1400, Chicago, Illinois
60661-2511. Copies of such material can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such materials can also be inspected on the Internet at
http://www.sec.gov.
REPORTS TO STOCKHOLDERS
The Company will furnish to its stockholders annual reports containing
audited financial statements and such other periodic reports as it may determine
to furnish or as may be required by law.
3
<PAGE> 6
INVESTOR SUITABILITY STANDARDS
THE PURCHASE OF SHARES INVOLVES SIGNIFICANT RISKS AND IS NOT A SUITABLE
INVESTMENT FOR ALL POTENTIAL INVESTORS. SEE "RISK FACTORS."
SUBSTANTIAL MEANS AND NET WORTH. An investment in the Shares is suitable
only for investors who have no need for liquidity in this investment and who
have adequate means of providing for their annual needs and contingencies.
Accordingly, no Shares will be sold to a prospective investor unless such
investor (i) has a net worth (exclusive of homes, home furnishings and
automobiles) of $250,000 or (ii) has a net worth (exclusive of homes, home
furnishings and automobiles) of $60,000 and expects to have during each of the
current and the next three tax years income from any source of $60,000 or more.
Residents of certain states are required to represent that they meet the
investor suitability standards established by such state. See "Terms of the
Offering and Purchase of Shares -- Investor Suitability Standards."
ABILITY AND WILLINGNESS TO ACCEPT RISKS. The economic benefit from an
investment in the Company depends upon many factors beyond the control of the
Company and the Managing Investment Adviser. The Company's investments involve a
high degree of business and financial risk that can result in substantial
losses. See "Risk Factors." Accordingly, the suitability for any particular
investor of a purchase of the Shares will depend upon, among other things, such
investor's investment objectives and such investor's ability to accept
speculative risks. The Shares are not a suitable investment for investors
seeking current income.
ABILITY TO ACCEPT LIMITATIONS ON TRANSFERABILITY. Investors may not be
able to liquidate their investment in the event of emergency or for any other
reason because there is not now any public market for the Shares and none is
expected to develop.
RETIREMENT ACCOUNT CONSIDERATIONS. Shares may not be purchased by any
employee benefit plan or individual retirement account with respect to which
U.S. Trust or any of its affiliates is a fiduciary within the meaning of Section
3(21) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), except pursuant to an available exemption therefrom.
Most financial and tax planning experts recommend a balanced investment
portfolio for retirement savings and suggest that the amount of funds to be
invested by an employee benefit plan or a retirement account in high-risk
securities, such as the Shares, be appropriate to an investor's particular
retirement savings needs. The Company recommends that any purchase of Shares be
considered accordingly.
PURCHASES ON BEHALF OF MINORS. In the case of a custodian purchasing
Shares on behalf of a minor pursuant to the Uniform Gifts to Minors Act, (i) if
the funds used for the purchase of the Shares are funds gifted from a donor (who
is normally the custodian for and the parent of the minor) to the minor at the
time of purchase of the Shares, then the donor must meet the financial
suitability standards set forth under "Investor Suitability Standards" and (ii)
if the funds used for the purchase of the Shares are funds belonging to the
minor prior to the time of the purchase of the Shares, then the minor must meet
such financial suitability standard.
4
<PAGE> 7
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information
appearing elsewhere herein. Each prospective investor is urged to read this
Prospectus in its entirety.
THE COMPANY
Excelsior Private Equity Fund II, Inc., a Maryland corporation (the
"Company"), is a newly organized, non-diversified, closed-end management
investment company which has elected to be treated as a business development
company ("BDC") under the Investment Company Act. The Company aims to provide
investors with the opportunity to participate with a minimum investment of
$25,000 in direct private equity investments and privately offered investment
funds managed by third parties. These investment opportunities are generally not
available to the public and typically require substantially larger commitments
than the minimum investment in the Company. Other advantages which might
otherwise be unavailable to investors if they were to engage directly in private
equity investments include professional management, investment and portfolio
diversification, and administrative convenience. See "The Company."
INVESTMENT OBJECTIVE AND POLICIES
The Company's investment objective is to achieve long-term capital
appreciation, rather than current income, by investing at least 70% of its
assets in private later-stage venture capital companies ("Later-Stage Venture
Capital Companies") and private middle-market companies ("Middle-Market
Companies"). Later-Stage Venture Capital Companies and Middle-Market Companies
are companies in which the equity is closely held by company founders,
management and/or a limited number of institutional investors (Later-Stage
Venture Capital Companies and Middle-Market Companies, collectively, the
"Portfolio Companies"). Subject to the limitations of the Investment Company Act
of 1940, as amended (the "Investment Company Act"), the Company also intends to
invest up to 30% of its assets in privately offered venture capital, buyout and
private equity funds ("Private Funds") managed by third parties which have
attractive investment return prospects and offer compelling strategic benefits
to the Company. Pending investment, operating purposes and for temporary or
emergency purposes, the Company will make liquid investments in interest-bearing
bank accounts, money market mutual funds, U.S. treasury securities and/or
certificates of deposit with maturities of less than one year, commercial paper,
and other short-term securities (collectively, the "Short-Term Investments").
The Company expects to maintain approximately 10% of its assets in Short-Term
Investments in order to pay for operating expenses and to meet contingencies.
The Company will seek to invest in opportunities consistent with the investment
philosophy of U.S. Trust including the portfolio strategies and investment
themes approach used by U.S. Trust in its investment management and advisory
business. Following its initial investments in Portfolio Companies, the Company
anticipates that it may be called upon to provide additional funds to Portfolio
Companies or have the opportunity to increase investments in successful
operations. The Company may from time to time borrow funds for operating
purposes in an amount up to 25% of its total assets to facilitate the making of
follow-on investments, to maintain its pass-through tax status or to pay
contingencies and expenses. The Company will not borrow to pay the management
fee payable to the Managing Investment Adviser. There can be no assurance that
the Company's investment objective will be attained. See "Investment Objective
and Policies."
MANAGEMENT AND COMPENSATION
U.S. Trust is the Managing Investment Adviser and is responsible for
identifying, evaluating, structuring, monitoring and disposing of the Company's
investments and providing, or arranging for suitable third parties to provide,
any and all management and administrative services reasonably necessary for the
operation of the Company and the conduct of its business. The Managing
Investment Adviser will also make available personnel and services to Portfolio
Companies requiring managerial assistance.
5
<PAGE> 8
The Managing Investment Adviser has served as the managing investment
adviser to UST Private Equity Investors Fund, Inc. ("Fund I"), a registered BDC,
since its inception in September 1994. The Company's investment strategy is
similar to that of Fund I. As of July 31, 1997, Fund I had investments in 12
portfolio companies and 6 private funds with an aggregate of approximately $40.3
million of invested and/or committed capital.
The Company will pay the Managing Investment Adviser a management fee equal
to (a) 1.5 % of the Company's net assets that are invested or committed to be
invested in Portfolio Companies or Private Funds and (b) 0.5% of the Company's
net assets that are invested in Short-Term Investments and are not committed to
be invested in Portfolio Companies or Private Funds. In addition, the Managing
Investment Adviser will receive an incentive fee equal to 20% of the Company's
cumulative realized capital gains (net of realized capital losses and unrealized
net capital depreciation) on investments other than investments in Private
Funds, less the aggregate amount of incentive fee payments in prior years, for
providing advisory and administrative services to the Company. No incentive fee
will be paid to the Managing Investment Adviser with respect to the Company's
investments in Private Funds. See "Management."
TERMS OF THE OFFERING AND PURCHASE OF SHARES
The Company is offering up to 150,000 Shares of Common Stock at a price per
Share of $1,000. The minimum investment is $25,000, or 25 shares. The Company
has the right to waive the minimum, at its discretion. The offering will
terminate on July 31, 1997 or such other subsequent date not later than December
31, 1997 as the Managing Investment Adviser and the Company may determine (the
"Termination Date"). If a minimum of 100,000 Shares or $100,000,000 has not been
subscribed for by the Termination Date, the offering will terminate and all
proceeds from the offering will be refunded to investors with any interest
earned thereon. See "Risk Factors -- Minimum Proceeds; Funding and Portfolio
Balance." The Company may continue to offer for sale the remaining unsold Shares
and accept subscriptions for such Shares from time to time at subsequent
closings until the earlier of the Termination Date or the date all the Shares
are sold. Each Subscriber will be required to complete, execute and deliver to
the Selling Agent an executed copy of the Subscription Agreement attached hereto
as Exhibit A (the "Subscription Agreement"). Funds paid by subscribers will be
deposited in an interest-bearing bank escrow account with U.S. Trust pending
each closing. Any change in the price of the Shares will be set forth in a
supplement to this Prospectus. See "Terms of the Offering and Purchase of
Shares."
USE OF PROCEEDS
The Company intends to apply the net proceeds of this offering to make
investments in furtherance of its investment objective and policies. See "Use of
Proceeds."
RISK FACTORS
The Shares offered hereby involve a high degree of risk relating to both
the Company and to the Company's investments. Such risks include, but are not
limited to, the Company's lack of operating history, transactions with
affiliates and potential conflicts of interest, limited public market for the
Shares of the Company, risks associated with and illiquidity of private equity
investments, the possible need for follow-on investments in Portfolio Companies,
competition for investments, lack of diversification in the Company's portfolio
and risks relating to regulation. Investors should carefully review the section
entitled "Risk Factors" in this Prospectus prior to investing in the Company.
DESCRIPTION OF SHARES
The duration of the Company will be ten years from the final closing of the
sale of the Shares; however, the Board of Directors has the right, in its sole
discretion, to extend the term for up to two additional two-year periods, after
which the approval of investors who represent 66 2/3% of the Company's
6
<PAGE> 9
outstanding Shares may determine to extend the term of the Company. Upon the
expiration of the Company's term, the Company will be dissolved and the
Company's portfolio securities will be sold. Each stockholder will receive a pro
rata share of the net proceeds of such sale. See "Description of Shares."
SELLING ARRANGEMENTS
The Shares are made available through the Selling Agent to clients of U.S.
Trust and its affiliates who meet the investor suitability standards set forth
herein. The Selling Agent may enter into agreements with one or more sub-selling
agents to arrange for the sale of the Shares in certain states. Residents of
certain states are required to represent that they meet the investor suitability
standards established by such state. See "Investor Suitability Standards" and
"Selling Arrangements."
FEDERAL INCOME TAX MATTERS
The Company intends to elect the special income tax treatment available to
"regulated investment companies"' under subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). As a result of such election, the Company
will not be subject to federal income tax on that part of its net investment
income and realized capital gains which it pays to its stockholders. See
"Federal Income Tax Matters."
7
<PAGE> 10
THE COMPANY
The Company is a newly organized, non-diversified, closed-end management
investment company which has elected to be treated as a BDC under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and which has
registered its securities under the Securities Act of 1933, as amended (the
"Securities Act"). The Company's investment objective is to achieve long-term
capital appreciation, rather than current income, by investing in private equity
securities of Later-Stage Venture Capital Companies and Middle-Market Companies
and, subject to the limitations of the Investment Company Act, in Private Funds
which the Managing Investment Adviser believes offer significant long-term
capital appreciation. In addition, the Company will offer managerial assistance
to certain Portfolio Companies. The Board of Directors may change the Company's
status as a BDC under the Investment Company Act only with the vote of a
majority of the outstanding Shares. The Company provides investors with the
opportunity to participate in investments which are generally not available to
the public and typically require substantially larger financial commitments than
the minimum investment in the Company. The Company is managed by the Managing
Investment Adviser under the supervision of the Company's Board of Directors.
The Company was incorporated in Maryland on March 20, 1997. The Company's and
U.S. Trust's principal office is located at 114 West 47th Street, New York, New
York 10036-1532, and the telephone number of the Company is (212) 852-3949.
As a BDC, the Company will invest at least 70% of its assets ("qualifying
assets") in securities of companies that qualify as "eligible portfolio
companies" under the Investment Company Act. An eligible portfolio company
generally is a United States company that is not an investment company and that
(i) does not have a class of securities registered on an exchange or included in
the Federal Reserve Board's over-the-counter margin list; or (ii) is actively
controlled by a BDC either alone or as part of a group acting together and has
an affiliate of a BDC on its board of directors; or (iii) meets such other
criteria as may be established by the Commission. Control under the Investment
Company Act is presumed to exist where a BDC either alone or as part of a group
acting together owns more than 25% of the outstanding voting securities of the
eligible portfolio company. The Company may maintain up to 30% of its assets as
non-qualifying assets; however, the Company intends to retain maximum
flexibility in connection with its investments and, therefore, does not have a
policy as to the minimum percentage of its assets that will be so invested. The
Company expects to maintain approximately 10% of its assets in Short-Term
Investments in order to pay for operating expenses and to meet contingencies.
Short-Term Investments will qualify for determining whether the Company has 70%
of its total assets invested in eligible portfolio securities.
With respect to investment of qualifying assets, the Company intends to
place its emphasis on direct and secondary purchases of:
- Private placements of Later-Stage Venture Capital Companies.
- Private placements of Middle-Market Companies.
The Company intends to invest non-qualifying assets directly or on a
secondary basis primarily in Private Funds.
The Company has no fixed policy concerning the types of businesses or
industry groups in which it will invest or as to the amount of funds that it
will invest in any one issuer; however, the Company currently intends to limit
its investment in any one issuer to 10% of its net assets, at the time of
investment. The foregoing is not a fundamental policy of the Company and may be
changed without stockholder approval. In addition, because of the Company's
election to be treated as a "regulated investment company" under the Code, the
Company will be subject to the diversification requirements of the Code. See
"Federal Income Tax Matters."
The Company will originate its investment opportunities from many sources
including unsolicited proposals from the public, personal contacts of the
Managing Investment Adviser or its affiliates, other venture capitalists, buyout
and private equity investors and referrals from investment banks, commercial
banks, lawyers, accountants and other members of the financial community,
including U.S. Trust personnel. Mr. David Fann, the President and Chief
Executive Officer of the Company and the Division Manager of the
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Alternative Investments Division of U.S. Trust, and Mr. Douglas A. Lindgren, the
Chief Investment Officer of the Company and a Senior Vice President of U.S.
Trust, have principal responsibility for evaluating, structuring and selecting
the Company's investments, subject to the review and approval of the Investment
Committee of the Managing Investment Adviser. Mr. Fann and Mr. Lindgren also
serve as President and Chief Executive Officer and Executive Vice President,
respectively, of Fund I.
In general, the Company will make its direct equity investments in a manner
consistent with the general investment philosophy employed by U.S. Trust in its
investment management advisory business. U.S. Trust believes in following a
long-term investment philosophy based on identifying opportunities with
sustainable fundamental values. Such values may be found in a company's future
earnings potential or in its existing resources and assets. See "Investment
Objective and Policies."
RISK FACTORS
The Shares offered hereby involve a high degree of risk, including, but not
limited to, the risk factors described below. Each prospective investor should
carefully consider the following risk factors inherent in and affecting the
business of the Company and this offering before making an investment decision.
Prospective investors should consider the information set forth under
"Management -- Potential Conflicts of Interest."
A. RISKS RELATED TO THE COMPANY
Lack of Operating History
While the key personnel of the Managing Investment Adviser and its
affiliates have considerable experience in venture capital and private equity
investing, including experience with Fund I, the Company has recently been
formed and has no operating history of its own upon which an investor may base
an evaluation of the likely performance of the Company.
Minimum Proceeds; Funding and Portfolio Balance
The Company will begin operations upon the sale of a minimum of 100,000
Shares or a minimum capitalization of approximately $100,000,000. The number of
investments, portfolio balance and potential profitability of the Company could
be affected by the amount of funds at its disposal and, with the minimum
capitalization, the Company's investment return might be adversely affected. The
funding level could negatively impact the number and diversity of investments,
increasing the Company's volatility and risk.
Reliance on the Managing Investment Adviser
The investment decisions of the Company will be made exclusively by the
Managing Investment Adviser. Investors will have no right or power to take part
in the management of the Company and will not receive the detailed financial
information made available by issuers to the Managing Investment Adviser in
connection with the review of possible purchases for the Company's portfolio.
Accordingly, investors must be willing to entrust all management aspects of the
Company to the Managing Investment Adviser.
Regulation
The Company has elected to be treated as a BDC under the Investment Company
Act. The applicable provisions of the Investment Company Act impose numerous
restrictions on the activities of the Company, including restrictions on the
nature of its investments, its use of leverage and its issuance of securities,
options, warrants or rights. Among the restrictions is the requirement that a
majority of the directors be individuals who are not "interested persons" within
the meaning of the Investment Company Act and that the Company must generally
invest at least 70% of its assets in securities of companies that meet the
requirements for "eligible portfolio companies" under the Investment Company
Act. In addition, a BDC must make significant managerial assistance available to
a significant number of the companies whose securities it purchases. The
Managing Investment Adviser believes that the constraints applicable to BDCs are
consistent with the objectives of the Company. However, such constraints could
prohibit the Company from investing in some
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potentially attractive situations that might otherwise be available if such an
investment would not disqualify the Company from its status as a BDC.
While the Company is not aware of any judicial rulings under, and is aware
of only a few administrative interpretations of the portions of, the Investment
Company Act applicable to the Company, there can be no assurance that such
provisions will be interpreted or administratively implemented in a manner
consistent with the Company's objectives and intended manner of operation. In
the event that the Board of Directors determines that it cannot operate
effectively as a BDC, the Board of Directors may at some future date decide to
withdraw the Company's election to be treated as a BDC and transform it into an
operating company not subject to regulation under the Investment Company Act and
the special income tax provisions available to "regulated investment companies"
under the Code, or cause the Company to be liquidated. Should the Board of
Directors seek to withdraw such election, it must obtain the approval of
investors who represent a majority of the Company's outstanding Shares. See
"Regulation."
Transactions with Affiliates; Potential Conflicts of Interest
The Investment Company Act restricts transactions between the Company and
any "affiliated person" (as defined in the Investment Company Act) including,
among others, the Company's officers, directors, principal stockholders and
employees, and any other affiliates of the Company. In many cases, the
Investment Company Act prohibits transactions between the Company and such
persons unless the Company first applies for and obtains an exemptive order from
the Commission. Delays and costs involved in obtaining necessary approvals may
decrease the profitability of such transactions or make it impracticable or
impossible to consummate such transactions. Further, provisions of the Federal
Reserve Act impose restrictions on certain types of transactions ("covered
transactions") between a member bank and its affiliates, as defined in those
provisions. For purposes of these provisions, the Company is an "affiliate" of
the Managing Investment Adviser and Fund I.
Prior to commencement of operations, the Company's Board of Directors will
implement written procedures approved by a majority of the disinterested
Directors that are designed to regulate investment activity by affiliates in
conflict with or in conjunction with the Company's activities, including
adopting a code of ethics containing provisions designed to prevent employees
from engaging in acts prohibited by Rule 17j-1 under the Investment Company Act.
However, circumstances could develop which would require Commission approval in
advance of proposed transactions by the Company or its affiliates with Portfolio
Companies or their affiliates. Depending upon the extent of the Managing
Investment Adviser's influence and control with respect to such Portfolio
Companies, the selection of any affiliates of the Managing Investment Adviser to
perform various services for Portfolio Companies may not be a disinterested
decision and the terms and conditions for the performance of such services and
the amount and terms of compensation to be received therefor may not be
determined in arms-length negotiations, although the terms and conditions of any
such selection are expected to be consistent with those which would be offered
in good faith to an unaffiliated third party retained to provide such services.
The selection of the Managing Investment Adviser or any of its affiliates to
perform services for a Portfolio Company must be approved by a majority of the
disinterested Directors of the Company and the independent and disinterested
directors of the Portfolio Company.
In addition, officers or Directors of the Company or its affiliates,
including the Managing Investment Adviser, may serve as directors of or as
consultants to certain Portfolio Companies and, in connection therewith, may
earn consulting fees, finder's fees, and other fees and commissions, which may
be paid in the form of cash, securities or other forms of consideration. While
the Managing Investment Adviser is obligated to use its best efforts to provide
the Company with a continuing and suitable investment program consistent with
its investment objective and policies, the Managing Investment Adviser is not
required to present to the Company any particular investment opportunity that
falls within the investment objective and policies of the Company except as set
forth in the procedures adopted by the Company's Board of Directors. Such
procedures provide that the Managing Investment Adviser must endeavor to offer
to the Company on an equal basis investment opportunities that would be suitable
for both the Company and other similar private equity funds for which the
Managing Investment Adviser provides discretionary investment advisory services.
The Company's Portfolio Companies may also enter into certain financial
arrangements with the Company and/or
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its affiliates subject to appropriate regulatory guidelines or approvals as
required. The Company intends to seek an exemptive order from the Commission
relieving the Company, subject to certain terms and conditions, from certain
provisions of the Investment Company Act to permit co-investments by the Company
with Fund I, which is an affiliate of the Company and the Managing Investment
Adviser, and certain other affiliates of the Company or the Managing Investment
Adviser, including certain companies or funds that may be set up in the future.
Such co-investments will be in specified amounts and on terms and conditions
that are the same in all material respects, subject to the availability of
capital for investment on the part of the Company and each such affiliate and
certain other considerations. There can be no assurance that the Commission will
grant such an order or that such affiliates will have capital available to
co-invest with the Company. See "Regulation." The Managing Investment Adviser
and its affiliates will not enter into any such arrangement with a Portfolio
Company unless such arrangement has been approved by a majority of the
disinterested Directors of the Company and by the independent directors of the
Portfolio Company who also have no interest in the arrangement. Because of their
potentially varying investment objectives or other factors, conflicts could
arise between the Company and its affiliates relating to such co-investments,
which can only be resolved through the exercise by the Managing Investment
Adviser of such judgment as is consistent with its fiduciary duties to the
Company. Even with the proper exercise of such judgment, however, there can be
no assurance that potential conflicts will be resolved in a manner favorable to
the Company. The Company will not have independent management or employees and
will rely upon the Managing Investment Adviser and its affiliates for management
and administration of the Company and its assets. Conflicts of interest may
arise in allocating management time, services or functions between the Company
and other entities for which the Managing Investment Adviser and its affiliates
may provide similar services. The Company's Board of Directors will supervise
the activities of the Managing Investment Adviser. See "Management -- Potential
Conflicts of Interest."
Unspecified Use of Proceeds
Inasmuch as the Company has not identified the particular uses for the net
proceeds from this offering other than to make investments on the basis of
opportunities as they may arise, prospective investors must rely on the ability
of the Managing Investment Adviser to identify and make portfolio investments
consistent with the Company's investment objective. Investors will not have the
opportunity to evaluate personally the relevant economic, financial and other
information which will be utilized by the Managing Investment Adviser in
deciding whether or not to make a particular investment or to dispose of any
such investment. See "Use of Proceeds."
Federal Income Taxation
The Company intends to elect to be treated as a "regulated investment
company" under subchapter M of the Code. As a result of such election, the
Company will not be subject to federal income tax on that part of its investment
income and realized capital gains which it pays out to its stockholders.
However, to the extent it makes insufficient distributions, the Company will be
subject to a nondeductible 4% excise tax and may lose pass-through tax treatment
under subchapter M. See "Federal Income Tax Matters."
Limited Public Market for the Shares; Trading Below Net Asset Value
There is no public market for the Shares and none is expected to develop.
The Shares initially will not be listed on a securities exchange or quoted on
Nasdaq. The Company may subsequently consider applying to have the Shares listed
or quoted; however, there is no assurance that the Shares will ever be listed or
quoted or that an active trading market for the Shares will develop, and if a
market does develop, it may be small and inactive. In addition, any purchasers
must meet the investor suitability standards set forth herein. Consequently,
investors may not be able to liquidate their investment in the event of
emergency or any other reason. To the extent that the Shares may be listed on a
securities exchange or quoted on Nasdaq, investors should note that shares of
closed-end investment companies often trade at prices different than their net
asset value and frequently trade at a discount from net asset value. See
"Regulation."
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B. GENERAL RISKS OF INVESTMENTS
Risk of Private Equity Investments
While the Company will be a non-diversified company as defined by the
Investment Company Act, it does not expect to invest more than 10% of its total
assets in any one Portfolio Company. The Company's investments in Private Funds
serve to further diversify its holdings. Since the Company's assets may be
concentrated in relatively few investments, substantial declines in the values
of its investments could have a material adverse effect on the net asset value
of the Company. Although private equity investments offer the opportunity for
significant capital gains, such investments involve a high degree of business
and financial risk that can result in substantial losses. Among these are the
risks associated with investment in companies in an early stage of development
or with little or no operating history, companies operating at a loss or with
substantial variation in operating results from period to period, companies with
the need for substantial additional capital to support expansion or to maintain
a competitive position, or companies with significant financial leverage. Such
companies may also face intense competition from others including those with
greater financial resources, more extensive development, manufacturing,
distribution or other attributes, over which the Company will have no control.
The Company anticipates that it may also make investments in high-technology
companies that may face risks of product obsolescence.
Illiquidity of Private Equity Investments
Because of the competition for investments that meet the requirements for
"qualifying assets," the Company anticipates that it may take up to four years
before it is fully invested or committed to invest in Portfolio Companies.
Private equity investments may typically take from four to seven years from the
date of initial investment to reach a state of maturity at which disposition can
be considered. In light of the foregoing, it is unlikely that any significant
distribution of the proceeds from the disposition of private equity investments
will be made until the later years of the Company's term.
The Company's private equity investments will consist primarily of
securities that are subject to restrictions on sale by the Company because they
were acquired from the issuer in "private placement" transactions or because the
Company is deemed to be an affiliate of the issuer. Generally, the Company
cannot sell these securities publicly without the expense and time required to
register the securities under the Securities Act or sell the securities under
Rule 144 or other rules under the Securities Act which permit only limited sales
under specified conditions. When restricted securities are sold to the public,
the Company may be deemed an "underwriter" or possibly a controlling person
under the Securities Act and be subject to liability as such under the
Securities Act.
In addition, contractual or practical limitations may inhibit the Company's
ability to sell, distribute or liquidate its investments in Portfolio Companies
because the issuers are privately held, because the Company owns a relatively
large percentage of the issuer's outstanding securities, or because joint
venture associates, other investors, financial institutions, or management are
relying on the Company's continued investment. Sales may also be limited by
financial market conditions, which may be unfavorable for sales of securities of
particular issuers or issuers in particular markets. The above limitations on
liquidity of the Company's portfolio investments could prevent a successful sale
and result in the delay of any sale or reduction in the amount of proceeds that
might otherwise be realized. Although the Company will reflect these restrictive
factors in the valuation of its investments, no assurance can be given that the
estimated values will represent the return that might ultimately be realized by
the Company from the investment. See "Valuation of Portfolio Securities."
Need for Follow-On Investments
Following its initial investments in Portfolio Companies, the Company
anticipates that it may be called upon to provide additional funds to Portfolio
Companies or have the opportunity to increase investments in successful
operations. Although the Company may borrow to make follow-on investments, there
is no assurance that the Company will make follow-on investments or that the
Company will have sufficient funds to make such investments. Any decision by the
Company not to make follow-on investments or its inability to
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make them may have a substantial impact on Portfolio Companies in need of such
an investment or may result in a missed opportunity for the Company to increase
its participation in a successful operation.
Competition for Investments
The Company expects to encounter competition from other entities having
similar investment objectives which may include others that may be affiliated
with the Managing Investment Adviser, including Fund I. Historically, the
primary competition for venture capital, buyout, and other private equity
investments has been from venture capital, buyout and private equity
partnerships and corporations, private equity affiliates of large industrial and
financial companies, small business investment companies, and wealthy
individuals. The Company will frequently be a co-investor with other
professional venture capital, private equity or leveraged buyout groups
including several in which the Company may be an investor. These relationships
with other groups should expand the Company's access to investment
opportunities.
In addition, it is possible that there may be circumstances under which an
additional investment would be considered an affiliated transaction, requiring
prior Commission approval. The receipt of an exemptive order from the Commission
could be time consuming and costly and there can be no assurance that such
approval would be obtained. Moreover, inasmuch as the Company intends to elect
to be taxed as a "regulated investment company" under subchapter M of the Code,
the ability to make additional investments could be restricted by the
diversification requirements of subchapter M. See "Federal Income Tax Matters."
Borrowing
In general, the Company does not intend to borrow funds for investment
purposes. However, the Company may borrow funds to facilitate the making of
follow-on investments, to maintain its pass-through tax status as a regulated
investment company under subchapter M of the Code or to pay contingencies and
expenses. The Company will not borrow to pay the management fee payable to the
Managing Investment Adviser. The Company is permitted under the Investment
Company Act to borrow funds if, immediately after the borrowing, it will have an
asset coverage (as defined in the Investment Company Act) of at least 200%. The
amount and nature of any borrowings will depend upon a number of factors over
which neither the Board of Directors nor the Managing Investment Adviser has
control, including general economic conditions, conditions in the financial
markets and the impact of the financing on the tax treatment of the
stockholders. Subject to the foregoing, the Company may borrow funds in an
amount up to 25% of the value of its assets for operating purposes. See
"Investment Objective and Policies -- Borrowing."
Although the Company does not intend to borrow funds to increase the size
of its investment portfolio, the use of leverage even on a short-term basis
could have the effect of magnifying increases or decreases in the Company's net
asset value. The Company also expects that, as a condition to lending, lenders
may place restrictions on the Company, which may include reserve requirements or
operating restrictions, and may limit the ability of the Management Investment
Adviser to control investments or their refinancing and the ability of the
Company to make distributions to stockholders. There can be no assurance that
debt financing will be available on terms that the Managing Investment Adviser
considers to be acceptable and in the best interests of the Company. If
borrowing is unavailable, the Company may be required to make an untimely
disposition of an investment or lose its pass-through tax status at some point
in the future. Failure by the Company to distribute a sufficient portion of its
net investment income and net realized capital gains could result in a loss of
its pass-through tax status and/or subject the Company to a 4% excise tax. See
"Federal Income Tax Matters."
Lack of Diversification
Although the Company intends to elect to be taxed under subchapter M of the
Code and will therefore be required to meet certain diversification requirements
thereunder, the Company intends to operate as a non-diversified investment
company within the meaning of the Investment Company Act and, therefore, the
Company's investments may not be substantially diversified. In any event, the
Company will not be able to achieve the same level of diversification as much
larger entities engaged in similar activities. The Company's
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assets may be subject to greater risk of loss than if they were more widely
diversified, inasmuch as the failure of one or more of a limited number of
investments could have a greater adverse effect on the Company than the failure
of one of a large number of investments. See "Investment Objective and
Policies."
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The investment objective of the Company is to seek long-term capital
appreciation by making private equity investments in companies and certain
privately offered funds which the Managing Investment Adviser believes offer
significant long-term growth. Current income will not be a significant factor in
the selection of investments. As a BDC, the Company will invest at least 70% of
its assets ("qualifying assets") in certain specified investments including
securities of companies that qualify as "eligible portfolio companies" under the
Investment Company Act. The Company may maintain up to 30% of its assets in
non-qualifying assets; however, the Company intends to retain maximum
flexibility in connection with its investments and, therefore, does not have a
policy as to the minimum percentage of its assets that will be so invested.
Pending investment, for operating purposes and for temporary or emergency
purposes, the Company will invest in Short-Term Investments. The Company expects
to maintain approximately 10% of its assets in Short-Term Investments in order
to pay for operating expenses and to meet contingencies. An investment in the
Company will provide investors with the opportunity to invest in Portfolio
Companies and Private Funds on the same terms as experienced institutional
investors. See "The Company" and "Regulation."
Direct Equity Investments
The Company will seek to achieve its investment objective by investing at
least 70% of its assets in Later-Stage Venture Capital Companies and
Middle-Market Companies. Later-Stage Venture Capital Companies and Middle-Market
Companies are companies in which the equity is closely held by company founders,
management and/or a limited number of institutional investors. Later-Stage
Venture Capital Companies are typically privately held companies with attractive
growth prospects and with products and services being sold or about to be sold
into the market. Middle-Market Companies generally are privately held companies
with annual revenues of $10 million to $250 million. The Company may also commit
to invest funds in a Portfolio Company beyond its initial investment or
guarantee the obligations of a Portfolio Company. The Company will attempt to
reduce the risks inherent in private equity investing by investing in a
diversified portfolio of companies involved in different industries and
different stages of development, through the utilization of professional
management provided by the Managing Investment Adviser in the selection of
private equity investments and through the active monitoring of such
investments.
Investments in Middle-Market Companies will be made in businesses which the
Managing Investment Adviser believes constitute attractive value or offer growth
opportunities. Some of these investments may be made in buyout transactions in
which a change of control may take place and may be financed on a leveraged
basis with debt provided by third parties. The financing and investment
structure of each of these investments will differ depending upon the growth
prospects and the capital needs of the individual businesses. Because of the
degree of debt financing that may be involved in these transactions, risks apart
from those relating to the Company's operations might be incurred.
The Managing Investment Adviser will evaluate the ability of prospective
investments to produce long-term capital appreciation based upon criteria that
may be modified from time to time. The criteria that will initially be used by
the Managing Investment Adviser in determining whether to make an investment
include:
(i) The presence or availability of competent management;
(ii) The existence of a substantial market for the products of a
company characterized by favorable growth potential, or a substantial
market position in a stable industry;
(iii) The existence of a history of profitable operations or a
reasonable expectation that operations can be conducted at a level of
profitability acceptable in relation to the proposed investment; and
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(iv) The willingness of a company to permit the Company and its
co-investors, if any, to take a substantial position in the company and
have representation on its board of directors, so as to enable the Company
to influence the selection of management and basic policies of the company.
Although the Company is a non-diversified company as defined in the
Investment Company Act, it does not expect to invest more than 10% of its total
assets in any one Portfolio Company or Private Fund. While the Managing
Investment Adviser will retain flexibility to invest in all types of industries,
it currently intends to make investments in companies engaged in products and
services in areas consistent with the general investment philosophy used by U.S.
Trust in its investment management advisory business. U.S. Trust follows a
long-term investment philosophy based on identifying opportunities with
sustainable fundamental values and uses three specific portfolio strategies to
guide investment decision-making.
U.S. Trust's first strategy is the "problem/opportunity strategy" which
seeks to identify industries and companies with the capabilities to provide
solutions to or benefit from complex problems such as the changing demographics
and aging of the U.S. population or the need to enhance industrial productivity.
U.S. Trust's second strategy is a "transaction value" comparison of a company's
real underlying asset value with similar assets changing ownership in market
transactions. Differences between a company's real asset value and the price of
its shares often are corrected over time by restructuring of the assets or by
market recognition of their value. U.S. Trust's third strategy involves the
identification of "early life cycle" companies whose products are in an earlier
stage of development or that seek to exploit new markets.
The three portfolio strategies discussed above are applied together with
several "longer-term investment themes" to help identify specific investment
opportunities. U.S. Trust believes that the longer-term themes described below
represent strong and inexorable trends and that the beneficiaries of these
trends will be rewarded in the long-term.
- World Energy Needs -- companies benefiting from the availability and
delivery of comparatively environmentally clean, secure hydrocarbon and
other energy sources.
- Productivity Enhancers -- companies benefiting from their roles as
innovators, developers, and/or suppliers of goods and services which
enhance service and manufacturing productivity or companies that are most
effective at obtaining and applying productivity enhancements.
- Quality of Life and the Environment -- companies concerned with the
quality characteristics, environmental conditions, safety and security of
lives and lifestyles of individuals, families and companies.
- Changing World Forces -- companies benefiting from the demographics of
aging in developed countries and youth in emerging countries.
- Communication and Entertainment -- companies benefiting from the
technological and international transformation of the communications and
entertainment industries, particularly the convergence of information,
communication and entertainment.
- Business and Industrial Restructuring -- companies benefiting from their
restructuring or redeployment of assets and operations in order to become
more competitive or profitable.
- Global Competitors -- companies benefiting from their position as
effective and strong competitors on a global basis.
Private Funds
Subject to the limitations of the Investment Company Act, the Company may
invest up to 30% of its total assets in securities of Private Funds and Private
Placements. Such Private Fund investments will generally be made in venture
capital, buyout, and private equity funds managed by third parties. The Company
does not expect to invest more than 10% of its total assets in any one Private
Fund. Such Private Funds, which will not be affiliated with the Managing
Investment Adviser, will have investment objectives compatible with those of the
Company and will involve risks similar to those involved in an investment in the
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Company. The Managing Investment Adviser will not have a role in the management
of such funds. Management of private funds typically charges a management fee
and an incentive fee based upon gains. These fees are in addition to the fees
payable to the Managing Investment Adviser.
Investment Practices
Borrowing. The Company may from time to time borrow funds for operating
purposes in an amount up to 25% of the value of its assets to facilitate the
making of follow-on investments, to maintain its pass-through tax status or to
pay contingencies and expenses. The Company is permitted under the Investment
Company Act to borrow funds in an amount not to exceed one-half of its available
capital (an asset coverage ratio of 200%). This may be done either through the
issuance of debt securities or by obtaining loans from commercial banks or other
sources. If the Company borrows funds through the issuance of a "senior security
representing indebtedness" (as deemed in the Investment Company Act),
distributions to stockholders or the repurchase of shares is prohibited unless
the Company's asset coverage ratio is 200% at the time of the distribution or
repurchase. In general, the Company does not intend to borrow for investment
purposes other than to facilitate the making of follow-on investments and will
not borrow to pay the management fee payable to the Managing Investment Adviser.
See "Regulation."
Although the Company does not intend to borrow funds to increase the size
of its investment portfolio, the use of leverage even on a short-term basis
could have the effect of magnifying increases or decreases in the Company's net
asset value. The Company also expects that, as a condition to lending, lenders
to the Company may place restrictions on the Company, which may include reserve
requirements or operating restrictions, and may limit the ability of the
Managing Investment Adviser to control investments or their refinancing and the
ability of the Company to make distributions to stockholders. There can be no
assurance that the Company will borrow when considered desirable. The Company
may not be able to arrange debt financing on terms acceptable to the Managing
Investment Adviser and the Board of Directors, or the Managing Investment
Adviser and the Board of Directors may believe borrowings are not in the
Company's best interest. If the Company were unable to obtain debt financing,
the Company might be required to sell a portfolio investment at an inopportune
time, or to forego the purchase of an attractive potential or follow-on
investment, due to a short-term liquidity problem. In either case, the value of
the Company's investment portfolio, and of the Shares, could be adversely
affected. See "Risk Factors -- Borrowing."
Other Investment Policies. The Company will not sell securities short or
on margin, write puts or calls or purchase or sell commodities or commodity
contracts. The Company will not underwrite the issuance of securities of other
companies. Where necessary, the Company may make follow-on investments in
Portfolio Companies to protect its original investment and may continue to
invest in restricted securities of such Portfolio Companies.
The Company will not lend its assets to any person or individual, except
through the purchase of bonds or other debt obligations customarily sold to
institutional investors. However, the Company may, subject to limitations of the
Investment Company Act, lend portfolio securities if collateral values are
continuously maintained at no less than 100% by "marking to market" daily. The
collateral received will consist of cash, U.S. short-term government securities,
bank letters of credit or such other collateral as may be permitted under the
Company's investment objective and policies and by regulatory agencies and
approved by the Board of Directors of the Company. While a loan of portfolio
securities is outstanding, the Company will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially.
The Company will not invest in real estate or oil, gas or other mineral
leases, either directly or indirectly (including limited partnership interests
of entities which invest in real property or interests in oil, gas or minerals).
The Company's objective and its policies (other than its status as a BDC)
are not deemed to be fundamental policies and all may be changed at any time and
from time to time without stockholder approval.
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TERMS OF THE OFFERING AND PURCHASE OF SHARES
The Company is offering up to 180,000 Shares of Common Stock at a price per
Share of $1,000. The minimum investment is $25,000, or 25 shares. The Company
has the right to waive the minimum, at its discretion. If a minimum of 100,000
Shares or $100,000,000 has not been subscribed for by the Termination Date, the
offering will terminate and all proceeds from the offering will be refunded to
investors with any interest earned thereon and without any deductions. See "Risk
Factors -- Minimum Proceeds; Funding and Portfolio Balance." Each subscriber
will be required to complete, execute and deliver to the Selling Agent an
executed copy of the Subscription Agreement which must be accompanied by a check
payable to the order of "United States Trust Company of New York -- Escrow
Agent" in the amount of $1,000 for each Share the subscriber desires to
purchase. There are no sales charges or other commissions payable in connection
with the purchase of the Shares.
Funds paid by subscribers will be deposited in an interest-bearing bank
escrow account with U.S. Trust pending each closing. In the event the Company
rejects a subscriber's Subscription Agreement or a subscriber elects to withdraw
his subscription prior to a closing date, U.S. Trust will promptly deliver to
such subscriber all funds received; any interest earned on such funds will be
returned within five business days of the next closing after such rejection or
withdrawal.
It is expected that a first closing will be held and that certificates
representing the Shares will be delivered on or about the fifth business day
after receipt by U.S. Trust of subscription funds representing 100,000 Shares or
$100,000,000. The Company may continue to offer the remaining unsold Shares and
accept subscriptions for such Shares from time to time at subsequent closings
until the earlier of the Termination Date or the date all Shares are sold.
Within five days after each closing, U.S. Trust will mail to each subscriber
checks in the respective amounts of interest earned. If the minimum of 100,000
Shares is sold, any charges or expenses will be paid by the Managing Investment
Adviser.
The Investment Company Act limits the ability of the Company to sell the
Shares at a price representing proceeds to the Company that is less than the
then net asset value per Share. Shares in the Company will be sold at a price of
$1,000 per Share. The price will be adjusted if at any closing during the
offering made hereby, the market value of a Share, based upon the Company's net
asset value, does not equal $1,000 per Share due to a change in the value of the
Company's investments. This Prospectus will be supplemented to reflect any such
change in the price.
INVESTOR SUITABILITY STANDARDS
Shares will be sold only to prospective investors who represent to the
Selling Agent that they (i) have a net worth (exclusive of homes, home
furnishings and automobiles) of $250,000 or (ii) have a net worth (exclusive of
homes, home furnishings and automobiles) of $60,000 and expect to have during
each of the current and the next three tax years income from any source of
$60,000 or more. Residents of certain states are required to represent that they
meet the investor suitability standards established by such state.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered hereby
will be approximately $180,000,000 if all Shares are sold and before deducting
organizational and initial offering expenses in the amount of approximately
$222,000.
No portion of the net proceeds of the offering has been allocated to any
particular investment. However, the proceeds will be utilized in a manner
consistent with the Investment Company Act. The proceeds will be used to invest
in Portfolio Companies and Private Funds, and for working capital and general
corporate purposes. Pending investment, for operating purposes and for temporary
or emergency purposes, such proceeds will be invested, in compliance with the
Investment Company Act, in Short-Term Investments. The Company expects to
maintain approximately 10% of its assets in Short-Term Investments in order to
pay for operating expenses and to meet contingencies. Short-Term Investments
will qualify for determining whether the Company has 70% of its total assets
invested in eligible portfolio securities. See "Regulation."
It is anticipated that there will be a significant period of time (up to
four years) before the Company becomes fully invested, although the Company
intends to invest or commit to invest at least 51% of the proceeds of the sale
of the Shares in Portfolio Companies within the earlier of (i) two years after
the Termination Date, or (ii) two and one-half years after the date of this
Prospectus. A delay is common for BDCs because of the competition for
investments in entities that meet the requirements for "qualifying assets".
Further, investments in Portfolio Companies may typically take from four to
seven years from the date of initial investment to reach a state of maturity at
which disposition can be considered. In light of the foregoing, it is unlikely
that any significant distribution of the proceeds from the disposition of
Portfolio Companies will be made until the later years of the existence of the
Company. See "Risk Factors."
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MANAGEMENT
MANAGING INVESTMENT ADVISER; COMPENSATION
United States Trust Company of New York will serve as the Managing
Investment Adviser of the Company pursuant to an investment management agreement
with the Company (the "Management Agreement"). The Managing Investment Adviser
has managed Fund I, a registered BDC, since September 1994.
The following list includes all the private companies and private funds in
which Fund I has invested as of July 31, 1997. The list is intended to
illustrate the types of investments with which the Managing Investment Adviser
has had investment experience.
PORTFOLIO COMPANIES
- AbTox Corp., Mundelein, Illinois
AbTox manufacturers low temperature, gas plasma sterilizers used by
hospitals and medical device manufacturers. The company believes that
gas plasma sterilization is more effective for applications involving
complex surgical tools used in minimally invasive surgeries than
traditional methods.
- Cardiopulmonary Corporation, Milford, CT
Cardiopulmonary Corporation has developed a unique, software-driven life
support ventilator which automatically adapts to patients' changing
breathing patterns. This FDA approved product is designed to lead to
better clinical outcomes and faster weaning cycles resulting in higher
quality care and lower treatment costs.
- CommSite International Inc., Vienna, VA
CommSite International Inc. ("CommSite") is a wireless communications
antennae site location and site management company. CommSite has
contracts with several of the major wireless providers to assist in the
build-out of paging, personal communications services and other wireless
networks.
- Corsair Communications, Palo Alto, CA.
Corsair Communications, Inc. ("Corsair") is a provider of equipment and
services to combat cellular telephone fraud and to improve cellular
networks. Corsair's technology, radio frequency fingerprinting, is used
to differentiate legitimate cellular calls from counterfeit calls made
on "cloned phones." To date, the company has successfully deployed its
products in New York, Philadelphia, Los Angeles, Boston and in several
other domestic and international markets.
- Pro-Communications, Inc., Princeton, NJ
Pro Communications, Inc. is the largest provider of telemessaging
services to small and medium-sized businesses in the United States. The
company's strategy is to consolidate the telemessaging industry while
seeking to provide add-on services to drive revenue growth.
- Quicklogic Corporation, Sunnyvale, CA
QuickLogic Corporation is an emerging leader in the rapidly growing
market for programmable semiconductors. The company positions its
products as a means for their customers to bring products to market
faster and more economically.
- Rental Services Corporation, Scottsdale, AZ
Rental Service Corporation is a heavy equipment rental company serving
the business to business market in the Southeast. Rental Services
Corporation's strategy is to exploit the outsourcing trend and to
consolidate the fragmented equipment rental industry. Rental Service
Corporation had an initial public offering in September 1996 (ticker:
RSVC).
- Best Friends Pet Resorts and Salons, Norwalk, CT
Best Friends is the largest provider of boarding and grooming services
for dogs and cats in the US. The company's strategy is to provide
superior service through a network of clean and conveniently located
facilities.
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- LogicVision, San Jose, CA
LogicVision is a leader in delivering built-in self-test technology for
integrated circuits. LogicVision's established customer base consists of
numerous, leading manufacturers of computer hardware and peripherals.
- NeoVista Software, Inc., Cupertino, CA
NeoVista is a leading data mining and knowledge discovery software
company. NeoVista has successfully deployed its technology to enable
business people to extract valuable information from the vast amount of
data that is being gathered and stored for Fortune 1000 customers such
as Wal-Mart.
- The Party Experience, Inc., Melville, NY
The Party Experience is a leading owner and operator of retail paper and
party goods superstores in the United States with 71 superstores in the
Northeast.
- Plynetics Express, Inc., San Leandro, CA
Plynetics is a leader in the rapid prototyping and rapid tooling service
industries. Plynetics' service offerings allow manufacturers to
outsource the prototyping and pilot manufacturing stages of the product
development process. This enables their customers to introduce products
to market more quickly, efficiently and economically.
PRIVATE FUNDS
- Brentwood Associates Buyout Fund II, LP
Brentwood Associates Buyout Fund II, LP ("Brentwood") specializes in
consolidation buyouts of businesses operating within fragmented
industries. Typically, the partners of Brentwood identify industries
with consolidation characteristics and develop a strategy for
implementation. Brentwood then recruits managers to execute the
strategy.
- Bruckmann, Rosser, Sherrill & Co., LP
Bruckmann, Rosser, Sherrill & Co., LP ("BRS") is a spin-off of the
principals of Citicorp Venture Capital, Ltd. where they had been
responsible for the successful buyouts of J&L Specialty Steel, Reliance
Electric, Steak & Ale, and Bennigan's Restaurants, among others. BRS's
strategy is to buy companies in a traditional management buyout
framework using financial leverage.
- Lawrence, Smith & Horey III, LP
Lawrence, Smith & Horey III, LP is a later-stage venture capital firm
focused on investing in companies on the East Coast. The firm's
expertise lies in new media, technology and services. The firm's
principals were responsible for successful venture capital investments
in Federal Express, Oxford Healthplans and Autotote.
- Morgenthaler Venture Partners IV, LP
Morgenthaler Venture Partners IV, LP invests in information technology
and healthcare companies at various stages of development as well as
buyouts of basic businesses. The firm's principals were responsible for
successful venture capital investments in Apple Computer, Synopsys,
Atria Software, Premysis Software and CardioThoracic.
- Sevin Rosen V, LP
Sevin Rosen V, LP ("Sevin Rosen") is a firm which provided early-stage
financing to companies such as Lotus, Compaq Computer, Silicon Graphics,
Cypress Semiconductor, Electronic Arts, and Cyrix. Sevin Rosen is
focused on investing in early-stage companies in the communications,
healthcare, and computer software and hardware sectors.
- Vanguard Ventures V, LP
Vanguard Ventures V, LP ("Vanguard") is a seed and early-stage venture
capital firm targeting technology companies in the Silicon Valley and
healthcare companies in California and Texas. Vanguard also incubates
previously successful entrepreneurs who are developing new ventures.
Some of their successful investments include Ciena, Advanced Fibre
Communications and Network Application.
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Under the supervision of the Company's Board of Directors, the Managing
Investment Adviser is responsible for finding, evaluating, structuring, and
monitoring the Company's investments in Portfolio Companies, Private Funds and
Short-Term Investments and performing the management and administrative services
necessary for the operation of the Company. In addition, the investment
professionals in charge of the day-to-day management of the Company have
extensive experience in venture capital and alternative investment strategies.
See "Directors, Officers and Investment Professionals" below. The Managing
Investment Adviser will also make available personnel and services to Portfolio
Companies requiring managerial assistance.
U.S. Trust provides investment management, trust and banking services to
individuals, corporations and institutions. U.S. Trust is a member bank of the
Federal Reserve System and the Federal Deposit Insurance Corporation and is one
of the twelve members of the New York Clearing House Association. On December
31, 1996, U.S. Trust's Asset Management Group had approximately $53 billion in
assets under management. The principal business address of the Managing
Investment Adviser is 114 West 47th Street, New York, New York 10036-1532.
In return for its services and the expenses which the Managing Investment
Adviser assumes under the Management Agreement, the Company will pay the
Managing Investment Adviser, on a quarterly basis, a management fee equal to (a)
1.5% per annum 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
Portfolio Companies or Private Funds and (b) 0.5% 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 Portfolio Companies or Private
Funds. The management fee is payable in arrears on the last day of each calendar
quarter. See "The Company" and "Regulation."
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
realized capital gains (net of realized capital losses and unrealized net
capital depreciation) on Direct Investments, less the aggregate amount of
incentive fee payments in prior years. No incentive fee will be paid to the
Managing Investment Adviser with respect to the Company's investments in Private
Funds. If the amount of the incentive fee in any year is a negative number, or
cumulative net realized capital 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 to the
Company all or a portion of the incentive fee previously paid.
THE MANAGEMENT AGREEMENT
The Management Agreement provides that the Managing Investment Adviser
shall identify, evaluate, structure, monitor and dispose of the Company's
investments and provide, or arrange for suitable third parties to provide, any
and all management and administrative services reasonably necessary for the
operation of the Company and the conduct of its business. Such management and
administrative services include, without limitation, providing the Company with
office space, equipment, facilities and supplies and clerical services; keeping
and maintaining the books and records of the Company, administering
stockholders' accounts and handling communications and correspondence with
stockholders, preparing accounting, management and other reports; and providing
such other managerial and administrative services as may be reasonably requested
by the Company.
Under the Management Agreement, the Company is obligated to bear all costs
and expenses directly allocable and identifiable to the Company or its business
or investments, including, but not limited to, fees of the directors; fees of
the Managing Investment Adviser; expenses of registering the Shares under
federal and state securities laws; interest; taxes; fees and expenses of the
Company's legal counsel and independent accountants; fees and expenses of the
transfer agent; expenses of printing and mailing Share certificates, stockholder
reports, notices to stockholders and proxy statements; reports to regulatory
bodies; brokerage and other expenses in connection with the execution, recording
and settlement of portfolio security transactions;
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expenses in connection with the acquisition and disposition of portfolio
securities or the registration of privately issued portfolio securities; costs
of third party evaluations or appraisals of the Company (or its assets) or its
actual investments; expenses of membership in investment company associations;
expenses of fidelity bonding and other insurance premiums; expenses of
stockholders' meetings; Commission and state blue sky registration fees; fees
payable to the National Association of Securities Dealers, Inc. (the "NASD"), if
any, in connection with this offering; and the Company's other business and
operating expenses.
The Management Agreement provides for indemnification by the Company of the
Managing Investment Adviser from any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and expenses) not
resulting from bad faith, negligence, misconduct or any breach of fiduciary duty
owed to the Company by the Managing Investment Adviser. The Management Agreement
provides that indemnification shall be made only following: (i) a final decision
on the merits by a court or other body before whom the proceeding was brought
that the Managing Investment Adviser was not liable by reason of bad faith,
negligence, misconduct or any breach of fiduciary duty owed to the Company or
(ii) in the absence of such a decision, a reasonable determination, based upon a
review of the facts, that the Managing Investment Adviser was not liable by
reason of bad faith, negligence, misconduct or any breach of fiduciary duty owed
to the Company by (a) the vote of a majority of a quorum of the disinterested
Directors of the Company who are not parties to the proceeding or (b)
independent legal counsel in a written opinion. Indemnification is limited by
Sections 17(h) and (i) of the Investment Company Act.
The Management Agreement provides that it shall continue in effect for two
years and that, after the initial period of effectiveness, it will continue in
effect for successive annual periods, provided that such continuance is
specifically approved at least annually by the vote of a majority of the Board
of Directors of the Company who are not parties to the Management Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such continuance, and either: (i) the vote of a majority of
the outstanding Shares of the Company; or (ii) the vote of a majority of the
full Board of Directors of the Company. The Management Agreement also provides
that it may be terminated at any time, without the payment of any penalty,
either by: (i) the Company, by action of the Board of Directors or by vote of a
majority of the outstanding Shares of the Company, on 60 days' written notice to
the Managing Investment Adviser; or (ii) the Managing Investment Adviser, on 90
days' written notice to the Company. The Management Agreement will terminate
immediately in the event of its "assignment" (as defined in the Investment
Company Act).
INVESTMENT OPERATIONS
The Managing Investment Adviser will initiate, screen and monitor the
private equity investments of the Company. The Managing Investment Adviser
anticipates that it may take up to four years for the Company to become fully
invested. The Managing Investment Adviser will invest at least 70% of the
Company's assets in Later-Stage Venture Capital and Middle-Market Companies and
up to 30% of such assets in Private Funds.
Private equity investments will typically be structured in negotiated,
private transactions directly with the issuer. The Company's investments will
generally consist of non-publicly traded equity and equity-like securities,
including common stock, preferred stock, warrants and convertible debentures,
subject to certain regulatory and other restrictions. In connection with most
Company investments, the Managing Investment Adviser will work with the
Portfolio Company to develop and implement the Portfolio Company's long-term
strategy and to enhance its value.
The Investment Committee of the Managing Investment Adviser, which consists
of senior investment professionals of U.S. Trust, will make the final investment
decisions regarding any investment proposal made by the Managing Investment
Adviser.
Deal Origination. Investment proposals may come to the attention of the
Managing Investment Adviser from many sources including unsolicited proposals
from the public, personal contacts of the Managing Investment Adviser or its
affiliates, other venture capitalists and private equity investors and referrals
from investment banks, commercial banks, lawyers, accountants and other members
of the financial community, including U.S. Trust personnel. The Managing
Investment Adviser believes that investment opportunities may
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also come from several venture capital and private equity funds of which it or
any of its affiliates may be an investor. Under certain circumstances, such
opportunities may require prior exemptive relief from the Commission. See "Risk
Factors -- Transactions with Affiliates; Potential Conflicts of Interest" and
"Regulation."
Evaluation of Investment Opportunities. Prior to committing funds to an
investment opportunity, a disciplined investment process is undertaken which
includes a legal, financial, tax, industry, and company due diligence
investigation by the Managing Investment Adviser to assess the prospects and
risks of the potential investment. The experience and expertise of the officers
of the Managing Investment Adviser will be essential in evaluating products,
markets, industry trends, financial requirements, competition and the management
team associated with a prospective investment. The Managing Investment Adviser
expects to be able to discuss the merits of particular investment opportunities
with the U.S. Trust Investment Research Division and may seek its assistance in
due diligence and the evaluation of investment opportunities. Each investment
opportunity will need to be approved by the Investment Committee of the Managing
Investment Adviser.
Structuring of Investments. The terms and conditions of the investments
acquired will result from negotiations directly with the Portfolio Company or an
affiliate thereof. The Managing Investment Adviser will be responsible for
conducting such negotiations on behalf of the Company and will seek to structure
the terms of the investment to provide for the capital needs and success of the
issuer and at the same time to maximize the Company's opportunity for long-term
capital appreciation. An important factor in successful private equity investing
is proper structuring of the transaction in terms of such matters as price, type
of security, restrictions on use of funds, commitments or rights to provide
additional financing, control and involvement in the issuer's business and
liquidity.
Management Assistance and Monitoring of Investments. Successful business
development investing requires active monitoring and participation and influence
on major business decisions. Representatives of the Managing Investment Adviser
and/or its affiliates will frequently serve as members of the board of directors
or advisory boards of Portfolio Companies or will have visitation rights to
those companies. Board representation, as well as a close working relationship
with the operating management, should enable the Company to exercise influence
and provide management assistance with respect to such matters as capital
structure, budgets, profit goals, diversification strategy, financing
requirements, management additions or replacements and developing a public
market for the securities of the Portfolio Companies. The close tracking of
internal financial statements and progress reports, as well as an active working
relationship with management, form the basis of effective portfolio monitoring
and risk management.
Liquidation of Investments. In order to realize the investment objective
of capital appreciation, private equity investments must be liquidated. The
method and timing of the liquidation of investments are critical elements to
maximizing portfolio return. The Company expects to liquidate its investments
through a variety of transactions, including mergers, negotiated sales of
Portfolio Companies, sales in registered public offerings, sales in the public
markets of registered securities and recapitalizations. In structuring the
investments, the Managing Investment Adviser will endeavor to reach such
understanding with the Portfolio Company or its affiliates as may be appropriate
as to the method and timing of liquidation of the Company's investments and will
usually seek to obtain registration rights at the expense of the issuer and
reporting compliance for eligible companies under Rule 144 under the Securities
Act. Timing of divestiture or liquidation depends on the performance of the
Portfolio Company, the ability of the Portfolio Company to refinance its
outstanding securities and other financial market opportunities. See "Risk
Factors -- Liquidity of Private Equity Investments." The Company will bear the
costs of liquidating investments to the extent that such expenses are not paid
by the issuer.
DIRECTORS, OFFICERS AND INVESTMENT PROFESSIONALS
The business and affairs of the Company will be managed under the direction
of its Board of Directors. Each director will receive $15,000 per year. No
director, officer or affiliated person will receive aggregate compensation from
the Company in excess of $60,000 for fiscal 1997. The Company does not have a
stock option plan, other long-term incentive plan, retirement plan or other
retirement benefits.
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The following are descriptions of the members of the Board of Directors and
the officers of the Company as well as of key employees of the Managing
Investment Adviser, including the members of its Investment Committee, key
investment professionals, and research professionals active in the management of
the Company. Unless otherwise noted, the business address of each individual
listed below is 114 West 47th Street, New York, New York, 10036.
Directors and Officers of the Company
* Edith A. Cassidy, Chairman of the Board and Director. Ms. Cassidy is a
Managing Director of U.S. Trust and oversees its Investment Research
Division. Prior to joining U.S. Trust in 1989, Ms. Cassidy was employed by
Piper, Jaffray and Hopwood as an Investment Executive, and by the IBM
Corporation. Ms. Cassidy serves on the Board of Westmoreland Davis
Foundation. She holds a BA degree from Goucher College. Ms. Cassidy serves
as Chairman and a director of Fund I.
Gene M. Bernstein, Director. Mr. Bernstein has been the President of BIG
Venture Inc., a privately held golf equipment marketing firm since March
1994. From 1990 until 1994, he was the President of Northville Industries
Corp., a privately held corporation engaged in petroleum, marketing,
distribution and trading. Mr. Bernstein was Executive Vice President of
Northville Industries Corp. from 1982 to 1989. Mr. Bernstein holds a BA
degree in English Literature from Alfred University, an MA degree in English
Literature from the University of Wisconsin and a Ph.D. in English
Literature from the University of Massachusetts. Mr. Bernstein serves as a
director of Fund I.
Stephen V. Murphy, Director. Since 1991, Mr. Murphy has been President of
S.V. Murphy & Co., Inc., an investment banking firm which specializes in
mergers and acquisitions, divestitures and strategic and capital-related
advisory services for financial institutions. From 1988 until 1990, he was
Managing Director of Merrill Lynch Capital Markets in charge of the
Financial Institutions Mergers and Acquisitions Department. Prior to 1988,
Mr. Murphy was Managing Director of The First Boston Corporation where he
headed up its Investment Banking Department's Commercial Bank Group. Mr.
Murphy holds a BSBA degree from Georgetown University and an MBA degree from
Columbia University. Mr. Murphy serves as a director of Fund I.
David I. Fann, President, Chief Executive Officer. As Division Manager of
the Alternative Investments Division of U.S. Trust, Mr. Fann is responsible
for private equity investing, hedge funds, and real estate investing for
U.S. Trust. Mr. Fann will have day-to-day management responsibility of the
Company for the Managing Investment Adviser. Prior to joining U.S. Trust in
April of 1994, Mr. Fann served in various capacities for Citibank from 1986
through 1994, including, as a Vice President of Citibank and its small
business investment company subsidiary, Citicorp Venture Capital Ltd. from
1991 until 1994. While at Citicorp Venture Capital Ltd., Mr. Fann invested
in buyout and venture capital transactions and venture capital funds and
served on the Board of Directors of several of its portfolio companies. Mr.
Fann holds a BAS degree in industrial engineering and economics from
Stanford University. Mr. Fann is on the Board of the Sommerset Exchange Fund
(a closed-end investment company) and AbTox, Inc.
Douglas A. Lindgren, Chief Investment Officer. Mr. Lindgren is a Senior Vice
President of U.S. Trust. Prior to joining U.S. Trust in April 1995, Mr.
Lindgren served in various capacities for Inco Venture Capital Management,
Inc. ("IVCM") from January 1988 through March 1995, including the positions
of President and Managing Principal from January 1993 through March 1995.
While at IVCM, Mr. Lindgren invested in venture capital and buyout
transactions and served on the Board of Directors of several of its
portfolio companies. Before joining IVCM, Mr. Lindgren was employed by
Salomon Brothers Inc and Smith Barney, Harris Upham & Co., Inc. He is an
Adjunct Professor of Finance at Columbia University's Graduate School of
Business, where he teaches courses on venture capital. Mr. Lindgren holds
MBA and BA degrees from Columbia University. Mr. Lindgren serves on the
Board of CommSite International Inc. and Pro Communications Inc.
- ---------------
* Indicates an "interested person" of the Company within the meaning of the
Investment Company Act.
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Ronald A. Schwartz, Corporate Secretary. Mr. Schwartz is Vice President and
Assistant General Counsel of U.S. Trust. Prior to joining U.S. Trust in
1991, Mr. Schwartz was associated with the firm of Walter, Conston,
Alexander & Green from 1985 through 1990, with a focus on securities law as
well as mergers and acquisitions. Mr. Schwartz received a BA and an MA
degree from the University of California at Berkeley, and a JD from Boalt
Hall, University of California.
Brian F. Schmidt, Chief Financial Officer. Mr. Schmidt is the Division
Manager of Mutual Funds with the Mutual Funds Division of an affiliate of
U.S. Trust. He is responsible for the operation and administration of the
Excelsior Family of Funds and the U.S. Trust Common Trust Funds. Mr. Schmidt
joined U.S. Trust in 1991 from Prudential Insurance Company of America,
where he was Director of Accounting. Prior to that he was a senior
accounting manager at Dreyfus Corporation. Mr. Schmidt has 16 years of
experience in financial services, concentrating in mutual funds. He received
his BS degree from Marist College. He is on the accountant's and treasurer's
committee of the Investment Company Institute and is a member of the
International Association of Financial Planning.
Frank D. Bruno, Treasurer. Mr. Bruno is a Vice President in the Mutual Funds
Administration Department in the Mutual Funds Division of an affiliate of
U.S. Trust. Prior to joining U.S. Trust, he worked for the Dreyfus
Corporation and Price Waterhouse. Mr. Bruno received his BS degree from The
Pennsylvania State University.
Investment Committee of the Managing Investment Adviser
Frederick B. Taylor, Chairman of the Investment Committee. As Vice Chairman
and Chief Investment Officer of U.S. Trust, Mr. Taylor oversees all of the
investment management business of U.S. Trust, is responsible for developing
and implementing U.S. Trust investment policy and presently serves as
Chairman of the U.S. Trust Portfolio Policy Committee. Mr. Taylor received
his BA degree with distinction from Wesleyan University and his MBA degree
from the Wharton School of the University of Pennsylvania. He is a member of
the New York Society of Security Analysts and the Association for Investment
Management and Research.
Paul K. Napoli, Co-Chairman of the Investment Committee. Mr. Napoli is
Executive Vice President and Division Manager of the Personal Investment
Division of U.S. Trust. He also has responsibility for the broker-dealer
operations and the New York region subsidiaries of U.S. Trust and is
Chairman of U.S. Trust International Corporation. He is also a member of the
board of directors of U.S. Trust of New Jersey, Campbell Copperthwait and
U.S. Trust of Connecticut. Mr. Napoli received his BA degree from Boston
College and his MBA degree from Columbia University. He is a Chartered
Financial Analyst, a Certified Trust and Financial Adviser and a member of
the New York Society of Security Analysts and the Association for Investment
Management and Research.
John J. Apruzzese, Managing Director and Senior Portfolio Manager of U.S.
Trust. Previously, Mr. Apruzzese was a staff member of the Labor and Human
Resources Committee of the United States Senate where he worked on federal
budget matters. Mr. Apruzzese received his BA degree from Bucknell
University and his MBA degree from New York University. Mr. Apruzzese is a
Chartered Financial Analyst and a member of the New York Society of Security
Analysts.
Richard L. Bayles, Managing Director and Senior Portfolio Manager of U.S.
Trust, currently manages the Excelsior Income and Growth Fund and the U.S.
Trust Stock Fund for Trusts. Mr. Bayles received his BA from Dartmouth
College.
Edith A. Cassidy, see "Directors and Officers of the Company."
William V. Ferdinand, Managing Director and Senior Investment Officer of
U.S. Trust Company of Connecticut. Mr. Ferdinand joined U.S. Trust from The
Penn Mutual Life Insurance Company where he served as Executive Vice
President and Chief Investment Officer as well as President and Chief
Executive Officer of its investment management subsidiaries. He also founded
the Penn Janney Fund, Inc., a mezzanine venture capital fund and served as
Chairman and CEO. Mr. Ferdinand is a CFA and received his BS degree from the
University of Pennsylvania Wharton School of Business and his MBA
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degree from New York University. Mr. Ferdinand is a member of the New York
Society of Security Analysts and the Association for Investment Management
and Research.
Joseph A. Gallagher, Senior Vice President of U.S. Trust Company of New
Jersey. Prior to joining U.S. Trust, Mr. Gallagher was Managing Director of
Delafield, Harvey, Tabell, which was acquired by U.S. Trust in 1992.
Previously, he held the positions of Senior Portfolio Manager in the Private
Banking and Investment Division at Citibank, N.A. and Vice
President -- Investments at United Jersey Bank. Mr. Gallagher received his
BS degree from Georgetown University. He is a Chartered Financial Analyst
and a member of the New York Society of Security Analysts and the
Association for Investment Management and Research.
Robert H. Hogan, Senior Vice President of U.S. Trust. He is a member of the
U.S. Trust Portfolio Policy Committee in New York. Mr. Hogan is a member of
the Association for Investment Management and Research and the New York
Society of Security Analysts.
Harvey A. Seline is a Managing Director and Senior Portfolio Manager of U.S.
Trust. Prior to joining U.S. Trust, Mr. Seline was a Trust Investment
Officer at The National Bank of Tulsa and a Trust Analyst at First City
National Bank in Houston. Mr. Seline received a BA degree from the
University of Colorado, and an MBA degree from Columbia University. Mr.
Seline is a Chartered Financial Analyst, a member of the New York Society of
Security Analysts, and a member of the Association for Investment Management
and Research.
Jay B. Springer, Managing Director of U.S. Trust. Mr. Springer has been a
portfolio manager since he joined U.S. Trust in 1983 and has managed the
Excelsior Early Life Cycle Fund since 1986. Mr. Springer graduated magna cum
laude from Boston University and received his MBA from New York University
in 1983. Mr. Springer serves on the Board of Directors of Bank Fiduciary
Funds and is a committee member of the New York State Bankers Association.
David A. Tillson, Managing Director and Senior Portfolio Manager of U.S.
Trust, currently manages the Excelsior Equity Fund. Prior to joining U.S.
Trust, he was founder and President of TDA Capital Management Company.
Previously, he held positions of First Vice President at W.P. Carey & Co.
Inc. and Second Vice President at General Reinsurance Corp. Mr. Tillson
received an AB degree from Brown University and an MBA degree from New York
University. Mr. Tillson is a Chartered Financial Analyst, a member of the
New York Society of Security Analysts and a member of the Association for
Investment Management and Research.
Leigh Weiss, Senior Vice President of U.S. Trust and Manager of
Institutional Equity and Balanced Portfolios. Mr. Weiss has been with U.S.
Trust since September 1993. Prior to joining U.S. Trust, he worked for
Goldman, Sachs & Co., where he had been since 1981. Mr. Weiss received his
BS degree in economics from the Wharton School of the University of
Pennsylvania and he earned his MBA from the University of Chicago
David J. Williams, Managing Director and Senior Portfolio Manager of U.S.
Trust, manages the Excelsior Business and Industrial Restructuring Fund.
Previously, Mr. Williams was Senior Vice President of Horizon Trust Company.
He was also a portfolio manager of T. Rowe Price Associates. Mr. Williams
received a BA degree from Yale University and his MBA degree from Harvard
University. He is a Chartered Financial Analyst.
U. S. Trust Investment Research Division
William G. Becker, Vice President of U.S. Trust, covers the changing world
demographics theme with emphasis on the automobile and consumer sectors.
Prior to joining U.S. Trust in 1979, Mr. Becker was a security analyst for
Dean Witter Reynolds, First Manhattan, Dominick & Dominick and Eastman
Dillon-Union Securities. He is a member of the Financial Analysts Federation
and the New York Society of Security Analysts. He is also a member of the
New York Automobile Analysts, the Retailing and Merchandising Analysts
Societies and the New York Consumer Analysts Group of New York.
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Mr. Becker received a BS degree from Rutgers University and received an MS
degree from Boston University.
Jimmy Chang, Vice President of U.S. Trust, covers the productivity enhancers
theme with emphasis on technology. Mr. Chang joined U.S. Trust in 1994 from
IBM, where he was an account manager for four years, marketing to selected
international banks. Prior to that, he was an IBM Systems Engineer. Mr.
Chang received his Bachelor of Engineering degree from Cooper Union in 1985,
graduating summa cum laude. He received his MBA degree in finance and
international business from New York University in 1992.
Joan Ellis, Vice President of U.S. Trust, focuses on the business and
industrial restructuring theme with emphasis on financial services. Prior to
joining U.S. Trust in 1984, she worked for the Peabody Museum of Salem. Ms.
Ellis received her BA degree from Pomona College and received her MBA degree
from New York University. Ms. Ellis is a Chartered Financial Analyst.
Ronald A. Fisher, Vice President of U.S. Trust, covers the productivity
enhancers, quality of life and environment, global competitors, and
communications and entertainment investment themes with special focus on
capital goods, water treatment, and entertainment software. Mr. Fisher
co-manages the Excelsior Productivity Enhancers Fund. Prior to joining U.S.
Trust in 1994, Mr. Fisher worked for Nippon Credit Bank, Citicorp., and
Chemical Bank. Mr. Fisher received his BA degree from Tufts University, and
his MBA degree from The Wharton School at the University of Pennsylvania.
John F. Gordon Jr., Vice President of U.S. Trust, focuses on the business
and industrial restructuring theme with emphasis on paper/forest products.
Prior to joining U.S. Trust in 1967, Mr. Gordon worked for Morgan Stanley &
Co. Mr. Gordon received his BA degree from Amherst College and was awarded
his MBA degree from the University of Michigan.
Robert C. Hodgson, Vice President of U.S. Trust, focuses on the changing
world demographics and global competitors investment themes with particular
emphasis on health care. Prior to joining U.S. Trust in 1995, Mr. Hodgson
worked as a pharmaceutical analyst for Cowen & Co., Oppenheimer & Co. and
Shearson Lehman, and as a financial and strategic planning analyst for
American Optical Corp. and Pfizer. From 1991 through 1994, he was a
runner-up in the Institutional Investor Survey of pharmaceutical analysts
and ranked in the top four in the Greenwich Survey. Mr. Hodgson received his
BS and MBA degrees from the University of North Carolina.
Michael E. Hoover, Senior Vice President of U.S. Trust, focuses on
communications and entertainment and long-term supply of energy themes. Mr.
Hoover manages the Excelsior Communications and Entertainment Fund and the
Excelsior Long Term Supply of Energy Fund. Prior to joining U.S. Trust in
1989, Mr. Hoover worked for Gruntal & Company, and Manufacturers Hanover.
Mr. Hoover received a BA degree from Dartmouth College.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank ("Chase") will serve as the Company's custodian in
accordance with the provisions of the Investment Company Act and the rules and
regulations thereunder. As such, Chase will be responsible for holding the
Company's cash and portfolio securities. Chase will also serve as the transfer
agent for the Company's shares. For its custodian and transfer agency services,
Chase will receive customary fees from the Company.
EXPENSES OF THE COMPANY
The Company will pay all of its expenses, including fees of the directors;
fees of the Managing Investment Adviser; expenses of registering the Shares
under federal and state securities laws; interest; taxes; fees and expenses of
the Company's legal counsel and independent accountants; fees and expenses of
the transfer agent; expenses of printing and mailing Share certificates,
stockholder reports, notices to stockholders and proxy statements; reports to
regulatory bodies; brokerage and other expenses in connection with the
execution, recording and settlement of portfolio security transactions; expenses
in connection with the acquisition and
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disposition of portfolio securities or the registration of privately issued
portfolio securities; costs of third party evaluations or appraisals of the
Company (or its assets) or its actual investments; expenses of membership in
investment company associations; expenses of fidelity bonding and other
insurance premiums; expenses of stockholders' meetings; Commission and state
blue sky registration fees; fees payable to the NASD, if any, in connection with
this offering; and the Company's other business and operating expenses.
On the basis of the anticipated size of the Company immediately following
the offering described in this Prospectus, it is estimated that the Company's
annual operating expenses will be approximately $250,000 (approximately 0.25% of
the proceeds of the offering). While the foregoing estimates have been made in
good faith on the basis of information as to currently available prices,
including estimates furnished by the Company's agents, there can be no assurance
that actual annual operating expenses will not be substantially greater than
such estimates as a result of increases in the cost of transfer agency and
professional and similar services that cannot be predicted and are beyond the
control of the Company.
Organizational expenses of approximately $15,000 which have been paid by
U.S. Trust will be reimbursed by the Company and will be amortized over five
years. Offering expenses, estimated at $207,000, will be charged against the
proceeds of the offering. Of the offering expenses, approximately $120,000 has
been incurred by U.S. Trust and will be reimbursed by the Company.
CONTROL PERSONS
As of the effective date of this Prospectus, all of the outstanding Shares
are owned by Douglas A. Lindgren. Mr. Lindgren's business address is 114 West
47th Street, New York, New York 10036.
BANK REGULATORY MATTERS
Based on advice of its counsel, it is the position of U.S. Trust that the
investment advisory and selling agent activities to be performed by U.S. Trust
and its affiliates, and the appointment of employees of the Managing Investment
Adviser and its affiliates as officers and Directors of the Company, are
consistent with the requirements of the Glass-Steagall Act. In addition, counsel
has advised that this combination of individually permissible activities is
consistent with the Glass-Steagall Act and federal or state legal and regulatory
precedent. There is presently no controlling precedent regarding the performance
of a combination of investment advisory and selling agent activities by banks of
the sort contemplated to be performed by U.S. Trust and its affiliates and
described herein, but applicable federal regulatory precedents allow commercial
banks to organize, sponsor and manage closed-end investment companies consistent
with the Glass-Steagall Act. State laws on this issue may differ from the
interpretations of relevant federal law and banks and financial institutions may
be required to register as dealers pursuant to state securities law. Future
changes in either federal statutes or regulations relating to the permissible
activities of banks, as well as future judicial or administrative decisions and
interpretations of present and future statutes and regulations, could prevent
U.S. Trust or its affiliates from continuing to perform all or part of their
investment management or selling agent activities. If U.S. Trust or its
affiliates were prohibited from so acting, stockholders would be permitted to
remain stockholders of the Company and alternative means for continuing such
services would be sought. In such event, changes in the operation of the Company
might occur and a stockholder serviced by U.S. Trust or its affiliates might no
longer be able to avail himself of any services then being provided. The
Directors of the Company do not expect that stockholders of the Company would
suffer any adverse financial consequences as a result of these occurrences.
POTENTIAL CONFLICTS OF INTEREST
The Managing Investment Adviser and its affiliates may be subject to
various conflicts of interest in connection with their relationships and
transactions with the Company. The contractual and other arrangements between
the Company and the Managing Investment Adviser and its affiliates have not been
established by arms-length negotiations. Such conflicts of interest may include:
Transactions with the Company and Portfolio Companies. The Managing
Investment Adviser and its affiliates may perform various services for the
Company and its Portfolio Companies. Such services may
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include making loans to the Company or to Portfolio Companies, maintaining
deposits of funds of the Company or Portfolio Companies, serving as directors or
officers of Portfolio Companies and providing services in connection with
mergers and acquisitions, leasing real estate and insurance and economic
forecasting. In consideration for such services, such persons may receive
various fees, commissions and reimbursements to the extent permitted under
applicable law. Depending upon the Managing Investment Adviser's or its
affiliates' influence and control with respect to Portfolio Companies, the
selection of such persons to perform such services for Portfolio Companies may
not be a disinterested decision and the terms and conditions for the performance
of such services, and the amounts and terms of such compensation, may not be
determined in arms-length negotiations. The selection of the Managing Investment
Adviser or any of its affiliates to perform services for a Portfolio Company
must be approved by a majority of the disinterested Directors of the Company and
the independent and disinterested directors of the Portfolio Company. The
interest rate and financing charges that such persons may charge the Company or
its Portfolio Companies on funds made available to it or them will not exceed
those that would be charged by unrelated lending institutions on comparable
loans for the same purpose.
The Investment Company Act and the Federal Reserve Act contain restrictions
as to certain transactions among the Company and the Managing Investment Adviser
or its affiliates. See "Regulation." Generally, transactions involving the
Company and the Managing Investment Adviser or certain of its affiliates must
receive the prior approval of a majority of the Company's disinterested
Directors having no financial interest in the proposed transaction and/or the
Commission and may be subject to certain percentage limitations, safety-
and-soundness and other requirements. There can be no assurance that prior
approval of the Commission can be obtained.
The Managing Investment Adviser expects to provide services to other
investors, including Fund I and other investment partnerships and other business
development companies organized by it or its affiliates. The Company will have
no contractual or other right to such services prior to any of such other
investors. The Managing Investment Adviser intends to file on behalf of itself
and the Company an application for an exemptive order from the Commission with
respect to proposed joint investments by the Company and U.S. Trust or certain
of its affiliates in Portfolio Companies. If an exemptive order is not granted,
no joint investments with U.S. Trust or its affiliates may be permitted. While
the Commission has granted exemptive relief in substantially similar
circumstances in the past, no assurance can be given that an exemptive order
will be granted. If the Company and U.S. Trust or its affiliates co-invest in a
Portfolio Company, certain conflicts may arise. See "-- Joint Investments in
Portfolio Companies and Other Securities" and "Regulation."
Conflicts as to Investment Opportunities. The Managing Investment Adviser
and its affiliates intend to make investments for their own account and may be
in competition with the Company for such investments. In addition, affiliates of
the Managing Investment Adviser may serve as adviser or managing general partner
of other private or public limited partnerships or other investment vehicles
which will have investment objectives identical with or similar to those of the
Company. While the Managing Investment Adviser is obligated to use its best
efforts to provide the Company with continuing and suitable investment
opportunities consistent with its investment objective and policies, the
Managing Investment Adviser is not required to present to the Company any
particular opportunity that falls within the investment objective and policies
of the Company, except as set forth in the procedures adopted by the Company's
Board of Directors, including a majority of the disinterested Directors. Such
procedures provide that the Managing Investment Adviser must endeavor to offer
to the Company on an equal basis investment opportunities that would be suitable
for both the Company and other similar private equity funds for which the
Managing Investment Adviser provides discretionary investment advisory services.
In addition, if the Company rejects an investment opportunity for any reason,
the Managing Investment Adviser or its affiliates would be permitted to accept
it. Within 60 days after the end of each fiscal year of the Company, the
Managing Investment Adviser will furnish the Board of Directors of the Company
with information on a confidential basis as to any investments made by the
Managing Investment Adviser or its affiliates for their own accounts during the
prior year of the types eligible for investment by the Company. The Managing
Investment Adviser and its affiliates will endeavor to resolve conflicts with
respect to investment opportunities in a manner deemed equitable to all and
consistent with their fiduciary duties to the Company.
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Joint Investments in Portfolio Companies and Other Securities. The
Managing Investment Adviser and its affiliates and employees may participate
with the Company as co-investors in Portfolio Companies and other securities and
may make loans to, or other investments in, Portfolio Companies. Such
participation will be required to be on a basis which, in the judgment of the
Board of Directors, is not more advantageous to such other persons than the
basis upon which the Company participates in such joint investments, and will
require the prior approval of the Board of Directors, including a majority of
the disinterested Directors. Without prior approval by the Board of Directors
and/or the Commission, the Company will not make joint investments in the
securities of any entity if the Managing Investment Adviser or any of its
affiliates have previously acquired a security issued by such entity, provided
that this prohibition does not apply to follow-on investments. In most such
instances, prior approval of the Commission of such joint investments will be
required. There can be no assurance that such approval will be obtained. See
"Regulation."
Timing of Disposition of Investments. The Managing Investment Adviser
receives certain amounts measured by the realized capital gains (net of realized
capital losses and unrealized net capital depreciation) of the Company as set
forth under "Management." The interests of the Managing Investment Adviser may
conflict with the interests of the stockholders with respect to the timing of
the disposition of Company investments. The acts of the Managing Investment
Adviser are subject to supervision by the Board of Directors.
Allocation of Management Time and Services. The Company will not have
independent management or employees and will rely upon the Managing Investment
Adviser and its affiliates for management and administration of the Company and
its assets. The Managing Investment Adviser believes that it and its affiliates
have or can attract sufficient personnel to discharge all of their
responsibilities to the Company. Conflicts of interest may arise in allocating
management time, services or functions between the Company and other entities
(including Fund I) for which the Managing Investment Adviser and its affiliates
may provide similar services. The officers and directors of the Managing
Investment Adviser and its affiliates will devote such time to the affairs of
the Company as they, in their sole discretion, determine to be necessary for the
conduct of the business of the Company. The Company's Board of Directors will
supervise the activities of the Managing Investment Adviser.
Other Relationships with Portfolio Companies. The Managing Investment
Adviser and its affiliates may have other relationships on an on-going basis
with Portfolio Companies in which the company has invested. Such relationships
could influence the Managing Investment Adviser or its affiliates to take
actions, or forbear from taking actions, which an independent investment adviser
might not take or forbear from taking. The Managing Investment Adviser and its
affiliates will not enter into any other relationship with a Portfolio Company
unless such relationship has been approved by a majority of the disinterested
Directors of the Company and by the independent directors of the Portfolio
Company who also have no interest in the relationship.
Lack of Separate Representation. The Board of Directors of the Company and
the Managing Investment Adviser are represented by the same legal counsel.
Separate counsel will be retained by the Board of Directors for the Company in
connection with any conflicts of interest or any other dispute arising between
the Company and the Managing Investment Adviser or any of its affiliates.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Subject to policies established by the Board of Directors, the Managing
Investment Adviser will arrange for the execution of the Company's portfolio
transactions and the allocation of brokerage. In executing portfolio
transactions, the Managing Investment Adviser will seek to obtain the most
favorable execution of portfolio transactions, that is the best combination of
net price and prompt reliable execution. In the Managing Investment Adviser's
opinion, it is not possible to determine in advance that any particular broker
will actually be able to effect the most favorable execution because, in the
context of a constantly changing market, order execution involves judgments as
to the price, volume, trend and breadth of the market, possibility of a block
transaction, and the broker's activity in the security as well as its general
record for prompt, competent and
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reliable service in all aspects of order processing, execution and settlement as
well as anticipated commission rates.
A portion of the securities in which the Company will invest may be traded
in the over-the-counter markets, and the Company intends to deal directly with
the dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are otherwise available. Under
the Investment Company Act, persons affiliated with the Company are prohibited
from dealing with the Company as principal in the purchase and sale of
securities. Transactions in the over-the-counter markets usually involve
transactions with dealers acting as principal for their own account. The Company
will not deal with affiliated persons as principal; however, affiliated persons
of the Company may serve as its broker in over-the-counter markets and other
transactions conducted on an agency basis in accordance with the Investment
Company Act, except that if an affiliated person is a market maker in the
securities of a company then the affiliated person will not serve as the
Company's broker in the purchase of such securities.
The Managing Investment Adviser has no obligation to deal with any broker
or group of brokers in the execution of transactions. With respect to certain
securities, the Company's portfolio transactions may be effected through
affiliates of the Managing Investment Adviser, provided it is consistent with
the policy of obtaining the most favorable execution. The Company's Board of
Directors has adopted procedures to ensure compliance with applicable
regulations relating to trading of portfolio securities.
In allocating brokerage among other brokers who are believed to be capable
of providing equally favorable execution, the Company may also take into
consideration the fact that a particular broker may, in addition to execution
capability, provide other services to the Company such as research and
statistical information.
PORTFOLIO TURNOVER
Because the investments of the Company generally require relatively long
periods of time to reach maturity, it is expected that the Company's portfolio
turnover will be low. Any short-term securities in which the Company invests
will have a high rate of turnover.
Portfolio turnover will generally involve some expense to the Company,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. The portfolio
turnover rate will be computed by dividing the lesser of the amount of the
securities purchased or securities sold during the year by the average monthly
value of securities owned during the year (excluding securities whose maturities
at acquisition were one year or less).
REGULATION
The Investment Advisers Act of 1940, as amended (the "Investment Advisers
Act"), generally prohibits investment advisers from entering into investment
advisory contracts with an investment company that provides for compensation to
the investment adviser on the basis of a share of capital gains upon or capital
appreciation of the funds or any portion of the funds of the investment company.
In 1980, Congress enacted the Small Business Investment Incentive Act of 1980
which added provisions to the Investment Advisers Act which permit the payment
of compensation based on capital gains in an investment advisory contract
between an investment adviser and a BDC.
In addition, the Small Business Investment Incentive Act of 1980 modified
the provisions of the Investment Company Act that are applicable to BDCs. The
BDC is considered to be a closed-end, non-diversified investment company as
those terms are defined in the Investment Company Act. The following is a brief
description of the Investment Company Act, as modified by the Small Business
Investment Incentive Act of 1980, and is qualified in its entirety by reference
to the full text of the Investment Company Act and the rules thereunder.
Generally, to be eligible to elect BDC status, a company must engage in the
business of furnishing capital and offering significant managerial assistance to
companies that do not have ready access to capital through
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conventional financial channels. A BDC must be operated for the purpose of
making investments in securities of the types required by the Investment Company
Act, which types include certain present and former "eligible portfolio
companies" and certain bankrupt or insolvent companies. A BDC need not invest in
all of the possible types of securities approved for investment by BDCs.
Business Development Companies must also make available significant managerial
assistance to portfolio companies. An eligible portfolio company generally is a
United States company that is not an investment company (except for wholly-owned
Small Business Investment Companies licensed by the Small Business
Administration) and that (i) does not have a class of securities registered on a
national securities exchange or included in the Federal Reserve Board's over-
the-counter margin list, (ii) is actively controlled by the BDC either alone or
as part of a group acting together and an affiliate of the BDC is a member of
the portfolio company's board of directors, or (iii) meets such other criteria
as may be established by the Commission. Control, under the Investment Company
Act, is presumed to exist where the BDC owns 25% of the outstanding voting
securities of the investee.
The Investment Company Act prohibits the Company from investing in certain
types of companies, such as brokerage firms, insurance companies, investment
banking firms, and investment companies. Moreover, the Investment Company Act
limits the type of assets that the Company may acquire to "qualifying assets"
and certain assets necessary for its operations (such as office furniture,
equipment, and facilities) unless, at the time of the acquisition, at least 70%
of the value of the Company's assets consists of qualifying assets. Qualifying
assets include: (i) securities of companies that were eligible portfolio
companies at the time the Company acquired their securities; (ii) securities of
bankrupt or insolvent companies that are not otherwise eligible portfolio
companies; (iii) securities acquired as follow-on investments in companies that
were eligible at the time of the Company's initial acquisition of their
securities but are no longer eligible, provided that the Company has maintained
a substantial portion of its initial investment in those companies; (iv)
securities received in exchange for or distributed on or with respect to any of
the foregoing; and (v) cash items, government securities, and high-quality,
short-term debt. The Investment Company Act also places restrictions on the
nature of the transactions in which, and the persons from whom, securities can
be purchased in order for the securities to be considered qualifying assets. In
addition, certain provisions of the federal banking laws, including the Bank
Holding Company Act of 1956, as amended, would prohibit or restrict investments
by the Company in securities of commercial banking organizations.
The Company is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of stock
senior to the Shares if its asset coverage, as defined in the Investment Company
Act, is at least 200% after the issuance of the debt or the Company stock. In
addition, provision must be made to prohibit any distribution to stockholders or
the repurchase of any shares unless the asset coverage ratio is at least 200% at
the time of the distribution or repurchase.
After this offering, the Company may sell its securities at a price that is
below the prevailing net asset value per share only upon the approval by the
holders of a majority of its voting securities, including a majority of the
voting securities held by nonaffiliated persons, at its last annual meeting. In
addition, the Company may repurchase its shares subject to the restrictions of
the Certificate of Incorporation of the Company and the Investment Company Act.
Under the Investment Company Act as amended by the Small Business
Investment Incentive Act of 1980, certain of the transactions involving the
Company and its affiliates (as well as affiliates of those affiliates) that
would previously have been prohibited without the prior approval of the
Commission require the prior approval of a majority of the Company's
disinterested Directors having no financial interest in the transactions.
Transactions involving certain closely affiliated persons of the Company,
including its Directors, officers and employees, still require the prior
approval of the Commission. In general, (i) any person who owns, controls, or
holds with power to vote, more than 5% of the outstanding Shares, (ii) any
director, executive officer, or general partner of that person, and (iii) any
person who directly or indirectly controls, is controlled by, or is under common
control with, that person, must obtain the prior approval of a majority of the
disinterested Directors and, in some situations, the prior approval of the
Commission, before engaging in certain transactions involving the Company or any
company controlled by the Company. The Investment Company Act and applicable
rules thereunder generally do not restrict transactions between the Company and
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its Portfolio Companies. In accordance with the Investment Company Act, a
majority of the Directors are not interested persons of the Company as defined
in the Investment Company Act. See "Management."
The Investment Company Act prohibits an investment company, such as the
Company, from knowingly participating in a joint transaction with an affiliate
of, any director or investment adviser to the investment company. Accordingly,
the Company may not, without exemptive relief from the Commission, participate
in a joint transaction with Fund I or companies or funds which may be affiliates
of the Company or the Managing Investment Adviser, or any other entity managed
by the persons who are the principals of the Managing Investment Adviser
(collectively, "Company Affiliates"). The Company and the Managing Investment
Adviser intend to submit an application to the Commission to permit such
co-investment. The Managing Investment Adviser believes that it will be
advantageous for the Company to co-invest with Fund I where such investment is
consistent with the investment objectives, investment positions, investment
policies, investment strategies, investment restrictions, regulatory
requirements and other pertinent factors applicable to the Company. The Managing
Investment Adviser believes that co-investment by the Company and any Company
Affiliates will afford the Company the ability to achieve greater
diversification and, together with any Company Affiliates, the opportunity to
exercise greater influence on the Portfolio Companies in which the Company and
any Company Affiliates invest together. Accordingly, the application will seek
an exemptive order permitting the Company and any Company Affiliates to invest
together in the same Portfolio Companies where such is consistent with
investment objectives, investment positions, investment policies, investment
strategies, investment restrictions, regulatory requirements and other pertinent
factors applicable to the Company. Although the Managing Investment Adviser
intends to select investments for the Company and for Company Affiliates
separately, considering in each case only the investment objectives, investment
positions, available funds and other pertinent factors of the particular
investment company or fund, it is expected that if the application for exemptive
relief is granted, the Company and any Company Affiliates may frequently invest
in the same Portfolio Companies, with each of the Company and any Company
Affiliates taking a position in the Portfolio Company. If the exemptive relief
is granted, it is expected that the Company and any Company Affiliates will
invest together in proportion to their respective amounts of capital available
for investment where such is consistent with their respective investment
objectives, investment positions, investment policies, investment strategies,
investment restrictions, regulatory requirements and other pertinent factors.
There is no assurance, however, that any such joint investments will in fact be
in proportion to their respective amounts of capital available for investment.
It is expected that exemptive relief permitting co-investment will be granted
only upon the conditions, among others, that before a co-investment transaction
is effected, the Managing Investment Adviser will make a written investment
presentation regarding the proposed co-investment to the independent directors
of the Company and the independent directors of the Company will review the
Managing Investment Adviser's recommendation. It is expected that prior to
committing to a co-investment, a "required majority" as defined in Section 57(o)
of the Investment Company Act) of the independent directors of the Company will
conclude that (i) the terms of the proposed transaction are reasonable and fair
to the Company and its stockholders and do not involve overreaching of the
Company and its stockholders on the part of any person concerned; (ii) the
transaction is consistent with the interests of the stockholders of the Company
and is consistent with the investment objectives and policies of the Company;
and (iii) the investment by the Company Affiliate co-investor would not
disadvantage the Company in making its investment, maintaining its investment
position, or disposing of such investment and that participation by the Company
would not be on a basis different from or less advantageous than that of the
Company Affiliate co-investor. There is no assurance that the application for
exemptive relief will be granted by the Commission. Accordingly, there is no
assurance that the Company will be permitted to co-invest with any Company
Affiliates.
VALUATION OF PORTFOLIO SECURITIES
Under the supervision of and in accordance with procedures adopted by the
Board of Directors, the Managing Investment Adviser will value the securities in
the Company's portfolio quarterly and at such other time as, in the Board's
view, circumstances warrant. In the event of a sale by the Company of its
Shares, the Managing Investment Adviser must determine the net asset value (the
"NAV") of a Share as of a date within
33
<PAGE> 36
48 hours before such sale (excluding Sundays and holidays) to comply with the
requirement of the Investment Company Act that shares not be sold below NAV
without stockholder approval.
In order to determine the NAV per Share, (i) the value of the assets of the
Company, including its portfolio securities, will be determined by the Managing
Investment Adviser under the supervision of the Board Directors; (ii) the
Company's liabilities will be subtracted therefrom; and (iii) the difference
will be divided by the number of outstanding Shares of the Company.
The value for restricted stock investments for which no public market
exists cannot be precisely determined. 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. In the early stages of development, venture capital investments
will typically be valued based upon their original cost to the Company (the
"cost method"). The cost method will be utilized until significant developments
affecting the Portfolio Company provide a basis for use of an appraisal
valuation (the "appraisal method") by the Managing Investment Adviser. The
appraisal method will be based upon such factors affecting the Portfolio Company
as earnings, net worth, the market prices for similar securities of comparable
companies and an assessment of the Portfolio Company's future prospects. In the
case of unsuccessful operations, the appraisal may be based upon liquidation
value. Valuations based on the appraisal method are necessarily subjective. The
Company will also use third party transactions (actual or proposed) in the
Portfolio Company's securities as a basis of valuation (the "private market
method"). The private market method will only be used with respect to actual
transactions or actual firm offers by sophisticated, independent investors.
Securities with legal, contractual or practical restrictions on transfer may be
valued at a discount (typically ranging from 10% to 40%) from their value
determined by the foregoing methods to reflect the effect of such restrictions.
The values for the types of investments referred to in the preceding
paragraph will be estimated regularly by the Managing Investment Adviser 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 Company anticipates that it may invest in securities for which a public
market exists but which are "restricted securities" for purposes of the
Securities Act. In evaluating such securities, the Managing Investment Adviser
will take into consideration various factors, including the price at which the
securities in question were acquired relative to the market price for
unrestricted shares of the same securities at the time of such acquisition,
modified as appropriate to reflect the nature of the market in which the
securities are traded, if any, the amount of the public float, the existence and
terms of any securities registration rights, the proportion of the Portfolio
Company's securities held by the Company, changes in the financial condition and
prospects of such Portfolio Company and other factors which may affect their
fair value, all in accordance with the Investment Company Act. Restricted
securities for which an established trading market exists will typically be
valued at a discount of 10% to 40% from the public market price with the amount
of the discount decreasing as the restriction period decreases. If no such
market exists, the asset will be valued at cost unless management has good
reason to use a different valuation method (such as sustained private sales of a
Portfolio Company's securities at prices higher than the value initially used by
management).
The Company's investments in Private Funds will be valued based upon the
Company's pro rata share of the value of the assets of a Private Fund as
determined by such Private Fund in accordance with its by-laws, constitutional
or other documents governing such valuation, on the valuation date. If such
valuation with respect to investments in Private Funds is not available by
reason of timing or other event on the valuation date, the Managing Investment
Adviser will determine such value based on the Managing Investment Adviser's
judgment of fair value on the appropriate date, less applicable charges, if any.
The value of unrestricted securities owned by the Company and traded on a
securities exchange or quoted on NASDAQ or the NASDAQ National Market System
will be determined based upon the last sale price for such securities on the
measuring date.
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<PAGE> 37
FEDERAL INCOME TAX MATTERS
The following discussion is a general summary of certain of the United
States federal income tax laws relating to the Company and investors in the
Shares. The discussion herein is based on the Code, regulations, published
rulings and procedures and court decisions as of the date hereof. The tax law,
as well as any interpretation thereof, is subject to change prospectively, as
well as retroactively. This discussion does not purport to deal with all of the
United States federal income tax consequences applicable to the Company or to
all categories of investors, some of which may be subject to special rules. In
addition, it does not cover any state, local, foreign or other taxes to which
the Company or the investors may be subject or any proposed changes in the law.
TAXATION AS A REGULATED INVESTMENT COMPANY
Qualification. The Company intends to qualify for the special income tax
treatment as a regulated investment company for federal income tax purposes.
Under subchapter M of the Code, the Company must, among other things, (a) derive
at least 90% of its gross income from dividends, interest, payments with respect
to loans of securities and gains from the sale or other disposition of
securities or certain other related income; (b) generally derive less than 30%
of its gross income from gains from the sale or other disposition of stock,
securities, options or foreign currency held for less than three months; (c)
diversify its holdings so that at the end of each fiscal quarter or generally
within 30 days thereafter, (i) at least 50% of the value of the Company's assets
is represented by cash, cash items (including receivables), United States
government securities, securities of other regulated investment companies, and
other securities that, with respect to any one issuer, do not represent more
than 5% of the value of the Company's assets nor more than 10% of the voting
securities of such issuer, and (ii) not more than 25% of the value of the
Company's assets is invested in the securities (other than United States
government securities or the securities of other regulated investment companies)
of any one issuer, or in two or more issuers which the Fund controls and which
are engaged in the same or similar trade or business; and (d) file an election
to be treated as a regulated investment company.
Taxation of Regulated Investment Companies. If the Company qualifies as a
regulated investment company and distributes to its stockholders at least 90% of
its net investment income, the Company will not be subject to federal income tax
on the net investment income so distributed. The Company, however, would be
subject to the regular corporate income tax (currently at rates up to 35%) on
any undistributed net investment income. A regulated investment company's net
investment income is generally its taxable income (without any dividend received
deduction), excluding its net capital gain (which is the excess of its net
long-term capital gain over its net short-term capital loss).
In addition, a regulated investment company is taxable on its undistributed
net capital gain, currently at rates up to 35%. To qualify as a capital gain
dividend which reduces the amount of net capital gain on which the Company pays
tax, it must designate the distribution as a capital gain dividend in a written
notice to the stockholders not later than 60 days after the end of its tax year.
Such amount, however, cannot exceed the Company's net capital gain for the year.
A regulated investment company is also subject to a nondeductible 4% excise
tax on the amount by which the income it distributes in any calendar year is
less than the required distribution amount. The required distribution for a
calendar year is equal to the sum of (a) 98% of the Company's ordinary income
for such calendar year, (b) 98% of the excess of the Company's capital gains
over its capital losses for the one-year period ending on October 31 (December
31 if the Company makes a special election) and (c) 100% of the undistributed
ordinary income and gains from prior years. For purposes of the excise tax, any
net investment income or capital gain retained by the Company will be treated as
having been distributed if the Company pays income tax on such income during the
calendar year in which the excise tax is being imposed.
Distributions. Distributions to stockholders attributable to the Company's
net investment income will be taxable as ordinary dividend income. Capital gain
dividends are taxable as long-term capital gains regardless of how long the
Shares have been held. In addition, the Company may designate all or a portion
of its undistributed net capital gain as a deemed distribution to its
stockholders. In such case, the stockholders are also taxed on the deemed
distribution as long-term capital gain, but are entitled to a tax credit equal
to the
35
<PAGE> 38
tax required to be paid by the Company on such amount and the basis in their
Shares will be increased by 65% of the deemed distribution to the stockholder
(i.e., the after-tax net capital gain retained by the regulated investment
company with respect to the stockholder). Stockholders must be notified of any
such deemed distribution within 60 days after the end of the fiscal year.
Under current law, the maximum federal income tax rate imposed on
individuals with respect to ordinary income and net short-term capital gain is
39.6% whereas the maximum rate on net capital gains is limited to 28%. In the
case of a corporate taxpayer, long-term capital gains are taxed at the same
rates as ordinary income and short-term capital gains. Corporate stockholders
are generally eligible for the 70% dividends received deduction with respect to
the ordinary income dividends paid by the Company to the extent such amount is
properly designated by the Company and does not exceed the dividends received by
the Company from domestic corporations.
Distributions by the Company are generally taxable to the stockholders at
the time the distribution is received. Any distribution declared by the Company
in October, November or December, made payable to stockholders of record in such
a month and paid in the following January, are deemed to have been paid by the
Company and received by the stockholders on December 31 of the year declared.
If, for any calendar year, the Company's total distributions exceed net
investment income and net realized capital gains, the excess will generally be
treated as a tax-free return of capital (up to the amount of the stockholder's
tax basis in his Shares and then as gain from the sale of the Shares). The
amount treated as a tax-free return of capital will reduce the stockholder's
adjusted basis on his Shares, thereby increasing the potential gain or reducing
the potential loss on the sale of the Shares.
Stockholders will be sent a Form 1099 each year detailing the tax status of
the distributions from the Company.
OTHER RULES APPLICABLE TO STOCKHOLDERS OF REGULATED INVESTMENT COMPANIES
Sale of Shares. In general, if Shares are sold, the seller will recognize
a gain or loss equal to the difference between the amount realized on the sale
and the seller's adjusted basis in the Shares. Any loss realized on a sale of
Shares will be disallowed to the extent the seller has acquired (or entered into
a contract to acquire) substantially identical stock within a period beginning
30 days before the disposition of the Shares and ending 30 days after the
disposition. In such case, the basis of the Shares acquired will be adjusted to
reflect the disallowed loss.
Any gain or loss realized upon a sale of Shares by a stockholder who is not
a dealer in securities will generally be treated as capital gain or loss. The
gain or loss will be long-term capital gain or loss if the Shares were held for
more than one year. In addition, if the Shares sold were not held for more than
six months, any loss on the sale will be treated as long-term capital loss to
the extent of any capital gain dividend from a regulated investment company
received by the stockholder with respect to such Shares.
Tax Exempt Investors. Stockholders who are exempt from tax under the Code
should not be required to include distributions from the Company in "unrelated
business taxable income" except to the extent that dividends or capital gains
would be taxable to such stockholders under subchapter F of the Code (e.g., as
debt financed income). If the Company designates all or a portion of its
undistributed net capital gain as a deemed distribution to its stockholders, a
tax-exempt shareholder should be entitled to claim a refund for taxes paid on
their behalf by filing Form 843 or an appropriate income tax return.
BACKUP WITHHOLDING
The Company may be required to withhold federal income tax at the rate of
31% on dividends and on the proceeds of any redemption or other disposition of
Shares paid to a stockholder if the stockholder fails to provide the Company his
taxpayer identification number or a certificate that he is exempt from backup
withholding, or the Internal Revenue Service notifies the Company that the
stockholder is subject to backup withholding. The stockholder is entitled to a
credit against his federal income tax for the amount of any backup withholding.
36
<PAGE> 39
FOREIGN INVESTORS
The United States tax treatment applicable to investors that are not United
States persons (a "non-United States holder") depends upon the particular
circumstances of the non-United States holder. A "United States person" is a
citizen or resident of the United States, a corporation or partnership created
or organized in the United States or under the laws of the United States or of
any State, or an estate or trust whose income is includible in gross income for
United States federal income tax purposes regardless of its source.
In general, a non-United States holder who is not engaged in a United
States trade or business is subject to a 30% (or reduced treaty rate, if
applicable) United States withholding tax on dividends. Capital gains of a
non-United States holder generally are not subject to the United States
withholding tax unless (i) the gain is effectively connected with the conduct of
a United States trade or business or (ii) the non-United States holder is an
individual and is present in the United States for at least 183 days and has a
"tax home" in the United States or such gain is attributable to an office or
fixed place of business in the United States.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT WITH HIS, HER OR ITS TAX
COUNSEL CONCERNING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.
37
<PAGE> 40
ERISA CONSIDERATIONS
The following is intended to be a summary only and is not a substitute for
careful planning with a professional. Employee benefit plans subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
section 4975 of the Code considering purchasing the Shares should consult with
their own counsel regarding the application of ERISA and the Code to their
purchase of the Shares.
FIDUCIARY CONSIDERATIONS
Certain employee benefit plans and individual retirement accounts and
individual retirement annuities ("IRAs") (collectively, "Plans") are subject to
various fiduciary and prohibited transaction requirements under ERISA and the
Code. Before investing in the Shares, a Plan fiduciary should ensure that such
investment is in accordance with ERISA's general fiduciary standards. In making
such a determination, a Plan fiduciary should be sure that the investment is in
accordance with the governing instruments and the overall policies of the Plan,
and that the investment will comply with the diversification and prudence
requirements of ERISA. Plan fiduciaries should also consider the tax aspects of
an investment in the Shares discussed in "Federal Income Tax Matters." In
addition, provisions of ERISA and the Code prohibit transactions involving the
assets of a Plan and persons who have specified relationships with a plan
("Parties in Interest" under ERISA and "Disqualified Persons" under the Code,
collectively referred to herein as "Parties in Interest"), unless an exemption
is available for such transaction. The consequences of such prohibited
transactions include the imposition of excise taxes, possible disqualification
of IRAs, and other liabilities. A Plan fiduciary should be sure that an
investment in the Shares will not constitute or give rise to a direct or
indirect non-exempt prohibited transaction. A Plan fiduciary should also
consider prohibitions in ERISA relating to improper delegation of control over
or responsibility for "plan assets."
PLAN ASSETS CONSIDERATIONS
In certain circumstances where a Plan holds an interest in an entity, the
assets of the entity are deemed to be "plan assets" of such Plan for purposes of
the fiduciary and prohibited transactions provisions of ERISA and the Code. In
addition, under such circumstances, any person that exercises authority or
control with respect to the management or disposition of such assets is a Plan
fiduciary. Plan assets are not defined in ERISA or the Code, but the United
States Department of Labor has issued a regulation (the "Regulation"), that
outlines the circumstances under which a Plan's interest in an entity will
result in the assets of the entity being deemed to constitute plan assets.
The Regulation contains a number of exceptions to the treatment of an
entity's assets as plan assets of its Plan investors. One such exception applies
where the securities acquired by the Plan constitute publicly-offered
securities. A "publicly-offered security" is defined under the Regulation as a
security that is (i) freely transferable, (ii) part of a class of securities
that is widely-held, and (iii) either (a) part of a class of securities that is
registered under section 12(b) or 12(g) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") or (b) sold to a Plan as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act, and the class of securities of which such security is a part
is registered under the Exchange Act within 120 days (or such longer period
allowed by the Commission) after the end of the fiscal year of the issuer during
which the offering of such securities to the public occurred. Whether a security
is considered "freely transferable" depends on the facts and circumstances of
each case. Generally, if the security is part of an offering in which the
minimum investment is $10,000 or less, any restriction on or prohibition against
transfer or assignment of such security for the purposes of preventing a
termination or reclassification of the entity for federal or state tax purposes
will not of itself prevent the security from being considered freely
transferable. Although the minimum investment permitted in the Shares is
$25,000, the Company has imposed no restrictions on transfer or assignment of
the Shares, other than the limitations set forth under "Investor Suitability
Standards." A class of securities is considered "widely-held" if immediately
after the initial offering it is owned by 100 or more investors independent of
the issuer and of one another.
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<PAGE> 41
It is anticipated by the Company that the Shares will meet the criteria of
the publicly-offered securities exception under the Regulation. Accordingly, the
Company believes that if a Plan purchases the Shares, the Company's assets
should not be deemed to be "plan assets."
DESCRIPTION OF SHARES
GENERAL
The Company is authorized to issue 200,000 Shares, par value $0.01 per
share. As of the date of this Prospectus, 1 Share is outstanding.
Any additional offering will be subject to the requirements of the
Investment Company Act that such Shares may not be issued at a price below the
then current net asset value, except in connection with an offering to existing
stockholders or with the consent of the holders of a majority of the Company's
outstanding voting securities (as defined in the Investment Company Act). See
"Regulation."
SHARES OF COMMON STOCK
Holders of Shares are entitled to one vote per Share on all matters
submitted for action by the stockholders. There is no provision for cumulative
voting rights with respect to the election of Directors. Accordingly, the
holders of more than 50% of the Shares can, if they choose to do so, elect all
of the Directors. In such event, the holders of the remaining Shares will not be
able to elect any Directors. Holders of Shares are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, holders of Shares are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision has been made for each class of stock, if any, having preference
over the Shares. Holders of the Shares, as such, have no conversion, preemptive
or other subscription rights, and there are no redemption provisions applicable
to the Shares. All Shares offered hereby, when issued for the consideration set
forth in this Prospectus, will be fully-paid and non-assessable.
DURATION
The duration of the Company will be ten years from the final closing of the
sale of the Shares offered hereby. However, the Board of Directors has the
right, in its sole discretion, to extend the term for up to two additional
two-year periods, after which the approval of investors who represent 66 2/3% of
the Company's outstanding Shares may determine to extend the term of the
Company.
SELLING ARRANGEMENTS
The Selling Agent has entered into a Selling Agent Agreement with the
Company pursuant to which the Selling Agent has agreed to act as selling agent
for the Shares. This agreement is an agency agreement only and places the
Selling Agent under no obligation to use its best efforts to sell the Shares or
otherwise solicit or promote transactions in such Shares. Shares are available
only to clients of U.S. Trust and its affiliates who meet the Company's investor
suitability standards. The Selling Agent will not at any time purchase any
Shares for its own account and its sole function is to promote the sale of the
Company's Shares. Both the Selling Agent and the Managing Investment Adviser are
subsidiaries of U.S. Trust Corporation. The address of the Selling Agent is 114
West 47th Street, New York, New York 10036-1532.
Pursuant to the Selling Agent Agreement, the Selling Agent may enter into
agreements with one or more sub-selling agents to arrange for the sale of the
Shares in certain states. The Selling Agent agrees under the Selling Agent
Agreement that it shall remain fully responsible for the performance of all its
duties under the Selling Agent Agreement and that it shall supervise the
activities of each such sub-selling agent.
The Company has agreed to indemnify the Selling Agent against certain civil
liabilities, including liabilities under the federal securities laws. However,
such indemnification is subject to the provisions of
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<PAGE> 42
Section 17(i) of the Investment Company Act which provides, in part, that no
agreement shall contain a provision which protects or purports to protect any
person against any liability to such company or its security holders to which it
would otherwise be subject due to such person's misfeasance, bad faith, or gross
negligence in the performance of its duties or reckless disregard of its
obligations and duties under such agreement.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by O'Sullivan Graev & Karabell, LLP, New York, New York.
EXPERTS
The Statement of Assets and Liabilities of the Company included in this
Prospectus has been audited by Ernst & Young, LLP, independent certified public
accountants, as stated in their report included herein, and is included herein
in reliance upon such report given on their authority as experts in auditing and
accounting. Ernst & Young, LLP is located at 787 Seventh Avenue, New York, New
York 10019.
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<PAGE> 43
REPORT OF INDEPENDENT AUDITORS
Shareholder and Board of Directors
Excelsior Private Equity Fund II, Inc.
We have audited the accompanying statement of assets and liabilities of
Excelsior Private Equity Fund II, Inc. as of March 20, 1997. This statement of
assets and liabilities is the responsibility of the Company's management. Our
responsibility is to express an opinion on this statement of assets and
liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Excelsior
Private Equity Fund II, Inc. at March 20, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG, LLP
New York, New York
March 20, 1997
F-1
<PAGE> 44
EXCELSIOR PRIVATE EQUITY FUND II, INC.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MARCH
20, JULY 31,
1997 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash............................................................... $ 1,000 $ 1,000
Deferred organizational and initial offering expenses.............. 222,000 222,000
-------- --------
Total Assets............................................... 223,000 223,000
LIABILITIES:
Accrued organizational expenses and initial offering costs......... 222,000 222,000
-------- --------
Net Assets consist of:
Common Stock, $0.01 par value; authorized 200,000 shares; issued
and outstanding 1 share........................................ $ 1,000 $ 1,000
======== ========
Net Asset Value Per Share.......................................... $ 1,000 $ 1,000
======== ========
</TABLE>
- ---------------
Notes:
(1) The Company was incorporated in the State of Maryland on March 20, 1997 and
has had no operations to date other than matters relating to its
organization and registration under the Securities Act of 1933, as amended,
as a diversified, closed-end management investment company that will elect
to be regulated as a business development company under the Investment
Company Act of 1940, as amended, and the sale and issuance of 1 share of its
Common Stock to Douglas A. Lindgren.
(2) Costs incurred by the Company in connection with its organization, estimated
at $15,000, will be amortized on a straight-line basis over a five-year
period beginning at the commencement of operations of the Company. Costs
incurred by the Company in connection with the initial registration of the
Shares, estimated at $207,000 will be charged against the proceeds of the
offering. Approximately $120,000 of these costs have been incurred by U.S.
Trust and will be reimbursed to it.
F-2
<PAGE> 45
EXCELSIOR PRIVATE EQUITY FUND II, INC.
SUBSCRIPTION AGREEMENT
Excelsior Private Equity Fund II, Inc.
114 West 47th Street
New York, New York 10036
Ladies and Gentlemen:
The undersigned, by signing this Subscription Agreement, and subject to the
terms and conditions hereof and the provisions of the Prospectus of Excelsior
Private Equity Fund II, Inc. (the "Company") (the "Prospectus"), hereby
subscribes for shares of common stock (the "Shares") of the Company in the
aggregate investment amount set forth on the reverse side hereof (the
undersigned's "Investment Amount"), and herewith encloses payment in an amount
equal to such Investment Amount. The undersigned understands that such funds
will be held by United States Trust Company of New York as Escrow Agent, and
will be returned promptly, together with any interest earned thereon, to the
undersigned, in the event that at least 100,000 Shares are not subscribed for
and the payments therefor are not made by July 31, 1997 or such other subsequent
date not later than December 31, 1997 as the Managing Investment Adviser and the
Company may determine.
1. Acceptance of Subscription. It is understood and agreed that the
Company shall have the right, in its sole discretion, to accept or reject this
subscription, in whole or in part. Subscriptions need not be accepted in the
order received, and Shares may be allocated in the event of oversubscription.
2. Right to Refund. The undersigned shall have the right to receive a
refund of their investment for a period of five business days from the date
payment for the investment is submitted by the undersigned. Such request may be
made in any fashion but, if made other than in an originally signed and written
communication, must be confirmed with such a communication within 15 business
days after the date payment is submitted.
3. Representations and Warranties of the Undersigned. The undersigned
hereby represents and warrants to the Company and UST Financial Services Corp.,
and each officer, director, controlling person, and agent of the Company and UST
Financial Services Corp., that:
(a) the undersigned meets the investor suitability standards set forth
in the Prospectus under "Investor Suitability Standards."
(b) if an investment in the Company is being made by a corporation,
partnership, trust, or estate, he/she has all right and authority, in
his/her capacity as an officer, general partner, trustee, executor, or
other representative of such corporation, partnership, trust, or estate, as
the case may be, to make such decision to invest in the Shares and to
execute and deliver this Subscription Agreement on behalf of such
corporation, partnership, trust, or estate, as the case may be, and this
Subscription Agreement is a valid and binding agreement of such
corporation, partnership, trust, or estate, enforceable in accordance with
its terms;
(c) the undersigned has reached the age of majority in higher state of
residence;
(d) the undersigned hereby acknowledges that the undersigned has
received and carefully reviewed the Prospectus, as amended and/or
supplemented; and
(e) if the undersigned is subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), in making this investment
he/she is aware of and has taken into consideration the prudence,
diversification, and other fiduciary requirements of ERISA and has
concluded that this investment is in compliance with such requirements; and
(f) The undersigned has, upon his/her own initiative, inquired about
and invested in the Company, and has not been solicited or induced in any
way by an employee of UST Financial Services Corp.
A-1
<PAGE> 46
4. Indemnification. The undersigned hereby agrees to indemnify and hold
harmless the Company and UST Financial Services Corp., each officer, director,
controlling person, and agent of the Company and UST Financial Services Corp.,
from and against any and all loss, claim, damage, liability, or expense, and any
action in respect thereof, joint or several, to which any such person may become
subject, due to or arising out of the falsity or inaccuracy of any
representation, warranty or any other information provided herein, together with
all reasonable costs and expenses (including attorneys' fees) incurred by any
such person in connection with any action, suit, proceeding, demand, assessment,
or judgment incident to any of the matters so indemnified against.
5. Survival. All representations and warranties contained in this
Subscription Agreement and the indemnification provisions contained in Section 4
hereof shall survive (i) the acceptance of the subscription, (ii) changes in the
transactions, documents, and instruments described in the Prospectus that are
not material, and (iii) the death or disability of the undersigned.
6. Governing Law. This Subscription Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
Under penalties of perjury, the undersigned certifies that the information
provided on the reverse of this form is true, correct and complete.
A-2
<PAGE> 47
EXCELSIOR PRIVATE EQUITY FUND II, INC.
SUBSCRIPTION AGREEMENT
<TABLE>
<S> <C>
---------------------------------
Purchase Price of $1,000 per Share: minimum
INVESTMENT AMOUNT: $ SHARES subscription is $25,000 (25 Shares)
---------------------------------
</TABLE>
Make check payable to U.S. Trust of New York, Escrow Agent for EXCELSIOR PRIVATE
EQUITY FUND II, INC., 114 West 47th Street, NY, NY 10036. Checks should be
delivered to the Selling Agent together with this Subscription Agreement.
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------
INDIVIDUAL ACCOUNTS: CUSTODIAL ACCOUNTS:
Complete sections 1, 4, 5 and sign below Complete sections 2, 3, 4, 5 and sign below
- ----------------------------------------------------------------------------------------------------------------
MANNER IN WHICH TITLE IS TO BE HELD (CHECK ONE)
- ----------------------------------------------------------------------------------------------------------------
(1) INDIVIDUAL ACCOUNTS (2) CUSTODIAL ACCOUNTS
[ ] A. Individual Owner [ ] F. Tenants by the [ [ ] N. Pension
[ ] B. Joint tenants with entirety ] J. IRA [ ] O. Profit Sharing
right of survivorship (both parties must sign) [ [ ] P. Other
[ ] C. Community property [ ] G. Corporate owner ] K. Keogh
[ ] D. Separate property [ ] H. Partnership owner Plan
[ ] E. Tenants in common [ ] I. Other [
(all parties must sign) ] L.
Uniform
Gifts
to
Minors
Act
[
] M. Trust
(date
est. )
State
of
----
EACH CUSTODIAN(S) OR TRUSTEE(S) MUST
SIGN
- ----------------------------------------------------------------------------------------------------
(3) TRUSTEE(S) OR Name of Each Custodian (Trustee) Account #
CUSTODIAN(S) --------------------------------------------------------------------------------------------------
(attach additional --------------------------------------------------------------------------------------------------
sheets if necessary)
Street or P.O. Box
--------------------------------------------------------------------------------------------------
City State Zip Phone
( )
--------------------------------------------------------------------------------------------------
Trustee or Custodian Tax ID Number
- ------------------------------------------------------------------------------------------------------------------------------
(4) Investor(s) Investor Name Co-Investor Name
--------------------------------------------------------------------------------------------------
Street or P.O. Box
--------------------------------------------------------------------------------------------------
City State Zip Phone
( )
--------------------------------------------------------------------------------------------------
Legal State of Residency (if different from above) U.S. Citizen
[ ] YES [ ] NO
--------------------------------------------------------------------------------------------------
SOCIAL SECURITY OR TAX ID NUMBER FOR IRS REPORTING
- ------------------------------------------------------------------------------------------------------------------------------
(5) DISTRIBUTION ADDRESS -- NAME OF CUSTODIAN (TRUSTEE) ACCOUNT #
IF DIFFERENT FROM --------------------------------------------------------------------------------------------------
ADDRESS ABOVE STREET OR P.O. BOX
(DISTRIBUTIONS FOR --------------------------------------------------------------------------------------------------
CUSTODIAL ACCOUNTS WILL BE CITY STATE ZIP PHONE
SENT TO THE CUSTODIAN)
( )
--------------------------------------------------------------------------------------------------
TRUSTEE OR CUSTODIAN TAX ID NUMBER
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
I certify, under penalties of perjury, that: (1) the tax identification number
shown on this application is correct and (2) I am NOT currently under IRS
notification that part of my dividend and interest income is to be withheld as a
result of my failure to report all dividend and interest income on my income tax
return -- i.e. backup withholding.
(Strike the word "NOT" above if you received IRS notification.)
SIGNATURE(S): Please read the reverse before signing; names must be signed
exactly as registered above; each investor is required to sign his/her/its own
Subscription Agreement unless signed by a trustee or custodian.
<TABLE>
<S> <C>
Investor's Signature Date
- ------------------------------------------------------------------- -------------------
Co-Investor's Signature Date
- --------------------------------------------------------------- -------------------
Trustee or Custodian's Signature Date
- ----------------------------------------------------- -------------------
Co-Trustee or Co-Custodian's Signature Date
- -------------------------------------------- -------------------
</TABLE>
THE SELLING AGENT MUST SIGN BELOW TO COMPLETE THE ORDER
I had reasonable grounds to believe, on the basis of information obtained from
the subscriber concerning his/her age (if applicable), investment objectives,
other investments, financial situation and needs, and any other information
known by me, including said subscriber's recognizable capacity to understand the
important aspects and risks of the investment, that (i) the subscriber is or
will be in a financial position appropriate to enable the subcriber to realize
to a significant extent the benefits described in the Prospectus; (ii) the
subscriber has a fair market net worth sufficient to sustain the risks inherent
in and investment in the Company, including loss of investment and lack of
liquidity; and (iii) the Company is otherwise suitable for the subscriber. I
further certify that I have informed the subscriber of all pertinent facts
relating to the liquidity and marketability of the Shares during the term of the
Company. I also warrant that I am exempt from licensing or duly licensed, as
appropriate, and may lawfully sell the Shares in the state designated as the
subscriber's residence.
<TABLE>
<S> <C> <C> <C>
Name Address
- ---------------------------------------------------------------------------------------------------------
City State Zip Phone
- ---------------------------------------------------------------------------------------------------------
[Licensed Firm Name] [Firm's Headquarters Mailing Address]
- ---------------------------------------------------------------------------------------------------------
[City] State Zip Phone
- ---------------------------------------------------------------------------------------------------------
Signature
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 48
=========================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SELLING AGENT. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table...................................... 2
Available Information.......................... 3
Reports to Stockholders........................ 3
Investor Suitability Standards................. 4
Prospectus Summary............................. 5
The Company.................................... 8
Risk Factors................................... 9
Investment Objective and Policies.............. 14
Terms of the Offering and Purchase of Shares... 17
Use of Proceeds................................ 18
Management..................................... 19
Brokerage Allocation and Other Practices....... 30
Regulation..................................... 31
Valuation of Portfolio Securities.............. 33
Federal Income Tax Matters..................... 35
ERISA Considerations........................... 38
Description of Shares.......................... 39
Selling Arrangements........................... 39
Legal Matters.................................. 40
Experts........................................ 40
Report of Independent Auditors................. F-1
Statement of Assets and Liabilities............ F-2
Exhibit A -- Subscription Agreement............ A-1
</TABLE>
------------------------
UNTIL NOVEMBER 1, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
=========================================================
=========================================================
EXCELSIOR PRIVATE
EQUITY FUND II, INC.
180,000 SHARES
OF
COMMON STOCK
--------------------
PROSPECTUS
--------------------
OCTOBER 7, 1997
=========================================================
<PAGE> 49
PART C - OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
I. Financial Statements
(a) Report of Independent Auditors
(b) Statement of Assets and Liabilities of the Company, as of March 20,
1997 and July 31, 1997 (unaudited)
2. Exhibits
1.1 Form of Selling Agent Agreement between the Company and UST Financial
Services Corp.*
3.1 Articles of Incorporation.*
3.2 By-Laws of the Company.*
4.1 Specimen Stock Certificate.*
4.2 Form of Subscription Agreement for investment in shares of the Company.*
5.1 Opinion and consent of O'Sullivan Graev & Karabell, LLP.*
10.1 Form of Transfer Agency and Custodian Agreement between the Company and
The Chase Manhattan Bank.*
10.2 Form of Management Agreement between the Company and United States
Trust Company of New York.*
10.3 Form of Escrow Agreement among the Company, UST Financial Services
Corp. and United States Trust Company of New York.*
23.1 Consent of Ernst & Young, LLP, independent auditors.*
- ---------------
* Previously filed.
C-1
<PAGE> 50
Item 25. MARKETING ARRANGEMENTS
See the Form of Selling Agent Agreement filed as Exhibit 1.1, as well
as the Company's Prospectus under the caption "Selling Arrangements."
Item 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, payable by the
Company in connection with the issuance and distribution of the securities
covered by this Registration Statement.
<TABLE>
<S> <C>
Securities and Exchange Commission Fees . . . $ 45,454.55
Blue Sky fees and expenses . . . . . . . . . 40,000.00
Printing . . . . . . . . . . . . . . . . . . 15,000.00
Legal fees and expenses . . . . . . . . . . . 100,000.00
Independent auditors' fees and expenses . . . 5,000.00
Miscellaneous . . . . . . . . . . . . . . . . 16,545.59
-----------
Total . . . . . . . . . . . . . . . . $222,000.14
===========
</TABLE>
Item 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Upon conclusion of the public offering of the Company's shares of
common stock, it is anticipated that no person will be controlled by or under
common control with the Company.
Item 28. NUMBER OF HOLDERS OF SECURITIES AS OF OCTOBER 1, 1997
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, par value $0.01 per share 1
Item 29. INDEMNIFICATION
Section 2-418 of the General Corporation Law of the State of Maryland,
the state in which the Company is organized, empowers a corporation, subject to
certain limitations, to indemnify its directors, officers, employees and agents
against judgments, penalties, fines, settlements and reasonable expenses
actually and reasonably incurred by them in connection with any suit or
proceeding to which they are a party so long as they acted in good faith or
without active and deliberate dishonesty, and they received no actual improper
personal benefit in money or property or services, or, with respect to any
criminal proceeding, so long as they had no reasonable cause to believe their
conduct to have been unlawful.
Article XI of the Company's Articles of Incorporation filed as Exhibit
3.1 provides that the Company shall indemnify its directors and officers to the
fullest extent permitted by the Maryland General Corporation Law, including the
advancing of expenses, subject to any limitations imposed by the Securities Act
of 1933, as amended (the "Securities Act") and the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Company's board of
directors may make further provision for indemnification of directors, officers,
employees and agents to the fullest extent permitted by law.
Article VIII of the Company's By-Laws filed as Exhibit 3.2 provides
that the Company shall indemnify, defend and hold harmless its directors and
officers to the fullest extent permitted by law, including the advancing of
expenses, subject to any limitations imposed by law.
C-2
<PAGE> 51
Under Section 1.6 of the Selling Agent Agreement filed as Exhibit 1.1,
the selling agent agrees to indemnify the Company and its directors, officers,
and controlling persons against certain liabilities including liabilities under
the Securities Act arising out of actions or omissions of the Selling Agent.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company, pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of
the Company in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless, in the opinion of its
counsel, the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Item 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
United States Trust Company of New York ("U.S. Trust") is a
full-service state-chartered bank located in New York, New York. Set forth
below are the names and principal businesses of the directors and certain
senior executive officers of U.S. Trust including those who are engaged in any
other business, profession, vocation, or employment of a substantial nature.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL TYPE OF
U.S. TRUST NAME OCCUPATION BUSINESS
---------- ---- ---------- --------
<S> <C> <C> <C>
Director Samuel C. Butler Partner in Cravath, Swaine Law Firm
Cravath, Swaine & Moore & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Director Peter O. Crisp Chairman of Venrock, Inc. Venture Capital
Room 5600
30 Rockefeller Plaza
New York, NY 10112
Director Antonia M. Grumbach Partner in Patterson, Law Firm
Patterson, Belknap, Webb & Tyler Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036
Director, Chairman of the H. Marshall Schwarz Chairman of the Board & Investment Management
Board and Chief Executive United States Trust Company Chief Executive Officer of
Officer of New York U.S. Trust Corporation and
114 West 47th Street United States Trust Company
New York, NY 10036 of New York
Director Philippe de Montebello Director of the Metropolitan Art Museum
Metropolitan Museum of Art Museum of Art
1000 Fifth Avenue
New York, NY 10029-0198
Director Paul W. Douglas Retired Chairman of the Coal Mining,
250 Park Avenue Board of The Pittston Transportation and
Room 1900 Company Security Services
New York, NY 10177
</TABLE>
C-3
<PAGE> 52
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL TYPE OF
U.S. TRUST NAME OCCUPATION BUSINESS
---------- ---- ---------- --------
<S> <C> <C> <C>
Director Frederic C. Hamilton Chairman of the Board of Investments and
The Hamilton Companies The Hamilton Companies Venture Capital
1560 Broadway
Suite 2000
Denver, CO 80202
Director John Hoyt Stookey Chairman of Suburban Petrochemicals and
c/o Landmark Volunteers Propane Pts. Propane
749A Main Street
Route 7, Box 455
Sheffield, MA 01257
Director Robert N. Wilson Vice Chairman of the Board Health Care Products
Johnson & Johnson of Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Director Peter L. Malkin Chairman of Wien & Malkin Law Firm
Wien & Malkin LLP LLP
Lincoln Building
60 East 42nd Street
New York, NY 10165
Director Richard F. Tucker Retired Vice Chairman of the Petroleum and
11 Over Rock Lane Board of Mobil Corporation Chemicals
Westport, CT 06880
Director Carroll L. Wainwright, Jr. Consulting Partner in Law Firm
Milbank, Tweed, Hadley & McCloy Milbank, Tweed, Hadley &
One Chase Manhattan Plaza McCloy
New York, NY 10005
Director, Vice Chairman and Frederick B. Taylor Vice Chairman of the Board Investment Management
Chief Investment Officer United States Trust Company and Chief Investment
of New York Officer of U.S. Trust
114 West 47th Street Corporation and United
New York, NY 10036 States Trust Company
of New York
Director, President and Chief Jeffrey S. Maurer President and Chief Operating Investment Management
Operating Officer United States Trust Company Officer of U.S. Trust
of New York Corporation and United States
114 West 47th Street Trust Company of New York
New York, NY 10036
Director Philip L. Smith Corporate Director and
P.O. Box 562 Trustee
Newburg, NH 03255
Director Eleanor Baum Dean of Engineering at The
4 Arleigh Road Cooper Union for the Education
Great Neck, NY 11021 Advancement of Science &
Art
</TABLE>
C-4
<PAGE> 53
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL TYPE OF
U.S. TRUST NAME OCCUPATION BUSINESS
---------- ---- ---------- --------
<S> <C> <C> <C>
Director Ruth A. Wooden President & Chief Executive Not-For-Profit Public
261 Madison Avenue Officer of The Advertising Service Advertising
1lth Floor Council, Inc.
New York, NY 10016
Director David A. Olsen Chairman of the Board and
Johnson & Higgins Chief Executive Officer of Insurance Broker/
125 Broad Street Johnson & Higgins Benefit Consulting
New York, NY 10004
</TABLE>
Item 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Company will be maintained at the
office of United States Trust Company of New York, 114 West 47th Street, New
York, New York 10036.
Item 32. MANAGEMENT SERVICES
Except as described in the Prospectus under the caption "Management,"
the Company is not a party to any management service related contract.
Item 33. UNDERTAKINGS
The Company undertakes to suspend the offering of its shares of Common
Stock until it amends its Prospectus if (1) subsequent to the effective date of
its Registration Statement, the net asset value declines more than 10 percent
from its net asset value as of the effective date of the Registration Statement
or (2) the net asset value increases to an amount greater than its net proceeds
as stated in the Prospectus.
The Company additionally undertakes, pursuant to Rule 415 under the
Securities Act, as follows:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b)To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(c)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
C-5
<PAGE> 54
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 7th day of October, 1997.
EXCELSIOR PRIVATE EQUITY
FUND II, INC.
By:/s/ David I. Fann
------------------------------------
David I. Fann, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
* Chairman of the Board and Director October 7, 1997
- ------------------------------------
Edith A. Cassidy
*
- ------------------------------------
Gene M. Bernstein Director October 7, 1997
*
- ------------------------------------
Stephen V. Murphy Director October 7, 1997
/s/ David I. Fann President and Chief Executive October 7, 1997
- ------------------------------------ Officer (principal executive
David I. Fann officer)
* Chief Financial Officer (principal
- ------------------------------------ financial and accounting officer) October 7, 1997
Brian Schmidt
* By /s/ David I. Fann
- ------------------------------------
David I. Fann
Attorney-in-Fact
</TABLE>
C-6
